Executive Summary

     The Israel - PLO Protocol on Economic Relations reflects the schizophrenia that afflicts the Agreement as a whole. Is it an agreement to separate Israel from the Palestinians, politically and economically, or is it an agreement of cooperation that will bring about an integration of their economies? These questions can hardly be answered before the parties have reached a shared clear view of the final status. Whatever political options may be under consideration, the provisions of the Protocol have created a dangerous situation, more of an invitation to a trade war rather than economic cooperation. The Protocol should have been designed to provide the economic foundation for an improved standard of living and for social progress. Instead, it has contributed to the impoverishment of the Palestinian population.

The Protocol on Economic Relations

The establishment of an Israeli-Palestinian customs union.

     The Protocol on Economic Relations (hereinafter - the "Economic Protocol" or "Protocol"), signed between Israel and the PLO,¹ reflects the schizophrenia that afflicts the Agreement as a whole. Is it an agreement to separate Israel from the Palestinians, politically and economically, or is it an agreement of cooperation that will bring about an integration of their economies? These questions can hardly be answered before the parties have reached a shared clear view of the final status.² In the meanwhile, the economic interim solution may dictate the political result. Whatever political options may be under consideration, the provisions of the Economic Protocol have created a dangerous situation, more of an invitation to a trade war rather than economic cooperation. This is a harsh statement requiring explanation, especially in view of the Preamble to the Economic Protocol, which reads:

The two parties view the economic domain as one of the cornerstones in their mutual relations with a view to enhance their interest in the achieving of a just, lasting and comprehensive peace. Both parties shall cooperate in this field in order to establish a sound economic base for these relations, which will be governed in various economic spheres by the principles of respect of each other's economic interests, reciprocity, equity and fairness.

Neither the Protocol nor the preceding Gaza-Jericho Agreement make express mention of the type of arrangement chosen for the interim period, yet the provisions make it clear that this is a customs union.³ A customs union entails a common level of external tariffs and application of the same regulations of commerce to substantially all imports from nonmembers, combined with elimination of all duties and other restrictive regulations of commerce with respect to substantially all imports from members.

     Regarding external tariffs, the Protocol stipulates that the Israeli rates of customs, purchase tax, levies, excises and other charges, prevailing at the date of signing of the Agreement, as changed from time to time, shall serve as the minimum basis for importation of most goods imported into the Palestinian Authority (article III.5(a)). Three lists of goods, attached to the Protocol, have been excluded. It has also been agreed to apply the Israeli system of importation to almost all goods imported into the PA (with the exception of the goods mentioned in the above three lists) (articles III.5(b), III.10). This includes the application of Israeli standards, licensing, country of origin, valuation for customs purposes, etc. The freedom of the PA to carry out an independent importation policy is restricted, with respect to the first two lists of excluded goods, to the quantities specified therein. With respect to the third list, on the other hand, the PA has been given full authority to independently determine and change from time to time the rates of customs, purchase taxes, levies, excises and other charges on those goods. This list includes basic food items and other goods for the Palestinian economic development program. It seems to have been understood that should the PA choose to reduce customs tariffs, or other duties levied on these goods, Israel would have to follow suit, in order to prevent its own imports from being first assigned to the territories controlled by the PA.⁴

     The Protocol further provides that "there will be free movement of industrial goods free of any restrictions including customs and import taxes between the two sides, subject to each side's legislation" (article IX). There is also free movement of agricultural produce (with a few exceptions, to be eliminated by 1998), subject to Israel's veterinary and phytosanitary requirements applicable to similar imports to Israel. According to the Protocol, the Israeli requirements follow international conventions and standards.

     With respect to indirect taxes on local production, each party levies and collects VAT and purchase taxes on local production, as well as any other indirect taxes (article VI.1); the purchase tax rates must be identical for imported and domestic [like] goods (article VI.2); whereas Israeli VAT rate is 17%, the PA may choose to levy a VAT rate of 15%-16% (article VI.3). With respect to direct taxation, Israeli and the PA have remained free to determine and regulate their tax policies independently (article V). It has however been agreed that Israel would transfer to the PA 75% of the income taxes collected from Palestinians employed in Israel, and the full amount of income taxes collected from Palestinians employed in the Jewish settlements.⁵

     In line with this Protocol no customs checkpoints exist between Israel and the Territories. Israeli customs officials, present at the Palestinian customs points of the Jordan River and the Gaza Strip, should receive from the Palestinian customs officials a copy of the relevant documents related to each shipment (article III.14).

The troublesome features of the customs union

Two aspects of this customs union are especially troublesome: the competition between the PA and Israel over import revenues and the absence of rules prohibiting unfair competition.

(1) The import revenues: a Palestinian-Israeli zero-sum game

     The Protocol provides (article III.15) that the clearance of revenues from all import taxes and levies, between Israel and the PA, will be based on the principle of place of final destination. Tax revenues are allocated to the PA even if the importation is carried out by Israeli importers, provided that the final destination stated in the import documentation is a corporation registered by the PA and conducting business activity in the territories under jurisdiction of the PA. Whereas the Protocol refers only to import taxes, article III.15 was probably meant to relate also to the purchase tax collected from imported goods upon their clearance from customs, notwithstanding its classification as an internal tax imposed on domestic as well as imported goods. In practice, Israel remits to the PA both customs duties and the purchase tax collected from imports with final destination in the autonomy.

     This means that Israel and the PA are competing for the revenues from imports. The gain of one is the immediate loss of the other. The method adopted by the European Community, when faced with the same problem, is instructive. In the EC, following the completion of the customs union in 1968 and the adoption of a common customs tariff, customs duties and agricultural levies (collected upon importation of agricultural products from non-members) were designated as a source of Community revenue.⁶ It has been noted that this designation follows logically from the nature of the customs union, since in effect goods are imported into the customs union rather than into any of its members.⁷ Whatever their port of entry, the goods are then in free circulation throughout the territory of the customs union. The import duties and agricultural levies are transferred by the Member States to the Community budget, less 10% allowed to cover the costs of collection by the national administrative authorities.

     The Protocol makes it clear that as soon as the documentation indicates that the final destination of the imported goods is a corporation registered and conducting business in the autonomy, all import taxes (including purchase tax) will accrue to the PA. There is no need for them to be sold in the PA. The free circulation principle ensures their free movement in Israel. In fact, they need not reach the Palestinian territories at all. Following clearance by the customs authority, they may lawfully reach the Israeli market directly. The Protocol thus creates a clear incentive to divert trade of goods subject to a high rate of purchase tax.

     It may as yet be too early to assess to what extent imported goods with final destination in the Palestinian territories, according to their documentation, end up being sold on the Israeli market, and all data collected so far must be treated with caution. Yet, complaints that diversion of trade is in fact taking place have already been sounded by the Israeli Ministry of Trade and Industry, the Association of the Chambers of Commerce and the Association of Manufacturers.⁸ Furthermore, a report made by the Economic Department of the US Embassy in Israel notes that, "both PA and GOI [Government of Israel] Ministry of Finance have revealed to us that statistics on customs and VAT clearances (for Palestinian purchases "cleared" through Israeli collections) confirm the counter-intuitive conclusions from the CSD [the PA Ministry of Planning's Central Statistics Department] figures: imports are indeed on the rise in spite of the very real economic woes ... In looking at Q/3/96 [3rd quarter of 1996] statistics compared with Q/3/95 numbers only, imports rose across the board in all categories (at least slightly) except in building materials".⁹ The increase in imports has taken place in spite of the repeated closures imposed by Israel on the Palestinian Territories and despite the economic depression, with real GNP falling some 18%.¹⁰

     One may only speculate what the reasons might have been for not creating a joint budget for the Israeli-Palestinian customs union. One reason may be that there seemed to be no need for a common budget in the absence of common projects that might be financed from that budget. Another reason may be that, as mentioned in the Preamble, "this Protocol lays the ground for strengthening the economic base of the Palestinian side and for exercising its right of economic decision-making in accordance with its own development plan and priorities". Strengthening the Palestinian economy is indeed a very important goal, yet any solution which puts the parties at odds with each other, rather than enhance cooperation between them, may end up causing more damage than benefit to both.

     This problem is aggravated by yet another factor. Whereas purchase taxes on PA-destined imports are directed to the PA, purchase taxes on Israeli domestic products accrue to the Israeli budget. The PA has thus a clear incentive to prefer the purchase of imported goods over Israeli domestic products. This has already caused anxiety to Israeli producers, and caused the Israeli Association of Manufacturers as well as the Israeli Minister of Trade and Industry to demand that purchase taxes be transferred to the PA also in respect of Israeli products.¹¹ The Israeli finance ministry has not yielded to this demand. It is not difficult to imagine that, had it agreed, Israeli products might have first been sold to corporations conducting business in the territories subject to the PA, and then resold on the Israeli market, the PA having collected the respective purchase tax. The danger is real, in view of the systematic monopolization of trade with the PA, as explained hereunder.

(2) The absence of rules regarding competition and its impact

(a) The need to prohibit anticompetitive practices

     The second fault of the Economic Protocol is due to the absence of any rules regarding competition. Agreements that provide for the free movement of goods must take into account the inseparability of "domestic" anticompetitive behavior, motivated by industrial policy considerations, from international trade policy. Therefore, customs union agreements, and even free trade area agreements, include provisions prohibiting anticompetitive behavior.¹² Thus, article 12 of the previous FTA between Israel and the EC, as well as article 36 of the future Association Agreement with the EC, declares as incompatible with the proper functioning of those agreements:

(i) all agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings which have as their object of effect the prevention, restriction or distortion of competition;

(ii) abuse by one or more undertakings of a dominant position in the territories of the Community or Israel;

(iii) any public aid which distorts, or threatens to distort, competition by favoring certain undertakings or the production of certain goods.

The Association Agreement further requires the Parties to ensure transparency in the area of public aid.

     Articles 85-90 EC Treaty provide even more stringent rules regarding competition. Being aware that Member States are in a position to insulate public undertakings from market forces, finance them out of taxes, protect them from domestic or foreign competition, and favor their interests over those of consumers, the EC Treaty provided that special and exclusive rights, granted by Member States to public undertakings, are to be abolished if they prove to be incompatible with the free movement of goods and services. These provisions enabled EC law develop a level playing field for private and public undertakings, and implement an economic order based upon open markets and undistorted competition.¹³

     Such provisions are missing from the Economic Protocol. Article IX.3 includes a rather vague and very soft undertaking, providing that "each side will do its best to avoid damage to the industry of the other side and will take into consideration the concerns of the other side in its industrial policy". This provision is no replacement for proper rules regarding anticompetitive behavior.

(b) The regulation of distribution in the Palestinian territories through "direct agents"

     The impact of the absence of competition rules was soon to be learnt by the Israeli side. On July 26, 1995, December 18, 1995 and January 6, 1996 the Palestinian Ministry of Economy and Trade issued circulars, informing all international companies that they may operate in the Palestinian Territories only through a direct importer, agent or distributor registered with the Palestinian National Authority.¹⁴

     On March 16, 1996, a communication was issued by Palestinian Ministry of Economy and Trade, reading as follows:¹⁵

     Following this communication, the PA Ministry of Economy and Trade issued a notification, reading as follows:

The Economic Development of the Palestinian Territories

     The evaluation of the different options for an economic arrangement between Israel and the Palestinians requires some understanding of the economic development of the Palestinian Territories, in view of the political and social problems encountered both before and during the Israeli occupation. The present situation, since the territories have come under the control of the PA, is covered as well. This study is limited to the most pertinent points.

