Overall Chronology

After Israel and the Palestine Liberation Organization (PLO) signed the Declaration of Principles on Interim Self-Government Arrangements (DOP) for the West Bank and Gaza Strip in Washington, DC on 13 September 1993, the two sides commenced negotiations to set the practical arrangements for Palestinian autonomy. In addition to the legal, political, and security-related aspects, the discussions included implementing the provisions of the declaration on economic matters, with the aim of establishing a common working ground and regulating the contractual aspects of economic relations between the territory under Palestinian self-rule, Israel, and the international economic system.

Article XI and Annexes III and IV of the DOP provided for sustained economic cooperation to promote the development of the West Bank, the Gaza Strip, and Israel. This cooperation was based on the recognition of mutual benefit and the need to work together for the development of areas such as water, electricity, finance, transportation, trade, and industry, in addition to broader regional economic cooperation.

Talks about economic arrangements commenced in Paris in November 1993, under the joint chairmanship of Ahmad Qurai' (Abu Ala') representing the PLO and Avraham Shohat, the then-Israeli finance minister, representing the Israeli government. On 29 April 1994, the two parties concluded an agreement on a document that came to be known as the Paris Economic Protocol on Economic Relations, which Qurei and Shohat signed with their initials. The text was appended as an annex to the Gaza-Jericho Agreement signed in Cairo five days later by Yasir Arafat, chairman of the PLO Executive Committee, and Yitzhak Rabin, prime minister of Israel.

The objective of the Palestinian side in the negotiations leading up to the protocol was to secure commitments from Israel that would be aligned as closely as possible with a Palestinian reading of the DOP in both text and spirit. The goal was to achieve a transformative shift in the Palestinian economy by establishing a robust infrastructure upon which this economy could grow and develop, embodying the unity of “the Palestinian territories” (i.e. the West Bank and Gaza Strip) in one single economic system.

The objectives also included creating a Palestinian economy that could balance between its relations with Israel and the neighboring countries, particularly Jordan, and laying the basis for having decision-making sovereignty in economic matters, which would pave the way for the establishment of an independent state within five years. These goals, as set by the Palestinian negotiators, were ultimately focused on alleviating the economic burden on the average Palestinian citizen and generating sufficient revenue to cover the budget of the newly created Palestinian Authority (PA).

In order to evaluate the extent to which the Palestinian objectives were rendered into principles and mechanisms underlying the protocol, it is necessary first to lay out its provisions and then to look at the extent to which these were implemented on the ground during the following years in light of the goals set by the Palestinians for those years. The analysis below will limit itself to examining the protocol’s content as it can be understood against the backdrop of the economic policies pursued by Israel in the early 1990s in the West Bank and Gaza Strip.

The protocol is composed of a preamble and eleven articles that consist of more than eighty clauses. The preamble mentions general principles that profess equality, mutual respect, and justice as the basis for economic relations between the two sides, with the aim of building a strong economic base for the Palestinian side. However, Article I immediately act to restrict these principles, by making these bilateral economic relations subordinate to the terms of the DOP and any future agreements and arrangements that would follow. Article II specifies the establishment of a Palestinian-Israeli Joint Economic Committee (JEC), whose task would be to follow up on the implementation of the protocol and deal with any issues that may arise from it. Articles III-XI address a number of areas of the economy where it is presumed that there will be changes to the existing situation. These areas include import and export policy; fiscal and monetary policy; direct and indirect taxation; insurance; agriculture, industry, and tourism; and labor.

Import-Export Policy

After occupying the West Bank and Gaza Strip in 1967, Israel prevented Palestinians from importing and exporting without its authorization, and even then, they could only import through Israel and Israeli merchants. Palestinians were also deprived of having economic relations with Arab countries both as a result of Israel’s ban on Arab goods entering the occupied territories, as well as the restrictions imposed by anti-Israel boycott laws adopted by countries members of the Arab League. These restrictions prevented the flow of Palestinian goods into Arab markets, except in miniscule quantities, out of a fear that there would be Israeli products slipped in among these goods. At the same time, the absence of customs barriers between Israel and the territories occupied in 1967, along with low transportation costs, made Israel the biggest trading partner of the Palestinians, but this partnership was one-directional and in distorted proportions. Thus, imports from Israel into the Palestinian territories – which amounted to 90 percent of these territories’ total imports – flowed in smoothly at a high volume, while restrictions purportedly having to do with security, safety, and health standards (and even outright bans) were imposed on exports from the Palestinian territories into Israel.

