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 development.
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 peace.

Comparative Analysis of Israeli and Palestinian Attitude Surveys of Manufacturing Enterprises

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 DATA group.
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 ones.
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 firms.
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 favor.
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 possible.
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 Pacific countries.3
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 high potential.
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 market.

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 supported.
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." <