Revisiting the Paris Protocol: Israeli-Palestinian Economic Relations, 1994-2014

Abstract

The 1994 Paris Protocol on Economic Relations between Israel and the Palestine Liberation Organization (PLO) supposedly aimed to achieve two objectives: to enhance the parties' interest in peace and to strengthen the Palestinian economy. Twenty years after, neither of these goals were realized. If anything, the prospects of achieving them worsened over time. This study argues that the protocol's failure was largely due to the overall political and territorial context within which it was implemented. This context was so restrictive and damaging for the Palestinian side that any alternative economic arrangement which could have been negotiated between the parties in 1994 would have been equally incapable of delivering a different outcome.

Headnote

The 1994 Paris Protocol on Economic Relations between Israel and the Palestine Liberation Organization (PLO) supposedly aimed to achieve two objectives: to enhance the parties' interest in peace and to strengthen the Palestinian economy. Twenty years after, neither of these goals were realized. If anything, the prospects of achieving them worsened over time. This study argues that the protocol's failure was largely due to the overall political and territorial context within which it was implemented. This context was so restrictive and damaging for the Palestinian side that any alternative economic arrangement which could have been negotiated between the parties in 1994 would have been equally incapable of delivering a different outcome.

Soon after Israel and the Palestine Liberation Organization (PLO) signed the Declaration of Principles on Interim Self-Government Arrangements (DOP) on September 13, 1993, two technical teams from both sides met intermittently in Paris, France over a period of six months to negotiate future economic arrangements. The product of their work, signed on April 29, 1994, was a formal document titled "Protocol on Economic Relations between the Government of the State of Israel and the PLO, representing the Palestinian people," more commonly known as the Paris Protocol.1 The protocol was originally intended as a five-year interim arrangement, but with the failure to reach a permanent political settlement by May 1999, the agreement has continued, de facto, to govern economic relations between the two sides.

The main goals of the Protocol were laid out in its preamble. "The two parties," it reads, "view the economic domain as one of the cornerstone [sic] in their mutual relations with a view to enhance their interest in the achievement of a just, lasting and comprehensive peace." "This protocol," it adds, "lays the groundwork for strengthening the economic base of the Palestinian side and for exercising its right of economic decision making in accordance with its own development plan and priorities"2 (empha sis added). Twenty years after, however, neither of these goals had been achieved. If anything, peace remained an elusive quest, no more attainable than it had been over the previous two decades. The Palestinian economy, meanwhile, is structurally weak and territorially fragmented, with the Palestinian Authority (PA) financially strained and chronically dependent on foreign aid for its fiscal survival.

In an attempt to answer the questions of what happened and why, this article starts with a basic assumption that as an interim five-year economic arrangement, and despite many inherent shortcomings, the Paris Protocol did represent an improvement when compared with the pre-Oslo environment from 1967 to 1993. In those two and half decades, Israel had totally dictated the terms of its economic relations with the Occupied Palestinian territories of the West Bank and Gaza Strip. This being the case, why did the protocol fail to achieve its stated objectives?

In examining this question, this article shows that post-Oslo Israeli-Palestinian economic relations, despite their immense potential under a different political and territorial setting, utterly failed to develop and mature in a way that would have permitted the small and weaker Palestinian economy to benefit from its close interaction with the much stronger and highly developed Israeli economy. A more equitable interaction could have gradually narrowed the income and development gaps between the two sides and thus built an economic foundation for peace. This, however, did not happen. Both gross domestic product (GDP) and GDP per capita gaps between the two economies continued to widen over the period under study, as the two graphs below patently show. How and why this happened, and what lessons and implications can be learned and inferred from this two-decade long experience, are the prime objectives of the article.

Before proceeding any further, a quick note on how this study relates to the literature on the Paris Protocol. In general, most of the published work on the protocol has focused on one or more of the following three areas: 1) identifying flaws and problems in the protocol; 2) quantifying the PA's financial losses emanating from its implementation; and 3) proposing various corrective measures. While important, these are not the most crucial issues when it comes to assessing post-Oslo Israeli-Palestinian economic relations. By mainly looking at the technical side of the protocol, the existing literature has essentially missed the forest for the trees: the sui generis and complex political, territorial, and security contexts within which economic relations between Israel and the Palestinian Territories have been conducted. By bringing this context to front stage, and examining its consequences and implications, this article aims to fill a gap in the literature on the Paris Protocol. The first section of this article provides a brief overview of the pre-Oslo economic relations between Israel and the Occupied Territories. Second, it gives a short summary of the Paris Protocol's main weaknesses. Third, the article discusses the political, security, and territorial context within which the protocol was implemented over the 1994-2014 period, providing detailed analysis of this context's impact on the performance of the Palestinian economy from 1994 to 1999, from 2000 to 2007, and from 2007 to 2014. Fourth, the analysis takes stock of major economic and fiscal difficulties facing the Occupied Territories two decades after signing the Protocol, followed by the identification of key underlying factors behind its failure. Finally, the article concludes with some policy implications, along with a few final thoughts on the future prospects of the Israeli-Palestinian economic relations.

PRE-OSLO ECONOMIC RELATIONS: A QUICK OVERVIEW

From when Israel occupied the West Bank, East Jerusalem, and the Gaza Strip in June 1967 up until the signing of the Paris Protocol in April 1994, the Palestinian economy had been fully operating under an Israeli trade regime. Economic borders between Israel and the Occupied Territories were virtually nonexistent. Movement of people and trade across borders from 1971 to 1991 was highly unrestricted.3 Palestinian trade with neighboring Arab countries and the rest of the world declined precipitously in favor of Israel, which became the West Bank and Gaza's de facto, dominant trading partner. Under a forced "customs union envelope," Israel collected taxes, directly and indirectly, from the Palestinians, and allowed unfettered wage employment inside Israel, mainly in the construction, agriculture, and service sectors for the low-skilled segment of the Palestinian workforce. Local banks operating in the Occupied Territories were ordered to close, and remained so for most of the 1967-93 period. Israeli currency became the legal tender, with branches of many Israeli commercial banks operating in the West Bank and Gaza Strip alongside Palestinian money changers.4

This policy of imposed economic integration in the context of military occupation yielded mixed results for the Palestinian economy. On the one hand, incomes in the West Bank and Gaza more than doubled between 1970 and 1990; the number of Palestinian workers inside Israel rose from 65,000 in the mid-1970s to nearly double that number in 1990, providing employment to nearly 40% of the Palestinian workforce, with remittances amounting to more than one-third of the Occupied Territories' GDP. Based on such record, and if measured by its short-term effect on income and wage employment alone, the impact of the Palestinian-Israeli economic relations was largely positive.5

That, however, was only half of the story. The impact on the Palestinian economy, its productive structure, resource base, and long-term prospects for growth and development, was extremely damaging. This negative outcome was largely due to the other aspects of Israeli policy that seriously circumscribed the Occupied Territories' development. From 1967 to 1993, for instance, the investment climate was highly restrictive, at times even prohibitive, and very discouraging to domestic private investment.6 Basic infrastructure, too, was largely neglected or nonexistent in some areas and remained in a state of disrepair throughout the entire period, with conditions way below what existed in other neighboring Arab countries with similar per capita income levels. Additionally, access to land, water, and other natural resources was heavily restricted; economic activities, particularly agriculture, were suppressed; and the expansion of municipal boundaries to provide for industrial growth and residential infrastructure was constrained.

The cumulative impact of Israeli restrictive policies in the West Bank and Gaza led to a number of structural imbalances and distortions. Three particular results were very damaging to the development of the Palestinian economy: 1) private investment, though high, was mostly residential, with very little allocated to investment in productive assets; 2) the trade deficit with Israel was exceptionally high and largely financed by exporting Palestinian labor services to Israel and Arab countries in the oil-rich Gulf region; and 3) the Occupied Territories' chronic inability to generate adequate jobs for its rapidly expanding labor force. On the eve of signing the Oslo Accords, due to these structural distortions, the Palestinian economy was largely underdeveloped, structurally weak, and heavily dependent on Israel for trade and employment.

That, in short, was the net outcome of two-and-a-half decades of the Israeli policy of integrating the Occupied Palestinian Territories into the Israeli economy. All this was expected to change following the signing of the DOP in September 1993 between Israel and the PLO, which led the two sides to negotiate new arrangements for their future economic ties under a different political setting.

POST-OSLO ECONOMIC RELATIONS: 1994-2014

In 1994, Israeli-Palestinian economic relations entered a new era in what was then largely viewed as a positive context. On the political front, the signing of the DOP ushered in a process of bilateral negotiations that led, in May 1994, to the Gaza-Jericho Agreement, which gave birth to the PA and resulted in the withdrawal of Israeli military forces from parts of the Gaza Strip and the town of Jericho in the West Bank. This was followed, on September 28, 1995, by the signing of the Interim Agreement on the West Bank and the Gaza Strip (known as Oslo II) interim agreement, signed on September 28, 1995, which led to further withdrawal of Israeli armed forces from more populated areas in the West Bank, expanding PA territorial jurisdiction and transferring more responsibilities to the Palestinian side. On the economic front, Israel and the PLO negotiated and then signed the Paris Protocol in April 1994 in an attempt to regulate their economic relations during the 1994-99 interim period. In less than three weeks after the signing of the DOP, 42 donor countries and multilateral organizations gathered in Washington, DC, pledging a total of $2.4 billion in financial and technical assistance to the Palestinian side in a show of support for the nascent peace process.7 The pledged money was intended to help the PA build its institutional and physical infrastructure, jump-start the Palestinian economy, and lay the foundation for peace and stability in the region.

However, this promising start and the euphoria it generated were short-lived and proved to be largely unwarranted. On the economic side, for instance, and despite the adjustments made to the pre-Oslo economic setting, the Paris Protocol suffered from two major problems: 1) serious flaws in the protocol's text and 2) insurmountable difficulties in the overall context within which it was implemented. As a result, the outcome was greatly disappointing, especially when measured against the overly optimistic expectations that accompanied the signing of the DOP and Oslo agreements. The remainder of this section will focus on the first problem, while the next section will elaborate more on the second.