In contrast, the protocol enabled the Palestinian side to use entry and exit points designated for the purpose of import and export and to establish Palestinian customs points called “freight areas.” At these locations, the Palestinian side would conduct inspections goods, collect taxes, and implement its own independent customs policy on imported goods. The protocol also allowed the Palestinian side greater access to Arab and global markets and a greater diversity in their trading partnerships, and it set standards and criteria in line with the Palestinians’ needs for food items and agricultural produce, construction materials, petroleum products, and household electrical appliances. It also facilitated the direct-source import of equipment necessary for economic growth, such as farm machinery, construction machines, motor vehicles, gasoline, and oils used for heating.

Yet on the other hand, the protocol also imposed restrictions that deepened the geographical separation between the West Bank and the Gaza Strip and separated Jerusalem completely from the PA territories. It also subjected foreign trade to a customs union envelope with Israel, which impacted product prices in the Palestinian market. The protocol deprived the Palestinians of importing more than a hundred kinds of raw materials used in the leather, construction, and food production industries and in the fields of engineering, metal work, and healthcare, such as certain kinds of chemical fertilizers, cutting and drilling machines, and telecommunication and technology hardware. All these restrictions were imposed under various political, security, or health safety pretexts. The protocol also interfered in import mechanisms, specifications, and standards of goods (“the Harmonized Commodity Description and Coding System”) and the volume and trends taken by Palestinian commercial trade. It also specified the terms of trade with the two main neighboring countries, Egypt and Jordan, on one hand, and with other Arab and Muslim countries, on the other hand, and limited the goods that could be imported, classifying them respectively into two lists: A1 and A2.

Monetary Policy

Since 1967, Palestinians had been prohibited from establishing and operating any banking institutions under Israeli Military Order no. 7. Israeli policy was based on preventing the establishment of an independent Palestinian banking sector and imposing stringent conditions on foreign banks wishing to reopen their branches in the newly occupied Palestinian territories. The facilitation of normal commercial exchange was restricted to taking place between the West Bank and Gaza on the one hand and Israel on the other.

This situation changed after the protocol; the Palestinians were now able to establish their own Palestinian Monetary Authority, which had the power to regulate the affairs of banks and financial institutions, manage official reserves, establish Palestinian banks and banking-related institutions, settle accounts and transactions made in foreign currencies, and have relations with the central banks of regional Arab countries such as Egypt and Jordan. The Jordanian dinar and US dollar also began to circulate in the PA territories as acceptable means of payment.

In spite of this, the terms of the protocol kept the Palestinians’ aspiration to establish their own national currency in abeyance. The Israeli shekel remained the dominant currency in circulation, with only limited use of the Jordanian dinar and an even rarer use of the US dollar. The protocol made the Bank of Israel (Israel’s central bank) conduct transactions with Palestinians as if it were effectively operating like a de facto central bank within the Palestinian territories. Additionally, the protocol overlooked the monetary implications of the transfer of funds between Palestinian areas and Israel. It thus failed to impose restricting conditions on the Bank of Israel that would obligate it to exchange the surplus of shekels circulating in the Palestinian territories.

Direct and Indirect Taxes

The importance of the taxation policy stems from the role it was to subsequently play in furnishing significant revenue for the Palestinian budget, which could be utilized in the development of infrastructure and the service sectors. Prior to the protocol, this had been nonexistent; shortly after the DOP was signed, Israel determined customs duties and tax tariffs solely according to its own interests, and it retained tax revenues and all revenues from customs duty for itself, rarely using them to improve the state of the Palestinians. Studies by the World Bank at the time estimated that the direct taxes collected by Israel from the Palestinians of the West Bank and Gaza Strip amounted to $150 million per annum and that it utilized none of these funds for the benefit of the Palestinians.

The protocol provided for the establishment of a separate Palestinian tax administration that would have the right to levy and determine the rates of direct taxation and collect taxes on capital, income, and investments. It also ensured the PA collection of all customs tariffs on goods designated for areas under control, even those imported through an Israeli intermediary. Additionally, the protocol granted the PA the authority to manage its own taxes and to levy a value-added tax (VAT) appropriate to the Palestinian economy, albeit on the condition that its rate should remain close to that of the Israeli economy.

