Economic Relations between Israel and the Palestinian Authority

Background Paper, February 1998

A. Introduction

It is Israel’s clear political and security interest to act for the advancement of the Palestinian economy and the well-being of the Palestinian population. The two economies are strongly interrelated, and this relationship between them during the interim period has been set forth in the "Paris Agreement" (incorporated into the Interim Agreement – "Oslo 2"). In order to prevent the formation of economic borders and to allow the free flow of good, the agreement creates a uniform customs framework for Israel and the Palestinian Authority (PA). Although criticism is sometimes voiced against the agreement in international forums (mainly due to political motivations), it is clear that any departure from this principle would primarily damage the Palestinian economy.

B. Employment in Israel

  1. In view of the importance to the Palestinian GNP of income from labor in Israel, and in light of Israel’s interest in reducing the numbers of foreign workers, actions are being taken to allow more Palestinians to work within Israel proper. As a consequence of this policy, the number of Palestinian workers in Israel is being determined by market forces alone (within security requirements) and the number of work permits is not subject to quantitative limits.
  2. Palestinians wishing to work in Israel must obtain a work permit. Today, about 45,000 Palestinians holding permits work in Israel – 25,000 from the Gaza district and 20,000 from Judea-Samaria.
  3. Another 12,000 Palestinians work in industrial parks and Israeli settlements within the West Bank and Gaza – 3,500 in the Erez industrial park and settlements in the Gaza Strip and 8,500 in such areas in Judea-Samaria.
  4. In all, Israelis currently employ about 57,000 inhabitants of the territories under permit.
  5. Additionally, tens of thousands (20,000-40,000) are known to cross from Judea-Samaria into Israel without permits each day for work.
  6. This brings the total number of Palestinians employed by Israelis to 80,000-100,000 – the highest number in several years.

C. Israeli Initiatives to Increase Palestinian Employment

In view of Israel’s intent to replace foreign workers with Palestinians and its interest in improving the economic situation in the PA areas, the Israeli Government has recently announced several new initiatives with respect to employment of Palestinians within Israel:

  1. In order to ease the burden on those workers who commute several hours daily to and from Israel, it has been decided to allow 5,000 laborers to stay in Israel overnight.
  2. A program has been approved to allow 30,000 Palestinian workers to enter Israel, even during security closures of the territories.
  3. In order to recruit more Palestinian workers into the Israeli construction industry, an employment fair was recently held in the Erez industrial park.

D. Commerce and Merchants

  1. Goods are allowed to flow freely between Israel and the PA. Furthermore, there is no restriction on the number of trucks that may cross between the sides; the extent of traffic reflects market requirements alone.
  2. In an effort to advance the activities of the Palestinian business community, Israel has designated a group of merchants, notables, and businessmen who may enter Israel under special permits. The program currently includes 7,500 businessmen from Judea-Samaria and 4,500 from the Gaza district – the highest number ever.
  3. The extent of bilateral trade between Israel and the Palestinians now stands at $2.0-$2.5 billion annually.
  4. The volume of trade measured in traffic (not including Israeli vehicles) is about 800-900 truckloads daily.

E. Industrial Areas and Investments

  1. As part of its efforts to improve the economic situation of the Palestinians, Israel is acting, together with the Palestinian Authority, to build additional industrial parks in Gaza and the West Bank.
  2. The concept of joint industrial parks along the dividing line, elaborated several years ago, has several advantages:
    1. Economic development (Palestinian and Israeli)
    2. Reinforcement of Israel-Palestinian economic cooperation
    3. Convenient access for workers and employers
    4. Preventing friction between Palestinian workers and Israelis
  3. One industrial park is in operation today, at Erez. More than 80 enterprises are located there, providing jobs for 3,000 workers from Gaza. Almost half of the enterprises are owned by Palestinian entrepreneurs.
  4. The plan to establish an industrial park at the Karni checkpoint (GIE-Gaza Industrial Estate) is in its advanced stages of implementation. Israel has contributed $7.5 million to the project, which is expected to become operative in the middle of 1998. The Karni industrial park, located in territory controlled by the Palestinian Authority, is to serve as the central industrial area of the Gaza Strip and to provide tens of thousands of jobs.
  5. Additionally, staff work is being done by the relevant agencies (Ministry of Industry and Trade, Ministry of Defense, Coordinator of Government Operations in the Territories) to designate a site for the first joint industrial park in Judea-Samaria.

F. The Transfer of Taxes

  1. Under the Paris Agreement, Israel forwards to the Palestinians monthly clearances on five accounts:
    1. Import Taxes
    2. Value Added Tax
    3. Fuel Excise Tax
    4. Income Tax
    5. Health Tax
  2. These transfers totaled NIS 1,871 million ($540 million) in 1997, as against NIS 1,416 million ($423 million) in 1996.
  3. This sums represent 60-65% of the Palestinian budget – clearly illustrating the importance of the Paris Agreement for the Palestinian Authority.

G. Conclusion

Israel is making considerable efforts to improve the economic situation within the areas of the Palestinian Authority. These efforts can be seen in the increase of Palestinians working in Israel, free passage (subject to security inspections) for Palestinian exports and imports, cooperation with the PA in establishing joint industrial parks, and the promotion of foreign investment within PA areas. Israel has found, however, that the PA occasionally subordinates economic considerations to political ones. In order for these initiatives to succeed, Israel requires the responsiveness and cooperation of both the Palestinians and the international community at large.