This paper analyses the potential economic consequences of the structural proposals for settling the Palestine-Israel conflict: two-state, one-state and confederation approaches.

Two-State Solutions

Two separate states may be the result of unilateral action (as in Gaza) or of a friendly, mutually agreed-upon policy. A friendly separation could result in close political and economic cooperation and coordination between the Palestinians and Israel. Such an arrangement could help develop close relations with Israel (in stages) and appears to be the preferred option for both states. In a friendly separation, areas of common interest will inevitably become integrated (labor, infrastructure, water, transportation, trade, etc.). The economic bodies sharing these areas could be the basis for a peaceful separation, leading to an economic community, and will inevitably involve cooperation, including on security matters. This solution, though difficult to achieve and maintain, has many potential economic advantages for the Palestinians and, to a lesser extent, for the Israelis.
A friendly separation has many more mutual advantages than would a hostile separation - accompanied by an extreme dissociation from and minimum contact with Israel. Under a hostile separation, each state would maneuver independently of each other's economic and political institutions and have fewer interfaces. The state with the wealthier and/or larger economy would dominate the smaller and poorer state.
The Palestinians have less than one-tenth of Israel's economic parameters (excluding labor), which, combined with an unstable political environment and extensive corruption, hinders the rate of economic development. This creates much difficulty in obtaining international aid. However, it should be noted that because of some of the Israeli policies toward the West Bank and Gaza Strip (WBGS), there were high Palestinian economic growth rates in the early years of occupation. An analysis of Palestinian per capita earnings and employment, trade, etc. show that during quiet periods, such as the first two decades of the occupation until 1986, there was a relatively high rate of economic growth - 6-7% per annum - which stabilized until the Oslo Accords in 1993. Following the Oslo Accords there was a high rate of growth, which continued until the second intifada, followed by a recession caused by "ultra-radical" action.
The number of authorized and unauthorized workers entering Israel reached 140,000 daily, and their earnings accounted for over one-third of Palestinian gross national product (GNP). The change of several percentage points in Palestinian economic indicators was due to income from Palestinian laborers working outside WBGS. Today, more than 90% of Palestinian workers are no longer allowed to enter Israel. Subcontracting to Palestine, much of it to Gaza, has ceased. Few Israelis venture into the Palestinian areas whether to shop or to do business there. Nor are there tourists. Palestinian economic activity is at an all-time low.
Since Israel's unilateral evacuation (an example of hostile separation) and the Hamas takeover of the Gaza Strip, economic activity has dropped to below one-half. Even external aid and trade would not compensate for the loss of the connection with Israel. Such a state would not be viable even with external economic support: economically, geographically (due to the lack of territorial continuity with enclaves and issues of access to resources, water, etc.) or in terms of infrastructure. A rapidly growing population for a small area and a shortage of housing units, exacerbated by high unemployment, further complicates the situation. Even Arab League assistance would not alter this.
A more likely political and economic agreement would fall somewhere between hostile and friendly separation, involving some losses and some gains. This, too, requires jointly favorable security policies, with the aid of foreign organizations and agencies. A near-cessation of hostile relations and activities would generate higher economic growth and improvement of most social indicators. This may be a necessary condition for friendly separation.
Considering that much of Palestinian economic growth has been slow in the West Bank and even negative in Gaza since the second intifada and the disengagement, the only direction the Palestinian economy could go is up. A reduction in corruption would also greatly improve the economic situation.
Single-State Options

Establishing a single Palestinian/Israeli state, whether as a bi-national entity or a federation with a strong central government and full economic integration, is impossible at present. A single "state" as in the case of Belgium, with a dual arrangement of two nationalities divided into two sub-entities and Brussels being bi-national, would be a good model for Israel/Palestine and Jerusalem, respectively. In Belgium, while national and cultural areas are separate, the economy is roughly integrated and centralized on a non-ethnic basis. Individuals may partially or voluntarily choose their ethnic communities.
Israeli Jews tend to oppose a single-state solution because they would soon become a minority in a joint state, which at present has 5 million Jews and 5 million Arabs in the combined historic territory. Demographically ethnic Palestinians would become the majority in the joint state within several years, thus ending Jewish aspirations for a Zionist or Jewish state. It would also end the Palestinians' desire for a separate national state. This double opposition would make a single-state solution difficult.

Confederation Options

Another option is a loose arrangement of two entities, such as in a confederation or an association with a weak central government involving most sectors and sub-sectors. The EU is an example of a confederation of independent and sovereign states that developed from a specialized economic agreement between two former enemy powers (the 1947 Franco-German Iron and Steel agreement). Much of the EU's strength stems from this union of independent, individual sovereign states, steadily becoming more integrated. The United States is basically a federation with a strong central government. Both the U.S. and the EU benefit from large-scale economies and from a variety of specializations. Israel, Palestine, Jordan, Syria and Lebanon could slowly evolve, in stages, into an expanded Levant confederation, involving a full economic union. Note that this area has often been united in history and could once again benefit from close geographic proximity.
Both a federation (meaning a single country like Israel/Palestine and possibly Jerusalem) and a confederation may be enlarged to include neighboring states. The expanded Levant union could play an important role with the economies of the east, west and south, similar to the role Jews and Arabs played during the later Middle Ages and the early modern period.
Other forms of single-state government may include a unitary state with no territorial ethnic, religious or cultural differentiation, usually defined as a consociation or a consocial entity. This is similar to the millet system in Ottoman Turkey, which still exists in practice on a minor scale within Israel and other Levant countries. Today's Republic of South Africa is an example of such a state. South Africa, because of its diversified economy, scale, abundant resources and proximity to external resources, has a strong economic base. Its skilled labor force, good transportation network, close trading partners, sources of investment, rapid movement of raw materials and final products and high-tech skills and facilities, are creating an economic giant. Recently it has expanded its economic and political role into a loose economic alliance of 13 states in Southern Africa (which it dominates).
Some of these characteristics may emerge in a Palestine-Israel economic union, which could eventually expand into a wider economic union. In the near future a Middle East North African Economic Union (MENAEU) could be formed with much economic clout internationally and lead to economic benefits for all its citizens - but only in the future. This larger union could possibly play an economic and political role affecting the areas to the east, west and south of it. Israel and Palestine, of course, may play a core role, considering their complementary economic and employment possibilities. Movement towards a potential Palestine-Israel economic community could benefit both states. This would involve the creation of joint economic councils in many economic spheres. As this would involve ethnic, political, social and external considerations, they could be introduced in stages. Jordan may be the most natural and logical partner or candidate to join a MENAEU for geographic, historic and political reasons.
With a union of the economies, it would be possible to gradually approach an association of the two countries. The union of two independent sovereign states in a loose confederation, similar to the first stages of the European Economic Community, would be economically desirable and politically acceptable, especially considering the conflicting aspirations of both national groups. Such a union could develop from a mutually agreed-upon friendly separation of Israel and Palestine, followed by the establishment of many shared economic bodies. This is only possible if there is an equitable agreement on security matters, some degree of mutual good will and recognition of the many benefits of a peaceful future, especially in the economic sphere, but also in the political and social spheres. The precondition for everything is a friendly, coordinated economic and political separation of Israel and Palestine, as soon as possible.