Palestinian Industrial Development and Israeli-Palestinian Attitudes to Cooperation
For the past year and a half, in the framework of an EU-sponsored
joint Israeli-Palestinian economic project, the authors have been
collaborating on a study involving industrial cooperation between
Israel and those responsible for Palestinian industrial
The paper presented here summarizes the final stages of this
endeavor by reviewing two sub-projects. One involves two separate
but parallel (nearly identical questionnaires) attitude surveys of
manufacturers in Israel and in the West Bank and Gaza (WBG). While
the surveys were conducted separately by the Israeli Manufacturers'
Association and DATA Studies and Consultations, the comparative
analyses were jointly carried out by the authors.
The other sub-project involves an analysis of Palestinian
industrial development - policies and potential - and its
cooperation with Israeli industry. The links between the two
studies are the findings that both Israeli and Palestinian
manufacturers, despite some misgivings, are heavily in favor of
mutual industrial cooperation; that there is an objective economic
need for Palestinian-Israeli industrial cooperation in order to aid
Palestinian development, and to strengthen the vested interest in
Comparative Analysis of Israeli and Palestinian Attitude Surveys of
The original study was carried out at the end of 1993 among 372
Israeli firms (representing over 400 individual plants) by the
Israel Manufacturers' Association and it represented over
one-quarter of Israeli industry. After the initial results were
presented in early 1994, Dr. Bahiri analyzed the findings in the
framework of the EU project. The original questionnaire was then
translated into Arabic and adapted by Dr. Hazboun's DATA team to
produce the parallel questionnaire used in the survey of
Palestinian manufacturers. The survey involved 195 firms with
fifteen or more employees, representing over half of the larger
Palestinian firms. Their findings were subsequently analyzed by the
The authors then cooperated in the comparative analysis of the
findings of the two related studies and in drawing conclusions.
Following this initial analysis we then proceeded to computer-match
the main findings and to summarize from them the more significant
Among Israeli firms, some 77% felt they were affected by the
Palestinian economy, while only 50% of Palestinian firms felt they
were affected by the Israeli economy.
As for the expected effect of the interim period, 36% of Israeli
firms thought this would be negative, while only 8% of Palestinian
firms thought so.
At the same time, 85% of Israeli firms and 76% of Palestinian firms
favored cooperation with the other side. However, Israeli firms
tend to favor cooperation only where competition is expected to be
slight. 59% of Palestinians were against reciprocal marketing,
while 57% of Israeli firms were in favor. Palestinian firms appear
to conceive reciprocal marketing arrangements as a means of
exploiting their lower labor costs, although they acknowledge that
it might serve to open new markets for both sides (Western markets
for Palestinian firms; Arab ones for Israeli firms).
Both sides support joint ventures as the favored form of
cooperation ¬71 % of Israeli firms and 56% of Palestinian
Regarding support for licensing (mainly Israeli to Palestinian),
only 30% of Israeli firms are in favor as against 55% of
Palestinian firms. The larger Palestinian firms are 65% in
Both sides also support subcontracting, with 45% of Israeli firms
and 55% of Palestinian firms in favor. Where subcontracting already
exists, more firms are in favor.
Regarding the effect on overall sales, whereas only 50% of Israeli
firms expected an increase, an overwhelming proportion (89%) of
Palestinians expected an increase in their sales.
While nearly all Palestinian firms (95%) considered themselves to
be in competition with Israeli firms, only one-third of the Israeli
firms thought so.
Subcontracting to the WBG from Israel was supported by 46% of the
Palestinian firms, but only by 7% of the Israeli firms. Mainly the
Palestinians seemed to want to continue subcontracting.
While 56% of Palestinian firms purchase non-labor inputs from
Israel, only 4% of Israeli firms do so.
Both sides felt that the Declaration of Principles (DOP) will have
a favorable effect on economic growth (92% of Palestinian and 96%
of Israeli firms).
Policies for Palestinian Industrial Development
The bulk of Palestinian industry is characterized by small units -
fewer than five employees. No more than 300 enterprises employ ten
workers, and only 40 employ 50 or more. There are very few
enterprises employing over 300 workers or more, while one-third of
Israeli industrial labor is so employed. In 1992, there were some
32,000 employed in manufacturing (including olive pressing) and
mining in the WBG.
Industry represents 7.8% of the WBG GDP and accounts for some 15.5%
of the employed workforce.
