Economic Interdependence Complicates Israeli-Palestinian Separation, Say Experts
Despite political conflicts, Israelis and Palestinians remain economically intertwined, posing challenges to full separation
The war between Israel and Hamas in Gaza has brought two conflicting ideas regarding Palestinian statehood. On the one hand, countries in the international community, including the US, believe the issue should be promoted at this tumultuous time. On the other, there are elements in the Israeli government and public who reject the notion of a Palestinian state bordering Israel while calling for the dissolution of the Palestinian Authority (PA), which governs the Palestinians in parts of the West Bank.
However, despite the animosity that exists, Israeli and Palestinian lives are very much connected. While it may be desirable for some, a complete separation between the two peoples is a difficult and tedious task. With the economies intertwined, disconnecting the two would have serious implications for both sides.
According to United Nations data, there were almost 200,000 Palestinians employed in Israel and in the territories it has occupied since the 1967 Mideast war. The numbers have fluctuated minimally since then due to the lack of alternatives the PA has compared to the Israeli market.
This also demonstrates Israel’s dependence on Palestinian workers. According to Kav LaOved, an Israeli nonprofit organization that promotes labor rights, the majority of Palestinians in Israel work in the construction sector, others in agriculture, industry, and service sectors. The money they earn acts as a major engine for the Palestinian economy, injecting it with millions of dollars annually.
The UN data also shows Israel is the PA’s largest trading partner, dominating almost 70% of its trade with other countries. All these financial arrangements are part of the historical economic agreements the parties signed in Paris in 1994, a year after the Oslo Accords signed between Israel and the Palestinians saw the establishment of the PA.
The protocol unequivocally operates against an independent Palestinian economy
“While the PA is independent in all civilian matters such as health care and education, the Paris agreements did not allow independence,” said Professor Zvi Eckstein, head of the Aaron Institute for Economic Policy at Reichman University. “The protocol unequivocally operates against an independent Palestinian economy. Today, there is an increasing understanding that this structure is mistaken.”
The agreements barred the Palestinians from establishing their own currency, having an independent export system, and limiting their ability to take out loans from foreign governments. The protocol spoke about “integrated economies” bonding the two together.
This system does not allow for Israel and the Palestinians to disconnect
“This system does not allow for Israel and the Palestinians to disconnect,” Eckstein told The Media Line.
When the war erupted between Israel and Hamas in the Gaza Strip in October 2023, one of Israel’s first responses was to deny the entry of Palestinian laborers from the West Bank into Israel. According to Israeli defense officials, their entrance posed security concerns and a potential for further tensions between Israelis and Palestinians.
However, according to the International Labor Organization, this has resulted in the loss of 32% of employment in the West Bank. In Gaza, which has been controlled by Hamas since 2007, the situation is worse, with an estimated loss of 60% of employment. The organization expects these numbers to continue to rise as the war drags on.
Economic cooperation between the warring sides exists and is anchored by international agreements signed in the 1990s.
According to Samir Abdullah, an associate professor at Bir Zeit University in the West Bank, trade has slowed down since the beginning of the war but has not stopped. With the complete stop of the movement of Palestinian workers into Israel, the Palestinian economy has slowed down.
“There is almost a complete disconnect,” Abdullah told the Media Line. He also believes the unemployed will now seek work in the PA. “The Israeli demand for labor put the Palestinian construction sector in a squeeze without workers. Now, there will likely be more supply than demand.”
The construction sector is a vivid example of the connectivity between the two economies. Israel has been facing a housing crisis for several years, and the current shortage in labor has organizations such as the Israeli Builders Association warning of an impending crisis.
However, according to Eckstein, both economies need to wean themselves from Palestinian laborers working in Israel. As former deputy governor of Israel’s central bank, Eckstein authored a report on behalf of a governmental committee in 2011, in which he stated that allowing for such work has a positive outcome mainly during an interim period before establishing an independent Palestinian economy.
“While it helps develop the economy, it creates dependency,” he said. “The key is to establish industries in the Palestinian territories. Export industries are the most important element in the development of small-sized economies.”
The Oslo Accords and the Paris Protocol regarding the economic setup of the PA were indeed supported to be an interim phase ahead of Palestinian statehood that never materialized.
The initiative that the US is reportedly leading, which would include a statement on a future of statehood for the Palestinian people, is meant to include both the Gaza Strip and the West Bank territories under PA control.
The control of the borders in both the West Bank and the Gaza Strip, barring the Rafah crossing, which Hamas and Egypt manage, remains solely in Israeli hands. This is also key to the Palestinians’ continued dependence on Israel.
“Nothing exists that Palestinians cannot get from other countries than Israel, but since the borders are controlled by the Israeli military, Palestinians cannot replace the Israeli imports,” said Abdullah.
Israel’s current government is the most right-wing ever to govern the country. Led by Prime Minister Benjamin Netanyahu, it adopted a hard-line position toward the PA even before the war broke out.
In the months before the war, amid escalating violence in the West Bank and a surge in Israeli settlement construction in the area, the PA was believed to be on the verge of collapse. Israel took measures to prevent this, reflecting Netanyahu’s acknowledgment not only of the political sensitivities but also of the co-dependence that exists between the two economies.
One of Netanyahu’s senior coalition partners is the far-right politician Bezalel Smotrich, whom Netanyahu appointed as finance minister. Smotrich has repeatedly spoken in favor of dissolving the PA and the complete disconnection between it and Israel. On Monday, Smotrich said establishing a Palestinian state instead of the PA would be akin to “replacing a cow with a donkey.”
Smotrich was echoing a sentiment of many Israelis who accuse the PA of condoning terrorism by paying stipends to the families of Palestinians who have engaged in violence against Israelis. The finance minister has also been against transferring funds earmarked for the PA. These funds amount to millions of US dollars and are mostly tax revenue that Israel collects on behalf of the PA as part of the Oslo Accords.
After the funds were frozen for a few months since the war began, Norway announced earlier this week that it would transfer the funds to the West Bank after receiving them from Israel. However, money for the Gaza Strip will still be withheld.
At the basis of any change to the structure of the Palestinian economy and the change the Israeli economy would also undergo as a result lie the political will, or lack thereof, of both sides.
The challenges facing the Palestinian economy are immense and include overcoming the largely corrupt system that currently runs it. Plagued by corruption, this is a significant impediment to any progress. Also, the lack of territorial continuity between the West Bank and the Gaza Strip and within the West Bank poses another stumbling block that needs political will in Israel to be removed.
Anything that allows Israelis and Palestinians to disconnect allows for Palestinian independence
“Anything that allows Israelis and Palestinians to disconnect allows for Palestinian independence,” said Eckstein. “In the current political constellation on both sides, there doesn’t seem to be a majority on either side. But it is entirely possible to allow for the development of an independent Palestinian economy in a measured and slow manner, with the involvement of international organizations.”
In the current hostile climate with a war unlike any other fought between Israelis and Palestinians, this seems unattainable.
“Mutual interests on the economic side are very much affected by the political changes,” Abdullah said. “Unless there will be real peace, the current relationship is unstable and unsustainable.”
