Over the last six months, the Palestine Trade Center (PalTrade), and the Peres Center for Peace conducted a joint study that looked at the economic ties and between Israel and the Palestinian Authority and the economic potential of relations between them. The study analyzed the actual economic damage and the “economic potential for Israel and the Palestinians that remains untapped as result of the ongoing conflict and political instability.”
Predictably the study, entitled “Untapped Potential, ” found that the economic benefit that both sides stand to gain in a peacetime economy was high. What is surprising, however, is the researchers’ finding that the potential is now higher than ever before.
Palestinian exports to Israel totaled $500-550 million in 2005 (of which $400-450 million was goods, and $50-100 million services), while Israeli exports to the Palestinian Authority totaled $2.5-2.7 billion, 70-75% of total Palestinian imports. The study’s authors noted the “Palestinian economy’s acute dependence on Israel,” and said that there was a negative coefficient between the intensity of the conflict and the volume of Israeli exports to the Palestinian Authority, due the impact the conflict was having on purchases businesses and households. This figure stands out more in the light of the Palestinian export potential, which now lags far behind that of Jordan and other countries in the region.
In 1990, Palestinian and Jordanian exports were at the same level. By 2005, Jordanian exports had increased tenfold. In 1999, the volume of Jordanian imports was similar to that of the Palestinian Authority, and by 2005 it was 3.5 times larger.
According to the study’s authors, whose economic data is also based on Palestinian VAT figures that have been authenticated by the Central Bureau of Statistics and its Palestinian counterpart, the exploitation of the potential of economic cooperation between Israel and the Palestinian Authority will double Palestinian GDP from $4 billion to $8 billion, and will increase it by a further $4 billion in the future. The addition to Israel’s GDP will reach $12 billion, in terms of added value, a sum that is equal to 10% of Israel’s GDP today. These expectations represent a “cautious estimate” of the benefits that can be created within 5-10 years of political and military stability, which will enable bilateral trade.
What effect will extensive Israeli-Palestinian cooperation have on job opportunities and unemployment in Israel, should Palestinians be allowed back in to jobs inside the Green line? Such a move will add 500,000-600,000 jobs in the Palestinian Authority, so that the number of employed people will almost double from 600,000 in 2004-2005 to 1.1 million.
Friendly or acrimonious separation
Such economic cooperation will also add 400,000 500,000 jobs in Israel, primarily in low technology industries such as agriculture, textiles, and clothing, with companies moving manufacturing activity back to Israel from China, India, Egypt and Jordan.
Israeli-Palestinian cooperation in export activity will increase Israeli exports by $17 billion, through two new export engines: the entry by Israeli products to the Palestinian market and the Arab Free Trade Area regional market (AFTA), through the use of Israeli inputs in Palestinian products (and, eventually, direct sales to the Arab trading block, which is likely to increase Israeli exports by a further $12 billion).
The other export growth engine is the increase in Christian tourism to the holy land. At present, Christian tourism accounts for 40% of incoming tourism to Israel. Last year, 800,000 Christian pilgrims visited Israel, and the potential for Christian tourism that will combine visits in Israel with trips to holy sites in the Palestinian Authority is at least 3-4 million tourists a year, which will generate a further $5 billion in revenue for Israel. The contribution to Palestinian exports will be seen primarily in the addition of Israeli technology, which will boost exports of products from the Palestinian Authority by $11 billion a year, compared with $500 million in 2005.
The study’s Palestinian and Israeli authors stress that their findings deserve the attention of leaders on both sides, “who face two crucial strategic decisions on the future of Israeli-Palestinian relations. They can either allow the conflict to continue, or work to achieve stability.” The price of further conflict will be “human misery,” and “substantial economic damage to both sides.”
The second strategic decision is between a friendly separation into two separate economic entities that will maintain trade relations, and will work together to maximize economic benefit for both sides, and “a hostile separation,” that will entail the severing of economic ties (save for coordination on humanitarian issues). The study finds that “a hostile separation will exact a heavy price of Israel and will have grave consequences,” - an immediate 5% loss in Israeli exports (excluding diamonds), a loss that will cause grave harm to sensitive sectors such as agriculture, the loss of 10,000 thousand jobs and the forfeiting of the vast economic potential that could result from full economic cooperation between the two sides.