THE FLAWED PARIS PROTOCOL

The negotiated Paris Protocol had, by and large, formalized the pre-Oslo customs union trade regime. The Palestinian economy continued to be obligated to operate under the high Israeli cost structure, despite the huge income and development differences that existed between the two economies. Though this was a major disadvantage for the Palestinian side, the protocol did include some elements favoring the Palestinian economy. Most notably, the protocol enabled the PA to claim, though not retroactively, part of its financial revenues, mostly in the form of the value-added tax (VAT) and customs duties, which had been hitherto collected and transferred to Israeli coffers. The protocol also gave the PA the choice to independently set its own duties on a limited number of consumer and capital goods imported directly from Arab and Muslim countries. Furthermore, the Protocol allowed for the establishment of the Palestinian Monetary Authority (PMA), a central bank-type of institution with power to license and supervise commercial banking activities in the West Bank and Gaza, but with no mandate to issue its own currency.8

Despite some apparent positive changes in the four areas that represented the core of the protocol - trade, fiscal, monetary, and labor relations - there were serious shortcomings, resulting in revenue loss for the Palestinians (e.g., VAT, import duties, and other taxes continued to be diverted to Israel) and a continued lack of discretion over the conduct of economic policy (fiscal, monetary, trade, and exchange rate). These flaws are well known in the literature on the protocol, and a quick reference to them here will suffice to illustrate the point.9

Paramount among the Protocol's serious flaws is that of "fiscal leakage."10 This problem is related to the clearance revenue mechanism: a revenue-sharing arrangement that committed Israel to make a monthly transfer of import duties, VAT, fuel, and other indirect taxes that it collected on behalf of the PA. The fiscal leakage problem emanates, in part, from the application of the final destination principle (i.e., where revenues are collected based on where the final consumption of imported goods takes place) as the basis of remitting customs duties and all other taxes levied on direct Palestinian imports from third countries (via Israeli ports). As such, customs taxes on indirect imports from Israel, such as on goods of non-Israeli origin that are imported by Israeli traders and then re-exported to, and consumed in, the West Bank and Gaza as Israeli goods (which in 2008 accounted for at least 58% of total Palestinian imports from Israel),11 are not covered by the protocol.12 The problem is further compounded by Palestinian traders' common practices of underreporting VAT invoices on imports from Israel, documents that the PA needs to have in order to claim the taxes from the Israeli side. The annual magnitude of lost revenues (i.e., import duties and other taxes paid by Palestinians but diverted to the Israeli treasury) has indeed been substantial, being conservatively estimated in 2011 at $300 million, the equivalent of 3.6% of West Bank and Gaza's GDP and more than 17% of the PA's total clearance revenues that year.13

The Paris Protocol's second set of flaws is related to three lists (A1, A2, and B) of imported goods on which it allowed the PA to set customs duties independently from Israel.14 The problem here had to do with the restrictions on the limited quantities of these lists; the overlap between items included in the three lists; the arbitrary nature of their selection; and the monopolistic practices these lists created inside the PA.15 More importantly, the quantities included in these lists represented an insignificant proportion of total Palestinian imports. They were too little to allow the PA to geographically diversify its imports, reestablish economic links with neighboring countries, and shop for cheaper sources of imports.16

The access of Palestinian workers to Israel was another problem in the Protocol. "Both sides," Article VII (1) reads, "will attempt to maintain the normality of movement of labor between them." Although the term normality was understood by both sides during negotiations to mean continued flow of Palestinian labor to Israel at the pre-Oslo level (somewhere between 100,000 to 120,000 workers), that presumption quickly proved to be baseless. The number of Palestinian workers in Israel began to drop in the face of Israel's policy to replace Palestinian workers with foreign labor from Asia and Eastern Europe in the early 1990s, and the harsh political realities of the interim period (1994-99) and in the turbulent years that followed.17

Furthermore, while the protocol allowed Palestinian agricultural exports to Israel, the products were subject to strict health and sanitary standards and regulations, serving as nontariffbarriers. The protocol also imposed five-year phase-out quotas on a number of Palestinian agricultural products in order to protect the Israeli farming sector. No similar restrictions, however, were placed on the heavily subsidized Israeli agricultural or industrial exports to the West Bank and Gaza thus leaving Palestinian farming and industries at a disadvantage.

Finally, the powers granted to the PMA were limited only to licensing and supervision of local commercial banks. Thus, in the absence of a national currency, the PMA could neither exercise the monetary policy role traditionally played by central banks, nor had any control over exchange rate. Moreover, PA control over fiscal policy under the post-Oslo customs union deal, which ipso facto dictated a close conformity between indirect taxes in partner countries, was very limited, if not nonexistent.

These shortcomings in the Paris Protocol's text, along with other problems pertaining to its implementation on the ground, were supposed to be addressed by the Palestinian side through the Joint Economic Committee (JEC), a watch-dog committee that the document established by Article II of the protocol "to follow up the implementation of this Protocol and to decide on problems related to it that may arise from time to time." In practice, however, the JEC was dormant for most of the 1990s, and even more so after the year 2000. The committee rarely convened to discuss Palestinian concerns and proved to be utterly ineffective in fulfilling its designed role.18

PARIS PROTOCOL AND OSLO PROCESS: CONTENT VS. CONTEXT

Shortcomings notwithstanding, the Paris Protocol did represent, at least as a five-year transitional arrangement, an improvement over the pre-Oslo economic setting. Furthermore, given the circumstances that surrounded its negotiations, the vast imbalances in negotiating power favoring Israel, and the dominance of the Israeli economy over the Occupied Palestinian Territories, one could not realistically have expected a major shiftin economic relations between the two sides or a drastically different nature of their terms than those represented by the protocol.

That said, however, and as the experience of the post-Oslo years demonstrated, the problem was not so much in the content of the protocol per se, as imperfect and lopsided as it was. Rather, it was the context that led to its poor and selective implementation and, subsequently, to the protocol's failure to achieve its stated objectives. The context was so restrictive and damaging that any alternative economic arrangement that could have been negotiated between Israel and the Palestinian side in 1994 would have been equally incapable of delivering a better outcome, irrespective of the terms and nature of the deal reached.

Broadly speaking, the context refers to three things: 1) the restrictive nature of post-1994 political and territorial arrangements that were negotiated between Israel and the PLO; 2) the deterioration in political and security conditions during most of the 1994-2014 period; and 3) the multilayered web of Israel's complex restrictions on Palestinian movement, coupled with continued colonization of the West Bank and Gaza. These combined factors resulted in the inefficient execution of the protocol, playing a major role in reducing whatever positive impact it could have had on the Palestinian side and ultimately resulting in its inevitable failure to achieve its objectives.

In what follows, these three factors and their adverse impact on Israeli-Palestinian economic relations, and on Palestinian economic performance in particular, will be discussed in some detail. This will be done by dividing the post-Oslo era into three distinct periods: first, the relatively quiet interim period (1994-99), then the turbulent years of 2000-2007, and finally, the period from mid-2007 to 2014, which was marked by intra-Palestinian political division, the Israeli blockade of the Gaza Strip, the eruption of three destructive wars between Israel and Hamas, and the breakdown of peace talks between Israel and the PA.

The Interim Period, 1994-99

The point of departure in the analysis of this period is the territorial-security setting produced by the Oslo I and Oslo II agreements, a setting that was inherently incompatible with (if not outright contradictory to) the stated objectives of the Paris Protocol. This point has never fully been discussed or even understood in the literature of post-Oslo Israeli-Palestinian economic relations. More specifically, there was a great disconnect between the nature and terms of the political-security arrangements that Israel and the PLO negotiated in Egypt (the Gaza-Jericho Agreement), and the nature and terms of the economic and trade pact that was negotiated between their respective delegations in Paris. As a result, the implementation of the September 1993 DOP came in two largely mutually exclusive arrangements where, on the one hand, a strict adherence to the Gaza-Jericho agreement (with its overriding emphasis on security) would make the full implementation of the protocol's customs union trade regime (with the free movement of goods and open borders at its core) nearly impossible. On the other hand, a faithful execution of the protocol - even with all its shortcomings - would render the Cairo agreement largely inapplicable. The Oslo II agreement of September 1995, which divided the West Bank into three areas of different jurisdictions, further added to the complexity of the political and territorial setting within which the Protocol was to be implemented.19

This hardly favorable context became even more damaging as a result of the deterioration in security conditions in 1995 and 1996, and the subsequent heightening of Israeli restrictions on the mobility of Palestinian people and trade. These restrictions were frequent, prolonged, and capricious, and applied to movements to, from, and within the Palestinian Territories. The Israeli closure policy, as it came to be known, was very detrimental to the Palestinian economy, as it introduced a greater degree of uncertainty into the business environment in West Bank and Gaza; increased the cost of production; disrupted Palestinian merchandise trade flows (both internal and external); and sharply reduced Palestinian workers' access to the Israeli labor market.20

Almost every aspect of the protocol was adversely affected by this grossly inauspicious context. Palestinian merchandise exports, despite their stipulated open access to Israel, remained well below their potential. As a result, PA trade deficit with Israel from 1994 to 2000 jumped from 31% to 63% of GDP.21 Palestinian workers' access to Israel did not fare well, either. Deterioration in security conditions and repeated imposition of closures and restrictions on Palestinian movement proved the protocol-assumed "normality" of labor flows to Israel to be unrealistic.22 The Palestinian banking sector which was allowed operations in the West Bank and Gaza according to the protocol's terms was also negatively affected by the increased political instability. Over the interim period, for example, while banks' deposits as a percentage of GDP quadrupled in size, both credit/deposit and credit/GDP ratios remained well below their regional average.23

Judged by its own objectives, the protocol had clearly failed during the interim period to deliver on both economic and political fronts. As the experience of the interim period had shown, the performance of the Palestinian economy was largely disappointing and way below expectations, while the Oslo peace process, which was supposed to be enhanced by the protocol-based economic cooperation, foundered at the US-sponsored Camp David Summit in July 2000.

More specifically on the economic front, the statistics of the interim period show that despite the disbursement of nearly $3 billion by donor countries between 1994 and 1999, real per capita GDP in the West Bank and Gaza declined by 8%, with 20.3% of the households living on less than $2 a day in 1998.24 Furthermore, job creation during this period mostly took place in the public sector, not in the private sector. While the PA was able to balance its recurrent budget in 1999, close to 60% of its revenues came from import duties, VAT, and other indirect taxes collected through the clearance revenue mechanism, reflecting a weak domestic tax base and an overreliance on Israel's goodwill to transfer the tax money on a regular basis. Public investment in the Occupied Palestinian Territories, meanwhile, was entirely financed by donor funds throughout the period.25

On the political front, the picture was equally grim. Not only did the restrictive post-Oslo political and security arrangements mute whatever positive impact the protocol could have had on peace building and development, but more damaging perhaps was the continued shrinking of the Palestinian economy's territorial space. In this respect, and throughout the interim period, there was continued Israeli confiscation of Palestinian land, unceasing expansion of Jewish settlements activities across the Occupied Territories; the construction of an advanced grid of roads and highways inside the West Bank primarily for settlers' use; severe restrictions on Palestinian access to and construction in Area C;26 and continued shortages in and restrictions on access to water resources in the West Bank and Gaza.27

The Turbulent Years, 2000-2007

The period between 2000 and 2007 was turbulent and very chaotic, with drastic changes in the overall political-security setting that adversely affected the implementation of the Paris Protocol. It was during this period that a new Israeli policy of unilateral separation from the Palestinians was brought to the scene for the first time. The speed of the downward spiral in conditions was dramatic. Following the collapse of talks over the core, final status issues (borders, settlements, security, refugees, and Jerusalem) at Camp David in July 2000, the second Palestinian intifada (uprising) broke out two months later, on September 28, with confrontation and violence quickly dominating the scene. In late March 2002, Israel waged a five-week, full-scale military operation against the PA, and reoccupied Area A of the West Bank from which it had previously withdrawn.28 A few months later, in June, Israel started the construction of a projected 442-mile-long (712 kilometers) separation barrier, mostly located inside the West Bank. In December 2003, the Israeli government announced its intention to unilaterally dismantle settlements in the Gaza Strip and withdraw its soldiers there; this plan was completed in September 2005. The drama continued on the Palestinian front with Hamas's seismic triumph in the legislative elections in January 2006 and culminated 18 months later, in June 2007, with the Islamist movement's armed takeover of the Gaza Strip.

