Throughout the past decades of military occupation, the freedom of the Palestinian business community to invest, to mobilize foreign investment and to trade were severely hampered by restrictions imposed by Israel on the business activity of the West Bank and the Gaza Strip (WBG). With the signing of the interim peace agreements, and specifically the Paris Accords of 1994, hope grew that the process of peace would simultaneously encourage an economic growth commensurate with the opportunities available in the WBG and would end the crippling Israeli restrictions.
Three years after the signing of the Declaration of Principles (DOP) and, despite the potential existence of conducive business opportunities, a profitable business environment remains elusive. Efforts by the business community to explore and plan new productive ventures and to engage prospective partners and investors continue to be hindered by the Israelis. The intervention of the Israeli government in matters vital to the management of business enterprises creates obstacles, some of which are a carry-over from the Israeli military occupation practices in the WBG. Many of them, however, were actually imposed after the signing of the peace accords. A case in point is the obstruction by Israel of the essential and basic movement of goods and people between the Palestinian territories, Israel and Jordan. Indeed, market access to Jordan and neighboring Arab markets remains limited and uncertain. The prospects of trade development in regional markets are further weakened as the competitiveness of prospective Palestinian exporters is undermined by high transaction costs, and by the extreme inefficiency and unreliability of the Jordan River crossing points.
Economic conditions are exacerbated by the administrative, logistical, and de facto non-tariff barriers which deny Palestinian businesses free access to Israel's markets, as was promised in the 1994 Paris Economic Protocol. Meanwhile, Israeli products continue to enjoy unimpeded and, in certain cases, facilitated access to Palestinian markets. Such a situation aggravates the already skewed balance of trade through the dependence on one major trading partner - Israel. Seventy percent of total imports to the West Bank and Gaza come from Israel, while only 30 percent of the West Bank's and Gaza's output are exported to Israel.
Indeed, Palestinian businessmen are questioning the viability of exercises aimed at fostering regional cooperation, as well as the benefit of the free-trade agreement with the US as they cannot, realistically, see the possibility of free trade flow between the West Bank, Gaza and the US, when it is inexistent between the Palestinian territories and Israel.

The Closure

The closure Israel has imposed on the WBG since March 1993 is the single most damaging measure which blocks the whole of the Palestinian business community from reaching its potential.
This closure cuts off Arab East Jerusalem from the WBG, denying the city its labor pool and much of its ability to market its goods. It also segments the West Bank into northern and southern sections. These two parts can only be linked either through a road that the US Consulate has identified as inadvisable for travel, or by passing through Jerusalem, provided the WBG residents hold valid entry permits to the city. As a result, companies have been compelled either to have two headquarters - one in the north and one in the south, with a distance of only about 17 miles between them ¬or risk having their operations diminished due to their inability to access either of the sections of the West Bank. In the case of Gaza, the absence of a safe passage for individuals and goods between the Palestine National Authority (PNA) areas leaves Israel as the only possible route of access to the West Bank. Again, entry permits are mandatory, but are often impossible to obtain.
Frequent and prolonged border closures thus fragment the Palestinian market into smaller markets, further discouraging investors from what is already perceived to be a small Palestinian market. Additionally, closures prevent planning and adhering to production and delivery schedules, causing heavy losses and hampering exports and imports. The numerous interruptions in the delivery of goods since the Oslo agreement has forced the closure of 350 textile shops in Gaza - fully one-third of the textile companies there. One West Bank trading company almost closed down because 70 percent of its trade was dependent on Jerusalem. Another Jerusalem corporation reported a 50-percent loss in profits. Estimates for the impact of the closure on lost revenues show a decline in profits ranging from 20-50 percent, while they cost the territories a daily loss of approximately $ 5-7 million in trade as well as in labor wages. Twenty-four percent of the labor sector are dependent on employment in Israel and lose their source of livelihood during total and internal closures. In effect, the $100 million in annual US assistance compensates the Palestinians for only 17 days of closure.

Travel Permits

Most companies cite their inability to obtain travel permits for their employees as a major constraint on their work. As mentioned above, permits are required for travel between Gaza and the West Bank on the one hand, and Jerusalem and Israel on the other, even when total closures are not in force. Under the catch-all issue of security, Israel uses arbitrary criteria for the granting of entry permits to West Bank and Gaza residents. Consequently, the movement of merchandise between Gaza and the West Bank remains subject to serious and costly bureaucratic and logistical impediments. The mobility of businessmen and their staff is highly restricted and uncertain. The mere subjection of the business community to these restrictions is anathema to the spirit of a free market.

Work Permits

Work permits are mandatory for all West Bank and Gaza laborers to allow them to work in Jerusalem or Israel. Even Palestinian Jerusalemite workers, living in certain parts of the city which were reclassified by Israel as lying outside the Jerusalem municipal boundaries, have been denied the right to work in Jerusalem without a permit. Most permits, when issued, expire at 7 p.m., placing the tourism sector, such as hotels, restaurants and tourist agencies, outside the reach of these workers. Permits for Gazans are even more restrictive: if they are not back at the Israeli Erez Checkpoint by 5 p.m., their permits are confiscated. Furthermore, all permits are revoked during a total and internal closure which may last anywhere from a few days to a month, creating a labor crisis, especially on the Jerusalem employment scene. Once a closure is eased, permit-holders have to reapply for new permits.

