In 1994, still rejoicing in the apparent success of the Oslo Accords of the previous year, Israel and the Palestine Liberation Organisation (PLO) embarked upon another set of deals in an effort to aid the contentious peace process. In May, both sides signed the Gaza-Jericho Agreement, remembered largely for its establishment of the Palestinian Authority (PA) as the legitimate body to govern the civil and security affairs of the Palestinians living under Israeli occupation. Five days earlier, an agreement of equal significance was signed, the Paris Protocol, designed to regulate all economic interaction between Israel and the occupied Palestinian territories.
Presented as a temporary measure, the final status of the economic integration between the two states was to be resolved alongside a future peace deal within five years; such a deal has never been agreed. Some 24 years later, Palestinian statehood remains unrecognised, leaving it without independent gates to the world economy. Instead, the regulations enforced as part of the Paris Protocol have led to widespread economic stagnation in the occupied territories.
Today, with nearly one in five Palestinians unemployed in the West Bank and more than 40 per cent of the population in the Gaza Strip without work, dependence on humanitarian assistance has become the norm for hundreds of thousands of Palestinians under occupation. The Israeli-led blockade on Gaza since 2007 has further debilitated the local economy, stripping basic necessities from the territory, with limited types and quantities of goods allowed in for its two million residents. Heavily reliant on aid, the myth of a functioning Palestinian economy has allowed Israel to exert its control over the lives of millions of people with international impunity; its actions are legitimised by Paris.
Tariffs and taxes
The Paris Protocol, also known as the Protocol on Economic Relations, was hailed as a landmark achievement following the Oslo Accords signed seven months earlier. The agreement stipulated that the Palestinian economy would be merged into that of Israel's through a customs union, with Israel in control of all borders. The PLO had originally requested a free trade area to give the Palestinians greater autonomy, but the request was denied, allowing Israel to sidestep the question of borders and the illegal presence of settlers in the occupied Palestinian territories.
The protocol mandated the use of the Israeli shekel by Palestinian businesses, making the introduction of any alternative currency illegal and entrenching their dependence on the occupying state. All imports and exports are also controlled by Tel Aviv, which has allowed for the substantial exploitation of Palestinian goods, with high tariffs for Palestinian exports, while Israeli goods flow freely across the border into the West Bank. Over 80 per cent of Palestine's trade is with Israel, estimated at some $2.93 billion every year, whilst Israel buy goods valued at less than $780 million from the Palestinians.
Another major aspect of the protocol was the tax system, which authorised Israel to collect all revenues from import tariffs and value added tax. It also collects all income tax from Palestinians who work in Israel and in the illegal settlements; in 2015, the amount collected on behalf of the PA was around $160 million a month. Israel has used this as a punitive measure against the PA and Palestinian resistance by suspending the transfer of all or part of this revenue on a number of occasions.
This has held the Palestinians to ransom until they abide by Israel's wishes with, for example, funds being withheld in the aftermath of Hamas-Fatah reconciliation efforts and Palestine's bid for membership of the UN. In 2016, the World Bank condemned Israel for failing to deliver funding to the PA, worth some $285 million every year. Such an amount is vital for the PA to be able to deliver public services effectively.
Earlier this year the Israeli Defence Ministry proposed a bill that would see the state deduct additional tax money from the PA in protest at the payments given to the families of Palestinian prisoners and those killed by the occupation forces. This move was decried by the PA as a "declaration of war".
Aid for Israel
Trapped in a cycle of never-ending peace talks, the occupied Palestinian territories have found themselves heavily reliant on international assistance over the past two and a half decades. Much of the support comes via the UN Relief and Works Agency for Palestine Refugees (UNRWA), which administers education, health, and relief and social services programmes for Palestinians across the region on behalf of the international community, but is itself almost entirely dependent on voluntary donations from UN member states. International and local NGOs and charity organisations also maintain an active presence on the ground, providing emergency humanitarian relief and long-term development projects.
Aid in the Palestinian territories has consequently come to function as a quasi-governmental institution, responsible for the provision of essential services and filling gaps in public services, with organic growth capability stifled by the occupation. It is also highly politicised; humanitarian aid for Palestinians is often equated — with no evidence whatsoever — to "support for terrorism".
Research indicates that much of the funds destined for Palestine actually serve to bolster Israel. A 2015 study by economist Shir Hever for Australian NGO Aid Watch found that at least 72 per cent of international aid is subverted and used to purchase goods and services from Israeli companies, thus flowing out of the Palestinian economy, and circulating instead in Israel.
The state enjoys a trade surplus with the occupied territories, selling Palestinians vastly more goods than it buys, making them heavily dependent on Israeli output. Israeli economists have also identified consistent efforts by the government to prevent Palestinian industrial development in sectors that could compete with Israel, through restrictions on Palestinian companies, heavy taxes and limitations on the freedom of movement of goods and people. With few Palestinian options available, aid agencies often have no choice but to purchase the goods they need from the occupying power, stimulating and supporting Israel's economy in the process.
Clouded by the still unresolved peace process, the state of the Palestinian economy is often overlooked by commentators in favour of the latest political negotiations. On the surface, some have attempted to argue that the Palestinians economic situation has improved since the Paris Protocol, with income per capita rising consistently except during the Second Intifada.
Yet that picture quickly diminishes upon a closer look at the data. Palestinian economic growth has been largely stagnant over the past two decades, averaging at less than three per cent since 2001. Spurts of growth and subsequent rapid decline have led to inherent uncertainty, a cyclical pattern that can be traced alongside Israeli aggression towards Palestinians, consequently attracting little foreign investment for Palestine's private sector.
A 2016 report found that over the past 20 years, the Palestinian economy has regressed; the share of the manufacturing sector has dropped from 18 per cent of economic output in 1995 to 12 per cent, and the agricultural sector in the occupied territories has halved.
Unemployment in the Palestinian territories remains high, particularly for young people, who make up 30 per cent of the population. In 2017, only four out of ten of young people aged between 15 and 29 were active in the labour market, reflecting the reason for the ongoing pessimism regarding employment prospects. One in five Palestinians is believed to live under the US$5.5 per day official poverty line. In Gaza, living standards have been declining steadily since 2014, with experts warning of the Strip's rapid de-development after it was declared "unliveable" three years ahead of the UN's dark 2020 prediction.
In 2017, a World Bank report argued that if the right policies were implemented, Palestinian growth could be raised to as much as seven per cent annually. It stipulated the crucial need for restrictions surrounding the West Bank to be dismantled and the siege on Gaza lifted. Yet even beyond such policy changes, swift recognition is needed that the economic equation as set down by the Paris Protocol has functioned as a form of financial enslavement of the Palestinian people and contributed to the ongoing occupation.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.