Go back

The Failure of Economics to Foster Israeli-Palestinian Peace

Published 30 Jul 2014

By Eliyahu Kamisher

In recent weeks the Israeli-Palestinian conflict has reached another boiling point. Three Israeli teens: Gilad Shaar, Naftali Frenkel, and Eyal Yifrach were kidnapped and horrendously murdered, whilst Palestinian teen Muhammad Abu Khadr was slain in a gruesome revenge killing. These killings erupted into this week’s vicious clashes, another round in the seemingly endless string of perpetual viciousness that is the Israeli- Palestinian conflict.

However, this was not always the case. It may seem like a myth or fable, but there was once a time when peace was possible. When Israeli Prime Minister Yitzhak Rabin and the then Palestinian national leader Yasser Arafat shook hands and smiled together on the White House lawn. The Oslo Accords set forth a process to establish a Palestinian state alongside Israel living “in peaceful coexistence and mutual dignity and security.”[1]For a short glimmering moment, cooperation, not conflict, was the norm. Peace was a goal within arm’s reach, not a distant mirage.

This paper will examine a central document of the Oslo Accords, The Protocol on Economic Relations, also known as the Paris Protocol, and explain why the Paris Protocol has failed to engender peace. Signed on 29 April 1994 the Paris Protocol was meant to usher in a new era of economic cooperation, stability, and growth between the nascent Palestinian Authority (PA) and Israel. Many hoped that such economic cooperation would lead both Palestinians and Israelis to form a long and lasting peace. However, over twenty years after the agreement, little has materialized. Gaza remains economically unfeasible with unemployment at 31 per cent in 2013.[2]The West Bank still faces an Israeli military occupation that restricts freedom of movement and economic development. Ultimately, the Israeli policies of rigid labour restrictions, importing foreign workers, and withholding Palestinian tax revenue have disregarded the Paris Protocol when it does not serve immediate Israeli political interests. Nonetheless, the Palestinians also critically failed to sufficiently curb corruption and terrorism creating a vital lack of trust and stability needed for economic cooperation.

Among the Protocol’s touted accomplishments was establishing the independent Palestinian Monetary Authority, allowing Palestinians to self-generate vital tax revenue, securing Palestinian jobs in Israeli labour markets, and opening the Palestinian economy to global import-export markets. In reality Israel still greatly controlled the Palestinian economy and only the “trappings” of economic autonomy was granted to the PA.[3]Palestinians were not allowed to establish their own currency. This was partly because currency would carry a symbol of national sovereignty, something the Israeli government would not allow, but mainly because the PA could not realistically support a stable independent currency.[4]Lacking an independent currency meant that the Israeli Shekel set all meaningful monetary policies such as inflation rates. Furthermore, the Paris Protocol delineated a customs union between Israel and the PA that entails the mutual acceptance of common tariffs and other taxation polices. This union made collabouration essential between the two economies, however, did not require any demarcation of economic borders, and put the majority of policy making in Israeli hands.

In a poll taken in October 1993 Palestinians respondents ranked job availability and standards of living ahead of repression, violence, and corruption as the greatest concern in the transition to self-government.[5]Palestinian negotiators sought to secure Israeli labour market access through the Paris Protocol.[6]This resulted in the labour normality clause, which states:

“Both sides will attempt to maintain the normality of movement of labour between them, subject to each side’s right to determine from time to time the extent and conditions of the labour movement into its area. If either side suspends the normal movement temporarily, it will give the other side immediate notification . . .”[7]

“Normality” essentially means unimpeded flow of Palestinian labourers into Israel. However, Israel still intended to ensure its security interests through the clause “subject to each side’s right to determine . . . the extent and conditions of labour movement.” Although it states “each side’s right to determine” in actuality this only applied to Israel, who was the only party with the potential desire and physical ability to restrict labour flows.

