Before The
Joint Economic Committee
October 21, 1997
Robert D. Blackwill and Robert Z. Lawrence**
John F. Kennedy School of Government
Harvard University
December 26, 1996
This report is based on a two-day meeting on 'Trade and Security in the Middle East," hosted by Harvard University's Institute for Social and Economic Policy in the Middle East (ISEPME) in Cairo on November 10-11, 1996. The meeting was designed to explore ways to enhance the flow of goods and persons in the Middle East without undermining the security of the parties involved. The basic premise of the meeting was that economic prosperity is an interest shared by Arabs and Israelis alike and that the free movement of goods and labor increases such prosperity. While the meeting was devoted to examining security considerations that affect the economic interactions among Israel, the Palestinian Authority (PA), Egypt and Jordan, this conference report focuses especially on the manner in which these considerations affect the bilateral relations between Israel and the PA.
The Declaration of Principles on Interim self-government Arrangements, signed in Washington, DC in September 1993 and the Protocol on Economic Relations, signed in Paris in April 1994, envisaged a high degree of interaction between the Israeli and Palestinian economies. Unfortunately, recurring acts of terrorism against Israeli citizens have led the Israeli government to implement prolonged and repeated closure of Israel to Palestinian goods and labor. Other tough security measures implemented at the crossing points also constrain Israeli-Palestinian trade and the Palestinians' ability to work in Israel. In turn, these measures have resulted in a significant deterioration in the economic conditions in Gaza and the West Bank, threatening the stability of the PA and the parties' ability to make further progress in the peace process.
This report concludes that enhancing economic prosperity requires Israel and the PA to act upon a pact already codified by policymakers, through various agreements between the parties, but insufficiently implemented at an operational level. The PA would take all measures necessary to prevent the planning and execution of terrorist acts against Israelis, inside Israel as well as in the West Bank and Gaza Strip. In addition, the PA and its security services would refrain from any acts that might undermine the confidence and trust of the Israeli government in the PA's willingness and ability to prevent violence against Israelis. If fully implemented by the Palestinians, such measures would make Israeli security far less dependent on the arrangements adopted at the checkpoints between the PA and Israel. In order to be effective, these security measures must remain classified, therefore, this report does not provide a detailed list of these steps.
For its part, the Israeli government would relax significantly arrangements that hinder the free movement of Palestinian labor, Palestinian-Israeli trade, and the Palestinians' ability to trade with other parties within and beyond the Middle East. This requires that closure be abandoned as a semi-reflexive policy; that investments be made by Israel in manpower and technologies that allow efficient but rapid security checks of workers, goods and transport vehicles; that privatizing the implementation of these measures be considered seriously; that VIP cards be provided to Palestinian business people, permitting them easy and rapid access to their Israeli counterparts; and that Israel minimize its intervention in the trade between the PA and other countries. These and other operational measures that would allow greater Israeli-PA economic interaction and enhanced Palestinian economic prosperity are listed in this report.
The report neither denies that the Palestinians also have legitimate security concerns, nor does it ignore the possibility that the relaxation of some security measures by Israel might involve a measure of risk. However, our considered estimate is that the danger to Israelis and Palestinians entailed in the current deterioration of economic conditions in the West Bank and Gaza Strip is far greater. In order to increase economic prosperity without undermining immediate security concerns, the Israeli government and the PA should both take bold measures. Past practice must be re-examined and new steps must be implemented to enhance economic interaction and prosperity as well as short- and long-term security for Israelis and Palestinians alike.
Economic development and physical security are both indispensable if the peace process is to continue and progressively bring ever more tangible benefits to the residents of the Middle East. We, therefore, propose in this report the enactment of a powerful pact among Israel, the Palestinian Authority (PA), Jordan and Egypt: more individual security and more commerce to the lasting benefit and general well-being of citizens throughout the area.
Without systematic progress on both fronts across the region and especially between Israel and the Palestinian Authority, the domestic political bases for continued progress toward peace cannot be maintained and expanded. Over the long run, ordinary Israelis will not support a peace process that does not lead to a reduction in the level of terrorism in Israel. Average Palestinians will not back in a sustained way President Arafat's peace effort in the face of increasing economic deterioration and cruel and endemic family hardship in the West Bank and Gaza Strip (WBGS).
