Introduction
The implementation of the agreements between Israel and the PLO
raises hopes for faster growth of the Palestinian economy and an
improvement in Palestinian standards of living. But although the
PLO will quickly achieve a degree of economic independence,
controlling several economic institutions and an array of
Palestinian domestic markets, this will not in itself result in a
significant improvement in living standards through economic
growth. Real change depends on developing exports: manufactured
goods, "industrialized" agricultural products, and tourist
services.
Small economies should not rely on their domestic markets. This was
true of the Israel of 1950, with an annual Gross National Product
(GNP) of less than $3.5 billion and a per capita GNP of $2,675 per
annum, and it is still true of Israel in the 1990s, with an annual
GNP of more than $55 billion and a per capita GNP of $11,000. It
will certainly be valid for the Palestinian economy, which takes
off with an annual GNP of $2.5 billion and a per capita GNP of
$1,750 (Table 1). The success and development of these economies
depends on extensive imports and exports.
A considerable number of small Third World economies, including
some in the Middle East, resorted to the opposite strategy of
"import substitution", attempting to develop their industries as
the sole suppliers of their domestic markets. The results have been
utterly discouraging.
Unfortunately it has not been easy for Third World producers to
gain access to the large western markets, probably both because of
a lack of confidence in Third World producers on the part of
western businessmen, and a lack of experience in dealing with the
caprices of western markets by Third World entrepreneurs.
Learning and, adjusting has been a slow and tortuous process, as
proved by the record of Middle East countries (Table 2). Per capita
industrial and agricultural exports from the Middle East in 1986
was less than $100, of which only some $40 were to high income
countries. In comparison, the Palestinian record in 1986 is quite
impressive: over $200 per capita, of which some $160 was to high
income countries.
It seems that where less developed economies have achieved a
measure of success, this is due to their proximity to
industrialized nations. Consequently the Palestinian economy could
perform better than other Third World economies by taking advantage
of the Israeli economy next door, which is twenty times its size,
and has developed channels to the world's largest markets. For this
purpose, the Palestinian economy needs free access to Israeli
markets and marketing channels within a framework guaranteed by
binding trade accords.
In striving for such accords, it must be realized that the need for
such a framework is asymmetrical at the macro level: it is critical
for the Palestinian economy, but - as an aggregate - marginal for
Israel. At the same time it must be stressed that asymmetry at the
macro level does not mean the same thing at the micro level. For
the individual Israeli and Palestinian businessmen transactions,
cooperation, and joint projects may be equally important and
beneficial.
Background
In the past, Palestinian access to the Israeli markets was wide
enough to accelerate development in a substantial number of
enterprises; but it was by no means liberal or universal. Trade
relations between Israel and the Palestinian economy in the
territories has differed from one market to another. Trade in
manufactured goods, finished consumer products, components, and
producers goods was free of administrative and fiscal barriers.
Israel's import of labor services from the territories has also
been relatively liberal; but the situation is very different
regarding the trade in farm produce. The agricultural produce of
the territories is subject to a highly restrictive licensing
policy, whereas Israeli agricultural exports to the territories are
free.
With regard to industrial goods, Israel implemented administrative
constraints. A new industrial plant in the territories had to prove
it could sell its products in the territories or abroad before it
received a license. This was intended to discourage Palestinian
industrialists from competing in Israeli markets. In the 1980s
this
policy was not always consistently implemented, and considerable
number of Palestinian manufacturers developed industrial facilities
relying heavily - sometimes almost exclusively - on Israeli
markets. In the 1990s the futility of the restrictive policy became
obvious both to the Israeli authorities and to the leading Israeli
manufacturers. After being exposed to imports from both the
European Community and the United States by free-trade agreements,
the hard core of Israeli industry could hardly complain about a
minor competitor such as the Palestinians.
As a result the industrial trade-related licensing policy was
discarded, leading to the establishment of new facilities; but
because of the Intifada Palestinian entrepreneurs were unable to
take full advantage of the new market opportunities.
