Over the course of two years, the Aix Group developed an
"economic" Road Map, to complement the political Road Map proposed
by the Quartet (the U.S., the EU, the UN and Russia). The Aix Group
includes Israeli and Palestinian academics and members of official
institutions - in particular, the Ministry of Finance and the
Ministry of Economy - acting in a personal capacity. The Aix Group
also includes international experts and academics from the European
Union, as well as members of international institutions, such as
the World Bank and the International Monetary Fund also acting in a
personal capacity. The initiator of the project is Professor
Gilbert Benhayoun. The Israeli participants are Professor Arieh
Arnon, Professor Raphael Bar-El, Professor Reuven Horesh and Dr.Ron
Pundak. The Palestinian participants are Dr. Samir Hazboun, Dr.
Salah Abdel Shafi, Dr. Fawaz Abu-Sitta, the economist Saeb Bamiya,
Mr. Ismail Abu Shehada and Mr. Sa'ad al-Khatib. Observers include
Mr. Gabby Bar and Mr. Dan Catarivas on the Israelis side and Dr.
Samih el-Abed, deputy minister of planning on the Palestinian
side.
The following executive summary was completed in January 2004. A
longer detailed version is available at
aix-group.cerefi@univ.u-3mrs.fr or the group's website:
www.aixgroup.u-3mrs.fr
(a) This paper, prepared by a non-official group of Israeli,
Palestinian and international economists, aims to establish an
economic counterpart to the Road Map for Peace. The paper
concentrates on economic arrangements associated with Phase III of
the Road Map, since the group believes the economic content of
Phases I and II can only be determined correctly if a clear vision
of permanent-status arrangements first exists.
(b) In accordance with the Road Map, the paper assumes the
emergence of a two-state solution embodying Palestinian economic
sovereignty, unambiguous borders and the conduct of economic
relations in a spirit of cooperation and mutuality. The group's
economic vision of permanent status is based on economic
arrangements that will seek a convergence of Palestinian living
standards with those of Israel, and promote independence in
economic policy-making while acknowledging economic
interdependency.
(c) Central to our discussion is a recognition that future
Palestinian economic strategy can no longer afford to rely so
heavily on the export of labor and remittance income. It is
unlikely that the number of Palestinians working in Israel will
again approach historical levels; moreover, domestic Palestinian
production and exports are hampered by upward pressure on domestic
wages and prices exerted by higher Israeli wage levels.
(d) The group assessed future policy options in the trade, labor,
fiscal, monetary and investment areas:
* Trade. The group recommends a free-trade area (FTA) consistent
with World Trade Organization (WTO) protocols. An FTA between a
Palestinian state and Israel is likely to be feasible and
efficient, as well as to offer exploitable development
opportunities. It would provide Palestinians open access to the
Israeli market, with Israel continuing to be a key trading partner.
At the same time, an FTA will allow the Palestinian state to
diversify its trade relations and implement development policies
conducive to economic growth and prosperity. An FTA will be most
efficient if accompanied by a friendly system of Rules of Origin.
Israel would grant the Palestinian state, as a developing economy,
the option to temporarily protect selected sectors.
* Labor. The group recommends the establishment of designated
border passages through which labor flow would be unencumbered,
while subject to regulation through taxes and/or permits.
Palestinian workers should be given preferential access to the
Israeli labor market, as compared to other foreign workers,
reflecting the lower negative externalities for the Israeli
economy. In addition, work permits should be granted to and held by
individuals, not contractors. Although the Israeli labor market
will play a diminishing role in Palestinian development, its
importance in an orderly economic transition is significant.
* Fiscal Policy. Under an FTA, each country would run an
independent international customs policy, but would not impose
duties on goods originating in Israel/the Palestinian state (with
certain exceptions as defined under the agreement). To minimize
smuggling, an indirect tax policy needs to be closely coordinated,
and value-added tax (VAT) and other indirect tax rates (excises,
purchase taxes) should only diverge marginally, if at all. Double
taxation should be avoided since this would discourage cross-border
economic activity. Accordingly, there is a case for applying lower
income tax rates to Palestinian workers in Israel as compared to
those applicable to Israelis or other foreign workers.
Alternatively, Israel should continue to remit to the Palestinian
state a large portion of the income tax it levies on Palestinians
working in Israel, as well as any social security deductions.
* Monetary Policy. The group recommends that the restrictions
embedded in the Paris Protocol preventing the Palestinian Monetary
Authority from issuing Palestinian currency be lifted in Phase II
(whether or not the Palestinian Authority [PA] then decides to
create a new currency). At present, the PA does not receive revenue
from issuing and circulating a currency, and this raises the
possibility of the PA sharing the revenue derived from the issuance
of Israeli shekels while the present currency system continues. The
two central banks should consult over the supervision of branches
and subsidiaries operating within each other's jurisdiction.
* Investment. The group recommends that both countries accord one
another's investors and investments national treatment - with some
exemptions in cases that bear upon special national interests. The
future economic agreement should permit full repatriation of
revenues and income, should preclude the possibility of double
taxation, and should address expropriation and regulatory matters
pertaining to facts and disputes created after its entry into
force. Donors can contribute to cross-border investment by
establishing funds that can be used to build equity positions in
Palestinian firms and to create joint ventures with Palestinian
partners, as well as by continuing to offer risk insurance and
guarantees to investors.
(e) The introduction of these new economic arrangements will
require intensive bilateral cooperation. This would be facilitated
in particular by the establishment of a joint Israeli-Palestinian
economic committee, as well as by regular dialogue at expert level
to exchange views on all areas of economic policy (emphasis added).
The establishment of an Israeli-Palestinian development fund should
be considered; this institution could play a major role in
encouraging a variety of joint activities, such as industrial
estates, business ventures for domestic and external markets,
tourism projects and joint public/private infrastructure
initiatives.
(f) The transitional period requires, above all, a vigorous effort
to stimulate Palestinian economic recovery. This can only be done
by restoring movement and predictability in transactions. Three
basic ingredients are required to achieve this:
1. An unencumbered flow of goods across borders and within the West
Bank and Gaza;
2. An unencumbered flow of people within the Palestinian
territories, coupled with a flow of workers to Israel;
3. The continued uninterrupted flow of fiscal transfers from Israel
to the PA.
The meaning and operation of a Palestinian state with provisional
borders, as envisaged under Phase II, needs thorough exploration
since it will serve as the precursor to full economic independence.
Phase II arrangements must realistically be based on a "Paris Plus"
formula - that is, the full implementation of the modified Paris
Protocol. Phase II arrangements should include measures that ensure
territorial viability, i.e., the creation of internal contiguity
and the inception of economic control over external borders. Steps
should be taken to denote emerging sovereignty, including the right
to issue currency and the granting of observer status in the
International Monetary Fund (IMF), the United Nations (UN), the
World Bank and the WTO. Attention should also be given to the
development of institutions that will reinforce cooperation and
resolve disputes.