Palestinian high dependence on Israel for trade, wage employment, and collection of VAT and import duties proved costly during this tumultuous period. With the tightening of Israeli restrictions on mobility of people and goods and the strict application of a back-to-back cargo transfer system,29 Palestinian exports to and through Israel sub26 sequently declined. The restrained business environment, higher production and transaction costs, loss of external markets, and destruction of private property and physical public infrastructure during repeated Israeli military incursions inside areas where the PA operated, all added to the decline in the Occupied Territories' merchandise exports and led to the loss of their competitiveness.30 Likewise, the projected "normal" flow of Palestinian workers to Israel, as envisaged by the protocol, sharply declined due to repeated border closures. Whereas, for instance, over 115,000 Palestinians worked in Israel in the year 2000, bringing home close to $1 billion in remittances (16% of GDP), both figures sharply dropped in 2005, with employment in Israel declining by 62% from its 2000 level and remittances reaching only 38% of their 2000 total.31

The transfer of clearance revenues worked relatively well during the interim period,32 but faced hurdles during the second intifada. The protocol's provisions obligated Israel to remit the various taxes and duties it collected on behalf of the PA on a monthly basis, but the mechanism came to a halt when Israel suspended the transfer of funds from December 2000 to December 2002.33 The relative decline in the Occupied Palestinian Territories' imports along with the precipitous drop in Palestinian labor in Israel during this period also meant that import duties, VAT, and direct tax on labor income all declined, causing further complication to the PA's ability to finance its expanding recurrent budget, which had to cope with shrinking revenues amid growing public spending.34

The 2000-2007 period also witnessed the implementation of two aforementioned unilateral Israeli projects: the construction of the West Bank separation barrier and the disengagement from Gaza. Both projects, discussed briefly below, adversely impacted the Israeli-Palestinian economic relations which continued, de facto, to be conducted on the basis of the Protocol after the end of the interim period in May 1999.

The building of the separation barrier began in June 2002.35 Only 15% of the barrier's tortuous route was built along the 1949 Armistice Line, the internationally recognized border between Israel and the occupied West Bank, also known as the Green Line. The rest of the barrier, 85%, was constructed to the east of the Green Line, i.e. inside the West Bank. The damaging impact of the barrier has been most obvious on the Palestinian agriculture sector, since the land located between the barrier and the Green Line constitutes some of the most fertile agricultural land in the West Bank. Furthermore, this land, known as the "seam zone" which constitutes about 9.4% of the West Bank, harbors most of the water resources and aquifers and is effectively detached from the rest of the territory.36 Therefore, access to land and water wells inside the seam zone is severely restricted for the Palestinians,37 resulting in a sharp reduction in both irrigated agricultural output and agricultural exports.38

The Gaza Strip disengagement represented another attempt by Israel to unilaterally separate from the Palestinians. Jewish settlers and the IDF were evacuated from Gaza by September 12, 2005. Israel, however, continued to retain exclusive control over Gaza's airspace and territorial waters, population registry, electromagnetic space, and the exit and entry of goods.39 After disengagement, Gazans' labor access to Israel all but dried up; Karni Crossing, the major commercial terminal between Gaza and Israel, was either partially operating or closed most of the time, and economic ties between Gaza and the West Bank further weakened.40

In November 2005, the US-sponsored Agreement on Movement and Access (AMA) was reached in an attempt to revitalize the Palestinian economy and boost Palestinian-Israeli trade relations. The agreement aimed to improve Gaza's cross-border commercial transactions with Israel; allow for a secure passage for goods and people between Gaza and the West Bank; facilitate agricultural exports from Gaza's dismantled Israeli settlements; relax Israeli restrictions on movement in the West Bank; operate the European Union-monitored Rafah Border Crossing for passengers and exports, and resume talks on constructing a Gaza seaport and the reopening of Gaza airport.41

All these efforts, however, quickly proved to be detached from the stubborn realities on the ground, and consequently failed to produce their intended results.42 Their main weakness lay in their technical nature, and, as such, they were grossly inadequate to deal with a Palestinian economic crisis that was deeply rooted in a highly intricate political and territorial conflict setting. These efforts were crushed when Hamas swept to power in the historic January 2006 PA legislative elections, only two months after the signing of the AMA.

Following the Islamists' startling electoral triumph and the refusal of the Hamas-led PA government to heed to the Middle East Quartet's (United Nations, the US, the EU, and Russia) three conditions - recognizing Israel, renouncing violence, and accepting previous agreements - Israel again suspended the monthly transfer of VAT and customs receipts and further tightened its restrictions on Palestinians' movement and access. Both measures, along with the suspension of donors' direct budgetary aid to the PA, led to a crippling financial crisis in the West Bank and Gaza.43 Incessant territorial fragmentation of the West Bank; continued construction of the separation barrier; the isolation of the Gaza Strip; and continued separation between West Bank and Gaza all added to the intricacy of the Palestinian economic crisis in the aftermath of Hamas's unexpected electoral victory.44

For a small economy like the Occupied Palestinian Territories, with trade in 2005 representing about 75% of GDP and trade with Israel accounting for about 84% of its total transactions,45 the impact of tightening restrictions on the movement of people and goods was crushing. In 2006, both imports and exports declined by 22% and 16%, respectively; Palestinian workers' access to Israel dropped to just 30,000 workers, almost all of them from the West Bank and none from Gaza.46 With the private sector unable to provide alternative domestic jobs, pressure on the public sector for employment mounted,47 and unemployment rates, especially among the youth, reached critical levels.48 Real economic growth in the Occupied Palestinian Territories between 2000 and 2006 was virtually zero, leading - due to rapid population growth estimated at 4% a year - to a sharp reduction in real GDP per capita, which in 2006 was 35% below its 1999 level.49

The deterioration in economic conditions was exacerbated by the inability of Israel, the West, and a bitterly divided Palestinian house to live with the 2006 election results. As it happened, Palestinian political wrangling quickly turned into intermittent factional armed fighting, culminating in Hamas's violent takeover of Gaza on June 14, 2007.

The Paris Protocol's implementation in this period continued to be hampered by the restrictive political-territorial setting outlined in the previous sections. Developments in mid-2007 in the Gaza Strip, however, added two more complicating factors to the already parlous and highly intricate scene: 1) the internal Palestinian political schism that followed the unexpected events in Gaza and 2) the selective Israeli policy response toward the politically divided Palestinian Territories: Hamas-ruled Gaza Strip and the Fatah-led government in the West Bank. This section will discuss the impact of these political developments on the protocol's implementation, starting with Gaza, then proceeding to the West Bank.

With Hamas in power in Gaza, Israel lifted its economic boycott on the West Bank-based Palestinian Authority, which it had imposed when the party had been elected 15 months prior. Meanwhile, the embargo was tightened on Gaza, with the explicit intention of shoring up the support of the Fatah-dominated leadership in the West Bank and weakening Hamas.50 In line with this new approach, Israel released the customs and VAT receipts that had been withheld since March 2006 and transferred the funds to the West Bank-based PA; firmly closed Gaza's commercial crossings;51 and suspended the "Gaza customs code" which was used to identify imported goods en route to Gaza through Israeli ports. On September 19, 2007, Israel officially declared the Hamas-run Gaza Strip a hostile entity and intensified its longstanding restrictions on the movement of people and goods to and from Gaza and imposed an economic blockade on the tiny 141-square-mile (365 square km) coastal enclave.52

With this policy firmly in place, virtually no exports were allowed to leave Gaza, and only essential international humanitarian assistance, along with a very limited range of basic consumer goods and fuel, were allowed to enter. Thus, after June 2007, as far as the Gaza Strip was concerned, the protocol was essentially obsolete, and whatever minimal economic contact remained between Israel and Gaza was conducted on a purely ad-hoc basis.53

The economic impact of the Israeli policy vis-à-vis Gaza from 2007 to 2014 was devastating. In addition to the heavy destruction caused by repeated Israeli military operations, the private sector was decimated by the draconian restrictions imposed on imports of construction supplies, raw materials, machinery, and spare parts (including those defined as "dual-use" items);54 the restrictions on access to agricultural land and fishing waters;55 the chronic shortages of potable water, electricity, and fuel;56 and the complete ban on all exports to Israel and the West Bank, the two traditional markets for 85% of Gaza's merchandise exports. By 2010, close to 70% of industrial establishments in the Gaza Strip were forced to shut down, with the rest operating on less than half of their production capacity.57 By the end of 2014, the crippling blockade along with three successive Israeli military campaigns against Gaza (2008/9, 2012, and 2014) took their severe toll on Gaza's GDP, slashing it by 50% and rendering real per capita income 31% lower than it was in 1994. As a result, rates of unemployment skyrocketed, and poverty rates reached record highs: 43% (over 60% among youth) and 39%, respectively.58 Over 80% of Gaza's population of 1.8 million became aid-dependent, with approximately half of them rendered food insecure.59

To circumvent the Israeli economic blockade, Gaza utilized underground measures, creating a vast network of cross-border tunnels along the eight-mile-long (13 km) border with Egypt. Smuggling tunnels had largely defined the economy of the Gaza Strip for the most part of the 2007-14 period and were vital for its survival. They provided a wide range of basic consumer goods and fuel supplies to the besieged population, delivered building materials to the construction sector, created thousands of direct and indirect jobs for unemployed Gazans, and were a major source of tax revenues for the Hamas-led government.60

All this, however, started to change after a turnover in the Egyptian government in July 2013. The new political leadership in Cairo viewed Hamas, allies of the previous government, as a threat to the Egypt's national security and began systematically demolishing the Gaza tunnels from its side of the border. This process reached its zenith in November 2014, with the establishment of a nearly 3,300-foot (1,000 meters) wide security buffer zone along the Gaza-Egypt border.61

In the West Bank, meanwhile, several developments in late 2007 and 2008 ushered in policy shifts by the PA, the donor community, and Israel. These developments included a US-sponsored international summit in Annapolis, Maryland in November 2007 to reinvigorate the dormant peace process; the December 2007 meeting of over 90 donor countries and international organizations in Paris, pledging a massive $7.7 billion in support of the PA's "Palestinian Reform and Development Plan, 2008-10;" the reinstating of high level security coordination between Israel and the PA; the deployment, after January 2008, of US- and EU-trained and equipped Palestinian National Security Forces in a number of major cities in Area A of the West Bank;62 and, since the beginning of 2009, a limited easing of Israeli physical and administrative restrictions on Palestinian movement within the West Bank, as part of the "economic peace" approach advocated by the government of the Israeli prime minister Binyamin Netanyahu.

Despite these developments, economic recovery in the West Bank remained slow, as the overall setting continued to be dominated by Israel's complex closure regime and relentless colonization of the West Bank.63 When recovery eventually occurred from 2009 to 2011, reaching an average growth rate of 8.6% a year,64 growth was short- lived;65 private sector investment in plant and machinery remained subdued; and the whole period ended with economic stagnation, a serious fiscal crisis, and a breakdown of the US-sponsored peace process.66

Furthermore, the West Bank's economic relations with Israel continued to represent a net loss in Palestinian revenues67, both in the form of a huge and rising PA trade deficit and continued leakage of customs and tax receipts.

