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Economics and Politics in the Israeli Palestinian Conflict Editors: Arie Arnon Saeb Bamya The AIX Group February 2015 To Ron This volume of studies, “Economics & Politics in the Israeli-Palestinian Conflict”, was prepared between 2013 and 2015 by The AIX Group, and is dedicated to the memory of our late friend and partner, Ron Pundak. Ron, was only 59 when he passed away in April 2014, in the midst of intensive efforts to promote a better future for both Israelis and Palestinians. Ron was one of the original initiators of The AIX Group, and a member of its steering committee for twelve years. As always, he contributed extensively to the planning of this volume and suggested many innovative ideas in the discus- sions of most of the chapters; one chapter, “alternative visions for the future”, was his last mission of writing for the Group, a mission that he attended to with burning urgency but, unfortunately, could not bring to completion. AIX Group | I Economics and Politics in the Israeli Palestinian Conflict Preface The present volume of studies that The AIX Group completed, draws on our joint work as a think- tank over many years. We always encountered misunderstandings concerning the respective roles of politics and economics in the Israeli - Palestinian conflict. There were people, who continuously promoted ideas that underestimated the importance of politics in the conflict, choosing not to address the political sphere and instead to come up with “economics first” and “economics only”, strategies. Such approaches have long history and immense influence, and they had led too many to believe that the fundamental political dimensions of the conflict could be neglected. As an economic think tank, where both Israelis and Palestinians participate as equals as well as partners, we have never thought that the economic aspects are negligible. They are certainly crucial for any imagined change in the current conditions especially, but not only, for the Pal- estinian society in the West Bank, East Jerusalem, Gaza and the diaspora. Facing the realities of the conflict, with the many asymmetries and disparities – Israeli statehood but no Palestinian sovereignty; an occupier versus an occupied; Israeli economy that is twenty times larger than the Palestinian one; Palestinian standards of living that are ten times lower than the Israeli ones – the ecosystem that will enable changing the relations between the two societies is of upmost importance. Any ecosystem is based on both political and economic decisions that are interwo- ven; hence, balancing properly the political and economic changes lies at the roots of moving to a new era we aspire. In the present studies we review what we see as major faults in past policies; we explain the disadvantages in an unbalanced ecosystem, where economics is perceived as important while politics is ignored. We review examples of such strategies, starting with the infamous Israeli policy towards the occupied territory, shaped by Moshe Dayan the then Defense minister and implemented by the Israeli government in the years after 1967. The policy was supposed to decrease resistance to the occupation, by maintaining reasonable standards of living, and thus promote the new reality. The strategy allowed Palestinian workers to enter the Israeli labor market, while preventing real development within the occupied territory itself. Decisions were made by Israel alone; the policy created asymmetries and dependencies that characterized the conflict up to this day. We criticize in the study the political and economic arrangements after Oslo, as articulated on the economic side in the 1994 Paris Protocol. These arrangements assumed a gradual political process to resolve the conflict that have never materialized, and carried on many aspects of the economic arrangements since 1967. Clearly, no Palestinian economic sovereignty, beyond a minimal control over the public sector, was on the cards. Now, more than twenty years since Oslo, all those who would like to see a resolution to the conflict, rather than the current Status Quo with intervals of a process for the sake of a process as we have had so far, are facing a serious challenge. The recent Kerry economic plan received our scrutiny in these studies as well. In many respects, it did not address the prerequisite to balance properly economics and politics; too much weigh was given to economics and too little to politics. The important lesson concerning the negative consequences, for both Israelis and Palestinians, as a result of no economic sovereignty for the Palestinians and no political agreement characterize all above three cases. AIX GROUP | II Economics and politics are interwoven and future arrangements would have to relate to both and find the right balance and synchronization; this lesson is relevant to many in the region, and dramatically more so to those who suffered the most. In the Gaza Strip, more than 1.8 million people on an area of 365 sq.km, live under