Thus, the Israeli government has a profound long-term stake in facilitating increased prosperity on the West Bank and in the Gaza Strip if, by easing restrictions on the passage of goods and people and thus improving economic prospects in the WBGS, it can reduce the appeal of violent extremism among the populace there. Because Israel's responsibility for crossing points and other matters related to movement into and out of the WBGS is clearly established in the September 1995 Interim Agreement on the West Bank and Gaza Strip, it follows that the obligation for undertaking most of these operational measures lies ultimately with the Israeli government. At the same time, the Palestinian Authority undoubtedly has a vital interest in working hard to decrease -even end- violence against Israelis both in the WBGS and in Israel, in order to build confidence with the Israeli public at large that typical Palestinians, despite their sometimes acute frustrations regarding the pace of the peace process, can be trusted to reject terror as an instrument for achieving their tactical and strategic political objectives.
Tragically, however, during the past year the negotiations regarding the implementation of the Oslo agreements, and increasingly the agreements themselves, have been widely associated for many Israelis with an increase in terror that has personally and painfully touched every comer of that small society. According to the Israeli Ministry of Foreign Affairs, there were 13 violent incidents launched from the West Bank and Gaza Strip against Israeli civilians between January and September 1996 with 86 men, women and children losing their lives and scores of others injured.
In reaction to these terrorist incidents, Israel decided to curtail severely the movement of goods and people between the WBGS and Israel. As a result, this same interval has been connected in the minds of most Palestinians with a precipitous decline in economic opportunity and well-being for themselves and their families. According to the United Nations, during the past year overall economic performance in the Gaza Strip as measured in real GNP has fallen 5.6 percent. Palestinian Census Bureau figures document a rise in unemployment over the same period from 31 to 55 percent. Crucially, these unemployment figures are higher among young males who make up the pool from which the shock troops of Palestinian terrorism are recruited. The analogous figures for the West Bank are 11.2 percent and i3 to 45 percent.
In addition, economic engagement between Israel, Egypt and Jordan has been disappointing. Despite the two peace treaties, political and security preoccupations on the part of these governments have largely stifled free market enterprise and prospects for economic cooperation that could enrich all three nations, improve the standards of living for their citizens, and begin to create patterns of openness and mutually beneficial commercial behavior that are an important ingredient of long-term peace in the region.
An agreed framework in which to address these multifaceted and interlocking issues related to commerce and security has been created in a number of agreements between the Government of Israel and the Palestinian Authority. This framework is embodied not only in the September 1993 Declaration of Principles on Interim Self-government Arrangements and the September 1995 Interim Agreement (which superseded the 1994 Protocol on Economic Relations), but also in the 1995 and 1996 Tripartite Action Plans on Revenues, Expenditures and Donor Funding for the Palestinian Authority. At least as early as April 1995, when the first Tripartite Action Plan was signed in Paris, representatives of the Israeli government and the Palestinian Authority stated that the two had to work together to safeguard the security of the Israeli people and the economic well-being of the Pales s. This aim has been repeated by officials from both parties on various occasions. There has been considerable difficulty, however, in finding operational measures that translate these principles into action.
Thus, it is the aim of this report to offer specific means by which the parties can make greater progress in realizing these bilateral and multilateral commitments, in order to boost economic activity among these four parties and especially between Israel and the Palestinian Authority (which is in the most economic difficulty), while protecting the security of all the people of the region and particularly the safety of Israeli citizens (who are under the greatest terrorist threat). we wish to stress that this commerce/security initiative, meritorious though we believe it is, cannot substitute for progress in the peace process writ large. But expanded economic enterprise among these parties can serve as one pillar of a cooperative effort to create a new, safer and more prosperous reality in the Middle East.
Economic interaction and security are both desirable goals but in the short term unfortunately one of these goals sometimes comes at the expense of the other. Completely preventing the movement of goods and people is certainly one way to minimize security risks but it could produce unacceptable economic costs. Conversely, allowing complete freedom of movement of goods and labor would maximize trade but could entail intolerable security risks. Policy choices must therefore settle somewhere between these extremes. It would be both presumptuous and inappropriate for us to prescribe exactly where this choice should be made. The leaders and citizens of the region must decide how to manage these tradeoffs. But all who are concerned about the area can play a role in seeking measures to achieve given security goals more efficiently-in particular through methods which maximize regional economic interaction.
The specific prescriptions contained here all relate to improving the flow of commerce between Israel and its neighbors. We do not suggest new and improved cooperative measures regarding security collaboration among Israel, the Palestinian Authority, Jordan and Egypt. This is not because we regard goods and workers as more important than security. Indeed, the contrary is the case. In an economic sense, without adequate security regimes in place in the area, commerce will not thrive. But far more important, in moral terms the sanctity of innocent human life must always transcend the search for commercial advantage.
