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Israel and the Palestinian economy

Yael Mizrahi-Arnaud, who recently completed the requirements for a Masters degree in international economics and Middle East studies at Johns Hopkins SAIS, contributed this post to the Matzav blog of the Israel Policy Forum  (reprinted here with its permission). She is a former Israel Air Force officer, and project manager at the Peres Center for Peace. She has conducted research in Israel and Iraq on innovative conflict management solutions.

Recent months have seen an increase in unilateral plans to resolve, or at least mitigate, the Israeli-Palestinian conflict. Since the Oslo Accords of the mid-1990s, the international community has embraced the consensus that a two-state solution is the only viable outcome. But barring any progress towards that result on the political front, buttressing the Palestinian economy may be the only realm in which tangible results can be achieved. A boost in the Palestinian economy will not only benefit the lives of millions of people and restore waning public confidence in the Palestinian Authority, but also set up the Palestinians as a self-supporting peace partner that can maintain the institutions of statehood.

A new push to buttress the Palestinian economy would stem not from an economic-peace rationale, which sees economic advances predicating political advances and statehood, but rather from the idea that a functioning Palestinian economy is a crucial component in and of itself, independent of negotiations. The desire is to merely keep the door open for a future resilient Palestinian polity, one that can be a viable state and a constructive neighbor to Israel. The Israeli military chief of staff has put it most aptly: “there is a clear Israeli interest, beyond the issue of values, to develop the Palestinian economy.”

Current trends in Palestinian demography and economics provide reason to worry. Unemployment stands at 27 percent, and for people 20 to 24, rises to 40 percent. With half of the population under 18, the Palestinians face a youth time bomb; without avenues for employment and advancement, these youth represent a growing security threat to Israel.

In addition, the Palestinian economy relies heavily on international aid to fuel its consumption, and suffers from a bloated public sector and static private sector. Annual GDP has improved, from -0.4 percent in 2014 to 3.5 percent in 2015. These trends arise due to restrictive and outdated economic arrangements with Israel, as well as poor governance by the Palestinian leadership.

A recent World Bank Report estimated that the PA loses $285 million a year as a result of its current economic arrangements with Israel, which date back to the 1993 Paris Protocol. That agreement saw the creation of an Israeli-Palestinian customs union, and a joint economic committee tasked with overseeing the movement of goods and labor between the two economies. A common truism of the Israel-Palestinian narrative, that the interim often becomes the reality, is nowhere truer than here.

The bulk of this loss comes from value-added tax (VAT) and import duties that Israel collects on the PA’s behalf, which are handed over on a monthly basis. These taxes are known as clearance revenues, and make up two-thirds of the PA’s public revenues. Israel takes a three-percent collection and processing fee on the VAT and import duties.

Any delay in these payments creates instability in the Palestinian economy, as the PA is the largest single employer in the West Bank, employing over 16 percent of citizens. Late payments mean the PA must take out bank loans, turn to foreign aid, or leave a large number of its employees unpaid. The last of these scenarios unfolded in the first quarter of 2015, when 40 percent of public sector wages went unpaid due to Israel’s withholding clearance revenues in protest of the Palestinian move to join the International Criminal Court.

Recent deals that Israeli Minister of Finance Moshe Kahlon struck with PA Finance Minister Shukri Bishara and Civil Affairs Minister Hussein al-Sheikh have led to the transfer of $128 million in unpaid clearance revenues. Coupled with the proposed increase in cooperation in the high-tech, medical, and construction fields, this is a good start.

Still, it is far from enough. Congress also recently voted to unblock $108 million in funds placed on hold after PA President Mahmoud Abbas’s September 2015 statement that the Palestinians were not longer bound by the Oslo Accords. An additional $51 million remains blocked today. Read more