On the trade side, despite the relative easing of physical restrictions on the movement of people and trade in the West Bank, Palestinian exports continued to be restrained. Private sector confidence remained dampened by a whole host of Israeli administrative restrictions - constraints on access to natural resources, restrictions on business travel and visas, and restrictions on the importation of a wide range of the so-called "dual-use" items of inputs and machinery.68 The lack of progress on the political front and the absence of further relaxation of Israeli restrictions added more uncertainty to the overall picture and shortened the investment horizon of Palestinian businesses. Furthermore, private sector investment that took place from 2007 to 2014 was mainly concentrated in low-risk, high-return projects in nontradable sectors (e.g., local services, real estate, construction) and contributed little to merchandise exports, while aid-driven expansionary fiscal policy of the PA led to higher levels of imports, increasing from $3.2 billion in 2006 to $6.5 billion in 2013. As a result, trade deficit with Israel skyrocketed, jumping from $1.89 billion in 2006 to $3.5 billion in 2012, accounting for 73% of total Palestinian trade deficit and 34% of GDP.69

On the fiscal side, leakages of customs and tax receipts continued to represent a major loss in financial revenues for the PA in the West Bank. With imports from, and through Israel doubling in size between 2006 and 2013, clearance revenues also increased, rising from $771 million in 2006 to $1.691 billion in 2013,70 implying a subsequent rise in the amount of revenues diverted away from the PA treasury to Israel. Faced with declining foreign aid, emerging signs of slowing economic growth, and pressing financial needs, the PA in 2011 entered into technical talks with Israel. The negotiations attempted to minimize the scope and size of the tax leakage problem and to enhance clearance revenue transfers - the PA's largest source of income, amounting to $2 billion in 2014 (over two-thirds of its total revenues), and covering about 40% of its recurrent expenditures.71

On July 31, 2012, an understanding was reached between Israel and the West Bank PA to streamline and improve the efficiency of the revenues clearance mechanism and enhance customs duties and tax collection.72 The new arrangement was supposed to go into full effect at the beginning of January 2013, but only part of it was implemented.73 This partial implementation (limited to online information exchange between Israeli customs authorities and the PA finance ministry on imports to the West Bank and Gaza) was too little and too problematic and thus did not result in tangible financial benefits to the PA.74

TAKING STOCK OF TWO DECADES OF FAILURE

This article attempts to assess the extent to which post-Oslo Israeli-Palestinian economic relations have strengthened the Palestinian economic base and laid the groundwork for peace. These were the presumed two objectives of the Paris Protocol, that were laid out in its preamble. Twenty years after, the record on both counts was grim. In fact, the Palestinian economy in 2014 was (and is still) much weaker than it had been in 1994 in terms of its capacity to generate high and sustained growth rates. The Palestinian Authority had become more dependent on Israel's goodwill to transfer clearance revenues without interruptions, and on the continued generosity of the international community to finance its recurrent deficit for its fiscal survival. Two decades after the protocol's signing, a quarter of the Palestinian workforce was unemployed, with a similar percentage of the population languishing in poverty,75 a third of households (or 1.6 million people) food insecure,76 and over half the population (or 2.4 million people) in need for some form of humanitarian assistance.77 For all four indicators, the figures for the Gaza Strip were alarmingly higher than those of the West Bank. On the political front, the post-protocol period, as was discussed previously, had seen frequent episodes of political deadlocks and renewed armed conflicts, with the prospects for achieving peace growing dimmer and more elusive over time.

More specifically, the West Bank and Gaza's potential future as a small economy crucially hinges on expanding its manufactured output and active engagement in regional and international trade. Yet by 2014, the Occupied Palestinian Territories had been substantially deindustrialized, with economic activities increasingly conducted outside the formal sector and steadily tailored to meet domestic demand. The degree of deindustrialization, informalization, and internalization of economic activities in Occupied Territories were serious enough to lead the World Bank in 2006 to conclude that, the West Bank and Gaza's "capacity to generate fast economic growth has been eroded, even if the [Israeli] closure regime becomes [sic] less oppressive."78

The erosion of the Palestinian economy's productive capacity since 1994 is evidenced in five major areas.79 It is first demonstrated by the progressive and sharp fall of the manufacturing sector's share in the Occupied Territories' GDP, from 20% in 1994 to only 10% in 2011, with the agriculture sector's share in total output steadily dropping from 13% to 6% in the same period (see Figure III).80 These are the two sectors that have had and continue to have the greatest potential contribution to long-term GDP growth, exports, and employment in the West Bank and Gaza. Meanwhile, the public sector's share in GDP jumped from 19% to 30% over the same period.81 Second, the substantial decline in the share of private investment which, at 15% of GDP, was not only low but was also mostly concentrated in residential housing, retail trade, and services, away from investment in productive assets. During the period under study, gross capital for mation in plant and equipment sharply declined from 12.9% of GDP in 2000 to 4.8% of GDP in 2014.82 Third, the share of merchandise exports declined from 10% of GDP in 1996 to 7% in 2011, with exports concentrated mostly in low value-added products and mainly destined to Israel, which accounted for a sizeable 84% of Palestinian exports in 2014 (see Figures V and VI). Fourth, the rate of youth unemployment, estimated at 25% in the West Bank and over 60% in Gaza by the end of 2014,83 had been steadily worsening over time. This rate was 4% percentage points above the general unemployment average in 2000 but jumped to 10% in 2009.84 More disturbing, however, was the rise in public sector employment, from 17% to 26%, while the share of the private sector dropped from 47% to 38%, overwhelmingly concentrated in the nontradable activities dominated by micro, family-owned businesses (see Figure 4).85 Finally, the Occupied Palestinian Territories' economy slumped after 2000 due to the diversion of foreign assistance from financing growth-enhancing investment in human capital and infrastructure projects to budget support and humanitarian interventions. The low level of the PA's public investment, 2% of GDP in 2014 (down from 5.6% of GDP in 2006), was way too low to even maintain the existing level of the Palestinian areas' decrepit infrastructure.86

Worse still, on the financial side, the PA continued to be highly reliant on international aid for its fiscal survival 20 year after its establishment. In fact, its dependence on donors for financing the deficit was on the rise, increasing from $200 million in 2000 to $700 million in 2006, reaching $1.2 billion in 2010.87 Furthermore, in 2014, the PA had an overall budget deficit of $1.59 billion (12.5% of GDP), with the IMF projecting continued fiscal strains over the medium term.88 External budget support, however, had been volatile and falling significantly since 2012, leading the PA to cover growing financing gaps by increasingly accumulating a substantial amount of public debt, mostly loans from local banks and payment arrears to the Palestinian Pension Fund and private sector suppliers. By the end of 2014, public debt was estimated at $5 billion, or 39% of GDP, just below the 40% debt limit mark set by PA law.89 Having reached the legal limits of domestic debt,90 such a precarious fiscal stance leftthe PA with two options: continue undertaking increasingly politically contentious fiscal reform measures to streamline its finances (something the PA has been aggressively pursuing since 2008 as part of its far-reaching fiscal reform agenda)91 or plead for more foreign aid, which had been on a sharp downward trajectory since 2008, dropping from a high of 27% of GDP that year to 7% in 2015.92 Both options, however, carried their own risks and limitations under status quo conditions,93 raising serious concerns about the PA's fiscal sustainability.

On the political side, the record proved equally depressing. As indicated before, the post-Oslo era was marred with repeated rounds of armed violence, worsening security conditions, and heightened political instability. For example, the collapse of peace talks between Israel and the PA in July 2000; the outbreak of the second intifada in September 2000; the launching of a major Israeli military operation against West Bank Palestinian cities in March 2002; Hamas's rise to power in January 2006 and subsequent fall of Gaza to the Islamists in mid-2007; the blockade and the isolation of the Gaza Strip since June 2007; three major Israeli military operations against Hamas-run Gaza (2008-9, 2012, 2014); and finally the collapse, in April 2014, of a last-ditch US effort to help revive the stalled peace talks between Israel and the PA.

THE FAILURE OF THE PROTOCOL: UNDERSTANDING THE BIG PICTURE

Five major underlying factors contributed to the Paris Protocol's dismal, but largely inevitable failure, all of which are quite unique to the Israeli-Palestinian context. First, economic relations between Israel and the Occupied Palestinian Territories had been conducted, throughout the period, in the context of colonizing military occupation, in which Israel had always assumed the upper hand in dictating the nature and terms of such relations. This was obvious during the 1967-93 period of imposed integration;94 in how the protocol was negotiated and implemented,95 and in the policy of unilateral separation from the Palestinians in the post-2000 period. In other words, Israeli-Palestinian economic relations were characterized by an absence of a level playing field; Palestinian interests, as a result, were constantly compromised in favor of the Israeli ones. As long as this extremely adverse setting remains unchanged, there is no reason to believe that the picture will be significantly different, whether under a revamped and improved Paris Protocol,96 upgraded trade logistics,97 or under any alter94 native trade and economic arrangement between Israel and the Occupied Territories.98

Second, throughout the entire 1967-2014 period, economic relations between the two parties were conducted in an environment of considerable Israeli-imposed constraints, and the nature, scope, and intensity of these constraints were mutating over time. Regulatory impediments that hobbled businesses in the Occupied Palestinian Territories during the 1967-93 period, for example, were replaced after 1994 with an even more restrictive web of physical and administrative security measures designed to control the movement of Palestinian people and goods, which became still more stringent, entrenched, and institutionalized after the year 2000.99 These severe restrictions on movement pinched the supply capacity of the Occupied Territories' economy, increased transportation time and costs,100 deprived Palestinian enterprises from the benefits of economies of scale, lowered factor productivity, and rendered Palestinian exports less competitive. The outcome was a growing Palestinian trade deficit with Israel that went from $1.5 million in 1999 to $3.2 billion in 2014 (see Figures V and VI).101 As a result, more financial resources were diverted to finance a rising import bill at the expense of financing domestic investment that is needed for a self-sustaining economy.

Third, during the pre-Oslo period, Palestinians' ability to access and utilize their land, water, and other natural resources; import raw materials and machinery; and freely reach regional and international markets had been severely limited.102 This lack of sovereign control over resources and borders was a direct outcome of the colonial nature of the Israeli occupation and the constraints imposed on Palestinian economic activities.The still-restrictive post-Oslo political and security setting did little to change this picture, which was further complicated by the unabated construction and expansion of Jewish settlements;103 the imposition of a draconian system of restrictions on the Palestinian movement of people and trade; the construction of the separation barrier; restrictions on the use of modern telecommunications technologies (e.g., third- and fourth-generation high-speed services) and their related equipment and infrastructure;104 and the lack of economic access to the resource-rich Area C (which amounts to 60% of the West Bank's land), including the Jordan Valley and northern Dead Sea.105 Israeli-Palestinian economic relations can hardly enhance the chances of peace and the West Bank and Gaza's development when the economic space of the Occupied Territories is continuously shrinking, its natural resource base steadily corroding, and its growth prospects persistently frustrated and repressed.106

Fourth, Palestinian economic policy space was also limited, if not totally absent. Both before and after Oslo, the Palestinian side lacked a whole host of policy tools crucial for short-term stabilization and long-term economic growth. The Palestinians completely lacked economic policy instruments (fiscal, monetary, exchange rate, trade, etc.) during the forced integration period, and the 1994 Paris Protocol, as discussed earlier, virtually cemented the arrangement. With no policy tools, the Occupied Territories' economy during the post-Oslo era was made vulnerable; Palestinian policy-makers' ability to adjust to frequent fiscal shocks was extremely limited; and their capacity to successfully implement economic recovery plans, let alone construct long-term growth strategies, was highly constrained.107 As an economy operating under occupation, Palestinian policy-makers lacked the freedom to act independently or undertake decisions, however minor, without the prior approval of the overbearing Israeli military authority.108

Fifth, throughout the post-Oslo period, Israeli-Palestinian economic and trade relations were conducted in an environment of heightened political instability and, at times, renewed armed confrontation and violence. This counterproductive setting had introduced elements of uncertainty and unpredictability to economic ties between the two sides and caused frequent disruption to and variation in their conduct; and - in the context of dependency on Israel for trade, wage employment, and the transfer of clearance revenues - proved to be very costly for Palestinians. As one study put it, "a relationship between two neighboring economies, in which measures taken by one can cause the other to lose the income of one third of its labor force, and interrupt 70 per cent of its imports and 90 per cent of its exports is simply untenable."109

Taken together, these five factors represent the principal reasons behind the Paris Protocol's failure. These factors, it should be emphasized, are neither mere background noise nor a distracting sideshow. Rather, they are the main event. Their detrimental impact is the chief reason behind the continued erosion of the Palestinian economy's productive capacity, and their collective adverse weight is the main obstacle that stands in the way of fruitful economic relations between Israel and the Occupied Territories. This heavily distorted political-territorial-security context has far-reaching implications, which will be discussed below.

