TRADE AND ECONOMIC LINKS IN THE TRANSITION PHASE: THE WEST BANK AND GAZA STRIP Avigdor Harekom Mordecai Kun Abraham R. Wagner soorrrwrdbw Offica of Regional Afbin Bureau of Near Bsmm & %uth.Asian Affairs DEPARTMENT OF STATE Washington, D.C. 20620 Tlu rmmch dwcrbrd In thb npon wos rponrond by tha Awtot lnmnniwl0nr)oprmm - wlr Cbntna No. AIOINEC-lW. Thr virm @*pddo not maamtly dhct the ophrfon . orgo(lduofthe~olchrnwuch, .. @ ANALmICAL ASSESSMENTS CORPORATION' Post Office Box 9695 Marina del Rey Cxlifarnia 90291 - - - 4640 Admiralty Way, Marina del Rey, California 90291 2131822-2571 * PREFACE After same three decades of warfare and hostility, two of the major parties to the Arab-Israeli conflict bave taken dramatic steps along the road to an overall Middle East peace. A peace treaty negotiated between Egypt and Israel at the diplomatic level is, of necessity, largely political in nature, with related security questions resolved aa part of the implemen- tation process. Ultimately, however, swh polltical and military coasidera- tiono merely provide the basis and the nmr-term etability in the envirouxno11t during which the conditions for long-teW peace and stabilization cur be rn achieved, In virtually every interrurtiaaal oituatlon, the fundamental basis of .. long-term stability lies in the economic incentives for the parties to &n- ' tain such a situation, Thus, in the Middle f ast, it is highly litrely that, wet time, the trade, econmdc links, development programe, iu;d other a- tually beneficial aspect. of a settlanent will do more to ensure its ongoing success thaa any other faetor. Crucial in thir regard will be the econamic lintn which develop between tha territories occupied by Israel since June 1967 in the Gaza Strlp and Jordanian West Bank areas, wlth Israel, Egypt, Jordan, and the rest of the world. With ouch a vScw, the present research looks toward the impact of a peace settlement on Tsrael, Egypt, Spa, Jordan, end Lebanon from the atandpoint of the made and acononic links which are kected to develop with the West Bank and Caza in s11pport of PRM 39 study requirements. The analysis here is f acueed on expected deveJ!opments during the five-year traa- - 1 @itionphase and beyond, considering arch potential changes in made linkagea and barriers to trade as wall as the effects of changes in direction and .- r' volme of trade on local production, productivity, employmeat, and income- In campletSng thir research, the authors would like to acknowledge the asdistance of Dr. Carol K. Wagner and Mr. Andrew Terrill of Analytical Asseas- rents Corporation, and Dr. Paul A. Jureidini, B. D. McLaurin, and Jim &ice of Abbott Associates, Inc. In addition, the research hord the benefit of Pmv!oqg.jl . Page. - Blank .. A .. discussions wfth Mr. Henry Engelbrecht, Department of State, and Mr. Robert ',. Xubal, Department of Defense. While each of these individuals has made a u contribution to this study, the authors bear sole responsibility for any errors of fact or judgment. TABLE OF CONTENTS . LIST OF TABLES AND FIGURES ..................... vii '.. I. INTRODUCTION: LINKS IN TBE OCCUPATPON ERA . m. 1 1.1 .The Political and Economic Context Since June 1967 .... 1 1.2 Evolution of Economic Links with Israel and the Arab World ............... 4 11. ECONOMIC LINKAGES DURIXG THE TRANSITION PEASE AND BEYOND a 19 2.1 Overview of Fundamental Conditianrr ............ 19 2.2 Evolution of Trade Link# and Institutions ........ 24.:. 2.3 Flow8 o$ Capital and Entrepreneurial Talent ....... 26 2.4 a Labor Flows and Future Labor Force Compositiosr ....... 36 2.5 Banking, Currency and Financial Institutiolne ....... 41 2.6 Development of Links ia Essential Infrastructure ..... 49 2.7 Opt- Policies for Trade and Stabilization ........ 52 111. TRE 106TmCE OF EVOLVING TRADE AND ECONOMIC LINKS ........ 59 3.1 Assumptiom About the Economic Envitonment .........59 3.1 The Cooperative Scenari,~:Implicatiaw of Economic Link to tbe West Bank, Gaza ;' ........ 63 3.3 The Status Quo SceaarSo: rplpli~ationu of'EconoaicL~kstothevest Bank, ma. ......... 76 XV. CON~USIONSm...e..*.*..*....mmm...m.. 85 - ... 89 A. 4.1 The Liaks with Israel ................... 4.2 The Economic Conlrequences at a Cooperative Scenario ... 85 . 4.3 mlications of a statis QUO ~cenario ........ 86 LZST OF TABLES Territoriesq Trade with Israel: 1974-1976 ............ 21 Territories' Trade kth Jordan: 1974-1976 ............'22 Domestic Distribution of Employment in theTerritories by Sector: 1971-193'5 ............. 31 '- Territoriest Output of Selected . Agricultural Products: 1967-1976 .............. ... 32 Destination of Agricultd' Output: 197112-1975/6 ........ 33 . , Indices of Industrial Employment in the Territories ....... 34 Population ead Growth Rates in the Tarritor*~ ......... 36 .. Rising Education Level in the Territories: 1968-1976 ...... 37 Composition of Damastic Employmeat in the Territories: 1970-1976 .................. 38 . 2.10 The Rising Employment Link Between Israel and the Territories: 1970-1976 .............. 39 2.11 Real Gross Domestic Product ................... 