Background
There are many political considerations in the "Gaza and Jericho
First" decision; but the purpose of this article is to consider the
likely economic effects of the plan. There are several reasons for
the emergence of the Gaza First idea:
• The difficulty of maintaining Israel's rule in the Gaza
Strip
• The small number of settlers in the area
• The ease of closing off the Gaza Strip from Israel
• The fact that Israelis are less emotionally involved in
Gaza
• The Gaza area has since 1949 had a separate identity from
the West Bank.
In order to make the scheme more acceptable to the Palestinians,
Jericho was added to the Gaza First proposal, and subsequently the
Israel Government and the PLO signed accords that included an
agreement to negotiate and implement a Gaza and Jericho First
plan.
This involves granting a degree of autonomy to Gaza and Jericho
larger than the early stages of autonomy to be granted to the rest
of the West Bank. Border crossings (the Jordan bridges and Egypt)
and most of the security will remain under Israeli control. Jericho
might initially serve as the "administrative center" of the
autonomy area.
The Economy of Gaza
In 1991 the total revenue of Gaza industry was less than $100
million with an estimated added value of around $35 million. There
are several Israeli industrial concerns with greater revenues, The
Gaza figure was around 40 percent of the West Bank's revenue and
added value, although its population was around two-thirds of the
West Bank's (excluding East Jerusalem). Gaza's population in 1992
was at least 720,000, living at a density of 2,000 persons per
square kilometer (more than any other entity in the world except
for the city-states of Hong Kong and Singapore). Gaza's industrial
output (based on comparative tables from the 1992 Statistical
Abstract of Israel) was only 0.6 percent of Israel's.
Revenue per employed person was only two-thirds of that in the West
Bank, and wages per employee were only five-sixths of that in the
West Bank. Comparative data for Israel: one-¬sixth for
revenue; one seventh for wages.
In terms of trade (not including the West Bank), Gaza's exports
were around $71 million and its imports were $289 million, meaning
an import surplus of $218 million.
Since early 1993 with the closure of the territories, there has
been a drastic drop in income from employment in Israel which
considerably reduced the GNP. Gaza's GOP (which excludes income
earned in Israel) was only around $550 million in 1990, which is
only one percent of that in Israel.
The general standard of living in Gaza is some 10 percent lower
than in the West Bank.
As regards private consumption per capita, Gazans spend only around
two-thirds as much as West Bankers. The percentage of refugees in
Gaza is considerably higher than in the West Bank.
Therefore, although the present situation in Gaza is critical -
even compared with the West Bank - it will be alleviated if
extensive autonomy is rapidly achieved and funds are
forthcoming.
Gaza industry is underdeveloped by any standards and there is
little industrial development. In clothing, however, there are many
subcontractors for Israeli industry, which exploits the
particularly low wages in Gaza. Its economy and consumption depend
more on imports - including from (and via) Israel - than on its own
production. Its standard of living is third-world level and lower
than that in the West Bank. Gaza Port - except for fishing -
handles little cargo. There is little outside investment, whether
expatriate Palestinians or foreigners. Unemployment was higher than
in the West Bank. All the above points indicate that the "Gaza
First" plan is very difficult to implement.
Therefore the period of Gaza and Jericho First should be measured
in months rather than in years, and the amount of autonomy
initially greater must be greater than in the rest of the West
Bank.
Gaza Port
While in historical times Gaza served as a port, at present it
caters only for limited (shallow water) cargos and fishing
vessels.
Most Palestinian leaders support the establishment of a deep water
port in Gaza and consider it viable. Two earlier Israeli studies1,
2 conclude that a Gaza port, while not necessarily the best
infrastructure investment in the West Bank and Gaza, is at least
economically viable, especially if Jordan transfers some of its
shipments (exports and imports) from Aqaba to Gaza and utilizes the
port's services. A minimum 30-¬year timespan should be
considered for this investment of several hundred million dollars.
Note, however, that in terms of employment, no more than 500 work
places would be generated by this investment. Initially, under Gaza
and Jericho First, steps can be taken to plan this project and set
up the authority; but full implementation might take several
years.
Free Economic Zone
"Free Economic Zones" are administrative devices intended to
facilitate desirable economic transactions that are normally
hampered by the government of the country where the zone is being
established.
There are no objective reasons why either Israel or the Palestinian
leadership should object to a Free Economic Zone, after the
Palestinian Interim Self Governing Authority (PISGA) is
established. In the long run a Free Economic Zone, especially one
combined with an open port, while not necessarily good for all
political entities, offers many advantages to a developing area
such as Gaza - and even possibly Jericho.
