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 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
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"
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.
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.
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
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.