The status of the occupied territories under public international law

     The West Bank formed part of the Palestine British Mandate until 1948. Following the 1948 war with Israel, it came under Jordanian control. Jordan attempted to annex the West Bank in 1950. The annexation was not recognized under public international law, Britain (with an exception regarding East Jerusalem) and Pakistan being the only states to recognize the annexation, which was also vehemently opposed by the Arab states. ²⁶ In 1967, following the Six Day War, it came under Israeli control. Israel has not annexed the West Bank, to the exclusion of East Jerusalem. The annexation of Jerusalem has not been recognized under public international law. ²⁷ In 1988 King Hussein declared that Jordan severed its legal and administrative ties with the West Bank.

     The Gaza Strip was also part of the British Mandate until 1948. Following the war with Israel, it was administered by Egypt from 1948 until its occupation by Israel in 1967. Egypt has never claimed title to it. ²⁸ The peace treaty between Israel and Egypt specifies in article II, that "the permanent boundary between Israel and Egypt is the recognized international boundary between Egypt and the former mandated territory of Palestine ... without prejudice to the issue of the status of the Gaza Strip".²⁹

The Economy of the West Bank and the Gaza Strip Prior to the Israeli Occupation

     Prior to their occupation by Israel in 1967, the economies of the West Bank and the Gaza strip were underdeveloped and fragmented. There was no exchange between the West Bank and the Gaza Strip.

(1) The Economy of the West Bank

     The West Bank had economic ties to Jordan, and therefore its economy was comparatively stronger than that of the Gaza Strip. Yet, the West Bank remained underdeveloped. Jordan gave preferential treatment to Transjordan, that had most investments directed to it and experienced a large increase in the urban population, in contrast with the West Bank with its mainly rural society. ³⁰ This preference was also reflected in the Jordanian budget. The high rates of full and seasonal unemployment (estimated at more than 50% of the labor force³¹) caused a high rate of emigration from the West Bank mainly to the East Bank of Jordan. As a result, the population in the West Bank changed little between 1952 and 1967, rising according to some estimates, from 742,300 in 1952 to 803,000 on the eve of the 1967 war. ³² In 1966 agriculture contributed 27% of the GDP and employed about half the labor force (as compared with 7% of the labor force in Israel), this seeming discrepancy due to low productivity as well as concealed unemployment. To an extent, this resulted from the fragmentation of farm units, the small size of the agricultural units not unique to the West Bank, but rather typical and the result of Muslim inheritance patterns. ³³ Furthermore, West Bank agriculture was heavily dependent upon rainfall with only 5% of the cultivated land being irrigated. Olives constituted the main crop in the West Bank. Scarcity of water prevented the expansion of agriculture. Primitive methods were employed; sowing and harvesting were done manually by the farmers, using antiquated tools such as sickle and scythe, and animals rather than tractors.³⁴

     Industry and mining contributed 8.8% of total GDP. Most of the manufacturing was carried out by small and medium workshops. 90% of them employed less than 10 persons and two thirds of those employed even less than 5. Most of them processed primary products, such as food, beverages, tobacco, textile and clothing. ³⁵ Construction contributed 6.4% to total GDP. The services sector was dominant, contributing more than 56% of the GDP. This was partially due to the significant role of tourism, mainly from Arab countries. ³⁶

(2) The Gaza Strip

     Following the 1948 war, the Gaza Strip constituted a separate economic unit administered by Egypt. Whereas some links with the Egyptian economy were maintained, many restrictions limited economic exchange. ³⁷ The population, which was approximately 280,000 in 1948, increased steadily to 288,000 in 1950, 373,000 in 1960 and around 400,000 in 1966. ³⁸ The labor force represented only a small percentage of the total population. Thus e.g. just prior to its occupation by Israel in 1967, the labor force was estimated at 19% of the total population. ³⁹ Female participation in the labor force has been negligible. ⁴⁰

     From 1948 to 1967 agriculture (including fishing) was the main economic activity in the Gaza Strip. In 1965 a third of the work force was employed in agriculture, which provided about 36% of the GDP, and 90% of all exports, citrus being the main source of income. ⁴¹ Nearly half the cultivated area was under irrigation. Before 1967 withdrawals from Gaza aquifers exceeded average renewable recharges by some 50%.⁴²

     Industry contributed about 4% of total GDP. ⁴³ In the whole area of the Occupied Territories there was only one modern factory. ⁴⁴ It was in Gaza and produced soft drinks. The rest of the industrial production was concentrated in small workshops, that used manufacturing methods and tools even poorer than those prevailing in the West Bank. Immediately after 1948 weaving was the most important of the small industries. About two thirds of all industrial firms produced textiles and carpets. ⁴⁵ The weaving industry declined rapidly, however, because looms could not be replaced or maintained and because lower priced textile imports came to dominate the local market. ⁴⁶ Industrial firms included flour mills, olive presses, ice factories, soft drinks and sweets manufacturers, cigarette and tobacco processors and organic fertilizer plants, woven and spun textile and production of soap. Some workshops engaged in the maintenance and repair of agricultural and irrigation equipment and manufacture of packing crates. The overall manpower employed in industry has in fact decreased from 2500 in 1953 to 1782 in 1960. ⁴⁷

     Trade and personal services contributed 28% to the GDP. ⁴⁸ Foreign trade was of great importance due to the need to import most raw materials. About 50% of the raw materials came from Egypt. ⁴⁹ However, the imports into Gaza served not only the local market. Gaza merchants imported also 'luxury' goods, such as whisky, radios, china and silverware and, thanks to relaxed border controls, smuggled them into Egypt. ⁵⁰ It has been estimated that only 10% of the goods imported into Gaza were purchased for local consumption. 70% were smuggled into Egypt, and 20% were consumed by tourists. ⁵¹ Citrus exports comprised 70% of the Gaza Strip total export in 1954, and this figure increased to 90% by 1966. The Gaza Strip suffered of a steadily growing trade deficit, which was covered mainly by remittances from UNRWA (United Nations Relief and Works Agency for Palestinian Refugees in the Near East) and, to a lesser extent, by other public transfers, as well as remittances from relatives abroad. ⁵²

     Construction, mainly of private housing, contributed 6% of the GDP and provided employment for 4000 workers before 1967. ⁵³ During the '50s and '60s Egypt has forbidden UNRWA the building of any permanent housing and the casting of concrete foundations. These restrictions were intended to ensure that the refugees retain their refugee status. ⁵⁴

     The services sectors in the Gaza Strip provided most of the remaining employment and accounted for over a half of the GDP before 1967. Its income was derived from tourism, public services, transportation and services given to Egyptian, Palestinian and United Nations forces stationed there. UNRWA employed a large staff to run its refugee camps, schools and clinics. ⁵⁵ The collection of taxes throughout this period was only marginal, and accounted for only 2-3% of GNP. Customs duties on imported goods, on the other hand, provided an important source of income due to the smuggling of goods into Egypt. ⁵⁶

The Economy of the West Bank and the Gaza Strip under Israeli Occupation prior to the Intifada

     In view of the weakness and problematic structure of the West Bank and Gaza Strip economies prior to the 1967 war, Israel could hardly be blamed for having distorted the Palestinian economy. In fact, no Israeli government formulated a well-defined economic policy regarding the territories occupied in 1967. ⁵⁷ The Israeli occupation has however created problems of its own.

     In the end of June 1967, less than three weeks after the end of the Six Day War the walls separating East Jerusalem from West Jerusalem were demolished. On the next day hundreds of Palestinians reported to work, offering their labor to Israeli employers. By then Israel had suffered two years of economic recession and tens of thousands of Israelis were still serving in the military reserves. Israeli employers were thus inclined to hire the Palestinians to work, mainly in construction. From the Palestinians point of view, the sudden war had taken place amidst the agricultural season in the West Bank. The bridges connecting the West Bank to Jordan had been bombed and there was danger that most of the 1967 crops, that should have been exported to Jordan, would be lost. Tourism was in danger of a crisis in the West Bank, and the public sector employees were concerned that their salaries would no longer be paid by Jordan. ⁵⁸

     The Israeli administration helped transport the West Bank crops to Jordan, and to that end even rebuilt the bridges on the Jordan River. The interest of Jordan and other Arab countries in purchasing the crops induced them to disregard the rules of the Arab Boycott prohibiting such exchange. Many Israelis, while touring the West Bank, also bought goods on sale there, due to their competitive prices. By August 1967 many Palestinians from both the West Bank and the Gaza Strip were willing to explore the opportunities opened to them to work in Israel in building, industry and agriculture; the Palestinians working in the Gulf states renewed their remittances to their family members in the Occupied Territories; and Jordan continued the payments to its former teachers and policemen. ⁵⁹ The money thus accumulated by the Palestinians helped them renew their inventories by purchasing goods from Israeli dealers and manufacturers. Payment in cash, rather than by arrangements of credit, common in Israel, made Israeli manufacturers offer them substantial rebates. When it turned out that they were willing to compromise the quality of products, Israeli manufacturers established special production lines for cheap merchandise sold to the Palestinians. By 1986 the number of Palestinians employed in Israel was estimated at 94,700, which amounted to 36% of the total labor force in the West Bank and Gaza Strip. ⁶⁰ In 1987 109,000 Palestinian workers, constituting almost 40% of the labor force, were employed in Israel. ⁶¹ Employment in Israel has been very meaningful from the point of view of the Palestinians: the income from Israel equaled a quarter of the GDP; most persons employed in Israel had no other source of income; more than half were sole providers of large families. Work was especially important for the residents of the Gaza Strip, where most of the population was urban, the economy less developed, the per capita GDP smaller, and rate of population growth - faster. From the Israeli point of view, the importance of the economic connection was much smaller. The 109,000 Palestinians working in Israel in 1987 constituted only 7.2% of the total labor force.

     Agriculture in the Occupied Territories has undergone significant changes since 1967. The Israeli Ministry of Agriculture provided technical assistance and agricultural education services that introduced technologically advanced methods of agricultural production, mainly more efficient methods of irrigation, especially drip irrigation; the production of protected crops in polyethylene greenhouses or through polyethylene mulch combined with drip irrigation; the use of fertilizers and pesticides; careful selection of seeds and kinds of stock and seedlings; and enhanced mechanization. ⁶² As a result, some yields have doubled or tripled since 1968. ⁶³ Although productivity levels have remained well below those in Israel, the USA and selected Western European countries, they have nevertheless been comparable to or exceeded those prevailing in neighboring Arab countries. ⁶⁴ In the Gaza Strip Israeli assistance also helped farmers shift from citrus to intensive agriculture focused on the production of vegetables. Improvement of cultivation methods decreased the number of persons needed in the orange groves. Whereas citrus groves required substantial investments, and only few had the required capital, the shift to vegetables better suited the social and economic needs of the rapidly growing number of residents of the Gaza strip. ⁶⁵ With the increase of employment opportunities in Israel, fewer persons were inclined to work in the agricultural sector in the Occupied Territories. As a result, agriculture became a secondary source of income for many families, employing also women, children and old persons.