Therefore, the far-reaching list of possible commercial improvements contained in this report must be accompanied by an equally long inventory of new cooperative actions undertaken by security professionals in the region to combat terrorism. Indeed, it seems highly unlikely that comprehensive improvements on the commercial side will be implemented in the absence of much closer security cooperation among the parties, especially between Israel and the Palestinian Authority. Nevertheless, it seems obvious that such possible detailed security precautions against real and potential terrorists should not be specified in a public document. We, therefore, leave that indispensable work to the appropriate authorities and experts.
The views expressed here are those of the authors but we take no credit for originality regarding the specific suggestions that are enumerated below. Most of these ideas have been around in public discussion for some time. Many of the prescriptions which follow were put forward at a November 10-11, 1996, ISEPME Conference on this subject we co-chaired in Cairo that was attended by security experts, other government officials, business people, and academic specialists from Israel, the Palestinian Authority, Jordan and Egypt. What has been lacking, however, has been the political will of the parties to put recommendations such as these into practice. We hope that the publication of this report will encourage political leaders in Israel, the Palestinian Authority, Jordan and Egypt to work together to implement urgently the general thrust of our action agenda, along with parallel cooperative security measures. Time is of the essence. If this situation does not soon get better, it will get worse.
In April 1994, Israel and the PLO signed an impressive Protocol on Economic Relations which provided for free trade between the Palestinian Authority and Israel, as well as between the WBGS and its Arab neighbors. if this agreement and the subsequent Interim Agreement were implemented under the right conditions, they could dramatically improve economic conditions in the WBGS. When these agreements were signed, Palestinians looked forward to opportunities to supplement the incomes their workers earned in Israel with expanded domestic possibilities for production and trade.
But terror has shattered these hopes. A series of violent actions, which have resulted in the loss of many lives in Israel, has been followed by increased security arrangements imposed by Israel's government. Commercial conditions in the WBGS have consequently become exceedingly difficult, and having conditions are becoming increasingly unsustainable. Israel has erected trade barriers far more draconian and pervasive dm would be associated with a stringent regime put in place to protect the internal market. Moreover, frequent changes in Israeli security practices have led to great uncertainty on the part of business people throughout the area. Firms cannot be sure whether their imports will arrive or their exports will exit. Transportation costs are extremely high and delays are prohibitively long.
With restrictions on their own travel, and that of their products, Palestinians are severely hampered as both laborers and contractors in the Israeli market. The movement of people and goods between the West Bank and Gaza Strip has also been restricted; even within the various parts of the West Bank, travel is often impossible. Indeed, Palestinians have sometimes found it easier to visit Israel or foreign countries than to move between the West Bank and Gaza Strip. - Finally, the transport of goods to and from the WBGS, from both Israel and the rest of the world, has been severely curtailed.
Security concerns have therefore created a crisis in the West Bank and the Gaza Strip. According to United Nations estimates, the private sector has been particularly adversely affected the number of employers fell by about twenty-five percent in the first half of 1996 alone. Declining worker incomes, which dropped from $740 million (in 1995 dollars) in 1992 to $70 million in 1995, reflect the impact of both the border closures, which reduced the number of days movement was allowed, and the decline in the number of Palestinians permitted to enter Israel. In addition, exports from the WBGS have fallen in the same period by 53.8 percent, from $280 to $129 million. The public finances of the WBGS are in disarray. Donor money, intended for long-term projects, is being diverted to current operating budgets. The economy is being maintained by donor transfusions of public works money and infrastructure projects, and many workers have turned to the agricultural sector.
The economic impact of the closures and other restrictive security measures highlights the crucial role that commerce with the outside must play in the sustained effort to create a decent standard of living in the West Bank and Gaza Strip. The Palestinian economy is simply too small to be self-sufficient. The Palestinians have been extremely dependent on Israel for employment. if they are to be partially or largely denied these critical opportunities within Israel, the only viable alternative is a dramatic increase in domestic employment m Palestinian farms and firms that export. But as indicated above, this substitution is also undermined by Israeli security measures that persistently cause delays and commercial uncertainty.
While increased employment is provided by infrastructure and other construction projects, these are mostly financed by external donors, whose funds are increasingly used to mitigate the costs of closures. In addition, domestic industry and services have some scope for import substitution and growth. But the income generated by all these activities will inevitably spill over into an increased demand for imports. To pay for these, the Palestinian economy will have to export. If it is to succeed economically, therefore, the WBGS must have access both to neighboring and global markets. The key question is how this can be done without jeopardizing security.
