From the Drawing Board

After nearly three years of violence and crisis, there is cautious optimism on the political front. This is the moment to open a wide-ranging policy debate about the nature of future economic relations between Israel and the Palestinians.

After nearly three years of violence and crisis, there is cautious optimism on the political front. This is the moment to open a wide-ranging policy debate about the nature of future economic relations between Israel and the Palestinians. A report prepared last year by the World Bank, "Long Term Policy Options for the Palestinian Economy" (July 2002), lays out several alternative policy options. One in particular, an open trade policy in which Israel would become one of many trading partners for the Palestinian economy, warrants a careful look by both parties.

This option is known technically as a non-discriminatory trade policy, or NDTP. An NDTP would in time bring major changes in the way Israelis and Palestinians have interacted over the past 35 years - a shift from near-total economic integration (and consequent Palestinian dependence on Israel) toward a more open, more independent Palestinian economy based on the export of goods and services to third parties including Israel.

On the basis of careful research, we believe this approach now offers the best hope for long-term Palestinian prosperity. This, in turn, would mean a more stable neighbor for Israel. Such stability can only be of benefit to Israel's security and its own economic prospects. Since 1968, Palestinians in the West Bank and Gaza have relied tremendously on remittances (i.e. labor exports) rather than on the export of goods and services.

Though the numbers declined during the Oslo period, in June 2000, 21 percent of all employed Palestinians still worked in Israel, mainly in low-skilled construction and agricultural jobs. Net income from abroad, most of which came from Israel, amounted to more than 22 percent of the Palestinian GDP, making it one of most remittance-dependent economies in the world.

This is why the loss of Palestinian jobs in Israel in the past two years has had such a devastating impact. Put another way, the intifada exposed the extreme vulnerability of the Palestinian economy to the Israeli job market and to its closure or contraction. Just as politicians need to consider day-to-day setbacks against some coherent vision of the future, so too must economic decision-makers.

A return to the 1994 Paris Protocol, which formalized the de facto customs union with Israel in existence since 1967, would offer growth benefits similar to an NDTP in the medium-term - provided that the Paris Protocol were implemented without internal or external closure of the Palestinian territories. But the Paris Protocol was never fully implemented, even before the intifada. What is more, the protocol would impede the long-term growth potential of the Palestinian economy. Not only has it hindered the expansion of Palestinian trade links with the rest of the world, but the large flows of Palestinian labor to Israel have reduced Palestinian competitiveness.

Israeli wages paid to Palestinians have driven domestic wage-levels up beyond any underlying growth in productivity, and have undermined the Palestinians' ability to export goods and services. The shift to a goods-based export policy will take time, to be sure, and will encounter many transitional problems. Critically, such a policy will require the active cooperation of Israel if it is to succeed. In this sense, an NDTP is part and parcel of a political rapprochement; it cannot be attempted in a hostile environment.

It is true that restoring access to the Israeli labor market is the quickest way to boost incomes for many ordinary Palestinians. Realistically, though, a return to pre-September 2000 employment levels for Palestinians in Israel seems unlikely - and doing so would anyway perpetuate Palestinian economic dependence on Israel, a source of potential future instability. Regardless of which trade option is pursued, Israel will remain the most significant Palestinian trading partner for the foreseeable future.

An NDTP policy is misunderstood by some as a form of "economic separation." It is not. It is a new form of economic cooperation, and cooperation is unavoidable if one believes that Palestinian prosperity is one of the keys to a sustained peace. In his recent article on these pages ("Back to the drawing board," Haaretz, July 7), Dr. Danny Rabinowitz dismisses the World Bank's exploration of the NDTP option as a "conditioned reflex" in favor of free trade. But this casual stereotyping does little justice to the serious issues that now need to be considered.

It amounts to writing off the Palestinian economy's potential for dynamic change, and ignores important Palestinian advantages such as a highly educated and entrepreneurial population with significant Diaspora support, the existence of preferential trade agreements with the EU and U.S., and the reform-minded economic policies of today's Palestinian Authority.

Post-World War II economic history offers illuminating examples of developing economies that have transformed themselves on the basis of their human potential. Surely Dr. Rabinowitz does not mean to rule out of court such a future for the Palestinian people? We certainly would not, however difficult such a transformation may appear today. What is more, we believe a careful, informed debate on the various policy options is critical: not only for the Palestinian economy, but for Israel too.

The writer is director of the West Bank and Gaza Department of the World Bank.