     During the first years of occupation the West Bank and Gaza Strip attained a relatively high rate of growth. The average annual growth of agricultural productivity was 12% in each of the first six years; average annual growth of industrial productivity - 15% (reaching 10% of GNP in the West Bank and 6% - in the Gaza Strip, the level being nevertheless comparable to that of developing countries); the share of building, which in the first years declined from its pre-1967 rate of 6% of GNP to 3% of GNP, then recovered and reached 6% in the West Bank and 9% in the Gaza Strip. ⁶⁶ When Israel plunged into recession and high rates of inflation in the late 1970s, GDP in the Territories grew at only 5.3% per annum. With economic growth in Israel slowing down even further, GDP in the Territories grew at 2% per annum in the early 1980s. ⁶⁷ Following economic recovery in Israel in the mid-1980s, GDP once again increased rapidly at a pace of 5.6% per annum. ⁶⁸

     The first 20 years of occupation have brought about a pronounced improvement in the standard of living of the Palestinians. Private consumption per capita rose during 1969-1986 at an overall rate of 5% per annum. ⁶⁹ This is evidenced by economic indicators, such as increase and improvement of quality of the food consumed; housing conditions; ownership of private cars, refrigerators, television sets, cooking appliances, sewing machines, etc. ⁷⁰ According to the World Bank Report, 95% of the Households in Gaza had running water and 100% had electricity (compared with 3 percent for water and 14% for electricity in 1974). This does not relate to the disadvantaged refugee camps. However, the quality of water in Gaza is far from satisfactory and electric shortcuts occur all too often. In the West Bank 79% of the households have running water and 75% - electricity, compared with 24% with water and 46% with electricity in 1974. ⁷¹

     The rate of growth of population has also moved upwards since 1967, from around 2.2% in 1968 to 3.6% in the West Bank and 3.8% in the Gaza Strip in 1987. ⁷² The increase in birth rate was accompanied by a decline in infant and child mortality. The growth of the population has since the 1950s been mitigated through negative migration. However, in 1983 Jordan forbade emigration of Palestinians to Jordan, and emigration declined to 4000 from both the West Bank and the Gaza Strip in 1983; 8000 in 1985; and 9000 in 1986. ⁷³ Life expectancy increased by a decade, from 56 in 1970 to 65 in 1987 (and 66 in 1991). ⁷⁴ Population in the West Bank increased from almost 600,000 in 1967 to 837,000 in 1987, and in the Gaza Strip - from almost 400,000 in 1967 to 545,000 in 1987. ⁷⁵ As a result of the high birth rate the population in the West Bank and Gaza Strip is very young. In 1986 Persons under 24 years of age constituted 69% of the population, whereas persons over 65 years were only 3% of the Territories population. ⁷⁶ Education has also developed significantly. The percentage of persons with at least 9 years of education has risen from 22% in 1970 to 46% in 1986 in the West Bank, and from 32% to 54% in the Gaza Strip during the same period. There has also been an increase of students enrolled in universities and academic institutes of higher education. ⁷⁷ Nevertheless, women illiteracy has remained a serious problem. ⁷⁸

     However, the story of the Palestinian economy under occupation is not just bright, as manifested by the following problems encountered:

     The trade relations between Israel and the Palestinians prior to the Intifada could be thus described as a trade of Palestinian labor for Israeli goods. ⁹¹ The number of industrial establishments has grown since 1967 thanks to the generation of capital from wages in Israel and remittances from Palestinian workers abroad, as well as the opportunities opened to Palestinian firms to subcontract to Israeli firms. However, the higher wages earned by Palestinians inside Israel were not invested in the economy of the Territories. The money was used for increasing consumption of Israeli products. Labor opportunities were not created in the Occupied Territories. This was partially due to restrictions imposed by the Israeli Civil Administration. The Government of Israel could have created incentives for investment in the Territories. However, the Israeli Government itself was uncertain whether the occupation would end with economic and political separation, or whether all of the Land of Israel west of the Jordan River would end up being integrated into one economic unit. ⁹² Another factor inhibiting economic development and making almost any investment futile was the very large rate of growth of the Palestinian population. The birth rate raises doubts regarding the viability of any program for economic rehabilitation. The Palestinian economy and welfare has become dependent on the Israeli economy.

The Economy of the West Bank and the Gaza Strip under Israeli Occupation since the Intifada

     Broadly speaking, the pattern of economic growth of the Occupied Territories since 1967 can be broken into four phases: very rapid growth until the mid-1970s; slightly less rapid growth until the early 1980s; stagnation until the onset of the Intifada (uprising) in December 1987; and decline thereafter. ⁹³

     The Intifada involved a general deterioration in security and led to disruptions in the economic relations with Israel. Since the beginning of the Intifada, data collection in the West Bank and the Gaza Strip has been disrupted. ⁹⁴ All information should therefore be treated with caution. Existing reports seem to indicate that both employment and trading activity have been adversely affected by both periodic border closures and curfews (imposed by Israel) and strikes and shop closures (imposed by the Palestinians). Exports from Gaza fell by 37.5% between 1987 and 1988 and have not recovered since. There was also a 20% decline in Palestinian employment during that year, both within the Territories and in Israel. ⁹⁵ Whereas the number of Palestinians employed in Israel has remained at about 109,000 during 1988, hours worked dropped significantly. ⁹⁶ Transportation costs to work in Israel increased as time to get to work increased mainly due to imposed road checks. ⁹⁷ This led to a decrease in the wage of Palestinians employed in Israel relative to that of Israelis and an increase in employers' costs. Strikes and demonstrations imposed work interruptions and these may have dominated the net effect on both employment and wage. ⁹⁸ Altogether, the Intifada contributed to reduced labor demand in Israel (construction being the only exception) as well as to reduced labor supply and economic activity.

     Four subsequent events influenced the Palestinian economy significantly:

     One indicator of the economic changes that have taken place in the occupied territories is the number of families in need of emergency food relief to avoid hunger. According to UNRWA, that number has increased from about 7500 in 1986 to 120,000 in the Gaza Strip and to 165,000 families in the West Bank by June 1991. ¹⁰⁷ Unemployment has thus risen to its pre-1967 level. Birth rate has nevertheless continued to grow, to about 50 per 1000 residents. ¹⁰⁸ The loss of purchasing power resulted with a decline in the production of goods for the local market. Local wages plunged. The public sector, i.e., the employees of the civil administration and of UNRWA, have become the main providers of income. The closures were coupled with export restrictions that created agricultural surpluses, which the local markets could not absorb despite very low prices. Due to the closures, Gaza's smaller subcontractors working for the Israeli textile industry faced substantial difficulties in importing raw materials and exporting finished goods. ¹⁰⁹ To pay for food, electricity and water bills it became necessary to convert private savings and assets into cash. ¹¹⁰ At the same time, Israel has allowed workers from third countries, e.g., Romania, Thailand and South America, to come on a temporary basis and replace the Palestinian workers. ¹¹¹ The dependence of the Israeli economy on Palestinian labor has thus diminished considerably, and so were also the chances for Palestinians to regain employment in Israel.

The economy of the West Bank and the Gaza Strip following the Interim Agreement with Israel

     It might have been hoped that the Agreements entered into between Israel and the PLO might improve the economy of the Palestinian territories and enhance security and peace in both Israel and the Palestinian territories. Unfortunately, to date such a development has not taken place.

     In the aftermath of the agreements, more violent incidents have taken place than ever before. On February 25, 1994 a Jewish settler from Kiryat Arba massacred at least 30 (about 50, according to the PLO) Palestinian worshipers in Hebron. This incident was the culmination of a long series of clashes between the Palestinian population and the Jewish settlers in Hebron and nearby Kiryat Arba. ¹¹² Suicide bombings struck central locations inside Israel in 1994 and 1995. The suicide attack of January 1995 prompted the Government to establish a committee, assigned to plan the separation of the Israeli economy from the Palestinian economy. ¹¹³ The plan, presented to the Government in March, included the erection of an electronic fence as well as the establishment of industrial parks on the borders of the West Bank and the Gaza Strip. The investment needed for the separating devices alone was estimated at half a billion US dollars, which seemed prohibitive. This kind of separation required also very substantial annual maintenance costs. Eventually, an electronic fence has indeed been built around the Gaza Strip. ¹¹⁴

     Since the establishment of the PA, Israeli citizens, especially those living in areas near the Palestinian territories, have been suffering from numerous thefts and from deliberate sabotage of equipment, as well as a deterioration of their personal security. ¹¹⁵ Thefts of cars transferred from Israel to the areas controlled by the Palestinian Authority were estimated at more than 40,000 in 1995. The Palestinian police has been reported to be among the users of the stolen cars. ¹¹⁶ The economic implications of these problems cannot be ignored.

     Terror has reached its peak in February 1996, when a series of terror bombings, mainly in the city centres of Jerusalem and Tel-Aviv, killed over 60 Israeli citizens and permanently maimed scores of others. An almost permanent comprehensive closure has been applied to the West Bank and the Gaza Strip since then. A relative relaxation of the closure (with over 45,000 Palestinians allowed to work in Israel) during the second half of 1996 ended when a terror bomb killed civilians in a cafe in centre Tel-Aviv in March 1997. Following that attack a comprehensive closure has been reinstated. Aside from the loss of jobs in Israel, the closures and security controls have caused serious delays in the importation and exportation of goods into the territories, especially the Gaza Strip, and made them substantially more expensive. Delays in deliveries have reduced client confidence in Palestinian suppliers. ¹¹⁷ The closure and separation policy resulted with sharply declining private investments and exports, making the four years 1992-1995 the worst in recent history. ¹¹⁸ Real GNP has declined by 18.41%. At the same time, the population increased by 27.8%. GNP per capita has thus declined by 36.16%. The West Bank and even more so the Gaza Strip have been struck by poverty and economic distress. ¹¹⁹

     The security problems and the ensuing closures resulted with a change of attitude within Israel. Whereas before the March 1996 terror attacks Israeli employers pressured the Government to grant more work permits to Palestinians, they now demanded an increase of permits issued to workers from third countries. ¹²⁰ The number of such workers has already reached 70,000 in 1995, and to about 100,000 in 1997. ¹²¹

     Other factors affecting the economic relations between Israel and the Palestinians in the aftermath of the entry into force of the agreements could be summarized as follows:

     It is true that border closures have had a severe impact over the economy of the West Bank and Gaza. The PA, with the help of the donor states, implemented a series of short-run measures, including the provision of temporary employment through public works to 40,000 workers. ¹³¹ Civilian employment rose from 34,800 in December 1995 to 39,000 in September 1996, while police employment increased from 24,000 to 33,000 in the same period. ¹³² Yet, it seems that Arafat's style of governance, characterized by lack of transparency and accountability, has been more than questionable. ¹³³ It has been alleged that corruption, favouritism and state-run monopolies are choking development and intimidating investors. Further complaints alleged that the whole bureaucracy is dominated by "the Tunisians", officially known as the "returnees", who returned with Arafat from Tunis, who run the economy in a fashion that enriches themselves as it further impoverishes society at large. ¹³⁴ The exclusive importing agencies caused a substantial rise in prices; during 1995 the price of flour has risen by 18% in Israel, but by 27% in Gaza; margarine has been subject to a price rise of 7% in Israel compared with 20% in Gaza; eggs - 26% in Israel and 41% in Gaza; soft drinks - 6% in Israel and 20% in Gaza; fish - 12% in Israel and 51% in Gaza. ¹³⁵ The price increase was more significant in the Gaza Strip than in the West Bank due to the tight closure imposed on Gaza. ¹³⁶

     The PA-controlled monopolies generate considerable revenue. It seems, however, that the profits have served to transfer income from the poorer classes to a new economic class that uses the money to pay its bureaucracy and enrich itself. ¹³⁷ In May 1997 the Budget Committee of the Palestinian Legislative Council issued a report according to which funds from foreign donors were channeled through personal accounts of Palestinian officials. The report named officials who had awarded contracts to certain companies because of "personal interests".¹³⁸ Members of the Palestinian Legislative Council claimed that $326 million, or 37% of the PA's annual budget, were wasted or misused by ministries during the past year, and that taxpayers' money was used to buy cars and villas for ministers and officials.