Permits for Transport Vehicles

Permits are required for vehicles and trucks that transport goods between the West Bank, Jerusalem, Israel and Gaza. Transportation costs have increased dramatically and this is one of the most frequent complaints of the business community. There are currently 3,200 trucks in Gaza, but due to the closure, Israeli trucks with yellow license plates have to be rented by West Bank traders for $300 to deliver goods just to the Gaza Erez Checkpoint. From there, traders have to rent a truck with a Gaza license plate at the additional cost of $250 per delivery. One Jerusalem corporation has reported that a truck-load delivery to Tel Aviv, which used to take one hour or less, can now take up to a week. Another West Bank corporation declared an erosion of 20-25 percent in profits as a result of increased transportation costs.

Restrictions on Investors

Border crossing points continue to be controlled by the Israeli authorities, including the issuance of visas and residence permits. These permits are very difficult to obtain and are given for only short periods of time (three months maximum), and renewed for short periods as well. Business visas for Arab investors are valid for one week only, and only one Palestinian investor from the diaspora is ever given a visitor's permit at a time, irrespective of the total number of investors in anyone project.
Prospective investors are also required to submit to the Israeli authorities an application form filled out in both Arabic and Hebrew, as well as a description of their business project. These are considered for approval by the Israeli Civil Administration and must comply with Israeli requirements.

Time-Consuming Security Checks

Lengthy security procedures and checks are imposed on all goods imported into the Palestinian territories, causing additional import-added costs for storage. These checks often result in the destruction of goods. A truck-load of tomatoes, for instance, may linger in the sun for three days, causing the tomatoes to rot and making them unfit for storage and sale.
Back-ups at the bridges and at the Erez Checkpoints are also compounded by fees for the use of Israeli forklifts, as unloading can only be done by Israeli work crews.

Prevalence of Military Laws

Scores of military orders and regulations are still in effect in the territories, and will remain so, until they are expressly repealed by both sides. These laws and regulations are rarely announced in advance and individuals are informed of violations only after the deed has been committed. Under the circumstances, prospective investors hesitate to risk their capital when they are unsure of the manner in which Israeli laws and regulations may, at a later date, affect their investments.

Purchase Tax

The competitiveness of Palestinian producers is compromised by the very structure of the arrangements agreed to in the 1995 Israeli-Palestinian interim agreement. Purchase taxation, included in the cost of Palestinian imports procured through Israel, is not refundable to Palestinian exporters, nor does it accrue to the Palestinian treasury. As a result, it must be built into the export costs and prices, while Israeli exporters are entitled to claim purchase tax refunds. These refunds represent just one example of structurally established disadvantages.

Biased Import and Export Procedures

The procedures listed below clearly favor Israeli importers:
a. There are no Palestinian entry and exit points for the movement of people and goods.
b. Palestinian trucks to Jordan are stripped down, leaving them without such equipment as refrigeration which is necessary for safe and hygienic transportation.
c. Trucks making deliveries to Jordan must cross the border and return on the same day and must unload/reload at the border for security checks.
d. Upon return from Jordan, trucks are often subjected to three-day inspections, and mechanics are brought on site to dismantle and reassemble the trucks.
e. Israeli trucks must be used for transport to and from Israeli airports and ports.
f. Complex paper work is involved in the trade between the West Bank and Jordan.
g. Seasonal and time restrictions are placed on exports, often prohibiting agricultural goods from being exported in season.
h. Late shipping documents cause merchandise delays at the ports, adversely affecting sales and marketing and distorting supply and demand.

Clearance and Handling

No Palestinian clearance or handling agents are licensed to work at Israeli ports; Palestinians have to use Israeli agents. All direct import agency positions are still being offered only to Israeli agents and Palestinians are hired only as sub-agents.
Palestinians are also denied permission to have bonded warehouses close to their markets and customer bases; warehouses must lie within a six-mile radius from the point of entry. In addition, export-processing zones do not exist in the WBG.

Lack of Proper Industrial Zones

The Israelis have refused to comply with the following measures necessary to set up successful industrial estates, such as delegating powers to the PNA for zoning, licensing and taxation; improving procedures for the free movement of goods and continuing shipment, in spite of closures; guaranteeing passes for people engaged in business, including during closures; cooperating on duty/VAT exemption, site selection, needs of the infrastructure and environmental standards.

Restrictions on Land Registration

The Israeli authorities maintain stringent bureaucratic control on land use, making it almost impossible to obtain building permits and land authorizations. Land has become very expensive, due to Israeli regulations and refusal to expand the boundaries of cities and local industrial estates.

Restrictions on the Tourism Sector

A host of Israeli regulations pertaining to the tourism sector are particularly burdensome to Palestinian investors. Certification of tour guides, for example, calls for competency tests in Hebrew, thereby imposing a natural barrier to non-Israeli entrants. Moreover, Israel consistently denies permits for either hotel construction or expansion, especially in East Jerusalem.

Prepared by the Economic Office at Orient House, Jerusalem. <