UP O R G Economic Dimensions of a Two-State Agreement Between Israel and Palestine Vol II: Supplementary Papers Aix Group Arie Arnon and Saeb Bamya (Eds.) June 2010 Preface The Aix Group is a unique working group of Palestinian, Israeli and international economists, policymakers, academics and private sector representatives that researches, produces and disseminates position papers which seek to identify economic scenarios and suggest economic recommendations in order to promote win-win outcomes for Palestinians and Israelis. The Group is accompanied by Israeli and Palestinian official observers, who not only share their thoughts with the Group, but have, time and time again, incorporated some of the Group’s ideas and recommendations into both their national policies and approaches to the negotiation table, thus making it a typical Track II economic forum. Indeed, in light of the deteriorating political circumstances of the region, the Aix Group has stood tall as one of the only forums of dialogue and cooperation where members of the two sides continue to meet and engage in rational discussions related to common concerns. Formed eight years ago under the auspices of the Université Paul Cézanne - Aix-Marseille III in France and in coordination with the Peres Center for Peace in Israel and DATA Center for Studies and Research in Palestine, the Aix Group is chaired by Professor Gilbert Benhayoun from Université Paul Cézanne. The Group is headed on the Israeli side by Professor Arie Arnon of Ben-Gurion University of the Negev, and on the Palestinian side by Mr. Saeb Bamya, former Deputy Minister of National Economy. Over the course of more than two years, the Aix Group exchanged ideas on various economic aspects of a possible permanent resolution within an overall two-state agreement. As in the previous works of the Aix Group, we had to imagine a political solution which seemed to some observers, and sometimes even to members of the Group itself, as a very remote possibility. Still, we assumed throughout the work, with all the reservations we had, that an agreement acceptable to the two peoples will be reached. Only in that context do the Group’s detailed discussions and findings make sense. Thus, we would like the reader to assess the arguments in the following pages with the expectation that a permanent political agreement on all dimensions is still very much attainable. i Acknowledgements This book summarizes the major points of our discussions. However, by no means does it reflect the views of the supporting institutions, project coordinators and meeting participants. Nevertheless, the Aix Group would like to thank the following institutions for their substantial contributions, strong support and dedication to the peace process in the Middle East, and without which the fourth stage of research, much like those which came before it, would not have been possible: The World Bank The French Ministry of Foreign and European Affairs Agence Française de Développement, France The General Council of Bouches du Rhône, France The Regional Council of Provence-Alpes-Côte d’Azur, France The Embassy of Finland in Israel The Representative Office of Finland, Ramallah For their valuable efforts and hard work, the Aix Group would also like to thank: Bashar Abu Ghanam, former Palestinian Project Manager, Data Center for Studies and Research Saher Al-Sous, Palestinian Project Manager, DATA Center for Studies and Research ii Barak Greenapple, former Israeli Project Manger, Business and Economics Department, The Peres Center for Peace Edan Raviv, Israeli Project Manager, Business and Economics Department, The Peres Center for Peace Adi Ashkenazi, former Director of the Business and Economics Department, The Peres Center for Peace Yoav Stern, Director of the Business and Economics Department, The Peres Center for Peace Colette Lescure, International Coordinator of the Aix Group, Université Paul Cézanne - Aix-Marseille III, France Emmanuelle Moustier, Assistant to the International Coordinator of the Aix Group, Université Paul Cézanne - Aix-Marseille III, France iii Members of the Aix Group Israelis Internationals Palestinians Prof. Arie Arnon Prof. Gilbert Benhayoun Mr. Saeb Bamya Head of the Israeli Research Chairperson of the Group Head of the Palestinian Research Team, Dept. of Economics, Ben- Department of Economics, Team, former Deputy Minister Gurion University University Paul Cezanne - of National Economy Aix-Marseille III Dr. Ron Pundak Dr. Samir Hazboun Director General, The Peres Researcher Economist Center for Peace DATA Studies Researchers: The Big Picture Prof. Arie Arnon Mr. Saeb Bamya Researchers: Refugees Prof. Arie Arnon Mr. Saeb Bamya Tamar Hacker Maysa Abu Awad Former Member of the Israeli Economist Delegation To