The free economic zones we are discussing would center primarily on
establishing industries; but also include various economic
services. A free economic zone in Gaza, based on a long-term stable
political agreement, probably leading to a separate Palestinian
political entity, would provide many economic benefits and help
establish local, foreign and Israeli industries within the zone. It
should be pointed out that from the time a decision is made to
establish a free economic zone to its actual operation would take a
minimum of one year, while the separate existence of a special
status for Gaza would probably not exceed one year. Therefore a
Gaza-¬Jericho authority might not have a fully operating free
economic zone during its short separate existence. This however
does not preclude taking a decision to start one or more such zones
prior to a full Palestinian self-rule, so that they can be
economically operational as soon as possible.
Free economic zones are often established to attract foreign
investment for the purpose of accelerating industrial development
in general, or some sectorial development in particular. They
provide the investors with environmental, institutional and legal
conditions which for political or economic reasons, cannot be
provided in the host country.
In theory, the Israeli authorities could have established a free
economic zone in the past under the status quo - which mayor may
not have been successful - but now conditions are riper, both from
the economic and political points of view.
It should be noted that the existence of free enterprise free
economic zones does not dictate the nature of the economic system
for the territories gaining self government. These are quite likely
to be based on a mixed economy, similar to that in Israel's early
years.
Interim Arrangements
Although Gaza and Jericho will achieve interim self government
before the rest of being considered for the whole of the occupied
territories should be implemented in the more limited Gaza and
Jericho areas.
While some Palestinians, mostly for reasons of political symbolism,
desire the greatest degree of economic separation from Israel,
Israel is unlikely to agree (at this stage) to a near total
separation of their economies and revenue systems from
Gaza-Jericho. While there may be different direct tax bases, for
Israel and the autonomous area, Israel is unlikely to agree
immediately to radically different indirect taxes, such as customs,
tariffs, and value added tax, with the possible exception of the
limited area of a free economic zone. While separate border
controls are possible for Gaza, any plan to be agreed upon will
serve as a precedent for the West Bank.
Free movement of goods and services, without customs or tariffs,
between the limited autonomy areas and Israel is envisioned albeit
with the removal of all unequal economic barriers.3 The existence
of shared relatively high customs and value added taxes would serve
as a source for much needed revenue and as a partial protection
against third party suppliers.
The period of separate self government for Gaza and Jericho should
not be long, and will serve as a model for a Palestinian Interim
Self Governing Authority.
Investment in Gaza
In 1990 only $150 million was invested in the Gaza Strip, of which
$125 million was in the construction sector. Israel in the same
year had a gross domestic capital formation of $9,500 million (63
times as great), of which less than half was in construction. In
that period, only about 2,000 housing units were started in
Gaza.
At present at least half the population of Gaza live in sub
¬standard housing, in some 50,000 to 60,000 housing units,
mostly in refugee camps. With the population increasing at some
30,000 per annum, an additional 5,000 housing units required.
Consequently the situation is constantly deteriorating.
To help solve the problem, at least 10,000 units should be built
annually (5,000 over the population increase) at a cost of around
$25,000 per unit, meaning a total annual investment of $250
million, or $1,250 million for the coming five years.
A further $450 million is required for the port of Gaza over the
five-year period of the interim agreement, plus an additional $225
million for other infrastructure projects.
Real unemployment is at present based on 22 percent potential of
the total population (160,000). Less than 100,000 are employed in
Gaza and Israel, meaning that 60,000 are unemployed. At the same
time, the potential working population increasing at a rate of
5,000 annually. To create jobs for 10,000 potential workers at
$10,000 per work place would cost $100 million a year - $500
million for five years. Another $300 million may be required for
other investment during this five-year period.
The total minimum investment for the five years is therefore $2,500
million, three times the estimated 1993 rate of $175 million. If
Gaza is to start a significant growth rate to help close the gap,
at least with the West Bank, most of this money must be made
available.
Regarding Jericho, a relatively underdeveloped town/region, we
cannot estimate the required investment as we do not know the size
of the potential area. The town itself has around 20,000
inhabitants but a larger area will be included in the Gaza-Jericho
plan. This might immediately add another 10 percent of the required
total five -year investment to be added to the Gaza
investment.
Other Considerations and Conclusions
A Gaza-Jericho entity could benefit from wealthy expatriate
Palestinians investing in new and "existing" industrial (and
service) establishments. Lately there have been moves to organize
these wealthy expatriates to invest in the West Bank and
Gaza; but there was a dispute within the Palestinian leadership as
to whether economic development was desir¬able prior to
political progress. Now it is assumed that, as the leadership has
accepted Gaza and Jericho First, it will encourage econo¬mic
development, on condition that it does not weaken the
Pales¬tinian claim to the rest of the West Bank.
