30
Developing an Israeli Grand Strategy toward
a Peaceful Two-State Solution
Introduction
The often-cited vision for a future Palestine is that it be a
sovereign, contiguous and prosperous state. There is no
doubt the three are interrelated. In the following article, we
focus on the latter issue of prosperity, and the basic elements
needed to secure such a state, guided by the premise that
an economically viable foundation is a crucial stepping-
stone on the way to a peaceful solution of two sovereign
and contiguous states.
The aim of this paper therefore is to discern the necessary
economic and institutional conditions required to make sure
– and convince the Israeli public – that a future Palestinian
state will not become a failed state, with the associated
negative political and security consequences that having
such a neighbor entails.
It should be noted that while this paper does not address
Israeli-Palestinian economic relations under Permanent
Status – which should ultimately be negotiated by a sovereign
Palestine – we focus instead on the required economic
developments to help both sides reach that point from an
optimal and economically secured position.
Finally, this paper argues that in order to progress to that
optimal position, there is a need to design and implement,
on an agreed basis, new economic arrangements between
Israel and the Palestinian Authority.
Background
The economic framework of relations between Israel and
the Palestinian Authority was formally defined in the 1994
“Protocol on Economic Relations” – also known as the Paris
Protocol – signed between the Government of Israel (GoI) and
the PLO, representing the Palestinian people. The Protocol
created a customs union between the two sides, known as
the “customs envelope”, that was intended by its authors
to serve as an interim arrangement – of no more than five
years
1
– until the establishment of a sovereign entity, i.e.
Palestine. Over twenty years since, the inherent structural
asymmetry, both in economic power and in everyday business
transactions continue to dominate the relations.
The disparity between Israel and the PA economy is well
known: GDP per capita in Israel equals to $37,208, while that
of the West Bank and Gaza equals to $2,966
2
. In addition,
1 The Protocol was to be replaced by an economic agreement for
permanent status, to be negotiated and put into effect with the
signing of a comprehensive and final-status agreement by 1999.
2 2014 World Bank figures, quoted in the Quartet Report to the AHLC,
April 2016.
while Israel in general refers to trade with the Palestinians
as domestic commerce, as defined by the customs union,
for the PA it is considered “cross-border” trade. Indeed,
the concept of "cross-border trade" is in itself problematic
since it suggests the existence of agreed borders, which
of course are still lacking in the Israeli-Palestinian context.
Thus, despite the use of the neutral term "crossing points",
from the point of view of Palestinian traders and workers,
the entry and exit points between Israel and the PA de facto
function as border crossings and customs clearance points
3
.
According to the analysis of Arnon (2001), the vision that the
Protocol represented was to create favorable conditions for
the development of the Palestinian economy, in the hope it
would undergo a process of sustainable growth. However,
this target was not reached; large sums of foreign assistance
were allocated to emergency programs and the public
sector, Israel continued to enjoy significantly more power
in the relations and any economic progress that was made,
came to a complete halt with the outbreak of the second
intifada. Lately, the drastic decline in donor funding “…
from 32 percent of GDP in 2008 to 6 percent in 2015 has
significantly contributed to the recent economic weakening”
(World Bank report to the AHLC, April 2016).
Beyond the need to revise and update an economic
framework which was originally structured for an interim
period, the customs envelope designed by the Paris Protocol
is only partially implemented (Arnon, 2001). This was most
evidently the case in Gaza, when the underground “tunnel
economy” between Gaza and Egypt thrived. Smuggling of
anything from cars, fuel and farm animals to cigarettes and
weapons, the tunnels provided a lucrative source of income
for Hamas who taxed the commodities passing through.
At the height of the tunnel industry, before Egypt began
dismantling it in 2012, there were about 1,500 underground
routes of supply between Gaza and Egypt.
4
Thus, even though the political and security situation has
changed significantly since the 1990s, the economic
frameworks that govern commercial relations between Israelis
and Palestinians have not. Moreover, until the conflict is fully
resolved, and in order to improve relations on the economic
(and hence also on the political) levels in the interim, the
following sections address the economic conditions required
3 From Peres Center report on “Strengthening the Palestinian Private
Sector through Reducing Trade Transaction Costs: A Comprehensive
Research and Advocacy Program”, December 2015.
4 Reuters Exclusive, August 2014:
c o m / a r t i c l e / 2 0 1 4 / 0 8 / 2 1 / u s - e g y p t - g a z a - t u n n e l s -
idUSKBN0GL1LC20140821
Anat Kaufmann and Baruch Spiegel
Economic Enabling Conditions towards
Sustainable Palestinian State-Building