     According to the International Monetary Fund Report (February 1997), the PA has undertaken to dismantle import monopolies by the end of 1998, and to encourage private sector investment through the strengthening of financial intermediation. ¹³⁹ The PA has also undertaken, according to the same report, to bring all revenues and expenditures, including revenues from PA commercial activities (particularly import monopolies), under the control of the Ministry of Finance by March 1, 1997. ¹⁴⁰ The IMF Report emphasizes that this is a crucial decision, as up to one-fourth of domestic revenues are currently being diverted to accounts outside of the Ministry of Finance. This has been putting pressure on the liquidity position of the Ministry of Finance. Lack of control by the Ministry of Finance (and the resulting incomplete data) has also impeded fiscal analysis. ¹⁴¹

The Necessary International Trade Law Rules: Pros and Cons of the Various Options

     The above study portrays a difficult situation which does not lend itself to any easy solution. Still, it seems worth the effort to assess the interests of the peoples involved from an economic point of view, since, it is believed, good economics could contribute to the peace process and, so it must be hoped, to the success of peace. ¹⁴²

A free trade area

     A free trade area means a group of two or more customs territories in which duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such territories (Article XXIV.8(b), GATT). Thus, in free trade areas the members remove the barriers to trade among them, yet maintain their separate national barriers against states that are not parties to the free trade area. This means that there is need to prevent non-members from taking advantage of the free trade area by entering it through the territory of the member that levies the lowest tariff on the product in question. Therefore only products originating in the territory of the member states should benefit from the abolition of trade restrictions. To that end every free trade area agreement includes detailed rules of origin. Customs inspectors must police the borders to ensure that only those goods originating in the other parties move freely, while other goods are properly taxed.

     It has been suggested that a free trade area is more advantageous to the PA, since it allows the Palestinians to choose a suitable external tariff. ¹⁴³ However, even if the PA had wanted to set the Palestinian tariff lower than the Israeli tariff, budget financing constraints might have made such a policy difficult to implement. ¹⁴⁴ The most important objection to a free trade area stems from the fact that it is practically impossible to establish customs borders between Israel and the West Bank due to the "leakiness" of such borders. ¹⁴⁵ The idea of having one arrangement (an FTA) with the Gaza Strip, where borders already exist, and another (customs union) with the West Bank, does not seem plausible, since that would entail different political results for the two regions. ¹⁴⁶ It may be concluded that the decision to abandon this solution was a correct and wise one.

A customs union

     A customs union means the substitution of a single customs territory for two or more customs territories, so that: (i) duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade in products originating in such territories, and (ii) substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union (Article XXIV.8(a) GATT). The common external customs and commercial policy eliminates the need for customs borders between the members. The character of a customs union dictates that it is not only products originating in the members that benefit from the rules regarding free movement, but also products from third countries, which have already been imported into the territory of one of the members. Once they enter the customs union they are in free circulation in the members. ¹⁴⁷

     It has been noted that the implementation of such an arrangement between Israel and the PA has the advantage of administrative simplicity. ¹⁴⁸ A customs union could provide the Palestinian territories with access to the Israeli market, which is the largest market in the region. This is vital for their economic growth, as a small economy does not allow for economic development if it attempts to rely on the domestic markets. Even the Israeli economy, far larger than the Palestinian, is dependent upon its foreign trade. ¹⁴⁹ However, access to larger markets is often difficult for third world entrepreneurs. While there may have been nothing economically wrong with the export of labour services from the densely-populated West Bank and Gaza Strip, terror and insecurity have rendered this arrangement implausible. It therefore seemed desirable and more promising to rely on an expanded production of exportable goods rather than labor services. ¹⁵⁰

     A report prepared by a team of experts at the Harvard University endorsed a long-term goal of establishing a customs union between Israel, the West Bank, Gaza and Jordan. According to that report, Israel and the Palestinians should start immediately implementing a customs union, and Jordan should join within five years. ¹⁵¹ Studies have been carried out noting the comparative advantages, as well as shortcomings, of Palestinian economy. ¹⁵² In particular, it was noted that water shortages, growing salinity and low citrus prices in Europe have made Gaza's traditional agriculture unsuitable. Modern horticultural industry, on the other hand, involving a more versatile basket of products and advanced facilities could provide families in Gaza with an opportunity to engage in trade, their comparative advantage being based on the low cost of labour there as well as on the capability of Palestinian farm families to mobilize much labour input that has low or no opportunity cost (women, children, old family members, and the spare time of the family workers). ¹⁵³

     Since even the Israeli market is limited in its capacity to absorb goods produced in the Palestinian Territories it has been maintained that, from an economic point of view, the most viable opportunities, should be created by joint ventures between Palestinians, Israelis and Jordanians. ¹⁵⁴ Such joint ventures could include the outsourcing by Israeli enterprises in the clothing industry to Palestinian operators. Such arrangements accounted for almost half of the Palestinian exports of goods in the mid 1980s, and those exceeded, by far, levels accomplished in the neighboring countries. ¹⁵⁵ They could also take a more favourable and more advanced relationship, as exists with respect to strawberries and cut flowers grown in Gaza and exported to Europe through the forwarding facilities and marketing channels already created by Israeli entrepreneurs. ¹⁵⁶ The establishment of industrial parks near border areas could provide a continuous flow of income and durable employment for the Palestinian population. ¹⁵⁷

A common market

     A common market entails the free movement of all factors of production, namely goods, services, labour and capital. From an economic point of view, it does not matter much whether the capital goes to the labour, or the labour goes to the capital. Theoretically, the result would depend, inter alia, on the economic and legal infrastructure provided by the economies involved. For the Palestinians, the ability to seek employment opportunities outside the West Bank and Gaza Strip has been, and still is, critically important, as their economy is not yet capable of providing enough opportunities for employment. However, the security concerns of Israel have made the free movement of workers into Israel impossible in the past years. Unfortunately, so far the security concerns could not be alleviated. The closures have exposed the vulnerability of the export of Palestinian labour services to Israel. Therefore, a common market with free movement of workers has so far not seemed to be an option. ¹⁵⁸

Separate markets

     It is not only economics that may dictate the solution chosen for the Israeli and Palestinian economies. Political and emotional considerations play a significant role as well. Lingering hostility may engender a pressure to restrict economic relations to a minimum; political ambitions and national pride may result with the building of high protective walls against Israel, being the more developed neighbour as well as the former occupier and enemy; finally, threats to the security of Israeli citizens may make the closure policy a permanent one, thus stifling any chance for cooperation and free movement. ¹⁵⁹

     For Israel, separation would mean loss of benefits that could be attained by an integration of the economies. However, due to the small size of the Palestinian economy, compared with the Israeli economy, the losses will not be very significant. Israel has undergone a process of adjustment to decrease labour from the territories relatively quickly and easily, since the workers could be replaced from third countries.

     For the Palestinian economy, the results may be extremely harsh. Limited natural resources make the Palestinians dependent upon imports. The funding of the imports should come from exports, since otherwise capital has to be imported, through grants or loans, to make up for the indispensable foreign currency expenditure. International trade is necessary for the development of economies of scale. Besides, small economies cannot develop in reliance on their domestic market. Large scale is essential for the industry to be competitive, efficient and able to reap the benefits of expertise and specialization. This is true also for the much larger economy of Israel. Yet, western markets do not offer easy access to third world entrepreneurs, and the process of learning and adjusting to the demands of those markets may be slow and painful. The opportunities provided by integration with the neighbouring Israeli market seem to be critical for the development of the Palestinian economy. ¹⁶⁰

Conclusions

     From an economic point of view, the customs union with the PLO is indeed the preferable and more viable solution. It does not entail the burdensome, and costly, administrative measures needed to monitor the origin of goods in a free trade area. The need of the Palestinian economy to be integrated with an advanced economy could be satisfied. In the long run this is the most important factor for Palestinian economic development. Mainstream economic theory argues that the greatest gains in efficiency and growth tend to come from linking economies that differ in their labour skills and productivity levels, as such economies are expected to have different comparative advantages. ¹⁶¹ The benefits to the Palestinian economy have been further enhanced by the US and the EC. The Declaration of Principles caused, unintentionally, Palestinian goods the loss of benefits accruing from the US-Israel Free Trade Area Agreement. This was rectified by the US extending, through a presidential proclamation, the duty-free treatment to items originating in the West Bank, Gaza Strip and qualifying industrial zones. Following the proclamation, duty-free treatment has been accorded since November 1996. It also allows for the cumulation of Israeli and Palestinian inputs in establishing product origin. ¹⁶² The EC has also signed a Euro-Mediterranean Interim Association Agreement on Trade and Cooperation between the European Communities and the PLO. The EC has provided for a free trade area with the West Bank and Gaza Strip. ¹⁶³

     The promotion of regional infrastructural networks in electricity, transport, telecommunications, petroleum and gas pipelines and water could offer more opportunities for strengthening interdependence and benefiting from complementarities and economies of scale. ¹⁶⁴ Especially for the West Bank and the Gaza Strip, their small size, the landlocked location of the West Bank and paucity of natural resources, would make separate infrastructure services very costly. The scarce water resources, common to Israel, the West Bank and Gaza, necessitate a joint effort to reach equitable solutions, that will make use of the existing resources; plan the construction facilities for sewage treatment, making reclaimed sewage a major source for irrigation and agricultural usage; plan desalinization plants; and even consider water importation to the extent that it may be needed. ¹⁶⁵ Tourism offers one more domain for cooperation.

     The success of the customs union depends on the commitment of both parties to the mutual opening of their markets and to the adoption of rules and policies that will enhance the creation of trade rather than trade diversion. It seems very important to determine a mode of sharing the revenues from imports rather than have Israel and the Palestinians compete for them. The monopolies must likewise be dismantled and state intervention in the economy minimized. International experience has shown that protection, activist industrial policy and public channeling of money into unviable enterprises lead to economic disaster. For economies to prosper they have to rely primarily on the private sector, operating in undistorted markets. It has been noted that reliance on the private sector is especially important in the case of the Palestinian economy, since public sector resources are likely to be very scarce. ¹⁶⁶ They should thus be spent prudently.