Another key section in the clause states, “If either side suspends the normal movement temporarily . . .” The use of “temporarily” is to ensure the Palestinian interest that if Israel does decide to limit labour, it will be brief. In other words in the case of a closure Israel will do the most it can to ensure Palestinian access to labour, while not endangering itself.

Yet Israeli labour closures have fully undermined the “attempt to maintain the normality of movement of labour” recognized in the Protocol. Following the signing of the Paris Protocol not only did labour fail to remain normal, but it was severely limited causing massive unemployment in Gaza and the West Bank. The total closure of labour flows in 1996 caused unemployment to spike to 66 per cent in the Palestinian territories. The closure was eased in June 1996; however, Palestinian unemployment still remained amongst the highest in the world. This specific closure resulted in a loss of 39.6 per cent of Gaza’s Gross National Product, and 18.2 per cent loss in the West Bank.[8]In 1998 another total closure was implemented resulting in wage loss of $11.4 million for official workers. Following this closure Israel dropped the number of Palestinian worker permits to 27,350, 44 per cent below the previous amount of workers, and only a fraction of the employment levels envisaged by the Paris Protocol.[9]

The economic closures greatly diminished the Palestinian economy’s long-term development. Production capabilities became severely restricted as exports massively declined. The lack of stability discouraged investment and thus a viable private sector has failed to grow. The resulting economic crisis meant 40 per cent of foreign aid allocated to long-term development programs had to be redistributed to emergency budget support and employment generation funnelled through the PA.[10] Accordingly, the public sector – funded heavily by foreign aid – has become the main employer in the Palestinian Territories, however, this does not provide for natural and stable economic growth.

Israel had and still does have legitimate security concerns to close borders as the decade after the signing of the Oslo Accords marked a significant rise in terror activity by terrorist groups such as Hamas and Islamic Jihad. However, the severity and length of the closures by Israel

showed a lack of effort and desire to reasonably maintain labour. In essence the cooperation “to establish a sound economic base” envisaged under the Protocol was thrown out the window.

The severity and length of the closure seems to be caused by two factors. First is the Israeli population’s growing sensitivity to terror, mainly resulting from a string of terrorist attacks including the infamous Jaffa Road Bus Bombings. The Israeli population became more averse to pursuing peace and implementation of the Oslo accords.[11]This combined with the assassination of Yitzchak Rabin in 1995 lead the pro-Oslo Labour party to lose the elections in 1996, 2001, and 2003. With the fall of the Oslo camp, came the fall of the Oslo mentality which replaced economic cooperation in favor of a hardline security mindset.[12]Consequently, Israel allowed for rigid labour restrictions to wreak havoc on the Palestinian economy in line with the emerging Israeli attitude.

Israel’s importation of foreign workers to supplement Palestinian labour is the most blatant rejection of the Protocol’s “normality of labour” clause. Palestinian labour became extremely unreliable due to Israeli closures. Needing dependable workers Israeli domestic producers petitioned for the importation of foreign workers as a stable work force. Subsequently, from 1992-1996 Israel increased foreign work permits from 4,000 to 107,000. The workers, mainly from South East Asia and Eastern Europe occupy the same jobs as Palestinians.[13]

According to the World Bank “Palestinian employment opportunities in Israel have been permanently reduced” due to the importation of foreign workers.[14]With the importation of workers Israel has essentially denied any major resumption of Palestinian labour into Israel because there is no longer the employment opportunities. In this case Israel has completely undermined the labour relations laid out in the Paris Protocol. Labour is no longer suspended “temporarily” but permanently. Thus, even if the Palestinians fully comply with all Israeli security requests, there will never be a return to the labour flows foresaw under the Protocol.