IMPLICATIONS AND CONCLUDING THOUGHTS

As this article has demonstrated, it is the context within which economic relations between Israel and the Palestinians are conducted that matters most, not the nature or the terms of their arrangement. In this context, unilateral Israeli separation from the Palestinians, whether coordinated or not, will do little to benefit the Palestinian side without any substantial changes in the underlying adverse political and security setting. Indeed the Gaza Strip in the wake of the 2005 disengagement is a stark example of such failed policy.110 Conversely, continued economic relations under unchanged conflict conditions will also not help the Palestinians, as shown by the 1967-94 forced integration period, but more so after Oslo. In both cases, the Palestinian economy will continue to wither, the only difference being in the speed, size, and scope of future deterioration.

For the Palestinian side to strengthen its economic base (which was one of the two goals laid out in the Paris Protocol's preamble) and to have a real chance at achieving high and sustained economic growth in the future, four necessary preconditions, indispensible for genuine economic independence, have to be met: 1) control over natural resources; 2) full control over national borders: i.e., land, airspace, and territorial waters; 3) a functional territorial link between Gaza Strip and the West Bank; and 4) control over the conduct of national economic policy-making. These four broadly stated prerequisites necessitate a political settlement that leads to an end to the Israeli military occupation of the West Bank and Gaza, and the creation of a sovereign and economically viable Palestinian state. Without a political settlement, no future economic arrangement with Israel will be of any significant or sustained benefit to the Palestinians. The half-century-long record of the pre- and post-Oslo years should provide us with enough evidence to make such an argument.

Put differently, for Palestine to be less dependent on Israel for employment, trade and infrastructure services in the long run, it should be able in the short and medium term to restructure and reorient its economy in a way that enables it to provide productive jobs for its burgeoning labor force; to secure external markets for its exports; and to develop its own trade infrastructure to link itself with the rest of the world. All this necessitates a different political and territorial setting that only a lasting political settlement can make possible. Absent that, continued military occupation will only mean continued Palestinian economic decline, with inevitably grave consequences. This has already happened in the past and will, in all likelihood, continue to produce similar outcomes in the future.

Another clear implication that emerges from this article has to do with the nature of the challenges facing future Israeli-Palestinian economic relations. These challenges are not, and have never been, technical in nature. Rather, the true challenge of future economic relations between the two sides is to secure a propitious political and territorial context within which differences among all possible trade arrangements would not be marginal in nature.

Given their geographic proximity, the sheer smallness of the territorial base of their two respective economies, the long-standing (albeit skewed) history of trade relations (though asymmetrical) between the two sides, and the high degree of complementarity between their economic structures, close economic relations between Israel and a future sovereign Palestine are all but inevitable. Harnessing the potential of such future relations, however, remains a tough challenge. Since 1967, and especially during the post-Oslo years, an ever increasing number of "facts on the ground" have inexorably been working against a negotiated political settlement, destroying its very basis, and persistently moving the conflict in a completely opposite direction.111 Whether they took the form of a protracted colonial occupation, relentless disintegration of the Palestinian territorial space, or unilaterally attempting to mold the outcome of the final political settlement, these "facts on the ground" remain a major impediment to the creation of a viable Palestinian state and, consequently, to meaningful economic ties between Israel and Palestine. This extremely damaging context has already produced two intifadas, a failed peace process, a fractured Palestinian economic landscape, and rendered a viable, two-state solution a physically unattainable goal.

Given the enormous gains that could be derived from politically unimpaired Israeli-Palestinian economic relations, and the substantial positive impact these relations could have on peace prospects and the West Bank and Gaza's development, the challenge is to provide the necessary favorable setting to make such future cooperation possible.112 Conversely, continued impediments to what would be under normal, conflict-free conditions, a straightforward and mutually advantageous engagement, will only work to widen the existing economic and development gaps between the two sides. Increasing the already-wide income disparities between the two neighboring economies only stands to prolong the present conflict for years to come.

Footnote

1. The Protocol on Economic Relations was attached as Annex IV to the Agreement on the Gaza Strip and the Jericho Area, signed in Cairo on May 4, 1994. A supplement to the protocol and a slightly modified version of it were incorporated into Annex V of the Israeli-Palestinian Interim Agreement on the West Bank and the Gaza Strip, known as Oslo II, signed in Washington, DC, on September 28, 1995.

2. Text quoted from the website of Israel Ministry of Foreign Affairs, "Gaza-Jericho Agreement Annex IV-Economic Protocol (updated February 8, 2013), www.mfa.gov.il/MFA/ForeignPolicy/Peace/Guide/Pages/Gaza-Jericho%20Agreement%20Annex%20IV%20-%20Economic%20Protoco.aspx.

3. Palestinian produce, however, was not allowed free entry into Israel due to Israel's highly protective policy for its farm products. See Mahmoud El-Jafari, "Main Features of Domestic and External Merchandise Trade of the West Bank and Gaza Strip," United Nations Conference on Trade and Development (UNCTAD), October 21, 1994.

4. For more on this, see The Palestinian Economy: Studies in Development under Prolonged Occupation, ed. George T. Abed (New York: Routledge, 1988); Arie Arnon, "Israeli Policy towards the Occupied Palestinian Territories: The Economic Dimension, 1967-2007," The Middle East Journal, Vol. 61, No. 4 (Autumn 2007), pp. 573-95.

5. This positive picture, however, needs to be viewed with caution. This is because despite the rise in money incomes in the West Bank and Gaza that compared at that time favorably with some neighboring non-oil Arab economies, the Palestinians in the Occupied Territories were also facing higher prices (due to higher cost structure in Israel) than the regional average, especially for tradable goods, which resulted in reduction of their income's purchasing power. This was also the case in the late 1990s when a World Bank study, using 1998 data for seven Arab countries, found that while GNP per capita in the West Bank and Gaza was higher than regional averages, it was lower than all other countries in the sample, except for Yemen, when per capita incomes were adjusted for their purchasing power. See Ma'moon Sbeih, ed., "West Bank and Gaza Update: Poverty in the West Bank and Gaza," World Bank (WB) Report No. 24923 (Apr. 2000)

6. According to two respected Israeli economists, "Israel's policy, at least until the 1990s, was to slow down local economic development [in the West Bank and Gaza]. This policy, and the measures taken to implement it, also contributed to transforming important parts of the Palestinian economy into a captive market for Israeli producers." See A. Arnon and J. Weinblatt, "Sovereignty and Economic Development: The Case of Israel and Palestine," The Economic Journal, Vol. 111, (Jun. 2001), p. 293.

7. WB and the United Nations Office of the Special Coordination in the Occupied Territories (UNSCO), "The Promise, the Challenges, and the Achievements: Donor Investment in Palestinian Development, 1994-1998," WB Working Paper No. 22536 (1999).

8. Article IV.10.a of the Paris Protocol stated that: "The New Israeli Sheqel (NIS) will be one of the circulating currencies in the [Palestinian] Areas and will legally serve there as means of payment for all purposes including official transactions." The US dollar and the Jordanian dinar are also widely circulated in the West Bank and Gaza, and commonly used as a store of value and as means of payment, mainly for big-ticket items.

9. For an earlier evaluation of the protocol, see Evaluating the Paris Protocol: Economic Relations between Israel and the Palestinian Territories, eds. B. Philippe and C. Pissarides (Brussels: European Commission, July 1999).

10. The fiscal leakage problem is more serious and much wider than the one briefly discussed here. For a more detailed and up-to-date discussion on this topic, see WB, "Economic Monitoring Report to the Ad Hoc Liaison Committee" Working Paper No. 96601 (May 27, 2015), pp. 12-23, and State of Palestine, "Stopping Fiscal Leakages, the Government of Palestine's Report to the Ad Hoc Liaison Committee Meeting" (April 19, 2016).

11. See Bank of Israel Research Department, "Recent Economic Developments No. 128, May-August 2010" (Oct. 2010), pp. 22. A more recent report by the World Bank estimated that 35% of Palestinian imports from Israel in 2014 (excluding water, electricity, and fuel) were from third countries. See WB, "Economic Monitoring Report to the Ad Hoc Liaison Committee," p. 15.

12. Only VAT on declared indirect imports from Israel is refunded to the PA.

13. Mahmoud Elkhafif, Misyef Misyef, and Mutasim Elagraa, Palestinian Fiscal Revenue Leakage to Israel under the Paris Protocol on Economic Relations (Geneva: United Nations Conference on Trade and Development, 2014), p. 37.

14. See Article III of the Paris Protocol. For a full description of goods in lists A1, A2, and B, see Annexes I, II, and III of the protocol, respectively. It also gave the PA the right to set standard specifications for goods included in lists A1 (which must be locally produced in Jordan, Egypt, or other Arab countries) and A2 (which could be imported from any country), but not for equipment and capital goods in list B where they still need to conform to Israeli standards.

15. See Nu'man Kanafani, "Trade: A Catalyst for Peace?" The Economic Journal, Vol. 111, No. 472 (Jun. 2001), pp. 276-90.

16. In June 2000, Israel and the PA signed an agreement to expand the items included in List A1 of the protocol. The agreement, however, was never implemented. See Office of the Quartet, "Report for the Meeting of the Ad-Hoc Liaison Committee on Action in Support of Palestinian State-Building" (September 30, 2015), p. 15.

17. Sami H. Miaari and Robert M. Sauer, "The Labor Market Costs of Conflict: Closures, Foreign Workers, and Palestinian Employment and Earnings," Forschungsinstitut zur Zukunftder Arbeit Discussion Paper No. 2282 (September 2006), p. 12.

18. For a critique of the structural and procedural weaknesses of the JEC, see Nu'man Kanafani, Clare Woodcraft, and Ayman Daoud, "Implementation of the Trade-Related Articles in the Paris Protocol on Economic Relations Between Israel and Palestine," Report for the European Commission, (Apr. 1998), Sections 1.3 and 1.4.