As noted above, the mutual interest which both parties have in commerce and security cannot be overemphasized. Each side has a strong stake in the internal security and economic development of the other. It is imperative that the economic development of the WIBGS become a high policy priority of the Israeli government. The Israeli public in general and officials who come into daily contact with Palestinians in particular need to appreciate Israel's interest in a prosperous WBGS economy. It will provide Israel with markets, products and workers. More important, the creation of wealth in the WBGS is a necessary although not sufficient factor in boosting the desire for peace with Israel and decreasing the appeal of violence throughout the West Bank and Gaza Strip; the peace process must of course, make progress over the long run as well. Israel's political leadership should stress to ordinary Israelis the benefits of Palestinian economic development.
Similarly, it is essential that maintaining the security of ordinary Israelis becomes a predominant policy objective of the PA and that President Arafat and his colleagues make that point frequently and publicly to their constituents. Palestinians must come to understand and accept that terrorism against Israelis undermines their cause over the long term and dramatically reduces the likelihood that Israel will agree to adopt cooperative measures such as those recommended in this report.
Before considering concrete suggestions regarding the improvement of commercial interaction among Israel, the PA, Jordan and Egypt, two fundamental points should be made.
Incentives and Implementation. Israeli officials dealing with security and commerce will reflect the incentives systems that they discern from the top of their government. Consistent with the thrust of this report, these individuals should be rewarded when they facilitate economic interaction without compromising security, and penalized when they do not. Such a change in the standard operating procedures and behavior of these Israeli security personnel would require strong and tough-minded leadership from the senior ranks of the security agencies and authoritative guidance from the Prime Minister and appropriate Cabinet Ministers. Indeed, even good intentions of political leaders can be thwarted by those actually making decisions on the ground. Efforts at improvement should be closely monitored, with effective feedback mechanisms to detect implementation failures.
Cooperation. This is a pivotal factor, necessary both between each of the party's public and private sectors and among them all. The previous Israeli system in the WBGS worked through unilateral action and this tradition continues to a considerable extent. However, in some cases it has become self-defeating.
First, joint teamwork between security forces on the two sides has been initiated and it is vital to improve further such collaboration. Second, Israeli and Arab businesses are critically affected by security measures. These entrepreneurs must make positive decisions if their respective economies are to benefit and ultimately, they bear many of the costs imposed by delays, inspection requirements, closures, etc. It is therefore important that the relevant business communities be consulted and involved (naturally without veto power) both with respect to the design of security systems and their implementation. The commitment of the business community is necessary also to ensure that the costs associated with adhering to security regimes do not undermine the economic rationale for trade. For their part, businesses need to provide specific feedback to governments on how their commercial activities are being affected by security measures.
Economic interaction must be kick-started, but once firms identify and enjoy the tangible benefits from cooperation through trade, subcontracting, and joint ventures, they will in turn have a greater interest in lobbying their respective governments to both facilitate trade and ensure the security necessary to keep it thriving.
This action agenda is not meant as a precise and definitive enumeration of what needs to be done. Rather, it is an illustrative starting point and a challenge, designed to stimulate governments to implement briskly measures in the spirit of those we advocate here.
The effect of Israel's closure policy on the Palestinian economy has been devastating. Closure days totaled 28 in 1992; 91 in 1,993; 77 in 1994; 125 in 1995; and 1996 will surpass last year's number. if it is true that there is no known case of a Palestinian laborer who entered Israel with a work permit and subsequently engaged in terrorist activity, Israel should end closure as a reflexive response to acts of terrorism inside Israel.
Establish a joint Israeli-Palestinian "Security and Commerce Advisory Board," comprised of eminent economic, business and security experts charged with systematically exploring methods for improving coordination and cooperation regarding these and other similar measures.
The following recommendations are designed to allow a marked increase in the number of individuals and vehicles that can be processed for transit at the crossing points' between the Palestinian Authority and Israel:
1) Open additional crossing points between the PA and Israel.
2) Increase significantly the security personnel checking permits and cargo at the crossing points.
3) Deploy a sufficient number of state-of-the-art devices for detecting weapons and explosives carried by individuals or hidden in cargo or luggage.
4) Extend hours of operation of border facilities to 24 hours per day.
5) Authorize private security firms to conduct security checks at the crossing points.
6) Review all fees charged at crossing points and provide for accelerated inspection procedures for vehicles and goods on a per-fee basis.
7) With the above changes in place, expand considerably the volume of traffic permitted to cross borders daily.