The study’s authors also claim that “the price of hostile separation for the Palestinians will be exceptionally high. The severing of economic ties will be devastating for the economy, and the aftershock will cause a sharp rise in unemployment and the deepening of the acute economic crisis that the Palestinian Authority is experiencing at present.” In addition, Palestinian exports to markets in Arab countries will lose the advantage that they would have enjoyed if they had access to, and the use of, Israeli technology, infrastructures, and marketing networks. They will also forfeit the opportunity to provide unfinished products to, and act as subcontractors for Israeli industries, as well cooperation in increasing Christian and Muslim tourism.
Does the fact that this study was commissioned by the Peres Center for Peace mean that there is political bias in its conclusions? The team at the institute’s business and economic department, headed by Smadar Shapira, and economist Rachel Batish-Levkovich, insist that the study was professional, although they admit that the motivation for conducting it was the Israeli political context. The study was conducted against the backdrop of the calls for the severing of economic ties, and the decision, eighteen months ago, by the then Minister of Industry, Trade and Labor, and current Prime Minister Ehud Olmert, to stop Palestinian workers entering Israel. However, Batish-Levkovich says, “We made conservative estimates, and before anything else we examined the economic advantages for Israel, since the paper will be submitted to Israeli decision makers first.”
The study was based on extensive economic data, including meetings and interviews with 150 Israeli and Palestinian businessmen, officials, and representatives of business organizations. The authors found that out of the Israelis that they interviewed, the severing of economic ties with the Palestinian authority created a considerable problem for small and medium-sized manufacturers, mainly in the textile industry, who will have to move sewing shops to the Far East, a move that is not feasible for firms with small production lines.
The study’s authors claim that, according to analysis by the World Bank, which was extremely pessimistic in its forecast in the event of economic separation, such an event would cause a 25% fall in Palestinian GDP (from $1,000-1,100 per capita a day to $800), alongside a sharp rise in unemployment, from 23% to 40%. Worse still, it could bring about a renewal of the violent conflict between the two sides.
The study states that, for the Palestinians, choosing a strategy of hostile separation from Israel would amount to a “grave error that will force the Palestinian economy into a long and painful adjustment of the loss of almost its sole export market (90% of exports), and will place it at a disadvantage against the economies of Jordan, Egypt and other competitors for Arab markets. This will in turn, “also undermine the social and political stability (in the authority), thereby reigniting the violent conflict with Israel.”
Border inspection points - the obstacle to trade
The authors of the study find additional motivation to introduce a friendly separation, if there is to be separation, in the advantages that it would have for Israel. It would create a new growth engine in the form of exports to Arab countries and the Palestinian Authority, at a similar rate to those to North America (Israel’s second largest trading partner after the European Union), an increase in tourism and tourism-related jobs, and other benefits, all of which will lower poverty levels in Israel.
The industries that will benefit the most from this are textiles and agriculture. On the eve of the intifada, the textile industry purchased $80-100 million worth of services a year from sewing shops in the Gaza strip, and $25-30 million in ready made clothing. The renewal of export services from Gaza to Israel will enable the development of hundreds of small Israeli businesses. For every dollar in Palestinian added value from sewing work for Israeli companies, Israel will gain an extra $2-3 in added value. At least one new job in Israel will be created for every new Palestinian job.
A friendly separation will dramatically improve the Palestinians’ economic and humanitarian situation. GDP per capita will rise from $1000 to $2,000 within a few years of economic cooperation and stability, alongside the development of a stable economy that will be based on exports to Israel, markets in Arab countries, and on tourism. The closing of the Karni border terminal has done the opposite: It put an end to an agricultural project that would have seen the renewed operation of Gush Katif greenhouses by Palestinian farmers, and the loss of work for Israel’s textile industry that that would have been subcontracted to businesses in the Gaza Strip.
The study claims that in order for both economies to enjoy the potential benefits, both the Israeli government and the Palestinian Authority will have to cooperate with the assistance of the international community, but they will also have to take action that will allow the business sector to realize the business opportunities that such cooperation provides. At present, the border inspection points are the main obstacle to trade between the two sides.
Published by Globes [online], Israel business news - www.globes.co.il - on December 7, 2006
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