The Required Domestic Law Rules

     The successful establishment of a customs union is dependent upon the implementation of an economic order based upon open markets and undistorted competition. One is tempted to think that free trade may be attained in a passive manner, that would let the market forces work. Quite the opposite is true. It is planned economies that require only one simple legal principle: the plan is law. Market economies must be based upon a sophisticated and a differentiated system of private and public law. ¹⁶⁷ Attaining international free trade requires not only cooperation on the international level, but also the implementation of domestic rules that would make the authorities of both Israel and the Palestinians support the rules rather than bend them in favour of local interest groups. Only through such rules would citizens be free to enjoy their rights to pursue international trade activities and explore the advantages conferred on the public at large. Whereas the establishment of a customs union is a matter of public law, its functioning has to be guaranteed by the commitment to private law rules of competition mandated by an open market economy. ¹⁶⁸

     Private sector initiative requires legal rules that govern property rights, their transfer and the settlement of disputes. The rules should be transparent, stable and enforceable in a fair and efficient manner. ¹⁶⁹ At present, the legal system in the West Bank is based mostly on the continental system with Jordanian influence, whereas in Gaza it is based more on common law from the time of the British Mandate. In most business areas there are separate laws in force in each of these territories. The duality in the legal system renders the system inadequate, complex, uncertain and leads to higher transaction costs. Thus, the companies law prevailing in the West Bank is the Jordanian one of 1964, whereas in the Gaza Strip it is the British Mandate Law of 1929 and 1930; there is no comprehensive law that governs contracts; commercial law in the West Bank is essentially the same as in Jordan; labour law has to be developed; the protection that the Landlords and Tenants Law gives the tenants resulted in a tendency to own property rather than rent it. There is need to enact laws regarding, inter alia, unfair competition, monopolistic and oligopolistic behaviour, safety, and consumer protection. Some of the areas for review and revision include the commercial code, company law, bankruptcy law, securities and intellectual property. ¹⁷⁰ According to the World Bank Report, the system of taxation lacks transparency and due process and is administered arbitrarily. ¹⁷¹

     One of the first initiatives taken by the Palestinian Authority was to prepare a Law on the Encouragement of Investments. The Law has been subject to much criticism regarding the guarantees and protection granted to investors; the scope of investment incentives; and mainly regarding the High Commission established under the Law for the promotion of investment. ¹⁷² The administrative framework of the Commission lacks transparency, its guidelines are ambiguous and its discretionary powers far too wide. Another manifestation of the administrated control is the right to appeal decisions of the Commission to the President of the PA. It has been noted that such a process is both highly irregular and inadvisable. The head of the executive is not a proper arbiter of a conflict between an investor and an administrative agency. ¹⁷³

     Economic activity and investment necessitate a strong, independent and effective judiciary. There is also a lack of coordination between the two court systems. The rules of procedure are antiquated. As a result, Palestinians usually use mediation, informal arbitration, and self-help to enforce their contracts. ¹⁷⁴

The Critical Role of Individual Rights

     The objectives of a customs union can be achieved only when supported by an adequate legal system that would ensure transparent rules, abided by private citizens and public authorities alike. This requires a system that protects individual rights and subjects its authorities to open criticism.

     The European Community has inserted into its Europa Agreements with the Central and Eastern European States provisions that would ensure their respect for human rights. Even the Euro-Mediterranean Agreements with Israel and with the PLO, which entail less integration than a customs union, include a provision (article 2) stating that "relations between the Parties, as well as the provisions of the Agreement itself, shall be based on respect for human rights and democratic principles [as set out in the universal declaration on human rights - according to the EC-PLO Agreement], which guides their internal and international policy and constitutes an essential element of this Agreement".

     In the Interim Agreement, Israel and the Palestinian Authority have undertaken to "exercise their powers and responsibilities pursuant to this Agreement with due regard to internationally-accepted norms and principles of human rights and the rule of law" (article XIV).

     To be sure, violations of human rights took place during the Israeli occupation. ¹⁷⁵ The violations were reported extensively by the electronic media and the daily newspapers; three extensive reports and many more newsletters were made by the Israeli Center for Human Rights in the Occupied Territories; Members of Knesset brought up the violations in parliamentary debates; and petitions regarding the violations were brought to the Israeli High Court of Justice. The acknowledgment that occupation entails violation of human rights resulted with disenchantment of many Israelis with the occupation.

     It could have been expected that with the transfer of powers to the Palestinian Authority the situation would improve significantly. Instead, it seems that a grave deterioration has taken place. Human Rights Watch and Amnesty International have both been very critical of the PA's repressive regime. ¹⁷⁶ Human Rights activists and journalists were arrested for criticizing the PA. Both Dr. Iyad al-Sarraj, the commissioner of human rights, and Bassem Eid, head of the Jerusalem-based Palestinian Human Rights Monitoring Group, have been arrested and threatened to cease their activities. Daoud Kuttab, a well-known Palestinian journalist and broadcaster, winner of the 1996 International Press Freedom Award of the Committee to Protect Journalists, was kept under arrest from 20.5.1997-27.5.1997, for broadcasting sessions of the Palestinian Legislative Council. The session broadcast on 19.5.1997 apparently contained particularly severe criticism of alleged corruption in the PA. ¹⁷⁷ Other transmissions have been jammed. A Palestinian human rights group charged that Arafat's security forces systematically tortured and mutilated detainees. ¹⁷⁸ According to the report, Arafat has established eight separate security forces. It has also been charged that the Chief of the Preventive Security Service has exercised censorship over the Al-Quds newspaper through almost daily contact with the managing editor, who seeks approval for all articles critical of the Palestinian Authority.

     This is clearly not an atmosphere that encourages accountability and transparency. Such curtailment of the freedom of expression and freedom of the press may allow the PA to avoid public criticism, yet it would hardly encourage private investors, or donor states, to contribute towards economic growth. Moreover, it seems impossible to have a customs union with an entity that does not observe adequate standards of human rights. The lack of accountability allows for the creation of distortions that frustrate the very basic tenets of a free market.

Peace Through Trade: Conditions For a Viable Customs Union

     The agreements entered into between Israel and the PLO reflected "their determination to put an end to decades of confrontation and to live in peaceful coexistence, mutual dignity and security".¹⁷⁹ Understanding that poverty and misery are enemies of coexistence, the parties regarded the economic domain a cornerstone in the mutual relations. The economic protocol of the Interim Agreement was a step in the right direction on the road to peace. It created a customs union between Israel and the West Bank and Gaza Strip. This choice was the best of the available options. It had the advantage of administrative simplicity while allowing the Palestinian territories access to the largest market in the region, a factor vital for their economic growth. A new economic order should have been established, enabling each party, but especially the small Palestinian economy to make the most of its comparative advantage. Cooperation in regional development of infrastructure, such as electricity, transport, telecommunications, gas and water could be envisaged. Tourism and other joint ventures could create more opportunities for cooperation and cohesion of the economies.

     So far the results have been disappointing. A main obstacle has been the deterioration of the state of security after the signing of the agreements, proving the interdependence between economic cooperation and peaceful coexistence. Sound economics may be capable of generating peace, yet no sound economic achievements can be attained in the absence of peace and security. There have been other obstacles as well. The Interim Agreement and Economic Protocol did not provide the conditions necessary for a rule-oriented customs union. To begin with, the parties were put at odds competing for the revenues from imports. This arrangement should be replaced by either creating a common budget to finance joint projects, or otherwise, by equitably sharing those revenues.

     The success of a customs union depends on the commitment of both parties to the mutual opening of their markets and to the adoption of rules and policies that will enhance the creation of trade rather than trade diversion. To that end a legal environment has to be created, that will support a private sector operating in an undistorted market. Such a legal infrastructure involves a sophisticated system of private and public law, both in Israel and in the Palestinian Authority. There is need for legal rules that govern property rights, their transfer and the settlement of disputes. The rules should be transparent, ascertainable and enforceable in a fair and efficient manner. There is also need for rules that will prohibit anticompetitive behaviour.

     The objectives of a customs union can be achieved only when the legal system is abided by private persons and public authorities alike. This requires a system that protects individual rights and subjects its authorities to open criticism.

     In the absence of any of the above conditions, Israel and the Palestinians would be obliged to separate their economies. The results of such a separation would be bad for all. On the other hand, the agreements already entered into have opened the way to a better future. Should the Israelis and Palestinians be able to surmount the differences, make the necessary rules and be truly committed to peaceful coexistence, then it would be exciting to know that good economics combined with an appropriate legal order could contribute to the peace process and - so it must be hoped - to the success of peace.

Endnotes

¹ Annex V of the Israeli-Palestinian Interim Agreement on the West Bank and the Gaza Strip, Kitvei Amana (Israel Treaty Series) 1071, pp. 281-384. According to its preamble, the Interim Agreement replaced the three preceding agreements signed with the PLO: the Gaza-Jericho Agreement signed in Cairo, May 4, 1994; the Agreement on Preparatory Transfer of Powers and Responsibilities signed at Erez, August 29, 1994; and the Protocol on Further Transfer of Powers and Responsibilities signed in Cairo, August 27, 1995. Article I of the Protocol however reads: "This Protocol, including its Appendixes, will be incorporated into the Agreement on the Gaza Strip and the Jericho Area (in this Protocol - the Agreement), will be an integral part thereof and interpreted accordingly. This paragraph refers solely to the Gaza Strip and the Jericho Area."

²The agreements signed between Israel and the PLO and their background are analyzed by Y.Z. Blum, "From Camp David to Oslo", 28 Israel Law Review 211 (1994); E. Podeh, "The Arab-Israeli Peace Process", 18 Middle East Contemporary Survey (MECS) 46, 46-52 (1994); for an insight into the events leading to the signing of the first step taken in the Declaration of Principles, cf. Y. Carmon, "The Story Behind the Handshake", 98(3) Commentary 25-29 (March 1994).

³Cf. Y. Gabai, "The Agreement on Taxation and Tariffs between Israel and the Palestinians", in: State Revenue Administration Report 1994 No. 44, pp. 261-273 (in Hebrew).

⁴ E. Kleiman, "The Economic Provisions of the Agreement between Israel and the PLO", 28 Israel Law Review 347, 359 (1994); cf. also the analysis of the rules by S.S. Elmusa, M. El-Jaafari, "Power and Trade: The Israeli-Palestinian Economic Protocol", 24(2) Journal of Palestine Studies 14 (Winter 1995).

⁵ It is noteworthy that according to the usual international practice, income tax accrues to the treasury of the territory in which a person works. Cf. Developing the Occupied Territories: An Investment in Peace (The World Bank, Washington D.C., September 1993), a six-volume series communicating the results of a study of the Multilateral Working Group in Economic Development, supported by the World Bank, at the request of the sponsors and organizers of the Middle East Peace Talks (hereinafter - World Bank Report), vol. 2: The Economy, p. 33.

⁶ Council Decision 70/243 of 21.4.1970, subsequently replaced by Decision 85/257 of 7.5.1985, which was in turn replaced by Decision 88/376 of 24.6.1988, OJ L 185/24 (articles 2(1)(a), 2(3)).

⁷ A.J. Easson, Taxation in the European Community, London: Athlone 1993, pp. 3-4.

⁸ S. e.g. A. Avneri, "An Autonomy of Smuggling", Yedi'ot Aharonot Daily Newspaper (hereinafter - Yedi'ot Aharonot) 6.2.1996.

⁹ USDOC, "Gaza Trade Statistics Show Drop in West Bank-Gaza Turnover and Increased Reliance on Israeli Supplies and Markets", December 1996. The report makes it clear that not all of the products supplied by Israel are "Israeli-produced", but may just be imported via Israel.