40 • 2.12 Consumer Prices and Value of the Israeli Pound: 1967-1978 .... 43 2.13 Net Capital Transfers iato the Territories: 1968-1976 ...... 46 .-. 3.1 Annual Growth Rate8 of the Populatton in the Territories: 1967-1976 ............ 65 3.2 Population Projections, West Bank. .:. - -. and C6za Strip: 1976 and 1983 ....-.. ;... ............ 66 . -. - 3.3. Projections of Some Kap . Variables: The Cooperative Scenarlo ................95 67 3.4 ~ojectionsof Gross Domestic Product: 1976 and 1983 ...... 68 3.5 Capital Requirements: Cooperative Scenario ........... 69 a 3.6 Project$- of Gross National ~rohct:1976 and 1983 ...... 69 - vii - :I LIST OF TABLES (Con1t .) 3.7 Pattern of Trade in Territories, Cooperative Scenario: 1983 ................... 74 3.8 Employed Persons by Selected Economic Sectors: Territorial Workers Who Are Employed In Israel (1970-1976) ...' 78 3.9 Projections of Key Economic Variables: Status Quo Scenario (1976 and 1983) ......... 81 . Actual a~dProjected Gruwth Rates: Status Quo Scenario ..... 82 . LIST OF FIGURES Earnings of West Bank and Gaza . Rasidents Working in Israel: 1967-1978 ................6 ... ~ueof ~xpc;ts from W~etB~UIC and mza to Israel: 1967-1978 .'. 10 - 1.3 Value of Imports from Israel to Wast Bank and Gaza: 1967-1978 . .. 11 l,4 Value of West Bank and Gaza Trade with Jordan: 1967-1978 .... 13 . I . I . INTRODUCTION : LINKS IX OCCUPATION ERA 1.1 The Political and Economic Context sine0 June 1967 Since the inception of Arab-XsraelA hostilities in May 1448, efforts by the United States and other powers have focused ou achieving an cad to the conflict, and the conclusion of a comprehmsivs settlement. accord. Nego- tiations conducted at various points eince 1948 have led to a series of between Israel and the major.Arab confrontation states, including the 11949 Armistice Accords signed at Rhodes and, most recently, e reries of dir- 1 engagement accords concluded following the 1973 Ocrobar War. In krge part, theam trucaa, interim y.emantm, and parti8l accmdm . .. - have focused on the immediate problem of tatmiaating hostilities and setting disengagement frontiers. Most of them agreements, negotiated through thitrd-party iztermadiaries, hwa at best looked toward political negotia- " 2 tions vhich would then lead to a comprehrnsiva settlement. While efforts to achieve a political settlemaat have been undar way since the 1973 war, it hs only been eincs the beginning of the Sadat-Be& lnltiat&ve In 1977 that the parties have moved decisively toioard achieving rrhis objective. Although the bulk of the discussions have thus far cm- tered an key political and military isaues, theta is an assumption on the %her include the 1974 Sinai-I and 1975 Sinai-IX accords between Egypt and Israel, and the 1974 Syrisn-Irsraeli disengagel~~tagreement. - b. '' '~h;ra'a~~urs'to haw been at least .'tacit agreemeat 4 the part of the confrontation stater, as well ar the United States, that the priorities in achieving a viable settlement hclude tennfinatian of ongoing hostilities, dSreng.gement of Arab and Israel5 forces on r near-tarm basis, stabilization af the regid military situation to prevent the outbreak of further hos- tiUtiaa, resolution of critical political and military issuer between the parties, and, finally, the implcmantatAoa of s comprehensive rettlcmmt accard which would provide the basis for long-~termregional stability. 4 See R. D. muria, Mohammed Mughisuddin and Abraham R. Wagner, Foreign Policy Ug fn the Middle East (New York: Praeger Publishers, 1977) . - part of all concerned that, over the long term, economic incentives dl1 4 the key to any settlement' s ef fectireness. It is useful to note that over the years the nature of the Arab- .Irr - Xsraeli conflict has changed dramatically, largely as a result of the . capture by Israel of the West Bank (including East Jerusalem), Gaza Strip and Colan Heights areas during the June 1967 warm3 Had the major Arab confrontation states been willing to enter into a peace agreement with Israel on the basis of the frontiers then existing, there is'little doubt that such an agreement would have received ovarwhelming support in the 4 Xsraeli Parliament, the Knesset. .. With the exception of areas in East Jerusalem annaed by Israel, the atatus quo has. cmoisted of deferring any Iaraeli decision abdur ehs polit- ical future of the West Bank .ad Cat. which is, in eemence, wht the . 3. framework emerging from the Camp David Sdtproposes for the transitioa phase of five year. to continue. Israeli government policy (incltding 3 economic and defense policy as well) with respect to these territories ha# * bean based on three essential assumptions: 3 3~sraeliusage contbues to refer to these area* a* "addIristared territories" while common usage in the United States and elsewhere ha.beem to refer to them as the "occupied territoria~.~'As used in the present re- port, the ten "territories" includes those areas captured by Israel in the . June 1967 War including the. Wemt Bank, areas of bat Jeraulam occupird 3 and annexed by Israel since 1967, and the Gaza Ship.