37
Enabling Conditions – Framework
After considering some of the key tangible conditions and
institutional progress required to stir the Palestinian economy
towards the path to prosperity, it remains to consider the
overarching economic framework necessary to enable all
of the above.
According to a senior Israeli economist, one who was
intimately involved in the 1990s economic negotiations, from
a purely economic perspective, the axiomatic argument is
that the more economic integration, the more economic
benefits both sides would reap, and so there is a need to
continue seeking opportunities for joint projects and “win-
win” initiatives. Nevertheless, the significant asymmetries
between the two economies, the fact that it is not a situation
of economic relations between sovereign entities but rather a
relation of Palestinian dependence on a much more powerful
Israeli market, highlights the continued need to establish a
separate, independently functioning Palestinian economy
. While we remain aware of the Palestinian need to exert
sovereignty and visibility in economic development there is
no doubt that in the coming years, the Palestinian economy
will continue to need Israel in order to create economic
growth, if only for the fact that Israel controls the gateways
of the air and sea ports.
The most fundamental question of framework concerns the
existing customs union, under which Israel collects and
transfers to the Palestinian Authority the taxes on goods
intended for the West Bank and Gaza Strip. Meanwhile, on
the Israeli side, the position of being in charge of collecting
Palestinian custom tax monies has exposed the government
to pressures to suspend the transfer of tax monies and to
international criticism when transfers are withheld. The last
time Israel withheld Palestinian tax money for a substantial
period was between January and March 2015, in response to
the PA joining the international criminal court in The Hague.
This had an immediate impact on PA budget and debt
having to cut back on public sector salaries in response.
While several past attempts, both formally and informally, to
upgrade the existing Paris Protocol have failed to challenge
the basic framework of the customs envelope, mainly because
an upgrade to Free Tree Agreement (FTA) or even “FTA-
minus” as some suggest, assumes the yet to be realized
existence of functional economic borders between the Israeli
and Palestinian economies. In the current state of affairs,
an FTA-type of agreement would be problematic due to
high potential of leakage of goods. However, this does not
mean that flexibility and reliefs (e.g. flexible rules of origin)
in existing economic agreements to enable quicker growth
should not be promoted on a relatively short-term basis.
31
More flexible tax arrangements could include agreements on
customs and income tax (permitting “double tax” returns).
For example, while global trends are around 0% customs,
the Palestinians may very well want to have protective
customs to support certain vulnerable Palestinian productive
31 Interview with senior Israeli economist, June 2016.
sectors (such as agricultural produce). On the other hand,
tax coordination should be kept to a minimum, for specific
and small groups of items (such as alcohol and tobacco).
32
In any case, the existing A1, A2 and B lists that are the only
agreed-upon exceptions to the customs envelope, need to be
revised. These were included in the Paris Protocol in order to
allow the PA the import of basic market needs from Jordan,
Egypt and other Arab and Islamic states under Palestinian
customs tariffs and Palestinian standards:
• A1: Goods imported must be locally produced in Jordan,
Egypt or in other Arab countries.
• A2 Goods imported can be imported from Arab, Islamic
or other countries.
• B Goods imported are not subject to quantitative
restrictions but are subject to Israeli standards.
It is worth noting that the lists have been updated only
twice since 1994, which means they have become largely
irrelevant to the evolving needs of the Palestinian market
(Peres Center, 2015). Further related agreements should
also address the issue of standards; allowing for exports
under lower standards but all should be clearly defined.
33
In addition to the importance of an upgraded economic
framework, there is also a need to consider the roles of
the actors within this framework. With the steady decline in
foreign aid, coupled with the limited options for additional
public sector growth, there is a final actor to consider, the
Palestinian private sector. According to 2013 analysis by the
Ramallah and London-based Portland Trust, the role of the
private sector is critical for job creation and independent
investment i.e., for becoming less reliant on external aid.
Senior Palestinian economists who stress that the private
sector has the ability (and liquidity) to finance major projects
ranging from investment in agriculture to education as well
as a particular interest in Gaza-based projects confirm this
argument.
34
Similarly, international actors such as the Quartet
have been persistently targeting private sector-led growth
initiatives, stressing that “there is significant growth potential in
sectors such as agriculture, manufacturing, tourism, ICT, and
infrastructure. The Palestinian private sector, though small,
has performed well under “…challenging circumstances,
including conflict, occupation, disrupted supply chains,
and limited access to outside markets. Profit levels of listed
companies are strong. Business owners are resilient and
resourceful. The banking sector is well-capitalized.” (OQ
report, 2016).
Conclusions
While the framework of diplomatic relations between Israel
and the PA continues to be strained by significant political
constraints on each side, the issue of Palestinian economic
development is much less controversial. Indeed, it is more
32 Ibid.
33 ibid
34 Discussion with senior Palestinian economist, March 2016.