¹⁰ United Nations Office of the Special Coordination in the Occupied Territories (UNSCO), Economic and Social Conditions in the West Bank and Gazas Strip: Quarterly Report Winter Spring 1997, Gaza: UNSCO 1.4.1997 (hereinafter - "UNSCO Report"), p. 50

¹¹ Cf. e.g. O. Koren, "The Manufacturers, the Chambers of Commerce and the Ministry of Trade and Industry Request Peres to Discuss the Palestinian Boycott on Israeli Goods", Globes Daily Newspaper (hereinafter - "Globes") 29.3.1996; "The Israeli Iron Manufacturers are concerned: The Palestinians are Starting Independent Importation", Ma'ariv Daily Newspaper (hereinafter - "Ma'ariv") 16.4.1997; O. Koren, "The PA will prohibit the distribution of Israeli cigarettes as of January 1996", Globes 5.12.1995.

¹² Cf. E.-J. Mestmaecker, "Providing Fair Conditions of Competition Under the Free Trade Agreements of the European Economic Community", 3 Northwestern Journal of International Law and Business 296 (1981).

¹³ S. further E.-J. Mestmaecker, "Can There be a European Law?" 2 European Review 1, 11-12 (1994); E.-J. Mestmaecker, "Staat und Unternehmen in Europaeischen Gemeinschaftsrecht: Zur Bedeutung von Art. 90 EWGV", 52 RabelsZ 526 (1988); R. Whish, Competition Law, 3rd ed., London: Butterworths 1993, pp. 330-346.

¹⁴ The contents of the circular dated 6.1.1996 are brought by M. Wertheim, "Can the Law Survive a Change in Political Sentiments?" Justice No. 12, March 1997, 22, at p. 24.

15 The text is brought by Wertheim, ibid., at pp. 24-25.

¹⁶ Cf. Wertheim, ibid., p. 26.

¹⁷ Cf. S. Salomon, "The Palestinians to international trade companies: Do not operate through Israeli agents", Telegraph Daily Newspaper 11.1.1996; O. Koren, "Palestinian importers are replacing Israeli importers on the Israeli market: Israeli importers of automobile spare parts warn against decrease of State revenues", Globes 5.2.1996; G. Eshet, R. Shaked, "The Separation Policy", Yedi'ot Aharonot 24.9.1996; S. Hametz, "The Ministry of Trade and Industry and the Chambers of Commerce: The Trade Regulations of the PA - A Serious Blow to the Paris Agreement", Ha'aretz Daily Newspaper (hereinafter - "Ha'aretz") 24.9.1996.

¹⁸ Cf. R. Bergman, D. Ratner, "The man who swallowed Gaza", Ha'aretz Friday Supplement 4.4.1997, at 18-27; J. Dempsey, "Poor pickings in Gaza for Palestinian entrepreneurs: Monopolies are stifling small businesses", Financial Times 3/4.5.1997.

¹⁹ I. Lotenberg, O. Koren, "Mr. five percent", Globes 16.2.1996. The article relates how former Deputy Director, Israeli GSS [General Security Services] has become chief middleman for monopoly transactions entered into between Israeli companies and PA agencies dominated by that senior financial advisor; Bergmann, Ratner, ibid.

20 S. Moshavi, "You call this a free market?" Business Week 7.4.1997; G. Dachs, "Staat der Staatenlosen: Arafats Cliquenwirtschaft hemmt die Entwicklung von Markt und Demokratie", Die Zeit 16.5.1997.

²¹ Bergman, Ratner, supra n. 18.

²² Bergman, Ratner, ibid.; N. Arad, "Three tons of cheese were caught on their way from the autonomy", Yedi'ot Aharonot 2.6.1996. In this case, tens of tons of "La Vache Qui Rie" cheese were imported as Hebron-bound. They were reported to have been lost in a fire, a claim against the insurers accordingly brought, yet seem to have surfaced in Israel later on.

²³ Dempsey, supra n. 18; A. Hass, Drinking the Sea at Gaza, Israel: Ha'Kibbutz Ha'Meuchad 1996, pp. 358-362 (in Hebrew).

²⁴ M. Zavadjil, N. Calika,O. Kanaan, D. Chua, Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and the Gaza Strip, Washington D.C.: International Monetary Fund 1997, p. 17 (hereinafter "IMF Report").

25Regarding the legislation in the Palestinian territories cf. part 4 of this article hereunder.

²⁶ P. Malanczuk, "Israel: Status, Territory and Occupied Territories", 12 Encyclopedia of Public International Law 149, 170-171 (1990); cf. also Y.Z. Blum, "The Missing Reversioner: Reflections on the Status of Judea and Samaria", 3 Israel Law Review 279, 288 (1968).

²⁷ P. Malanczuk, "Jerusalem", 12 Encyclopedia of Public International Law 184, 193 (1990).

²⁸ Malanczuk, supra n. 26, at p. 165.

²⁹ 18 ILM (International Legal Materials) 362 (1979).

30A. Mansour, "The West Bank Economy: 1948-1984", in: The Palestinian Economy (G.T. Abed (ed.)), London: Routledge 1988, pp. 71-99; S.M. Roy, Development under occupation: A study of United States government economic development assistance to the Palestinian people in the West Bank and Gaza Strip, 1975-1985, unpublished doctoral dissertation submitted to Harvard University, 1988 (UMI - University Microfilm International), pp. 21, 263-264; A. Bergmann, Economic Growth in the Occupied Territories 1968-1973, Jerusalem: Research Department, Bank of Israel 1974 (in Hebrew), p. 86; H. Awartani, "Israel's Economic Policies in the Occupied Territories: A Case for International Supervision", in: International Law and the Administration of Occupied Territories (E. Playfair (ed.)), Oxford: Clarendon 1992, p. 399.

³¹ Bergmann, supra n. 30, p. 47.

³² Mansour, supra n. 30, pp. 71-72.

³³ Bergmann, supra n. 30, p. 47; cf. also Z. Abu-Amr, "The Gaza Economy: 1948-1984", in: The Palestinian Economy (G.T. Abed (ed.)), London: Routledge 1988, p. 106.

³⁴ Cf. Bergmann, supra n. 30, pp. 46-48; cf. also Roy, supra n. 30, pp. 264-265.

35 Mansour, supra n. 30; Bergmann, supra n. 30, pp. 57-58.

³⁶ Mansour, supra n. 30.

³⁷ Roy, supra n. 30, pp. 262-263; Z. Abu-Amr, "The Gaza Economy: 1948-1984", in: The Palestinian Economy (G.T. Abed (ed.)), London: Routledge 1988, pp. 101-120.

³⁸ Abu-Amr, ibid., pp. 101-102.

³⁹ Roy, supra n. 30, p. 265.

40 Abu-Amr, supra n. 37, pp. 102-103; cf. also Hass, supra n. 23, p. 218-224.

⁴¹ Abu-Amr, supra n. 37, pp. 105-107.

⁴² This figure is taken from the World Bank Report, supra n. 5, vol. 4: Agriculture, p. 6.

⁴³ Abu-Amr, supra n. 37, pp. 104, 109.

⁴⁴ Bergman, supra n. 30, pp. 57-58.

45Abu-Amr, supra n. 37, p. 110.

⁴⁶ Abu-Amr, ibid.

⁴⁷ Abu-Amr, ibid.

⁴⁸Abu-Amr, ibid.

⁴⁹ Abu-Amr, ibid., p. 113.

50 Abu-Amr, ibid., p. 113; Bergmann, supra n. 30, p. 77; Roy, supra n. 30, p. 263.

⁵¹ Bergmann, ibid.

⁵² Abu-Amr, supra n. 37, pp. 104, 113-114.

⁵³ Abu-Amr, supra n. 37, p. 116.

⁵⁴Hass, supra n. 23, pp. 198-199.

55 Abu-Amr, supra n. 37, p. 116.

⁵⁶ Bergmann, supra n. 30, p. 65.

⁵⁷ Cf. H. Awartani, "Palestinian-Israeli Economic Relations: Is Cooperation Possible?" in: The Economics of Middle East Peace: Views from the Region (S. Fischer, D. Rodrik, E. Tuma [eds.]), Cambridge, Mass: MIT 1993, 281, 282; Y. Elizur, Economic warfare: The hundred-year Economic Confrontation between Jews and Arabs, Israel: Kinneret 1997 (in Hebrew), pp. 171-173.

⁵⁸ Elizur, supra n. 57, pp. 165-167.

⁵⁹ Elizur, ibid., pp. 168-170.

60 Statistical Abstract of Israel 1987, 724, Table XXVII/23.

⁶¹ D. Zakai, The Economic Development in Yehudah, Samaria and the Gaza Strip 1985-1986, Jerusalem: Bank Israel - The Research Department 1988, p. 14.

⁶² World Bank Report, supra n. 5, vol. 4: Agriculture, p. 1; Bergmann, supra n. 30, pp. 48-57; Roy, supra n. 30, pp. 264-269.

⁶³ World Bank Report, ibid., vol. 4: Agriculture, p. 8.

⁶⁴ World Bank Report, ibid.

65 Elizur, supra n. 57, p. 186.

⁶⁶ Bergman, supra n. 30, p. 43.

⁶⁷ Zakai, supra n. 61, pp. 8, 11-12, 22.

⁶⁸ Zakai, ibid.

⁶⁹ National Accounts of Judea, Samaria and the Gaza Area 1968-1986 (Central Bureau of Statistics - Special Series No. 818), 60.

70 Zakai, ibid., pp. 26-31; World Bank Report, supra n. 5, vol. 2: The Economy, pp. 10-11.

⁷¹ World Bank Report, ibid.; cf. Hass, supra n. 5, pp. 166-168.

⁷² Statistical Abstract of Israel 1995, No. 46, Table 27.1; cf. also World Bank Report, supra n. 5, vol. 2: The Economy, p. 11.

⁷³ Zakai, supra n. 61, pp. 43-49.

⁷⁴ World Bank Report, supra n. 5, vol. 1: Overview, p. 5.

75Statistical Abstract of Israel 1995, No. 46, Table 27.1.

⁷⁶ Zakai, supra n. 61, p. 48.

⁷⁷ Zakai, ibid.; cf. also World Bank Report, supra n. 5, vol. 2: The Economy, p. 11.

⁷⁸ World Bank Report, ibid.

⁷⁹ Roy, supra n. 30, pp. 269-272.

80 Roy, supra n. 30, p. 274.

⁸¹ Cf. Awartani, supra n. 30, p. 411.

⁸² Roy, supra n. 30, pp. 274-276.

⁸³ Awartani, supra n. 30, pp. 406-407.

⁸⁴ Zakai, supra n. 61, p. 71.

85 Zakai, supra n. 61, p. 72.

⁸⁶ B. Abu-Kishk, "Industrial Development and Policies in the West Bank and Gaza", in: The Palestinian Economy, supra n. 33, 165, at pp. 177-179; H. Awartani, "Agricultural Developments and Policies in the West Bank and Gaza", in: The Palestinian Economy, supra n. 33, 139, at p. 160.

⁸⁷ Cf. World Bank Report, supra n. 5, vol. 2: The Economy, p. 33.

⁸⁸ World Bank Report, ibid.; Y. Dror, Infrastructure in the West Bank and Gaza, Tel-Aviv: The Armand Hammer Fund for Economic Cooperation in the Middle East/ Tel-Aviv University, November 1992 (in Hebrew).

⁸⁹ Elizur, supra n. 57, pp. 162-163.

