Raja Khalidi
The Guardian (Opinion)
October 26, 2010 - 12:00am

The Bank of Israel earlier this month issued a report on Israeli-Palestinian trade links that should make policymakers on both sides of the Green Line ponder deeply the premises of current and future economic relations.

The report, titled Sales by Israel to the Palestinian Authority, compares previously unpublished data based on VAT receipts with officially "reported" balance of payments statistics on tradeflows. The bank reveals that Israel exports only the equivalent of 0.15% of its gross domestic product to the Palestinian Authority market – a trivial amount for the powerful Israeli economy.

The report is an eye-opener for anybody concerned with future relations between Israel and Palestine – especially in view of the the idea that economic peace could somehow lead to real peace.

The true value of exports from Israeli producers to Palestinian consumers is at most 15% of that usually assumed by policymakers, donors and international institutions. Most of what is usually reported as Israeli exports to the Palestinian Authority ($3.2bn in 2008) does not come from Israel but is actually goods and services transiting through Israeli ports. Customs revenue on these flows, to the tune of $600m annually, is captured by Israel and not by the Palestinian Authority, the ultimate destination.

With Palestinian exports to Israel at around $500m, Palestine has a small trade surplus with Israel rather than the overwhelming deficit assumed by analysts and observers of 40% to 50% of Palestinian GDP. Only 20% of all Palestinian trade is with Israel, not the 80% widely assumed. So Palestinian dependency is not on the Israeli economy per se, but rather on the stranglehold that Israeli occupation maintains over Palestinian trade with the world through the so-called "customs union" in place since 1994.

These findings have enormous implications for the debate about economic integration or separation between Israel and Palestine. They have a direct bearing on the economic policy and trade orientations of a future Palestinian state.

From an Israeli perspective, the Palestinian economy is an afterthought and these findings change little. This has been so at least since the separation barrier went up, Palestinian labour inside Israel was reduced to a trickle and Gaza was cut off from Israel. If anything, the report attests to the success of Israeli occupation policy, which has pursued physical and economic separation from Palestinians since the first intifada.

By emphasising how insignificant a trade partner Palestine has become, the bank is revealing what most Palestinian policymakers and business elites know, but continue to act as if they don't: Israel has no vital interest in economic relations with Palestine. Israel could completely sever all economic links with the PA tomorrow and few Israelis would protest, other than some consumer goods manufacturers and a handful of commercial intermediaries whose access to Israeli ports allows them to monopolise the world's trade with Palestine.

But for Palestinian policymakers the bank's findings may be received as either a catastrophe or a blessing, depending on where they stand on the economic integration/separation debate.

For the former, this new data refutes the usual hype about dynamic comparative advantages, trade creation and technology transfer deriving from Palestinian integration with the larger, more advanced Israeli economy. The report implies that there is no mutual or unilateral Palestinian interest or justification for closer economic relations.

For a large swath of economists, politicians, businessmen and international institutions, it has been an article of faith that Palestine necessarily benefited from trade and related economic integration with Israel. The proximity and sheer scale of the Israeli economy supposedly made relations with it inevitable and market diversification almost impossible.

A whole generation of Palestinian policymakers has been nurtured on the idea that future Palestinian economic development policy was first and foremost a function of trade and economic relations with Israel.

But for more sober analysts, the bank has confirmed what they have been saying: Palestine's economic future is to be found as much, if not more, in its Arab hinterland than with Israel. The adverse path of economic dependence in place since occupation has reached its natural end; the costs of skewed economic integration with Israel have for a long time outweighed possible benefits.

Framing the Palestinian development policy debate in terms of the optimal trade regime with Israel, as donors and international institutions do, is a risky approach for a small, economy that needs sustainable reconstruction, growth and development.

Thanks to the Bank of Israel, we now know that Palestine's trade openness is with the rest of the world, and much less so with Israel; preferential trade relations with Israel are immaterial to Palestine's development prospects; and that a future Palestinian state should be looking eastwards, or at least beyond Israel, in designing an economic policy framework suited to its real needs and existing global relations.

If they really want a viable Palestinian state to emerge, donors and international institutions should be supporting Palestinian efforts to break the Israeli economic siege by establishing PA customs control at borders with Jordan and Egypt, and allowing Palestine to integrate equitably with regional and world economies.


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