19. The 1995 Oslo II agreement carved up the West Bank into three distinct areas: Area A (18% of the West Bank) where the PA assumes civil and internal security responsibilities; Area B (22% of the West Bank) in which the PA has civil powers, along with joint security control with Israel; and Area C (60% of the West Bank) which remained under Israel's full control. Two things should be noted here. First, Areas A and B are territorially fragmented terrain, with 227 small Palestinian cantons, disconnected and scattered across the West Bank. Second, Israel's control over Area C was originally intended to be temporary arrangement according to Chapter 2, Article XI.3.c of the Oslo II agreement, which states that Area C, "except for the issues that will be negotiated in the permanent status negotiations, will be gradually transferred to Palestinian jurisdiction in accordance with this agreement." The transfer was supposed to have been completed before the end of the interim period in May 1999.

20. Sebnem Akkaya, Norbert Fiess, Bartlomiej Kaminski, and Gael Raballand, "Economics of 'Policy-Induced' Fragmentation: The Costs of the Closure Regime to West Bank and Gaza," Middle East and North Africa Working Paper Series No. 50, WB Working Paper No. 43821 (Jan. 2008).

21. See Geoffrey Bannister and Ulric Erickson von Allmen, "Palestinian Trade: Performance, Prospects, and Policy," in Rosa A. Valdivieso et al., West Bank and Gaza: Economic Performance, Prospects, and Policies: Achieving Prosperity and Confronting Demographic Challenges (Washington, DC: International Monetary Fund, 2001), pp. 83-99 and table 4.1.

22. During the interim period, for example, there were a total of 317 closure days. See UNSCO, "The Impact on the Palestinian Economy of Confrontations, Mobility Restrictions and Border Closures, 1 October 2000-31 January 2001" (February 25, 2001), table 1.

23. Valdivieso et al., West Bank and Gaza, p. 10.

24. Sbeih, ed., "West Bank and Gaza Update," p. 1.

25. Stanley Fischer, Patricia Alonso-Gamo, and Ulric Erickson Von Allmen, "Economic Developments in the West Bank and Gaza since Oslo," The Economic Journal, Vol. 111, No. 472 (Jun. 2001), pp. 254-75.

26. On this point, the World Bank noted that, "it is virtually impossible for Palestinians to obtain construction permits for residential or economic purposes, even within existing Palestinian villages in Area C: the application process ... [is] fraught with 'ambiguity, complexity and high cost.'" See Orhan Niksic, Nur Nasser Eddin, and Massimiliano Cali, "West Bank and Gaza: Area C and the Future of the Palestinian Economy" WB Report No. AUS2922 (October 2, 2013), p. 4.

27. Yehezkel Lein, "Thirsty for a Solution: The Water Crisis in the Occupied Territories and its Resolution in the Final Status Agreement," trans. Zvi Shulman, B'Tselem report, July 2000, Chapter 3.

28. Since March 2002, Area A has no longer been offlimits to the Israeli army, which conducts regular raids and incursions inside major Palestinian cities in the West Bank without any restrictions. Ghaith al-Omari, "Limiting Incursions in Area A: The Next Step for Israeli-Palestinian Security Coordination," Washington Institute for Near East PolicyWatch No. 2608 (April 20, 2016). See also "Netanyahu: Israeli Army to Continue Incursions in Area A," Ma'an News Agency, April 21, 2016, www.maannews.com/Content.aspx?id=771227.

29. A back-to-back cargo transfer system refers to the Israeli-imposed procedures whereby merchandise entering or exiting the West Bank and Gaza to, or through, Israel are subjected to laborious security inspection. Trucks arriving to either side of the commercial crossings between Israel and the West Bank and Gaza are off-loaded then reloaded in a process that usually entails long delays, causes substantial damages to goods, and involves extra cost to Palestinian traders. See WB Technical Team, "An Assessment of Progress in Improving Passages and Trade Facilitation," Working Paper No. 40458 (June 19, 2005), p. 7. See also Services Group, "Stagnation or Revival? Israeli Disengagement and Palestinian Economic Prospects: Technical Paper I - Borders and Trade Logistics," WB Report No. 32972 (Dec. 2004), pp. 3-4.

30. International Monetary Fund (IMF)-WB, "West Bank and Gaza: Economic Developments in 2006 - A First Assessment" (March 2007), p. 8, table 3.

31. IMF-WB, "West Bank and Gaza," p. 6, table 1.

32. Israel temporarily suspended the transfer of clearance revenues to the PA during August and September 1997 in response to suicide bombings in Jerusalem. See Udo Kock and Hania Qassis, "West Bank and Gaza: Recent Developments in Clearance Revenues," IMF note (Oct. 2011), p. 5.

33. A. Bennett et al., "West Bank and Gaza: Economic Performance and Reform under Conflict Conditions," IMF, Middle Eastern Department (September 15, 2003), p. 71-72.

34. The increase was mostly in the big-ticket areas: wages, nonwage social transfers, and net lending (i.e., money owed by municipalities in the West Bank and Gaza to Israel for the consumption of electricity and water). For a reference to PA public expenditure from 2004 to 2007, see IMF, "Macroeconomic and Fiscal Developments in the West Bank and Gaza," Ad Hoc Liaison Committee Meeting (September 24, 2007), p.13, table 3.

35. As of July 2014, approximately 62% of the barrier (which consists of 26-30-feet-high concrete walls, watchtowers, fences, ditches, razor wire, an electronic monitoring system, patrol roads, and a buffer zone) has been completed, 10% was under construction, with the remaining 28% was planned but not yet constructed. See UN Office for the Coordination of Humanitarian Affairs (OCHA), "10 Years since the International Court of Justice (ICJ) Advisory Opinion" (July 9, 2014), p. 2-3.

36. WB, "West Bank and Gaza: Assessment of Restrictions on Palestinian Water Sector Development," Report No. 47657 (Apr. 2009), p. 84.

37. The seam zone was declared a closed military area on October 2, 2003. Since then, Palestinians not residing there could access the area only through Israeli-controlled gates, and only if they carried an Israeli military-issued visitor permit. See UN, "UNSCO-OCHA Discussion Paper - 'Seam Zone' Military Order" (November 3, 2003).

38. UNCTAD, "Report on UNCTAD's Assistance to the Palestinian People," 53rd Session, Item 8(b) (July 19, 2006), p. 7. In 2011, an OCHA bulletin reported that "olive trees in the area between the Barrier and the Green Line have an approximately 60 per cent reduction in yield compared to their equivalents on the 'Palestinian' side of the Barrier." See OCHA-Occupied Palestinian Territory (OPT), "The Monthly Humanitarian Monitor" (Dec. 2011), p. 8.

39. The digging and operation of hundreds of tunnels along the border between Gaza and Egypt during the 2007-13 period, however, allowed large quantities of goods to be smuggled into Gaza away from Israel's direct control.

40. Mohammed Samhouri, "Gaza Economic Predicament One Year after Disengagement: What Went Wrong?" Crown Center for Middle East Studies Middle East Brief No. 12 (Nov. 2007).

41. For the full text of the agreement, see WB, "The Palestinian Economy and the Prospects for Its Recovery," Working Paper No. 40462, Vol. 1 (Dec. 2005), pp 39-43.

42. For an earlier assessment of the AMA's implementation, see OCHA, "The Agreement on Movement and Access One Year On" (Nov. 2006); and PLO Negotiations Affairs Department, "The Agreement on Movement and Access: The Costs of Non-Implementation" (October 2006), available through the Jewish Virtual Library website, www.jewishvirtuallibrary.org/jsource/arabs/PalPaper100106b.pdf.

43. For more on this see Karim Nashashibi, "Palestinian Finance under Siege: Economic Decline and Institutional Degradation," OCHA Special Focus: Occupied Palestinian Territory, No. 1 (April 2007).

44. See Mohammed Samhouri, "Looking beyond the Numbers: The Palestinian Socioeconomic Crisis of 2006," Crown Center for Middle East Studies Middle East Brief No. 16 (Feb. 2007).

45. UNCTAD, "Report on UNCTAD Assistance to the Palestinian People," 59th Session, Item 11(b) (July 13, 2012), p. 6, table 1.

46. A. David Craig, "West Bank and Gaza Update," WB Report No. 41040 (Sept. 2006), pp. 11-12.

47. Between 2000 and 2007, PA employment increased by 30%, jumping from 114,940 to 150,290, not including part-time workers. See A. David Craig, ed., "West Bank and Gaza Update," WB Report No. 44298 (Mar. 2008), p. 17.

48. In 2007, average unemployment rate in the Occupied Territories stood at 22% of the active workforce (29% in Gaza, and 19% in the West Bank), up from 10% in 2000. See Craig, ed. "West Bank and Gaza Update" (Mar. 2008), p. 16.

49. Economic Monitoring Report to the Ad Hoc Liaison Committee, "Two Years after London: Restarting Palestinian Economic Recovery," WB Working Paper No. 41039, No. 2 (September 24, 2007), p. 8.

50. This policy came to be known as the "West Bank First" policy. For a critical analysis, see Mohammed Samhouri, "The 'West Bank First Strategy': A Political-Economy Critical Assessment," Brandeis University, Crown Center for Middle East Studies, Working Paper No. 2 (Oct. 2007). See also Geoffrey Aronson, "'Follow Us Not Them' - The Ramallah Model: Washington's Palestinian Failure," Conflicts Forum Monograph (Nov. 2007).

51. Israel permanently closed Karni Border Crossing in mid-2007. This was followed by the closure of Sufah Crossing in September 2008, then Nahal 'Oz Crossing in January 2010. The only official cargo crossing between Gaza and Israel currently in operation is Kerem Shalom terminal located at the southeastern tip of the Gaza Strip.

52. Mark Tran, "Israel Declares Gaza 'Enemy Entity,'" The Guardian, September 19, 2007, www.gu.com/world/2007/sep/19/usa.israel1.

53. The West Bank-based PA, however, continued to receive (as part of the clearance revenue monthly transfers) the VAT, import tax, and petrol tax on basic food commodities and fuel that were allowed to enter Gaza from Israel. The share of Gaza in total clearance revenues, however, declined precipitously after the 2007 blockade. See Kock and Qassis, "West Bank and Gaza," IMF Note (Oct. 2011), p. 2.

54. These are civilian goods viewed by Israel as having potential military use. The list of "dual-use" goods (which also applies to the West Bank) includes a wide range of items like capital equipment, raw materials, spare parts, chemicals, fertilizers, etc. For more on this, see "Checking the 'Dual-Use' List Twice," Gisha: Legal Center for Freedom of Movement, Gaza Gateway (blog), January 31, 2016, http://gisha.org/en-blog/2016/01/31/checking-the-dual-use-list-twice/; "Information Sheet: Dark-Gray List" Gisha, January 31, 2016, http://gisha.org/UserFiles/File/publications/Dark_Gray_Lists/Dark_Gray_Lists-en.pdf.

55. An estimated 35% of Gaza's agricultural land (about 17% of Gaza's total area size), and more than two thirds of its Oslo-agreed 20 nautical miles territorial waters, are inaccessible to the Palestinians due to the Israeli-enforced security buffer zone along the Israeli-Gaza border, and the Israeli naval blockade of Gaza. For more on this, see OCHA and the World Food Programme (WFP), "Between the Fence and a Hard Place: The Humanitarian Impact of Israeli-Imposed Restrictions on Access to Land and Sea in the Gaza Strip," OCHA-WFP Special Focus (Aug. 2010).