90 Elizur, supra n. 57, pp. 175-189; A. Cassesse, "Powers and Duties of an Occupant in Relation to Land and Natural Resources", in: International Law and the Administration of Occupied Territories, supra n. 30, pp. 419-442; for the Palestinian point of view cf. I. Matar, "Exploitation of Land and Water Resources for Jewish Colonies in the Occupied Territories", in: International Law and the Administration of Occupied Territories, supra n. 30, pp. 443-457.

⁹¹ Cf. World Bank Report, supra n. 5, vol. 2: The Economy, p. 27; A. Arnon, D. Gottlieb, "The Analysis of the Palestinian Economy: The West Bank and the Gaza Strip, 1968-1991", 69 Bank of Israel Economic Review 44 (1996).

⁹² Elizur, supra n. 57, p. 186-188.

⁹³ World Bank Report, supra n. 5, vol. 2: The Economy, pp. 11-14.

⁹⁴Cf. Statistical Abstract of Israel 1995, pp. 750 (Hebrew), 120 (English) regarding Judea, Samaria and the Gaza Area.

95 World Bank Report, supra n. 5, vol. 2: The Economy, pp. 11-14.

⁹⁶ World Bank Report, supra n. 5, vol. 2: The Economy, p. 74.

⁹⁷ World Bank Report, supra n. 5, vol. 2: The Economy, p. 93.

⁹⁸ World Bank Report, ibid., pp. 36, 93.

⁹⁹ World Bank Report, ibid., p. 36.

100 World Bank Report, ibid., pp. 2, 94; regarding the widespread support for Saddam Hussein cf. S. Roy, "The Political Economy of Despair: Changing Political and Economic Realities in the Gaza Strip", 20(3) Journal of Palestine Studies 58, 59-60 (Spring 1991).

¹⁰¹Statistical Abstract of Israel 1993, Table 5.1.

¹⁰²World Bank Report, supra n. 5, vol. 2: The Economy, pp. 94-95.

¹⁰³Statistical Abstract of Israel 1995, Table 27.25.

¹⁰⁴Statistical Abstract of Israel 1995, Table 27.25.

105Elizur, supra n. 57, pp. 191-195; cf. also S.M. Roy, "Gaza: New Dynamics of Civic Disintegration", 22(4) Journal of Palestine Studies 20 (Summer 1993).

¹⁰⁶UNSCO Report, supra n. 10, p. 1; Statistical Abstract of Israel 1995, Table 27.25.

¹⁰⁷Cf. Roy, "Gaza: New Dynamics of Civic Disintegration", supra n. 105, p. 22; Roy, "Separation or Integration: Closure and the Economic Future of the Gaza Strip Revisited", 48(1) Middle East Journal 11, 15 (Winter 1994).

¹⁰⁸World Bank Report, supra n. 5, vol. 1: Overview, p. 5.

¹⁰⁹UNSCO Report, supra n. 10, pp. 56-57.

110UNSCO Report, supra n. 10, p. 53.

¹¹¹Elizur, supra n. 57, p. 196.

¹¹²Cf. M. Litvak, E. Berkhess, "Palestinian Affairs", 18 Middle East Contemporary Survey (MECS) 132, 135-138 (1994).

¹¹³Elizur, supra n. 57, pp. 199-202.

¹¹⁴R. Sofer, "The fence surrounding Gaza has been completed", Yedi'ot Aharonot 30.11.1994.

115U. Binder, "It feels as if we live on the North border", Ma'ariv 3.4.1994; A. Fishman, "The ripped seam", Yedi'ot Aharonot 15.12.1995; H. Elush, N. Dotan, "Thefts: a real threat to the existence of agriculture on the border-line", 88-89 Moledet 1/96; D. Brener, "The members are required to pursue the thieves", Ma'ariv 20.3.1997.

¹¹⁶S. Bhatia, "Hot Cars bring cool cash from Gaza Palestinians", London Observer 24.12.1994; It has been reported that a portion of the stolen cars are used by the Palestinian police: B. Barak, "A senior intelligence officer of the Israeli police confirms: the Palestinian security forces drive stolen Israeli vehicles", Yedi'ot Aharonot 16.9.1994; E. Bohadna, "The Palestinians: We shall return stolen cars in exchange for refund of taxes collected by Israel", Ma'ariv 25.7.1994; "A catastrophe is expected regarding the number of car thefts", Yedi'ot Aharonot 4.3.1995, mentioning a forecast of 60,000 stolen vehicles in 1996; E. Levin, "The Palestinian Authority has offered to pay ransom to legitimate stolen vehicles", Globes 15.4.1997. According to the article the PA has offered to pay the Association of the Israeli Insurance Companies a lump sum for 15,000 vehicles, provided that no more complaints will be made regarding stolen cars. The offer has been rejected, according to the report, for fear that such a settlement may encourage future thefts; Y. Markus, "When Chich calls Tibi", Ha'aretz 6.6.1997. According to this report, S. Lahat ('Chich'), the former Mayor of Tel-Aviv, upon discovering that his car had been stolen, turned to Dr. Tibi, Arafat's adviser, and recovered his car in less than two hours. The article raises doubts whether car thefts from Israel to the Palestinian Territories has become so well organized that it takes Arafat's adviser to return a car.

¹¹⁷UNSCO Report, supra n. 10, p. 56; The issue of building a new port in Gaza, to alleviate the problems created by the closure, is outside the scope of this article. The port would facilitate direct import and export to the Gaza Strip, yet pose serious security problems for Israel (control of the direct import of armaments). The port would also aggravate the problems caused by the competition between Israel and the Palestinian Authority over the revenues from imports. It is noteworthy that the World Bank Report raised doubts regarding the economic viability of such a new port, and suggested that the issue be assessed in the regional context. Cf. World Bank Report, supra n. 5, vol. 5: Infrastructure, p. 76.

¹¹⁸Cf. M. Levine, "Palestinian Economic Progress Under the Oslo Agreements", 19 Fordham International Law Journal 1393, 1405 (1996); UNS5CO Report, supra n. 10, pp. 1-2, 6.

¹¹⁹Cf. MAS (The Palestine Economic Research Institute) Policy Notes: Standards of Living in the West Bank and Gaza Strip, Issue No. 4, September 1996; S. Roy, "'The Seed of Chaos, and of Night': The Gaza Strip after the Agreement", 23(3) Journal of Palestine Studies 85 (Spring 1994).

120Elizur, supra n. 57, p. 198.

¹²¹R. Sa'ar, "A Ministers' Committee approved recommendations to restrict foreign workers to 17,500", Ha'aretz 16.4.1997. The Committee has also decided to increase the number of work permits issued to Palestinians to 70,000 by the end of 1997, 30,000 of whom will also be licensed to work during border closures.

¹²²R. Shaked, "Arafat revoked the legal rules introduced by Israel in the Autonomy; Singer: He is in breach of the Agreement", Yedi'ot Aharonot 25.5.1994; Raja Shehadeh, "Questions of Jurisdiction: A Legal Analysis of the Gaza Jericho Agreement", 23(4) Journal of Palestine Studies 18, 23 (Summer 1994); The scope and content of some of the legal rules applied by Israel to the Palestinian territories is discussed by E. Benvenisti, Legal Dualism: The Absorption of the Occupied Territories into Israel, Boulder: Westview 1990. The military orders introduced, inter alia, changes motivated by welfare considerations, e.g., the institution of public health services; The changes introduced by Israel in the tax system are detailed by E. Sharon, "The Tax System in Judea, Samaria and Gaza Prior to the Establishment of the Autonomy", in: State Revenue Administration Annual Report 1994 No. 44, pp. 275-283 (in Hebrew); Cf. also J. Rabah, N, Fairweather, Israeli Military Orders in the Occupied Palestinian West Bank 1967-1992, Jerusalem: Jerusalem Media & Communication Centre 1993; World Bank Report, supra n. 5, vol. 5: Infrastructure, p. 18.

¹²³Cf. J.R. Weiner, "Hard Facts Meet Soft Law - The Israel-PLO Declaration of Principles and the Prospects for Peace: A Response to Katherine W. Meighan", 35 Virginia Journal of International Law 931, 950 (1995).

¹²⁴Cf. Benvenisti, supra n. 122, pp. 31-32, 41.

125O. Koren, "The Chambers of Commerce: it appears that as a rule businessmen in the territories fail to make payments to Israeli businessmen", Globes 11.12.1995. According to the article, this problem has also affected trade relations maintained regularly over a prolonged period; A. Avneri, "Concern over the fate of the cooperation agreements and collection of debts", Yedi'ot Aharonot 30.9.1996.

¹²⁶A. Inbar, "The bill will be presented to the Government", Globes 28.1.1994. The electricity, water and telecommunications services have been given to the local municipalities, who in turn provided them to the population. However, the municipalities have not paid the bills.

¹²⁷Cf. World Bank Report, supra n. 5, vol. 3: Private Sector Development, p. 4.

¹²⁸World Bank Report, supra n. 5, vol. 1: Overview, p. 13; vol. 2: The Ecnomy, p. 56; vol. 3: Private Sector Development, p. 3; cf. Levine, supra n. 118, p. 1400.

¹²⁹World Bank Report, supra n. 5, vol. 1: Overview, p. 13.

130World Bank Report, supra n. 5, vol. 1: Overview, p. 18.

¹³¹IMF Report, supra n. 24, p. 8.

¹³²IMF Report, ibid., p. 23; cf. also UNSCO Report, supra n. 10, p. 28.

¹³³N. Haetzni, "Gaza on the brink of bankruptcy", Ma'ariv 5.5.1995; Bergman, Ratner, supra n. 18; S. Moshavi, "You call this a free market?" Business Week 7.4.1997; D. Hirst, "Shameless in Gaza", Guardian Weekly 27.4.1997; Fawaz Turki, "Arafat's awful reign", Washington Post 21.5.1997; Gisela Dachs, "Staat der Staatenlosen: Arafats Cliquenwirtschaft hemmt die Entwicklung von Markt und Demokratie", Die Zeit 16.5.1997.

¹³⁴Hirst, supra n. 133. According to the article out of the $74 for which a ton of cement is sold in Gaza, $17 goes to the PA, and $17 into Arafat's own account in a Tel-Aviv bank.

135G. Eshet, U. Nahshon, "The cash-box is empty", Yedi'ot Aharonot 24.9.1996.

¹³⁶Peace Watch Report 3/97 - Corruption as a System of Governance, p. 3. The report points out that the closures are necessary for the monopolies to prosper. The report also relates that, whereas the Israeli Civil Administration eventually licensed the establishment of a cement plant in Hebron, and a group of entrepreneurs from Hebron and Shekhem have organized to invest in it, the PA, shortly after coming into office, revoked the licence and instead established monopolies to import cement from the Israeli monopoly and from a plant in Jordan.

¹³⁷Cf. S. Roy, "Economic Deterioration in the Gaza Strip", Middle East Report (July-September 1996) 36, 38.

¹³⁸Report of the Palestinian Legislative Council Budget Committee for Financial Matters Regarding the Planned General Budget of the PA Law F/Y 1997, May 1997 (in Arabic).

¹³⁹IMF Report, supra n. 24, p. 17.

140IMF Report, supra n. 24, p. 19.

¹⁴¹Ibid.; Bergman, Ratner, supra n. 18, mention more than half a billion NIS (about 170 million US dollars) that have been transferred by Israel to a secret account in Tel-Aviv, controlled according to the report, by Yasser Arafat.