Prior to this, trade with Israel produced a comparatively modest
contribution toward the growth of the Palestinian GNP. Employment
of Palestinians in Israel was a far more significant factor (Table
1). In 1990, for example, the annual per capita Palestinian GNP was
approximately $1,750 consisting of four major components:
* Approximately $450 from the Palestinian labor force employed in
Israel.
* Approximately $100 export of goods from the territories to Israel
partly value added augmented Israeli goods exported abroad.
* Approximately $50 value added in goods exported abroad.
* The remaining $1,250 consumption and capital formation in the
territories.
In comparison, Israel's per capita GNP in 1990 was $10,575
annually. A mere one percent of that amount is attributable to the
value added through the export of goods and services to the
territories.
Trade Benefits: A Microeconomic Illustration
In an attempt to illustrate the potential of a free trade
framework, we will make a number of observations about
industrialized agriculture and manufacturing in the Palestinian
economy, with special reference to Gaza. Open-Market Transactions: The simplest and most common form
of co¬operation between Palestinians and Israelis involves
straightforward open-market transactions. Examples are a
Palestinian manufacturer of farm and farm related implements, who
sells to mechanized farms in Israel, a Palestinian modern
stone-cutting plant selling to Israeli contractors specializing in
quality construction, and several Palestinian work-shops selling
injected-sole footwear to Israeli outlets.
Despite the restrictive licensing policy of Israel in the
territories before 1992, several Palestinian manufacturers of
metal, plastics and wood products managed to develop new plants
directed at the Israeli consumer and producer markets. Their
eventual success in production and marketing indicates the
potential for exports from the territories to Israel, including
finished leather goods, clothing, processed foods, trinkets and
toys, paper products, and electrical appliances (Table 3). These
goods can be sold as finished products on the Israeli market, other
products can be sold as components of "composite" goods,
incorporating value added by Palestinian and Israeli businesses,
marketed in Israel and exported abroad.
Composite Goods, Traditional Shops: The Israeli Connection:
The clothing shops of Gaza provide an example of low key
"stationary" realization of Palestinian value added through an
Israel connection. Twenty percent of Gaza's industrial
establishments are small sewing shops, employing an average of five
people per shop, with a small investment of some $2,000 per
employee. These establishments function as subcontractors for the
large Israeli clothing industry. The Gazans provide the sewing and
their wages are low; the Israelis carry out the designing, cutting
and finishing. This situation, however, does not have to continue,
taking into consideration Gaza's new sewing plants, employing 15 -
20 people, with an investment of $30,000 per employee. This
situation will definitely not prevail in modern industries such as
horticulture, Gaza's mechanized agriculture.
Composite Goods, Modern Industry: The Israeli Connection: A
water shortage, increasing salinity, and low prices for citrus in
Europe have resulted in a notable decline in Gaza's traditional
citrus branch. At the same time the region has developed 400
hectares of greenhouses and 700 hectares of plastic tunnels for
modern horticulture. Equipped with modern appliances, including
drip irrigation, these installations - and the expertise of their
operators - facilitate the production of sophisticated agricultural
products for even the most capricious Western markets. For example
at the present time some 60 percent of strawberries exported under
the "Carmel" label are grown in Gaza. In this the Palestinian farm
component is sophisticated; the Israeli component is transportation
and marketing. In time the Palestinians may be able to establish
their own brand name in the European market; but even then it is
unlikely that the Gazans will develop an air freight capacity that
depends on a versatile two-way turnover in the immediate future, so
the product will probably remain a composite one.
Nevertheless, the micro level relations between the Palestinian and
Israeli partners will be symmetrical! The Israelis will be under
pressure to maintain their strawberry exports, and they will depend
on the Gaza growers. Consequently their need for the Gaza farmers'
product is no less than the Gaza farmers' need for the Israeli
marketing and air-freight services. There could even be a
"reversed" connection: strawberries grown on Palestinian farms in
Gaza, and on Israeli farms in the Jordan valley could be exported
by Palestinian marketers under a Palestinian brand name.