56. See "Water Crisis in Gaza Strip: Over 90% of Water Un-Potable" B'Tselem: The Israeli Information Center for Human Rights in the Occupied Territories (February 6, 2014); and OCHA, "The Humanitarian Impact of Gaza's Electricity and Fuel Crisis" (Mar. 2014).

57. See Portland Trust, "Economic Feature: The Private Sector in Gaza," in Palestinian Economic Bulletin, No. 51 (Dec. 2010), p. 3, table 2.

58. WB, "Economic Monitoring Report" (May 2015), pp. 5-6, 14.

59. According to the UN, the number of Palestinian refugees in the Gaza Strip receiving food assistance had jumped from 72,000 refugees in 2000 to 868,000 refugees in 2015, a sharp increase of about 12 times over the period. See, UN Relief and Works Agency (UNRWA), Emergency Reports: Gaza Situation Report, No. 93 (May 12-19, 2015), www.unrwa.org/newsroom/emergency-reports/gaza-situation-report-93.

60. The Hamas government had a special governmental department that regulated and monitored tunnel operations, collecting taxes from operators on all the goods that were smuggled from Egypt to Gaza, and collecting fees on the tunnels' registration and licensing. For more on this, see Nicolas Pelham, "Gaza's Tunnel Phenomenon: The Unintended Dynamics of Israel's Siege," Journal of Palestine Studies, Vol. 41, No. 4 (Summer 2012), pp. 6-31.

61. Mahmoud Mourad, "Egypt to Deepen Buffer Zone with Gaza after Finding Longer Tunnels, ed. Lin Noueihed, Reuters, November 17, 2014, http://reut.rs/2cE4N5d. It was later reported that Egypt planned to expand the buffer zone more than a mile. See "Egypt to Expand Buffer Zone with Gaza," Middle East Monitor, April 13, 2015, www.middleeastmonitor.com/20150813-egypt-prepares-to-expand-buffer-zone-with-gaza/.

62. Jim Zanotti, "U.S. Security Assistance to the Palestinian Authority," Congressional Research Service Paper R40664 (January 8, 2010), p. 16. Despite the deployment of the Palestinian National Security Forces, and the existence of high-level security coordination between Israel and the PA, Israel security forces continue to conduct regular military incursions inside Palestinian cities and refugee camps inside Area A of the West Bank.

63. In its comment on the West Bank's slow recovery, the World Bank noted that "The fact that the West Bank economy is dramatically failing to fulfill its potential, even in periods of relative stability in the security situation, only underlines the extent to which economic restrictions are still preventing any real upturn in economic activity." See Economic Monitoring Report to the Ad Hoc Liaison Committee, "Palestinian Economic Prospects: Gaza Recovery and West Bank Revival," WB Working Paper No. 76017 (June 8, 2009), p. 5.

64. This growth was mainly driven by two factors. The first was the high level of donor-funded government expenditure. Between 2008 and 2011, donors' contributions to the PA recurrent and development expenditure totaled close to $6 billion. See WB Poverty Reduction and Economic Management Department, "Towards Economic Sustainability of a Future Palestinian State: Promoting Private Sector-Led Growth," WB Memorandum No. 68037 (Apr. 2012), p. 40, table 2. The second factor was related to a prodiguous jump in private consumption financed by domestic bank borrowing. Figures from the Palestinian Monetary Authority (PMA) show that the amount of bank credit extended to the private sector almost doubled between 2008 and 2011, rising from $1.30 billion to $2.45 billion, much of which went to finance private consumption, real estate, and residential construction. See PMA, Al-nashra al-ihsa'iyya al-rub'iyya [Quarterly Statistical Bulletin], No. 1 (2nd Quarter, 2013), p. 32, table 11.

65. After 2011, real economic growth rate in the West Bank declined significantly, reaching 6% in 2012, 0.5% in 2013, and 0.2 % in 2014, implying negative growth in per capita income. See Karim Nashashibi, "Palestinian Public Finance under Crisis Management: Restoring Fiscal Sustainability," UN Development Programme Position Paper (March 2015), p. 10, table 1.

66. Jodi Rudoren and Isabel Kershner, "Arc of a Failed Deal: How Nine Months of Mideast Talks Ended in Disarray," The New York Times, April 28, 2014, http://nyti.ms/2cneHY2.

67. One exception to this trend was the increase in the flow of West Bank-based Palestinian workers into Israel and on West Bank settlements. Between 2006 and 2014 this figure nearly doubled, from 55,000 to 105,200 (of whom only 60% had an Israeli-issued work permit). See UNCTAD, "Report on UNCTAD Assistance to the Palestinian People: Developments in the Economy of the Occupied Palestinian Territory," 61st Session, Item 11(b) (July 7, 2014), p. 4, table 1; Palestinian Central Bureau of Statistics (PCBS), "Labour Force Survey (October -December, 2014) Round (Q4/2014): Press Report on the 'Labour Force Survey Results'" February 12, 2015, p. 6.

68. A report by the United States Agency for International Development noted that, "Despite a marked increase in the effectiveness of PA security efforts and improvements in the overall security situation in the West Bank, Israel has not relaxed its dual-use control regime. On the contrary, more goods were added to the list during this period of relative stability, and control regime has become more restrictive." Quoted in Nashashibi, "Palestinian Public Finance under Crisis Management," p. 18.

69. UNCTAD, "Report on UNCTAD Assistance to the Palestinian People" (July 2014), p. 4, table 1.

70. UNCTAD, "Report on UNCTAD Assistance to the Palestinian People" (July 2014), p. 4; IMF-West Bank and Gaza (WBG), "Report to the Ad Hoc Liaison Committee" (September 12, 2014), p. 24, table 2.

71. On the nature of technical talks between representatives from ministries of finance of both sides, see WB, "Stagnation or Revival? Palestinian Economic Prospects: Economic Monitoring Report to the Ad Hoc Liaison Committee," Working Paper No. 76022 (March 21, 2012), pp. 9-11. On a related note, Israel continues to use the monthly transfers of clearance revenues as a tool to politically pressure the PA. Twice in 2011, in May (after the PA reached a reconciliation and unity deal with Hamas) and in November (after Palestine's admission to UN Educational, Scientific and Cultural Organization), and again in December 2012 (following a UN General Assembly vote to recognize Palestine as a non-member observer state), Israel suspended the transfers of clearance revenues. Israel also withheld the transfer of Palestinian tax money during the first four months of 2015 in retaliation for the PA's application to join the International Criminal Court and other international conventions and treaties.

72. For a summary of this understanding, see Oussama Kanaan, Udo Kock, and Mariusz Sumlinski, "Recent Experience and Prospects of the Economy of the West Bank and Gaza: StaffReport Prepared for the Meeting of the Ad Hoc Liaison Committee," IMF (September 23, 2012) p. 18.

73. WB, "Economic Monitoring Report to the Ad Hoc Liaison Committee" (September 25, 2013), p. 17

74. A senior PA official at the ministry of finance who was a member of the Palestinian negotiating team to the agreement stated, "There was no political decision on the part of top Israeli government office to carry out the agreement" Phone interview by the author, July 13, 2015. The PA ministry of finance, however, continued to hold regular meetings with its Israeli counterpart in an effort to find solutions to the fiscal leakage problem in order to minimize Palestinian financial losses. For an update on this, see IMF-WBG, "Report to the Ad Hoc Liaison Committee" (April 5, 2016), p. 10.

75. Orhan Niksic, Nur Nasser Eddin, and Dana Almubaied, "Economic Monitoring Report to the Ad Hoc Liaison Committee" WB Working Paper No. 99646, Vol. 2 (September 30, 2015), p. 4. Applying the International Labor Organization relaxed definition of unemployment which takes discouraged workers into consideration, would increase the Occupied Palestinian Territories' jobless rate in 2014 to 30% (and even higher if the underemployed are included in the calculation). See UNCTAD, "Report on UNCTAD assistance to the Palestinian people: Developments in the economy of the Occupied Palestinian Territory," 62nd Session, Item 10(b) (July 6, 2015), p. 3, table 1.

76. See UNRWA and PCBS, "Food Insecurity in Palestine Remains High," UNRWA Newsroom, press release, June 3, 2014.

77. See Office of the UN Special Coordinator for the Middle East Peace Process, "Report to the Ad Hoc Liaison Committee" (April 19, 2016), p. 4.

78. WB Social and Economic Development Group, "West Bank and Gaza Country Economic Memorandum: Growth in West Bank and Gaza; Opportunities and Constraints," Report No. 36320, Vol. I (Sept 2006), p. iii.

79. For an elaborated discussion of the adverse developments in these five areas, see WB, "Fiscal Challenges and Long Term Economic Costs: Economic Monitoring Report to the Ad Hoc Liaison Committee," Report No. 76024 (March 19, 2013), pp. 12-23.

80. Approximately 63% of the West Bank's agricultural land is located in Area C which is offlimits to Palestinians. See Applied and Research Institute of Jerusalem (ARIJ) and the Spanish Cooperation in Jerusalem, "A Review of the Palestinian Agricultural Sector, 2007," p. 4.

81. WB, "Fiscal Challenges and Long Term Economic Costs," p. 13.

82. Office of the Quartet, "Report for the Meeting of the Ad-Hoc Liaison Committee" (April 19, 2016), p. 9.

83. WB, "Economic Monitoring Report to the Ad Hoc Liaison Committee" (September 22, 2014), p. 10, table 1; WB, "Economic Monitoring Report" (May 2015), p. 7.

84. WB, "Building the Palestinian State: Sustaining Growth, Institutions, and Service Delivery; Economic Monitoring Report to the Ad Hoc Liaison Committee" Working Paper No. 76019 (April 13, 2011), p. 17.

85. WB, "Building the Palestinian State," p. 17. Close to 90% of businesses in the West Bank and Gaza employ less than 5 workers. See PCBS, Atlas al-ta'dad al-munsha'at fiFilastin, 2012 [Establishment Census Atlas of Palestine, 2012] (November 2013), p. 37.

86. See Niksic, Nasser Eddin, and Almubaied, "Economic Monitoring Report" (Sept. 2015), p. 18.

87. Kock and Qassis, "West Bank and Gaza," p. 3.

88. See IMF-WGB, "Report to the Ad Hoc Liaison Committee" (Apr. 2016), p. 21, table 2.

89. Of the $5 billion public debt, $1.233 billion was domestic bank borrowing (85% of local banks' equity); $1.259 billion was foreign debt; $1.799 billion were payment arrears to Pension Fund, and $695 million were arrears to private sector suppliers. See IMF-WGB, "Report to the Ad Hoc Liaison Committee" (May 18, 2015), p. 26.

90. In fact, the PA had already exceeded the debt limit. By the end of 2015, PA's overall debt reached $5.4 billion, or 43% of GDP, with domestic bank borrowing rising to $1.5 billion. See IMF-WGB, "Report to the Ad Hoc Liaison Committee" (Apr. 2016), p. 5.

91. In 2008, the PA embarked on a three-year plan for fiscal reform with the principle aim to achieve fiscal sustainability by reducing the overall budget deficit from 28% of GDP in 2007 to 17% in 2010. See PA Ministry of Planning and Administrative Development (MOPAD), "Palestinian Reform and Development Plan, 2008-2010." This goal that was successfully achieved and followed by another three-year plan, wherein the PA managed by the end of 2014 to further reduce the deficit to 12% of GDP. See MOPAD, "National Development Plan, 2011-13: Establishing the State, Building Our Future" (April 2011).