8) Provide officers and officials at crossing points immediate access to senior decision makers in case of unexpected situations and developments.
9) Establish clear criteria and standard operating procedures for inspections to reduce arbitrary decisions made by junior officials at the crossing points.
10) End petty enforcement of regulations not related to genuine security concerns.
11) Increase significantly the number of Palestinians provided with permits to work in Israel beyond the current levels.
12) Make criteria clear-for obtaining permits to enter to work in Israel.
13) Provide extended multi-day permits to workers with long-time employment records.
14) Increase the number of Palestinian business people allowed to enter Israel.
15) Adopt procedures that allow rapid processing of applications by business people requesting entry permits.
16) Provide business people and their passenger cars extended period, multi-entry permits.
17) Allow business people overnight stays in Israel, perhaps with registration requirements.
18) Engage the security services of the PA in assisting the process of clearing Palestinian business people for extended period, multi-entry permits.
19) Provide facilities and procedures for safe passage between the West Bank and the Gaza Strip.
20) Until 19 is fully implemented:
a) Permit escorted, sealed convoys of buses and trucks.
b) Allow West Bank business people with permits to enter Israel entry into the Gaza Strip as well, and vice versa.
21) Increase opportunities for the movement of goods and business people both to and through Jordan and Egypt.
22) Lessen security inspections of goods moving out of the WBGS that are destined for Jordan, Egypt and/or points beyond.
23) Improve the operation of visa, permit, border, transportation and transit facilities between the WBGS, Jordan and Egypt; permit Palestinian goods and business people using Jordanian and Egyptian ports and airports speedy passage. .
24) Change system of cargo transportation from back-to-back (requiring that goods be unloaded at the crossing points from trucks of exporters to trucks of importers) to point-to-point (allowing exporters' trucks to be escorted to their final destination).
25) Speed the movement of goods imported to and exported from the WBGS via Israeli ports and airports.
26) Provide dedicated facilities in Ashdod and Ben Gurion airports that offer accelerated access for goods from and destined for the WBGS.
27) Allow inexpensive and reliable shipment by competing private firms of bonded goods destined for the WBGS and provide for custom clearance to occur in the WBGS.
28) Provide custom clearance facilities for Palestinian exporters in the WBGS so that they do not need to enter Israel in order to perform this task.
29) Construct a rail link to dedicated facilities in Ashdod to permit containerized shipments.
30) Begin construction of a Palestinian port and eventually establish a fully functioning airport in the PA.
31) Negotiate an agreement to allow Palestinians the right to administer customs for goods destined for the West Bank and Gaza Strip; begin the training of Palestinian officials by the Israeli customs service to ensure uniformity of treatment.
32) Cooperate with the PA in examining the feasibility of a high-speed rail link between the West Bank and Gaza Strip.
The above measures obviously do not offer a panacea to end the deep distrust that now exists between Israelis and Arabs. Seriously weakening the instinctive hostility among these peoples will take years and ending it decades at best. But history does demonstrate that enduring hatreds among neighbors can fast be attenuated and then eliminated, that longtime enmity need not be permanent. The concepts and prescriptions in this report offer only a partial means to help build trust among the parties, and especially between the Israelis and the Palestinians. But if successfully implemented along with parallel enhancements in security cooperation, tangible steps like these can make a positive difference. In our judgment, it is time to try.
Ambassador Robert D. Blackwill teaches foreign and defense policy at Harvard University's John F. Kennedy School of Government, where he also chairs the School's Executive Programs for Russian General Officers, for members of the Russian State Duma, and for senior Chinese military officers. Special Assistant for European and Soviet Affairs to President George Bush, his most recent books are Engaging Russia and Damage. Limitation or Crisis? Russia and the Outside World. He is now working on a book to be published in 1997 on The United States, Europe and the Greater Middle East.
Professor Robert Z. Lawrence is the Albert L. Williams Professor of International Trade and Investment at Harvard University's John F. Kennedy School of Government. He is also a Senior Fellow at the Brookings Institution, a Research Associate of the National Bureau of Economic Research and Chair of the ISEPME Project on Trade in the Middle East which produced the report, Free Trade in the Middle East: The Triad and Beyond. He is a member of the Presidential Commission on Pacific Trade and Investment, and has been a consultant to the World Bank, the OECD, LTNCTAD and the Federal Reserve Bank of New York. His recent studies include Single World, Divided Nations? A Vision for the World Economy and Regionalism, Multi-lateralism and Deeper Integration.
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