Although Israel has disregarded the labour aspect of the Protocol, much of the Palestinian’s labour problems must also be attributed to problems within the Palestinian Authority. Former chairman of the Palestinian Monetary Authority, George T. Abed stated in 1994:

“I find it ironic that the Palestinian leadership . . . should be pushing for a large share of its labour to seek work in Israel. It ought to be the priority of the leadership to mobilize the Palestinians in an urgent national crusade to implement the development programs as fast as possible so as to create employment for its people at home.”[15]

In many respects the Palestinian leadership was short-sighted in their economic goals, only seeking to cut deals with Israel instead of establishing long-term goals. Furthermore, corrupt politicians under Yasser Arafat squandered much of the foreign aid donated to the Palestinian development program and the Palestinians failed to establish an appropriate legal and regulatory setting to attract foreign investment.[16]However, Palestinian short-sightedness and corruption was unable to debilitate the Palestinian economy as significantly as Israeli policy decisions. This is not to say that a vast amount of Palestinian politicians were not short-sighted and corrupt, yet the majority of the Palestinian economy was inextricably tied to and controlled by Israel. Thus, even though they were corrupt the Palestinian Authority lacked the ability to damage their own economy as drastically as Israeli policies did.

The Palestinian value-added tax (VAT), which was originally promoted as a symbol of cooperation and unity amongst the Israelis and Palestinians, later became an Israeli political pressure tool. The VAT is a sales tax and constitutes around two thirds of the Palestinian Authority’s self-generated revenue. However, the VAT must be no lower than one to two per cent of the Israeli VAT.[17]Furthermore, the Protocol established the VAT to be collected by Israel and transferred monthly to the PA.

In essence the majority of Palestinian self-generated tax income is set by Israel and collected by Israel, but given to the Palestinians.

However, Israeli control of the VAT is not necessarily a bad thing. As George T. Abed states:

“Israel has one of the most efficient and developed VAT systems in the world and if the Palestinians were to run their system as efficient they could cover a substantial portions – perhaps more than half of their current budgetary requirements from the VAT alone.”[18]

Yet, Israeli governments have withheld VAT revenues multiple times, essentially in a punitive function. In December 2012 Israel withheld over $100 million dollars in VAT revenues in response to a unilateral bid by Mahmoud Abbas to upgrade the Palestinian’s status in the United Nations to “observer state.”[19]More recently, the Benjamin Netanyahu government withheld tax revenue in response to the Fatah-Hamas unity government.[20]There may be a legitimate argument for withholding funds from the unity government, due to its affiliation with a terrorist group. Nevertheless, the first case is in direct dismissal of the Protocol, which states:

“Representatives of the two sides will meet once a month, on the twentieth day of the month . . . The clearance claims will be settled within six days from the meeting, through a payment by the side with the net balance of claims against it, to the other side.”[21]

Principally, Israel must pay the Palestinian Authority the taxes it has collected on the 26th of every month. There is no clause that allows for withholding payments. Thus, Israel consistently violates the Protocol to politically pressure and punish the Mahmoud Abbas government.

In response to Israel’s withholding of taxes in 2012 the European Union called for Israel:

“To avoid any step undermining the financial situation of the Palestinian Authority. Any such action by Israel would undermine existing cooperation mechanisms . . . Contractual obligations, notably under the Paris Protocol, regarding full, timely, predictable and transparent transfer of tax and custom revenues have to be respected.”[22]

According to the European Union Israel is deliberately undermining “existing cooperation mechanisms” by violating its “contractual obligations.”

To ensure proper implementation the Paris Protocol created a forum to resolve disputes called the Joint Economic Committee (JEC). The JEC is meant to “follow up the implementation of this Protocol and to decide on problems related to it that may arise from time to time.”[23]This committee is supposed to ensure fair implementation and equal representation. Yet, there is no actual enforcement ability established by the JEC to make sure the meetings are convened or its rulings abided by.

For example, in 2012 protests swept through the West Bank rallying against the high cost of living and unemployment. The Mahmoud Abbas Government consequently requested a review of the Paris Protocol, but it was denied. Danny Alon, Israel’s Deputy Foreign Minister at the time stated, “there is no room to meet the Palestinian request to review the economic accords between [the two] governments.”[24]The Protocol specifically states that each side “may request the review of any issue related to this Agreement by the JEC.”[25]At the end of the day, however, this is only a request and the Palestinians have no leverage to make sure Israel complies.