transitory, unacceptable, ecosystem: To let civilian population live with no normal movement provisions and no trading arrangements, under practical siege lasting more than seven years, is not acceptable. The argument that this is a response to a political decision of the population misses the point, since it is not only wrong butalso ineffective. In a study dedicated to Gaza, “Some Economic Aspects of the Reconstruc- tion of Gaza”, we propose ideas that will help get the dire situation a little better. We believe that the efforts, so far not successful, to see serious reconstruction after the war should be linked to attempts to change the current ecosystem in Gaza strip. The reconnection of Gaza and its people to the rest of the world cannot wait. Though, as in the West Bank and in Gaza, the path away from the Status Quo necessitate recalculation of strategy on the part of the leaderships. The Status Quo (SQ) as defined in the studies, is perceived by many Israelis as sustainable. In the studies we assess some of costs of the SQ for the two sides: The costs are hard to compute and compare, but the studies clearly show that the costs for Israel, in terms of high losses for maintaining the SQ due to security costs, are even higher than many in Israel think, and very significant. The damages as a result of the SQ for the Palestinian economy are dramatic. There is no enough private and public investment; no sufficient productive employment creation; and no sustainable growth. The illusions in some circles that the SQ can continue as is, and it is the superior of the alternatives, can only be defended if one ignores its real costs. Partly, the international community carries those costs. This is not the result of well calculated decisions to support the SQ, but rather an unintended consequence of policies aimed twenty years ago at supporting the “peace process”. We think that it is time for all stake holders to reconsider their policies. We, in The AIX Group, are not exception to this conclusion, and we engage our joint Israeli-Palestinian-International team in reassessing what is our role in the coming era. In an attempt to look beyond the impasse, the paper “Palestinian/Israeli Relations: Alternative Visions of the Future” outlined some of the possibilities. The paper surveys the SQ and possible threatening deteriorations in it and then reviews alternatives to the SQ. The alternatives include (1) no agreement while Israel implement unilateral measures; (2) “one state”, where two live in one space under one sovereign; and (3) the well-known “two state” formula that we analyzed in many past studies (see our site). Thus, we assess some adverse alternatives, an imaginary one, the “one state” that avoids addressing some of the basic issues, and a positive solution that after so many years seems to too many as far-removed from implementation. However, we be- long to the optimists who think that the “two state” formula is superior to all other alternatives, points at the right direction and against the strong forces who contest it from all directions, and can yet become the reality. It is the only framework for having both political and economic arrangements that will address the desires of those living in the region, while seeking self-de- termination as well as prosperity. AIX Group Steering Committee AIX Group | III Economics and Politics in the Israeli Palestinian Conflict Members of The AIX Group Steering Committee Israelis Internationals Palestinians Prof. Arie Arnon Prof. Gilbert Benhayoun Mr. Saeb Bamya Israeli Academic Director Chairman Palestinian Academic Director Prof. Joseph Zeira Dr. Samir Hazboun Hebrew University of Jerusalem DATA Studies and Consultations Dr.Ron Pundak* Co- Chair, Israeli- Palestinian Peace NGOs Forum Mr. Edan Raviv The Peres Center for Peace *deceased Researchers Israelis Internationals Palestinians 1. Twenty Years After Oslo and The Paris Protocol - The Protocol on Economic Relations between Israel and PLO Analysis of its Weakness and Proposed Modifications Prof. Arie Arnon Mr.Saeb Bamya Ben Gurion University Yitzhak Gal Dr. Saad Khatib Legal and Trade Advisor 2. Palestinian Economic Development: The Destructive Effect of Occupation Adi Finkelstein Dr. Saad Khatib Hebrew University of Jerusalem Dr. Assaf Sarid Shawqi Makhtoub Brown University Trade Policy Expert Prof. Joseph Zeira Hebrew University 3. The Economic Costs of the Conflict to Israel: The Burden and Potential Risks Prof. Joseph Zeira Mr. Saeb Bamya Tal Wolfson AIX Group | IV 4. The Role of Economics in the Israeli-Palestinian Conflict: Analysis from Dayan’s to Kerry’s Economic Plan Dr. Assaf Sarid Dr. Saad Khatib Prof. Jimmy Weinblatt Maysa Abu Awad Max Budovitch 5. Palestine- Israel Relations: Alternative Visions for the Future Looking Ahead – Alternative Strategies towards a Final Status Agreement Mr. Ilan Baruch 6. Palestine-Israel Relations: Alternative Visions For the Future Palestinian Economy under Restrictions, Where Do We Go From Here? Dr.

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