Dr. Roby Nathanson

1. Establishing Israeli-Palestinian Economic Links and Creating Conditions for Private Sector Development Dr. Roby Nathanson United Nations Seminar on Assistance to the Palestinian People Amman January 2008

2. The Paris Protocol • The Paris Protocol was adopted by the Israeli Government and the PLO as Protocol IV of the Oslo agreement. • The Protocol’s purpose was to regulate and govern Palestinian-Israeli economic relationships during the interim period, until a final status agreement was reached. • The Protocol became inoperable due to local policies implemented by Israel since 2000 in response to the growing terrorist threat.

3. Policies Affecting the Paris Protocol’s Implementation • Division of the West Bank into “cantons” with limited movement between them. • Increasing barriers between Israeli and West Bank markets. • Restrictions from the Jordan Valley limited economic benefit from the agriculture there. • Closed border crossings in Gaza (to Israel and to Egypt) choked economic activity. • Isolation of East Jerusalem from the West Bank limited trade and commerce.

4. The PA’s Economic Situation • After the Oslo accords, the Palestinian economy entered a steady growth path. Palestinian GDP grew at an average rate of 8% annually between 1995-2000, reaching US$4,512 million by 1999. • Palestinian employment also improved. Unemployment declined to 11.8% in 1999, compared with 23.8% in 1996. The median net wage peaked at US$17.3 daily in 1999, compared with US$11.5 in 1996. • With the eruption of the Second Intifada (2000) and the subsequent border closings, the Palestinian economic situation deteriorated. Election of the Hamas government in 2006 worsened the situation as direct aid was cut off.

5. Palestinian Economic Situation Estimated GDP: Real and with 8% Growth Source: PCBS.

6. The PA’s Economic Situation Labour Force Participation and Unemployment Rates Source: PCBS.

7. Israeli-Palestinian Trade • Before the outbreak of the Second Intifada, approximately 95% of all Palestinian exports were exported to Israel. Since then, exports to Israel have declined drastically. • Since the 1980s, Israeli imports from Gaza and the West Bank have declined sharply and continuously, from 2.5%-3.5% of all imports in the first half of the 1980s to 1%-1.5% in the 1990s and 1% in 2000-2005. • The leading export sectors from Palestine to Israel are: * Agriculture * Building materials * Textile (mainly sub-contracting for Israeli firms).

8. Two Strategic Decisions 1. Theconflict’s future: • Continuation of the conflict. • Work toward a final status agreement based on a two-state solution. 2. The forms of economic separation to be adopted between Israel and the Palestinian Authority: • Friendly Separation – Two economies linked through a quasi- customs union with agreements that facilitate bilateral trade. • Hostile Separation – Almost complete severance of economic ties and business relations.

9. Friendly Separation • Palestinians will be enable to achieve a dramatic change in their basic economic and humanitarian situation. • The GDP per capita could grow from about US$1,000 currently to US$2,000 within a few years. • Hundreds of thousands of new jobs would be created. • Development of a stable and sustainable export-oriented economy built on four foundations: * Exports to Israel * Exports to Arab markets * Exports to Western markets * Tourism

10. Economic Benefits to the PA Exports to new markets: • With open borders, the PA, as a member of AFTA, can easily export to other members of the Arab world. • Palestinian exports are expected to increase by some US$7 billion by 2015. • Historical examples: The Jordanian-Israeli case - Bilateral trade reached US$175 million in 2006 after signing the 1993 peace agreement. The Israeli-Turkish case - Bilateral trade has grown from US$0.1 billion to US$2.1 billion in the 15 years since the political basis for normalized economic relations was established.

11. Economic Benefits to the PA Palestinian and Israeli textile industries: • Prior to the Second Intifada, the value of Palestinian exports of sewing services and finished textile products was estimated at US$105-$140 million. • With political stability, the value of sewing services to Israeli producers can potentially reach US$300-$500 million annually. • 20,000-40,000 new Palestinian jobs can potentially be generated.

12. Economic Benefits to the PA Christian “Holy Land” Tourism: • Christian tourism constitutes a major share of Israeli tourism, about 28% (500,000 tourists) of total tourism in 2006. • Under stable political conditions and Israeli-Palestinian cooperation in marketing and product development, the number of Christian tourists can potentially increase to more than 2 million by 2015 and 4.6 million by 2025. • The average Christian tourist is expected to contribute a minimum of US$300-$500 to the Palestinian economy. • The tourist trade’s contribution to the Palestinian economy could rise to about US$0.6-$1 billion a year by 2015.

13. Indicative estimates of the economic potential of Israeli-Palestinian cooperation:

14. Hostile Separation • An extremely high price will be paid by the Palestinians. • The Palestinian economy would have to go through a painful adjustment period. • The economy will lose its sole major export market, absorbing a 90% share of all exports. • Unemployment rates will climb; the economy will plunge into even deeper recession. • Further de-stabilization of the Palestinian social and political systems that could subsequently re-ignite the violent conflict with Israel.

15. Practical Proposals • The Annapolis Declaration created a new political momentum that should also benefit PA’s socio-economic situation. • A Palestinian Israeli Economic Cooperation Administration (PIECA) should be created to establish the economic momentum. • PIECA will establish an investment fund financed by donors to the Paris conference (Dec. 2007). • The fund will invest in joint ventures generated by Palestinian and Israeli firms. Other partners (e.g., from Jordan and Egypt) will be welcomed. Cont’d

16. Practical Proposals • The fund will provide micro credits and subsidies for small businesses and the self-employed. • Priority will be given to small- and medium-size firms active in tourism, textiles, construction and services (e.g., communication technology) as well as agriculture. • PIECA will monitor the use and allocation of funds.