the Paris Protocols Dr. Sharon Hadad Economist Researchers: Territorial Link Guy Ronen Dr. Samir Hazboun Barak Greenapple Bashar Abu Ghanam Former Project Manager, Economist The Peres Center for Peace Shimon Farang Landuse Traffic and Roads Planning Ltd. Dr. Danny Tirza Dan Teresa Initiatives Ltd. Thomas M. Leitersdorf Planning & Architecture, Ltd. iv Israelis Internationals Palestinians Researchers: Jordan Valley Itzhak Gal Mr. Saeb Bamya Economist Adi Ashkenazi Shawqi Makhtoob Former Director, Economist Business & Economics Department The Peres Center for Peace Researchers: EU-MED Joseph Zaira Saad Khatib Department of Economics, Senior Policy Advisor, Hebrew University, Jerusalem Carana Corporation Alon Etkin Shawqi Makhtoob Economist Economist v During two years of research, the Aix Group has held two international conferences as well as dozens of meetings, to which individuals from different economic organizations, ministries and academic institutions were invited to listen and to comment on the work of the Aix Group. The following people, among others, have participated as guests and listened to the Aix Group’s ideas and findings (in no particular order): Israelis Internationals Palestinians Dan Catarivas Bernard Kouchner Samir Huleileh Director, Foreign Minister, France Managing Director, Division of Foreign Trade Riad Al-Khouri Portland Trust & International Relations, Visiting Scholar, Basem Khoury Manufacturers’ Association of Israel Carnegie Middle East Center Head of Board, Jimmy Weinblatt Joel Toujas-Bernate Palestinian Federation of Industries Rector, Ben Gurion University Senior Resident Representative Azzam El-Shawa Danny Arditi (West Bank & Gaza), Head of Board, Brigadier General, Chairman, International Monetary Fund Al-Quds Bank National Security Council Gracia Ignacio Bercero Ahmed Quray (Abu Ala) Irit Ben-Aba Director, Head of Palestinian Negotiating Head of Economic Affairs Division, S u s t a i n a b l e D e v e l o p m e n t a n d Team Bilateral Trade Relations Ministry of Foreign Affairs European Commission Hezi Kugler Farrukh Iqbal Director General, Sector Manager, Ministry of Middle East & North Africa Region National Infrastructure Social & Economic Development Gabby Bar Department Senior Regional Director, The World Bank Middle East & North Africa Dr. Bernard Philippe Ministry of Industry, Trade & Labor Delegation of the European Commission to Tunis Nicola Cobold Deputy CEO, Portland Trust (London) Douglas Fraser Canadian Special Coordinator for the Peace Process Jean-Michel Casa Former French Ambassador in Israel Christophe Bigot Current French Ambassador in Israel Alain Rémy Former French General Consul in Jerusalem Guillaume Klossa Vice President, Evens Group vi Table of Contents Preface i Acknowledgements ii Introduction: The Rationale and Assumptions Behind the Aix Group Economic Analysis 2 The Big Picture: The Political and Economic Alternatives Facing Israelis and Palestinians 9 A Framework for a Permanent Agreement Concerning the Palestinian Refugees 45 The Territorial Link between the West Bank and Gaza Strip: Examining the Alternatives 137 The Economic Development of the Jordan Valley 207 The Union for the Mediterranean: The Barcelona Process and the “Two State” Solution 275 Introduction: The Rationale and Assumptions Behind the Aix Group Economic Analysis Steering Committee of the Aix Group Arie Arnon, Saeb Bamya, Gilbert Benhayoun, Samir Hazboun, Ron Pundak Economic Dimensions of a Two-State Agreement Between Israel and Palestine Introduction In 2003, the Aix Group came to the conclusion that one of the errors committed and habituated by both Israelis and Palestinians was that of basing the peace process on “gradualism,” whereas the right way forward was to adopt what we have called an approach of “reverse engineering.” Under reverse engineering, the sides first agree on where they want to go, i.e. on the contours of a permanent agreement, and then decide on which steps and processes will optimally reach that end. Gradualism, on the other hand, takes the form of an incremental approach, moving one step (and one issue) at a time with no agreement on, or even slight consideration of, the end result. This is an inappropriate approach – particularly in the context of the power imbalance between the two sides – which time and time again contributed to failure, . In fact, the failure to agree to and implement the “two states for two nations” formula was partly due to the fact that the sides avoided serious discussions of the contours of a real end game to the conflict – culminating at Camp David almost precisely one decade ago. However, whereas many concluded that following the failure at Camp David it is altogether impossible to reach a permanent and comprehensive agreement, we