Despite the returns promised by the protocol to the Palestinian budget, it nevertheless granted Israel significantly larger privileges. Because it allowed Israel to retain the authority to inspect all goods passing through Israeli crossings, the Palestinians would lose the ability to keep in check the fiscal leakage between direct and indirect import taxes collected from customs revenue. With regard to the customs revenues collected by Israel on behalf of the PA, by virtue of its complete control over all crossings, ports, borders, and the flow of commercial traffic, the protocol allowed Israel to retain 3 percent of the total revenue as collection and processing fees, instead of enabling the Palestinians to collect this revenue directly. It also did not take into account the differences between the Palestinian and Israeli economies and obligated the Palestinian side to remain beholden to a customs union based on the principle of a common market and free trade. It also obligated the Palestinian side to keep the VAT that it levied within two percentage points (15-16 percent) of the then Israeli VAT rate of 17 percent, and it compelled the Palestinians to desist from signing any economic agreements that would be inimical to the interests of the Israeli economy.

The Insurance Sector

The section of the protocol related to insurance inaugurated the era of insurance in the Palestinian territories, which had previously been nonexistent and was linked to Israeli insurance companies and governed by military orders, such as the 1976 Order no. 677 concerning compensation for the victims of road accidents in the West Bank (with the corresponding Order no. 544 for the Gaza Strip in the same year).

The protocol laid the groundwork for the institutionalization of the insurance process in the Palestinian territories. It made it uniform and compulsory in the West Bank and the Gaza Strip. It gave the PA the authority to monitor and license insurance companies and to establish and maintain a statutory Palestinian Road Accident Victims Compensation Fund for the West Bank and Gaza. It also granted Palestinians access Israeli insurance funds in the same way that Israelis could access Palestinian insurance funds, and it made Palestinian and Israeli insurance policies valid across the territories of both parties.

However, the protocol also obliged Palestinians to provide prior compensation for road accidents involving uninsured vehicles registered in the Palestinian territories. The above-mentioned Road Fund would also be required to transfer to the Israeli road insurance fund, on a monthly basis, for each insured vehicle, an amount equal to 30 percent of the amount paid to the Israeli fund by an insurer registered in Israel, without a similar requirement being enforced on the Israeli side. Additionally, it granted Israeli insurance companies a legal framework to file lawsuits against Palestinian insurance companies in Israeli courts in Jerusalem, without the same provision being applicable to the Israeli companies.

The Agriculture, Industry, and Tourism Sectors

The agriculture, industry, and tourism sectors had been suffering a significant decline as a result of Israeli military orders issued shortly after the 1967 occupation, which were issued with the intent of having direct control of the granting of permits, building licenses, import and export licenses, and imposing taxes on traders and economic establishments. With these orders, the occupation also took control of water resources, limited the drilling of wells by Palestinians, and restricted their freedom to choose which crops to plant. They also imposed strict control over industries and their essential supplies and hindered their natural growth by repeatedly rejecting license applications by Palestinians for new factories. The Israeli army’s confiscation of Palestinian lands led to a spike in land prices as a result of land becoming in short supply, as well as the absence of supporting infrastructure and a banking system capable of offering loans and credit. The tourism sector was also monopolized by Israeli tour companies that enjoyed complete freedom of movement between crossings and borders between Palestinian and Israeli areas and had a more advanced level of tourism services to offer.

In contrast, the protocol facilitated the development of these sectors to some extent, within the framework of the opportunities provided by the import and export of allowed materials and products. Additionally, there were provisions within the protocol that called for enhancing the level of cooperation with the Israeli economy concerning these sectors. This included the supply of vaccines and pesticides to farmers, the establishment of joint industrial zones for industrialists from both sides, and collaboration with the Israeli tourism sector. The protocol also called for the establishment of official PA institutions whose existence was previously not permitted, such as the Tourism and Antiquities Authority, which would manage tourism-related matters in the Palestinian areas; the Ministry of Agriculture, that would promote regional cooperation in agriculture and open markets to Palestinian agricultural produce; and the Ministry of Industry, which would offer specialized services to industrialists and work to facilitate the commercial trade of their merchandise both domestically and internationally.

However, at the same time, the protocol ignored the existing situation of the Palestinian industrial, agricultural, and tourism sectors and set special restrictions regarding the import of certain equipment and machinery that would allow for growth in the industrial and agricultural sectors. Paragraph 13 of Article VIII stated that both sides should “refrain from importing agricultural products from third parties which may adversely affect the interests of each other’s farmers,” which in practical terms meant that the protocol gave priority to the interests of Israeli farmers over anyone else. The protocol also allowed the Israelis to place restrictions on the export of Palestinian agricultural produce to Israel in terms of scale and in certain categories; the Palestinian side did not have this option. This left Palestinian farmers alone in the face of competition from Israeli produce, since Israel got to set the quantities of eggs, poultry, and certain fruits whose import it allowed to protect its own producers, while the PA had no such power to restrict the import of Israeli fruits and vegetables to similarly protect Palestinian farmers.