92. See IMF-WGB, "Report to the Ad Hoc Liaison Committee" (Apr. 2016), p. 18, fig. 2.

93. As one study correctly argued, without a fundamental change in the stringent conditions under which the Palestinian economy is operating, and in the absence of a tangible increase in private and (donor-funded) public investment spending, bringing down fiscal deficit would only result in a contraction in economic growth and subsequent reduction in government revenues, thus making the PA fiscal crisis much worse. See Nashashibi, "Palestinian Public Finance under Crisis Management," p. 33.

94. On this point, a number of respected Israeli economists observed:

After researching the Palestinian economy for several years we are convinced that its links with the Israeli economy were the most important factor in determining the course of its economic development. The formation of these links, and the nature of the labor, goods and capital flows between the Palestinian and Israel economies, were determined almost exclusively by Israel.

Arie Arnon, with Israel Luski, Avia Spivak, and Jimmy Weinblatt, The Palestinian Economy: Between Imposed Integration and Voluntary Separation (Leiden, Netherlamds: Brill, 1997), p. 1.

95. In the words of Israeli economist Arie Arnon, "Palestinians' acceptance of the terms of the Protocol had more to do with the balance of power between the two sides than with genuine, voluntary, acceptance," in "The Implications of Economic Borders between Israel and Palestine," Palestine Israel Journal of Politics, Economics and Culture, Vol. 9, No. 3 (2002), p. 33. Palestinian economist Nu'man Kanafani and his coauthors also argued that "Israel's ability to enforce its own interpretation has transformed the PP into a chronic source of conflict rather than a basis for cooperation." Kanafani, Woodcraft, and Daoud, "Implementation of the Trade-Related Articles in the Paris Protocol," section 3.1.

96. A number of studies have proposed few technical recommendations to amend the Paris Protocol, to fix its shortcomings, and to enhance its implementation. For example, see The Aix Group, "Twenty Years after Oslo and the Paris Protocol: Proposed Modifications to the 'Protocol on Economic Relations between Israel and the PLO'" (June 2013); Office of the Quartet Representative, "Back to the Future: Integrating the Political and Economic Tracks; Report for the Ad Hoc Liaison Committee" (March 19, 2013); Mattia Toaldo, "Beyond the Paris Protocol: Reforming Israeli-Palestinian Economic Relations," European Council on Foreign Relations, Middle East Peace Process Project (June 2013). It is worth emphasizing, however, that despite the obvious need to eliminate all sources of the financial losses incurred by the Palestinian side as a result of the fiscal leakage and other protocol-related problems, it is highly doubtful that the proposed technical fixes aimed to improve few aspects of the protocol-based trade regime, if and when implemented, will result in sustained long-term benefits to the Palestinian side without any fundamental change to the underlying and very restrictive political-territorial setting that led to the Paris Protocol's failure in the first place.

97. Peres Center for Peace, "Peace with Prosperity: Examining the Impact of Movement Restrictions on the Palestinian Economy" (May 2009).

98. A recent study has advocated the shiftfrom the PP-based Customs Union arrangement to an advanced Free Trade Agreement between Israel and Palestine. The study argues that such a shift, under certain conditions, would result in substantial improvements in the Palestinian GDP, merchandise exports, and employment. See Karim Nashashibi, Yitzhak Gal, and Bader Rock, "Palestinian-Israeli Economic Relations: Trade and Economic Regimes" Office of the Quarter Representative, Research Paper 2015.

99. Israel has repeatedly maintained that these restrictions are imposed on security grounds. The World Bank, however, challenged this argument:

it is often difficult to reconcile the use of movement and access restrictions for security purposes from their use to expand and protect settlement activity and the relatively unhindered movement of settlers and other Israelis in and out of the West Bank.

See WB Technical Team, "Movement and Access Restrictions in the West Bank: Uncertainty and Inefficiency in the Palestinian Economy" (May 9, 2007), p. 2.

100. For both exports and imports, Palestinian firms face significantly higher transaction costs and considerably longer processing time than the Israeli companies. Figures from World Bank's report Doing Business 2015, for example, show that a Palestinian firm, on average, pays $1,750 to export a container and waits 23 days to complete the process. An Israeli firm, by comparison, pays only a third of that cost ($620) and finishes the export transaction in half the time (10 days). Similarly, a Palestinian company pays an average of $1,425 to import a container and waits 38 days to get it, while their Israeli counterpart pays just a third ($565) of the Palestinian import cost and finalizes the whole process in just 10 days. See WB Group, Doing Business 2015: Going Beyond Efficiency (Washington, DC: International Bank for Reconstruction and Development, 2014), pp. 193, 229.

101. See Elkhafif, Misyef, and Elagraa, Palestinian Fiscal Revenue Leakage, p. 11. The Palestinian total trade deficit by the end of 2014 was estimated at $4.7 billion.

102. Palestinians have one of the lowest per capita water resources in the Middle East region, and their ability to develop water resources and infrastructure is subject to Israeli veto power. See Amnesty International, "Troubled Waters: Palestinians Denied Fair Access to Water," Report MDE 15/027/2009 (Oct. 2009); and B'Tselem, "Water Crisis: Discriminatory Water Supply" (March 10, 2014).

103. The Israeli settler population in the Occupied Territories more than tripled since the signing of the Oslo Accords, reaching by the end of 2013 an estimated 547,000 Jewish settlers; 350,000 of them live in 125 settlements and some 100 settlement outposts throughout the West Bank. The rest (197,000 settlers) live in 12 settlements in East Jerusalem area. See B'Tselem, "Settlements: Statistics on Settlements and Settler Population," (updated May 11, 2015). In 2009, B'Tselem found that 21% of the built-up area of the settlements was privately owned Palestinian land. See Eyal Hareuveni, "By Hook and by Crook: Israeli Settlement Policy in the West Bank," trans. Zvi Shulman, B'Tselem (July 2010), p. 5.

104. For detailed discussion on the Israeli restrictions on the development of the information and communication technology (ICT) sector in the Occupied Territories, see Nur Arafeh, Wassim F. Abdullah, and Sam Bahour, "ICT: The Shackled Engine of Palestine's Development," Policy Brief, Al-Shabaka: Palestinian Policy Network (November 9, 2015), https://al-shabaka.org/briefs/ict-the-shackled-engine-of-palestines-development/. A World Bank report estimated the Palestinian mobile sector's revenue loss directly attributable to the absence of 3G technology between $339 and $742 million during the period 2013-2015, and the total VAT fiscal loss for the PA over the same period (not counting corporate taxes) between $70 and $184 million. See WB Group, Transport and ICT, "The Telecommunication Sector Note in the Palestinian Territories: Missed Opportunity for Economic Development," Report No. 104263 (February 1, 2016), p. 8.

105. Less than 1% of Area C is accessible to Palestinian economic use. The World Bank conservatively estimated the combined direct and indirect economic benefits from allowing the Palestinians free access to Area C (excluding the areas subject to final status negotiations) to be at least $3.4 billion a year (close to 35% of GDP in 2011), which would provide the PA with $800 million a year in additional tax revenues, and cut its fiscal deficit by half; See, Orhan Niksic, Nur Nasser Eddin, Massimiliano Cali, and Duja Michael, "West Bank and Gaza: Area C and the Future of the Palestinian Economy" WB Report No. AUS2922 (October 2, 2013), p. x-xi, figure 1. Another study had estimated the benefits of allowing Palestinians access to the Jordan Valley, and to utilize 50,000 dunums (which is just 1.5% of Area C) to be $1 billion annually, or about 10% of GDP [Note: a dunum is a unit of land that equals 1,000 square meters, or approximately one-fourth of an acre, or one-tenth of a hectare]. Allowing Palestinians to farm additional 100,000 dunums there would create between 150,000 and 200,000 new jobs, directly and indirectly. See Itzhak Gal, Adi Ashkneazi, Saeb Bamya, and Shawqi Makhtoob, "The Economic Development of the Jordan Valley," in Economic Dimensions of a Two-State Agreement between Israel and Palestine, Vol. II: Supplementary Papers, eds. Arie Arnon and Saeb Bamya (Aix-en-Provence, France: Aix Group, 2010), pp. 239-40.

106. For an economic analysis of the negative impact of Israeli restrictions, see WB, "Palestinian Economic Prospects: Aid, Access and Reform; Economic Monitoring Report to the Ad Hoc Liaison Committee," Working Paper No. 51943 (September 22, 2008), pp. 39-58.

107. On the limited economic policy space of the PA see UNCTAD, "Report on UNCTAD Assistance to the Palestinian People," 55th Session, Item 10(b) (July 15, 2008), pp. 7-14. One should note here, however, that in the highly peculiar Palestinian case, and for economic policy tools to be effective, and economic management to be at all possible, other conditions must be met; namely, freedom of internal movement, control over national natural resources, and unfettered access to outside world.

108. In this regard, an Israeli report noticed that the division of the West Bank into three areas of different jurisdictions,

creates the illusion that the PA is the main body responsible for the lives of most Palestinian residents in the West Bank [in areas A and B]; in truth, any decision the PA makes, however insignificant, necessitates the consent (even if tacit) of the Israeli authorities.

B'Tselem, "Reality Check: Almost Fifty Years of Occupation," (June 5, 2016).

109. UNCTAD, "Palestinian War-Torn Economy: Aid, Development and State Formation" (April 5, 2006), p. 47.

110. On January 19, 2016, the chair of Israel's opposition, Isaac Herzog, presented a plan - which was unanimously endorsed by the Labor Party on February 7, 2016 - to unilaterally separate from the West Bank Palestinians but without fundamentally changing the underlying conflict conditions. For a summary and analysis of the plan, see Ofer Zalzberg, "The Israeli Labor Party's 'Separation Plan,': Making Peace with the Palestinians by Focusing on the Israelis" Friedrich Ebert Stiftung Israel, Perspective (Apr. 2016).

111. "Facts on the ground" refers to a whole host of Israeli policies and practices designed to alter the political landscape of territory controlled by Israel, including the West Bank. These measures include, among other things, the continued building and expansion of Jewish settlements and outposts; the construction of the separation barrier; and an extensive network of Israeli-only bypass roads, tunnels and highways crisscrossing the West Bank to connect Jewish settlements to each other and to cities inside Israel. These actions have substantially fragmented the West Bank; divided the area into a hodgepodge of isolated enclaves; and rendered 60% of its total land size inaccessible to the Palestinians. In addition, there are hundreds of military checkpoints (permanent and mobile), roadblocks, gates, etc; all part of a complex system of restrictions, both physical and administrative, designed and implemented by Israel to control the movement of the Palestinian population, vehicles and goods within, to, and from, the West Bank. For more, see OCHA, "Movement and Access in the West Bank" (Sept. 2011).

112. A 2015 study by the RAND Corporation has conservatively estimated the cumulative potential economic gains (direct and opportunity) that could be generated over a 10-year period (2014-24) as a result of resolving the Palestinian-Israeli conflict on the basis of two-state solution to be a total of $123 billion for Israel and $50 billion for the WBG's Palestinians. See C. Ross Anthony et al., The Cost of the Israeli-Palestinian Conflict (Santa Monica, CA: RAND Corporation, 2015), p. 29.