It should be noted that real estate prices in the West Bank and
Gaza have risen considerably since the start of the Madrid talks,
indicating some belief in political and economic progress. More
recently land prices have jumped in Jericho.
For many Palestinians, Jericho implies also the area of the bridges
across the Jordan, involving their control of cross-border trade
and transportation. It is difficult to envision Israel accepting
this prior to the overall settlement.
While Jericho will receive "symbolic autonomy" representing the
West Bank, it can become an administrative capital of the area of
autonomy. A service-and-tourism-based free economic zone could be
established there. At present its industry is even less developed
than Gaza; but it is a service center. Its links with Gaza are
likely to be of limited economic or industrial consequence. It does
however have major tourist potential.
It is impossible to separate economic consi¬derations from
political ones regarding Gaza and Jericho First. However, if it
comes about, major economic projects, such as a Gaza port, a Gaza
free economic zone, and rapid economic develop¬ment could soon
be implemented. It would also demonstrate the Palestinian capacity
to maintain effective con¬trol over a Palestinian area, and
ease the way for the rest of the West Bank. However, it might not
be possible to overcome all the inherent economic difficulties of
the Gaza Strip, and to promote rapid industrial development, prior
to the establishment of a real self-¬governing authority in
the remainder of the West Bank and Gaza (excluding Jewish
settlements and East Jerusalem). If some measure of industrial
development is achieved, this would be a step toward a real
economic takeoff for the whole West Bank and Gaza.
The removal of direct Israel rule and the establishment of an
autonomous administration, even if only temporarily as a first
stage, will have an immediate positive effect on several areas.
Citrus exports (which have often been hampered by the Israelis),
and citrus processing will further develop. Fishing and fish
processing facilities could also be improved immediately. A greater
number of government jobs (especially in Jericho) will become
available. A government budget could also provide for investment in
infrastructure, housing (especially in Gaza), and social services.
The implementation of the Gaza-Jericho plan will mean the virtual
end of the Intifada, with possibilities for increased employment in
Israel, thus increasing Gaza's GNP. Small¬-scale investment
will increase Gaza's industry and services, and Jericho will also
develop rapidly.
With the abolition of the civil administration in Gaza and Jericho,
existing budgets will be transferred to Palestinian authorities.
These should be supplemented both by additional funds from local
sources (some via Israel) and international assistance, possibly
supplemented by PLO-related funds.
Furthermore, with the gradual establishment of equity in the
territories' relations with Israel, economic cooperation can be
stepped up, albeit on a more equal footing than hitherto. Some of
the areas of cooperation are labor intensive industries, building
materials, computer software and tourism.
In conclusion, with the signing of a mutual recognition agreement
between Israel and the PLO, and the Gaza-Jericho accord, the
stalemate in the peace talks has ended. This should also end the
present economic stagnation of the West Bank and Gaza. There will
be a period of rapid economic and political progress, especially
for Gaza and Jericho. The economic pre-condition for this, apart
from increased local investment, is a massive flow of funds from
abroad ¬from expatriate Palestinians, including PLO, the Gulf
States, the European Community, Scandi¬navian, the United
States and Japan - and possibly Israel in the form of joint
ventures and repayed social security. This should serve as a model
for development in the rest of the West Bank and create conditions
for further progress. Nevertheless, the economic gap between the
Gaza Strip and the West Bank will not be easily closed, even after
many years of progress.
A final point: the economic benefits from a comprehensive peace,
establishing a separate Palestinian entity, will over a decade
result in massive economic growth for both Palestine and Israe1.4
To achieve this it is crucial that the Gaza-Jericho plan should be
only the first step in an on-going political and economic
process.
1. A. Tal, H. Wolpert, and S. Bahiri: Regional Cooperation in
tile Development of Transportation Infrastructure in tile Middle
East. The Armand Hammer Fund for Economic Cooperation in the Middle
East, Tel Aviv University, 1988.
2. Zeev Hirsch, Shauli Katznelson and David Sasson, A Free Economic
Zone and Port for tile Gaza Region. The Hammer Fund for Economic
Cooperation in the Middle East, Tel Aviv University, 1991.
3. Equitable Economic Integration by the author - New Outlook,
Ian-Feb. 1993, Tel Aviv.
4. Peace Pays: Palestinians, Israelis, and tile Regional Economy,
the author with Samir Huleileh and Daniel Gavron. Israeli Palestine
Centre for Research and Information, Jerusalem 1993.