While industrial development is in most developing countries one of
the most important bases for economic development, its percentage
of the GDP has not increased in the WBG since the beginning of the
Occupation. This is in spite of the absolute growth rate of
industry between 1968 and 1977 of nearly 16% per annum 1 after
which it leveled off. While the reason for the early growth was
that spare capacity existed and was being increasingly utilized, it
serves as an illustration that, without the subsequent restrictive
policies of the Israeli Occupation, rapid industrial development is
In 1993, the PLO in Tunis issued its economic plan2 of its total
planned investment (in 1991 U.S.$) of 11.6 billion; only $405
million, or 3.5%, was allocated to industry. According to their
figures, 6.7% of the GDP was to come from industry by 1995, and it
was to be reduced to 5.9% by the year 2000. This was based on a
projected growth rate in the industrial sector of 8.5%, which was
lower than their target of 11.4% growth for the economy as a whole.
The forecast of the planners, that industry will account for less
than 60% of the GDP, seems neither realistic nor desirable. A
higher rate of industrial growth is required. Note that the share
of industry in 1990 for low-to-middle-income countries reached an
average of 37% in 1990, with the average of 45% for East Asian and
In order to reach a minimum of a 20% share of the GDP in industry,
a growth rate of 20% per annum over ten years is necessary. This
should be the minimum target for a balanced growth, and to reach
the average relative productivity, industrial employment should
grow at only 8% per annum for the ten years.
The investment required, based on the authors' estimate of $30,000
for each new place of work (the PLO plan allowed for only $10,000)
and a further average $10,000 to improve existing places of work,
would be in the region of $1.5 billion ($150 million per annum):
not an impossible task considering the low starting levels and the
There will be different rates of growth for different branches.
Some of the areas for possibly more rapid development are metal and
electrical branches (especially electronics), diamonds (a new
branch), paper, building materials (essential for expected massive
construction), rubber, plastics and chemical (especially
pharmaceutical) branches. Another related area of rapid growth is
computers, especially software for the regional markets.
Some of the conditions that would aid such rapid industrial
development are a correct mix of a private enterprise industrial
economy aided by public institutions and infrastructure. This means
learning both the positive and negative lessons of other developing
countries, such as Egypt and India (negative lessons), as well as
Jordan and Israel's formative years (1950-1970). Palestinian
industry should follow an export-led growth path with some initial
protectionism. The Palestinian diaspora could be targeted. Free
economic zones (FEZ), government-subsidized industrial estates and
an investment authority should be established by the authorities to
serve an entrepreneurial environment. Finally, the Palestinian
Authority should exploit its links with Israel, reform and revise
them, develop equitable industrial cooperation with Israeli
industry and help Palestinian firms penetrate the Israeli
Palestinian-Israeli Industrial Cooperation
The Palestinian entity should exploit its special ties with Israel.
Indeed, we have already seen that a large majority of manufacturers
on both sides favored industrial cooperation.
The following are some of the reasons for continuing with, and
strengthening, industrial cooperation:
a. Existing partial integration;
b. The Declaration of Principles (OOP) agreement which provides for
cooperation in textiles, food, pharmaceuticals, electronics,
diamonds, computers and hi-tech industries;
c. Large size of the Israeli GNP and its market;
d. Need for rapid development of Palestinian manufacturing;
e. Exploiting Israel's international marketing links;
f. Exploiting Israel's technological structure; and g.
Strengthening vested interest in peace.
The areas of subcontracting and joint ventures (both of which are
supported by manufacturers on both sides), the area of building
materials and the exploitation of the Dead Sea should also be
considered. Furthermore, the Palestinians can exploit the
relatively large Israeli market, its potential investors, and
Israeli links with free-trade-agreement areas and other connections
with the rest of the world. In return, the Israelis could benefit
from jointly developing further ties with the Arab world. There
could be joint exploitation of both the Palestinian and Israeli
diasporas for investment and technology transfer. And lastly, joint
studies with the aim of strengthening industrial cooperation for
mutual benefit should be undertaken.
We have seen that both Israeli and Palestinian manufacturers are in
favor of industrial cooperation, and that such mutual support, if
achieved, can lead to a higher rate of economic growth, especially
for Palestinian industry. It was suggested that the recent PLO
economic plan (1994-2000) as regards industry is not ambitious
enough when we consider the requisites for balanced economic
growth. Around 20% per annum industrial growth (COP) is required
over the next ten years in order to reach the minimum threshold of
20% of the COP in industry. Policies for industrial development
based on a balanced mix of private and public initiatives were
discussed and outlined. Finally, industrial cooperation between
Israel and the Palestinian entity was also addressed and
This is a shortened version of papers submitted to the EU in a
joint Israeli-Palestinian industrial study, in the framework of
"Sustaining Middle East Peace through Regional Cooperation."