Food Processing: An Example of a "Reversed" Connection:
Canning factories, soft drink producers, and others engaged in
processing food depend on the supply of metal cans. In a factory
which specializes in catering-size (bulk) preserves, the percentage
of the cost of the can may be as low as five percent of the final
product. For consumer-size (retail) cans, it can be as high as 35
percent, or 50 percent in the case of soft drinks. Palestinian food
processing plants buy their cans in Israel. In the case of the
bulk-size cans this may be temporary; but in the case of
consumer-size cans a Palestinian substitute is unlikely due to the
smallness of the market, and importing cans from abroad will cost
too much. As a result of this, there could be a very substantial
proportion of value added in Israel on a product carrying a
Palestinian brand name, marketed locally, in the neighboring
countries or in the West.
The Rational Connection: In the examples we have considered,
there is little room for an economically feasible replacement of
either the Palestinian or the Israeli components. In the case of
commercial and business services and material inputs, the end
products of a score of Palestinian enterprises are likely to be
composite products, consisting of Palestinian and Israeli values
added in varying proportions. If commercial interests are
paramount, the product's label will be determined to please the
customers, regardless of the proportion of Israeli or Palestinian
added value in the product.
Established and New Enterprises: Assortment, Size and
Investment
Generally speaking, industrial development will bring about
structural changes, such as a greater assortment of goods, larger
plants and higher capital intensity. Extended marketing
opportunities will lead to a greater assortment of products,
probably more sophisticated producer and consumer goods or
components thereof. Their production requires plant-size operations
rather than traditional workshops, and advanced technology needing
relatively expensive facilities.
Following the change in Israeli licensing policy in 1992, a wave of
new initiatives has already materialized in Gaza, indicating the
direction of structural change.
* Whereas 74 percent of the existing establishments specialized in
the traditional clothing, wood, and metal products, only 22 percent
of the new enterprises were of this sort. This was also the case in
horticulture, where there was a perceptible move from vegetables to
flowers.
* The workforce in the new food processing plants was double that
of the traditional establishments: ten instead of five (Table
3).
* The new enterprises had an investment of $50,000 per employee
(Table 1), instead of the average of $2,000 per employee in the
traditional workshops. This will also lead to industrial
diversification. In horticulture, roses may replace carnations as
the main flower crop. Palestinian factories could start producing a
variety of electrical appliances, leading to an even greater
investment per employee than shown in Table3.
Conclusions
Arguments in favor of free trade between Israel and the Palestinian
economy have generally been presented in aggregate economic terms.
The few examples presented in this article are intended to shed
light on some of the crucial microeconomic aspects of free
trade.
At the micro level it is relatively easy to distinguish between
conservative and progressive patterns of cooperation. The
availability of cheap Palestinian labor for the Israeli clothing
industry determines and maybe even perpetuates the conservative
relationship. The situation in horticulture is different: while
taking advantage of the available manpower of the extended farming
families, it nevertheless relies on very modem techniques,
representing the cutting edge of agro-technology. The dynamics of
this situation guarantees continuous modernization, advancement of
human capital, and improving wages. Cooperation in this
industrialized agriculture, and in most of the new industrial
enterprises, is therefore progressive.
With regard to the asymmetry mentioned previously, there is in the
progressive relationships ample opportunity for microeconomic
symmetry, even though the macroeconomic situation is fundamentally
asymmetrical. As it is the microeconomic situation that determines
the terms of each individual transaction, microeconomic symmetry
can guarantee the Palestinian terms of trade. In a market economy
it is not the macreconomic asymmetry that determines the rules of
the game, except at the outset. Therefore the parties involved -
particularly the Palestinians - should strive for a free trade
framework, which is universal and complete, because in a sense this
is the sine qua non of Palestinian development in the years to
come.
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