Although the Paris Protocol is internationally recognized and signed by both parties there is no enforcement mechanism to ensure the obligations of the Protocol are respected. In similar economic agreements enforcement is established by an interdependence of the countries. This allows both nations to provide a mutual economic threat if the other violates. Conversely, in the Israeli-Palestinian agreement there is only a one-sided dependence of the Palestinians. Therefore, although the Protocol provided an outline for economic relations, the lack of enforcement ability suggests that implementation will only occur at Israel’s behest. Thus, Israel can defy the Protocol with few to no repercussions.


Eliyahu Kamisher is a recent graduate of the University of California Santa Barbara. In 2012/13 he studied in Israel and worked as a freelance journalist in Israel and the OPT’s and surrounding countries. He also interned at the Institute for Terrorism Research and Response and the Orfalea Centre for Global and International Studies.



[1] 1 Oslo I Accords (1993) Accessed 16/07/2014

[2] Palestinian Central Bureau of Statistics, Press Release on the Results of the Labour Force Survey,


[3] Levin, Jamie (2007) “Accord to Discord: A Political Economy Approach to the Oslo Process” in Palestine Israel Journal Vol. 14, 63.

[4] Elmusa, Sharif and Mahmud El-Jaafari (1995) “Power and trade: The Israeli-Palestinian economic protocol” in Journal of Palestine Studies Vol. 24, No. 2, 20.

[5] Levin, “Accord to Discord,” 67.

[6] Arnon, Arie and Saeb Bamya (2007) “ Back to Negotiating the Final Status – The Economic Dimension: Past, Present, and Future” in PalestineIsrael Journal Vol. 14, No. 3, 71

[7] Government of the state of Israel and the P.L.O, (1994) Protocol on Economic Relations “Paris Protocol” Article VIII <> Accessed on 17/07/2014.

[8] Roy, Sara (1999) “De-development revisited: Palestinian economy and society since Oslo” in Journal of Palestine Studies Vol. 28, No. 3, 64.

[9] Roy, “De-development,” 70.

[10] Roy, “De-development,” 72.

[11] Leon, Dan (1995) “Israeli Public Opinion Polls on the Peace Process.” Palestine-Israel Journal of Politics, Economics, and Culture Vol. 2, No. 1.

[12] Arnon, Arie (2007):“Israeli Policy towards the Occupied Palestinian Territories: The Economic Dimension, 1967-2007.” The Middle EastJournal Vol. 61, No. 4, 587.

[13] Ishac Diwan, and Radwān Alī Shabān (1999), “Development Under Adversity: The Palestinian Economy in Transition: Summary” World Bank Group, 5.

[14] Diwan, and Radwān Alī Shabān Executive Summary”, 3.

[15] Abed, George T (1994) “Developing the Palestinian Economy. An Interview with George T. Abed” in Journal of Palestine Studies Vol. 23, No. 4, 43.

[16] Roy, “De-development,” 78.

[17] Paris Protocol, Article IV.

[18] Abed, “Developing the Palestinian Economy,” 42.

[19] Reuters, “Israel to Withhold Palestinian Funds” last modified 12/12/2012.

Accessed 17/07/2014

[20] Times of Israel, “Israel to withhold PA tax transfers ahead of unity announcement” 01/06/2014 Accessed 17/07/2014

[21] Paris Protocol, Article VI.

[22] Council of The European Union, Council Conclusion on the Middle East Peace Process 3209th Foreign Affairs Council Meeting, Brussels: 10thDecember, 2012.

[23] Paris Protocol, Article III.

[24] Ma’an News, “Israel Deputy FM: No room for review of Paris Protocol,” last modified 11/9/2012, Accessed 17/07/2014.

[25] Paris Protocol, Article II.