¹⁴²Cf. "Economic Transition in the Occupied Territories: an Interview with Stanley Fischer", 23(4) Journal of Palestine Studies 52-61 (Summer 1994); cf. also R. Arad/ S. Hirsch/ A. Tovias, The Economics of Peacemaking (Study for the Trade Policy Research Centre, London, UK/ Washington D.C., USA), London: MacMillan 1983.

¹⁴³Nu'man Kanafani, Professor of Economics at the Royal Veterinary and Agricultural University in Copenhagen, Palestinian - Israeli Trade Relations (1): Free Trade Area or Customs Union? MAS (The Palestine Economic Policy Research Institute) Policy Notes, Issue No. 1, August 1996; Samir Huleileh, PA Assistant Deputy Minister of Trade, views this a political rather than economic reason for establishing an FTA, since it would allow the Palestinians to define their relationship with third countries and the international market independently - Palestinian - Israeli Trade Relations (2): Trade Policy Options for the West Bank and Gaza Strip, MAS (The Palestine Economic Policy Research Institute) Policy Notes, Issue No. 2, September 1996.

¹⁴⁴Ibid.; cf. also the comments of Samir Huleileh, PA Assistant Deputy Minister of Trade, ibid.

145World Bank Report, supra n. 5, vol. 1: Overview, p. 14.

¹⁴⁶Samir Huleileh, PA Assistant Deputy Minister of Trade, Palestinian - Israeli Trade Relations (2): Trade Policy Options for the West Bank and Gaza Strip, supra n. 143.

¹⁴⁷Cf. article 9(2) EC Treaty.

¹⁴⁸World Bank Report, supra n. 5, vol. 1: Overview, p. 14.

¹⁴⁹Cf. T. Einhorn, The Role of the Free Trade between Israel and the EEC: the Legal Framework for Trading with Israel between Theory and Practice, Baden-Baden: Nomos 1994, pp. 15-20.

150Cf. E. Sadan, "Durable Employment for the Refugee-populated Region of Gaza", Paper presented at the Middle East Multilateral Conference at the Centre for International Relations, University of California, Los Angeles, June 5-8 1993, published in: Practical Peace-Making in the Middle East: the Environment, Water, Refugees and Economic Cooperation and Development, N.Y.: Garald 1995.

¹⁵¹Toward Free Trade in the Middle East: The Triad and Beyond - A Report by a Team of Israeli, Jordanian and Palestinian Experts (Robert Z. Lawrence, Kennedy School of Government [Chair]), Cambridge, Mass.: Harvard 1995.

¹⁵²Cf. E. Sadan, "Sourcing Alliances and Open Market Transactions: Trade in Goods between Israel, Jordan and the Palestinian Economy", in: S. Roy, K. Pfeifer (eds.), The Economic Ramifications of Peace in the Middle East: Research in Middle East Economics, Cambridge: Harvard 1997, vol. 3 (forthcoming).

¹⁵³Cf. Sadan, "Durable Employment for the Refugee-populated Region of Gaza", supra n. 150; Awartani, "Palestinian-Israeli Economic Relations: Is Cooperation Possible?" supra n. 57, pp. 288-289.

¹⁵⁴Cf. Sadan, "Sourcing Alliances and Open Market Transactions: Trade in Goods between Israel, Jordan and the Palestinian Economy", supra n. 152.

155Ibid.

¹⁵⁶Ibid.; cf. also S. Hirsch, I. Ayal, N. Hashai, R. Khesin, Arab-Israeli Potential Trade: The Role of Input Sharing, Tel-Aviv: The Armand Hammer Fund for Economic Cooperation in the Middle East/ The Israel Institute of Business Research, Tel-Aviv University 1996; Awartani, "Palestinian-Israeli Economic Relations: Is Cooperation Possible?" supra n. 57, pp. 289, 292-295.

¹⁵⁷E. Sadan, "Durable Employment for the Refugee-ppopulated Region of Gaza", supra n. 150; cf. also e.g. H.Weiss, Y. Kasif, A Feasibility Study, Prepared for the Association of Manufacturers, Regarding a Joint Venture in the Textile Sector, to be located in the planned Karni industrial park, February 1997 (unpublished).

¹⁵⁸Toward Free Trade in the Middle East: The Triad and Beyond, supra n. 151, p. 15.

¹⁵⁹Cf. N. Halevi, "Economic Implications of Peace: The Israeli Perspective", in: The Economies of Middle East Peace: Views from the Region (S. Fischer, D. Rodrik, E. Tuma (eds.)), Cambridge: MIT 1993, 87, at p. 107; E. Kanovsky, "Assessing the Mideast Peace Economic Dividend", BESA (Begin-Sadat) Centre for Strategic Studies, Bar-Ilan University, Mideast Security Studies No. 15 1994 (in Hebrew); cf. also H. Awartani, S. Awad, Palestinian - Israeli Joint Ventures: Constraints and Prospects, Nablus: Department of Economics, Centre for Palestine Research and Studies (CPRS), April 1994 (in Arabic. English summary).

160Cf. World Bank Report, supra n. 5, vol. 1: Overview, p. 13.

¹⁶¹Cf. R. S. Belous, J. Lemco, "The Nafta Development Model of Combining High- and Low-Wage Areas", in: NAFTA as a Model of Development (R.S. Belous, J. Lemco [eds.]), New York: State University of New York 1995, p. 6; Ishac Diwan, Regional Coordinator for the Economic Development Institute at the World Bank, "Three Questions, Three Options", in: Palestinian - Israeli Trade Relations (2): Trade Policy Options for the West Bank and Gaza Strip, supra n. 143.

¹⁶²Cf. Authorization of the President to make the proclamation, 104th Congress of the USA, 2nd session, 3.1.1996; The White House Office of the Press Secretary, Press Release November 14, 1996; 16(7) Middle East Business Intelligence, April 5, 1997.

¹⁶³OJ C 1997 128/1 (24.4.1997). The current agreement is pending ratification by the PA.

¹⁶⁴World Bank Report, supra n. 5, vol. 1: Overview, p. 14.

165N. Kliot, Water Resources and Conflict in the Middle East, London: Routledge 1994; A. Sofer, Rivers of Fire: The Conflict of Water in the Middle East, Tel-Aviv: Am Oved/ Haifa University 1992 (in Hebrew); J. R. Starr, D. C. Stoll, The Politics of Scarcity: Water in the Middle East, London: Westview 1988; E. Kally, Options for Solving the Palestinian Water Problem in the Context of Regional Peace, Israeli-Palestinian Peace Research Project Working Paper Series No. 19, The Harry Truman Research Institute for the Advancement of Peace, The Hebrew University of Jerusalem Winter 1991/92; Abdel-Rahman Tamimi, Water: A Factor for Conflict or Peace in the Middle East, Israeli-Palestinian Peace Research Project Working Paper Series No. 20, Arab Studies Society, Jerusalem Winter 1991/92; F.M. Fisher, An Economic Framework for Water Negotiation and Management, Cambridge: Harvard University John F. Kennedy School of Government 1.4.1994.

¹⁶⁶World Bank Report, supra n. 5, vol. 1: Overview, p. 13.

¹⁶⁷Cf. E.-J. Mestmaecker, "Can there be a European Law?" supra n. 13, p. 11; for an analysis of the injury caused to the rule of law by such regulated competition cf. E.-J. Mestmaecker, "Zwischen freiem und verwaltetem Wettbewerb - Moeglichkeiten und Grenzen der Wettbewerbspolitik", in: E.-J. Mestmaecker, Recht in der offenen Gesellschaft, Baden-Baden: Nomos 1993, pp. 667-672.

¹⁶⁸Cf. E-J. Mestmaecker, "Can there be a European Law?" supra n. 13, p. 12; E.-J. Mestmaecker, "Staat und Unternehmen in Europaeischen Gemeinschaftsrecht: Zur Bedeutung von Art. 90 EWGV", supra n. 13.

¹⁶⁹Cf. Elmusa, El-Jaafari, supra n. 4, p. 15; the contributions of J. MacFarlane and H. Al-Zuabi from the Birzeit University Law Center; J. Battat, from the Foreign Investment Advisory Service; M. Nasr, Dean of the Faculty of Commerce at Birzeit University, in: The Legal Framework for Business in the West Bank and Gaza Strip, MAS Policy Notes, Issue No. 3, September 1996; World Bank Report, supra n. 5, vol. 1: Overview, pp. 17-18; cf. How to Conduct Business in the Palestinian Territories, Jerusalem: The Small Business Support Project 1996.

170Cf. D. Perla, R. Abdul-Hamid, M. Haller, D. Kalman, Intellectual Property Reform in the Palestinian Territories, Jerusalem: IPCRI (Israel/Palestine Centre for Research and Information) 1997; R. Bahu, E. Melloul, W. Walsh, Banking Law Reform in the Palestinian Territories, Jerusalem: IPCRI (Israel/Palestine Centre for Research and Information) 1995.

¹⁷¹World Bank Report, supra n. 5, vol. 1: Overview, p. 17; cf. R. Hamid, M. Haller, K. Molkner, Tax Law Reform in the Palestinian Territories, Jerusalem: IPCRI 1996.

¹⁷²K. Molkner, A Critical Analysis of the Palestinian Law on the Encouragement of Investment, Jerusalem: IPCRI (Israel/Palestine Centre for Research and Information) 1995; cf. also the criticism of Battat in The Legal Framework for Business in the West Bank and Gaza Strip, supra n. 169.

¹⁷³Molkner, supra n. 172, p. 31.

¹⁷⁴D. Kalman, R. Abdul Hamid, M. Dahleh, A. Qayyum, T. Nybo Rasmussen, Commercial Contract Enforcement in the Palestinian Territories, Jerusalem: IPCRI (Israel/Palestine Centre for Research and Information) 1997.

175Cf. e.g. B'Tselem, The Israeli Information Center for Human Rights in the Occupied Territories, Annual Report of Violations of Human Rights in the Territories 1989, Jerusalem: B'Tselem 1989; B'Tselem, Violations of Human Rights in the Territories 1990/91, Jerusalem: B'Tselem 1992; B'Tselem, Violations of Human Rights in the Territories 1992/93, Jerusalem: B'Tselem 1994.

¹⁷⁶Human Rights Watch World Report 1996, pp. 290-293; Amnesty International: Palestinian Authority Bulletin, 22.5.1997. According to the bulletin the broadcasts of the sessions of the Palestinian Legislative Council are frequently jammed by the PA, as they often contain severe criticisms of the Palestinian Authority.; B'tselem - The Israeli Information Center for Human Rights in the Occupied Territories, Punishment without trial, illegal arrest and torture of Palestinians residents of the West Bank by the Palestinian Security Services: Summary, August 1995; R. Shaked, "The investigation chambers of the Palestinian General Security Services", Yedi'ot Aharonot 9.9.1994; H. Shlain, "A "B'tselem investigator has been released yesterday from arrest in Ramalla", Ma'ariv 4.1.1996.

¹⁷⁷Amnesty International: Palestinian Authority Bulletin 22.5.1997, ibid.

¹⁷⁸S. Ghazali, "Torture, Murder and Lies", Associated Press 27.5.1997; The Palestinian Human Rights Monitor, "Deaths in Custody: 1st Quarter 1997", March - April 1997, Issue #2.

¹⁷⁹The Preamble to Interim Agreement.

     ^* Dr. Einhorn is a Senior Lecturer-in-Law, The Israeli Center for Academic Studies (affiliated with the University of Manchester, UK).

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