As for the Palestinian tourism sector, the continuing Israeli control over all crossing points as affirmed in the protocol could be considered its most significant obstacle. In addition, the exclusive authority granted to the Israeli side for issuing entry and exit permits, left unchallenged by the protocol, and the absence of any Palestinian control of Jerusalem—which contains some of the most prominent tourist sites—has further hampered this sector's development.

Although the protocol indicated that each side would be responsible for preserving and protecting the archaeological sites and the sites of historical, religious, and cultural significance that fell under its jurisdiction and refrain from infringing upon those under the control of the other side, the fact that the majority of the area of the West Bank and Gaza Strip remained under direct Israeli occupation left many Palestinian tourist sites under the control of Israeli tourist bodies. Consequently, this would deprive Palestinians from obtaining the revenue generated by tourism from these sites.

The Labor Sector

The labor sector was almost completely usurped and subject to Israeli control as a result of an official program launched by Israel in 1968 that was based on a policy of raising the wages of Palestinian workers in Israel by approximately 80 percent compared to wages in the West Bank and Gaza, easing security restrictions on the movement of workers, and establishing Israeli industrial zones adjacent to the recently occupied Palestinian territories, where Palestinian workers manufactured Israeli goods. This led to a reduction in the rate of unemployment in the Palestinian areas from 15 percent to approximately 2-4 percent by 1990. By the end of 1992, the number of Palestinian workers in Israel and its settlements in the West Bank and Gaza had surpassed 116,000.

In reality, this state of affairs did not change to any significant degree after the signing of the protocol; Israel continued to maintain control over the rate of influx of Palestinian workers into its labor market. However, Palestinian workers were now allowed to access benefits from Israeli social security, and the PA also received a percentage of the workers' income tax that it would use for social welfare and healthcare services for the workers, thereby providing them with a Palestinian health insurance.

Nevertheless, the protocol overlooked obliging the Israeli side to maintain normalcy in freedom of movement or of the Palestinians' right to work, while it allowed for their employment to be “temporarily suspended” without clearly specifying what “temporary” meant in terms of duration. Furthermore, the protocol also excluded Palestinians working in Israeli settlements from being covered by Israeli laws that guarantee health insurance or social security benefits. It gave Israeli courts the discretion to determine what was appropriate to deduct from workers' wages or their retirement benefits transferred over to the PA if they found them to be employed illegally.

Conclusion

In view of the different economic areas that were addressed by the protocol, an evaluation of whether the role it played was the starting point for an independent, strong Palestinian economy, or yet another form of Israeli subjugation and control over the Palestinians, must consider the constraints contained in the protocol, which limited from the start the Palestinian attempt to create a launching pad for developing Palestinian economy, for opening it up to external trade, and for interconnecting the West Bank and Gaza Strip economies. The protocol was no more than an annex to the Oslo Accord, governed by its ceiling, which itself offered the Palestinians nothing more than “interim self-government.”

In addition, multiple factors have lowered this ceiling to a large degree. These include the state of the Palestinian economy, whose fragility has increased since 1967. This has fostered an economic subordination to Israel that predated the Oslo Accords and has remained ever since. There was also a prior absence of Palestinian state economic institutions essential for implementing the protocol's provisions and applying the regulations and laws relevant to them. At the same time, Israel continued to have complete control over border crossings, land, and water and energy resources, as well as dominance over various commercial and economic sectors. Israel had also accumulated greater experience in competing at the international and regional economic levels. All this has meant that any gains made by Palestinians from the protocol had a limited positive effect, which continued to diminish even further as Israel increasingly violated the Protocol's terms and manipulated them in order to serve and sustain its colonial policies aimed at control over the land and its resources.

The protocol did help to kick-start the Palestinian economy on various levels, and many of its provisions opened up larger [economic] spaces for the Palestinians than they had before. However, it did not extricate them from the dominance and control of the Israeli economy. It did not lay the foundation for a strong economy capable of growth, development, and openness as much as it did for establishing a Palestinian civil administration within a bubble of total Israeli dominance: control over all aspects and areas of Palestinian life and ability to subvert the Palestinians’ economic aspirations quickly and easily without itself suffering any significant consequences.