A peace agreement between the government of Israel and the PLO has yet to be signed; a Palestinian state has yet to be established. But such details are unimportant to the organizations representing the Israeli bourgeoisie. “It does not matter whether a Palestinian state arises, whether Israel imposes autonomy or the territories are annexed. The economic solution is the same: continuation of the free movement of goods, capital and labor between the West Bank and Gaza on the one hand and Israel on the other,” says the Israeli economist Ezra Sadan, who carried out a comprehensive study of the economy of the Occupied Territories for Israeli security forces in 1992. Dov Lautman, the president of the Israeli Industrialists’ Association, told a meeting with Palestinian manufacturers: “It’s not important whether there will be a Palestlnian state, autonomy or a Palestinian-Jordanian state. The economic borders between Israel and the territories must remain open.” [1] Sadan, an academic, talks about annexation as if it were still a possibility. The industrialist Lautman knows that that option no longer exists.

Over the last two or three years there have been numerous conferences with titles like “The Economic Future of Israel and the Territories,” events usually sponsored by the Industrialists’ Association or the Association of Chambers of Commerce. There have also been meetings between Israeli and Palestinian manufacturers, mostly behind closed doors. The meetings, studies, official pronouncements and seminars reveal a growing anxiety about the economic implications of Palestinian independence, which Israel’s ruling social stratum considers to be only a matter of time. Tactically there has been a change in the Israeli bourgeoisie’s way of thinking about this prospect. Strategically there is complete agreement between representatives of the various sectors (banking, industry and large-scale commerce) and the government that the economic dependence of the “Palestinian entity” must be preserved.

At the government level and within the Bank of Israel, committees have been established to prepare Israel economically for Palestinian autonomy. [2] Incidentally, while the Israeli bourgeoisie is preparing for Palestinian independence, the labor movements concerned — the Histadrut and the Federation of Palestinian Trade Unions in the Occupied Territories — maintain no significant contacts.

Who’s Afraid of a Palestinian State?

The Israeli bourgeoisie has come to recognize that there is no alternative to some degree of Palestinian political independence. A whole generation of Israeli manufacturers tried to crush every possibility of capitalist industrial development in the territories. The Israeli occupation authorities operated as an arm of the Israeli bourgeoisie, making it impossible for a Palestinian capitalist to obtain the thousand-and-one approvals required for establishing any large business without producing a document stating that he would not be competing with an Israeli company. In this way the authorities prevented the establishment of dairies, cement factories, food factories and textile plants. Until the intifada, the Histadrut-owned dairy company, Tnuva, maintained a monopoly on the sale of milk products to the Occupied Territories. At the same time, the Israeli economy has been the source of a sizable portion of the territories’ income; about one half of the national income of the Gaza Strip reportedly comes from the labor of Gaza workers inside Israel. It is this classic colonialist division of labor that Israeli business leaders are determined to preserve at all costs.

A total and immediate loss of West Bank and Gaza markets would likely cause heavy losses to many Israeli businessmen in construction, hotels, imports and manufacturing. Employers in construction and agriculture benefit from cheap Palestinian labor, and importers have concessions for goods sold in the territories. As for Palestinian exports to Israel, one Palestinian businessman put it this way: “The sum total of the territories’ industrial exports has about the same value as the output of Elite” (a large Israeli producer of chocolate and food products, whose 1992 sales totaled about $150 million). There has also been a severe shortage of capital for Palestinian investment, due in part to a lack of Arab banks. The Coordinating Office of Economic Organizations, the umbrella organization of the bourgeoisie, includes about a dozen employers’ organizations, the most important being the Industrialists’ Association and the Association of Chambers of Commerce. Despite the fact that the financial sector is very influential in Israel, and that every economic sector (whether owned by the government, the Histadrut or private capital) depends on it, the manufacturers are the dominant group in terms of their organizational clout. The Industrialists’ Association represents companies with some 330,000 wage workers.

Palestinian independence accompanied by a cutoff of economic ties would, first and foremost, hurt Israeli manufacturers and merchants (including importers). Branches of Israeli banks in the territories were almost all closed after the outbreak of the intifada, so this sector has little involvement in the territories. But Israeli exports to the territories are estimated at a billion dollars a year, including goods imported from abroad by Israeli importers. Palestinian businessmen have begun, without success so far, to pressure foreign companies to limit the concessions they grant Israeli importers to the state of Israel itself, so as to exclude the West Bank and Gaza. Palestinian independence involving full sovereignty would compel Israeli importers to give up the Palestinian market or find a Palestinian partner.

For manufacturers, things are more complicated. Two hundred large companies are responsible for about 90 percent of Israel’s exports, and it is these companies which control the Industrialists’ Association and dominate the Coordinating Office. But the Association also includes small and mid-sized companies in every sector. One sector which has many small and medium sized firms is known as the “General Branch,” which employs some 24 percent of wage workers. In 1992 the total proceeds of Israeli industry totaled $32.5 billion: 23 percent was in the General Branch, 17 percent was in food products, 22 percent was in chemicals, 10 percent was in textiles, 10 percent was in metals and electrical goods, 12 percent was in electronics and 8 percent in other sectors. [3]

When Lautman declared, at a February 16 meeting with Palestinian businessmen in East Jerusalem, that “small and medium-sized Israeli firms will be hurt as a result of autonomy,” he meant firms in the General Branch. Open borders between a Palestinian state and Israel — in other words, continuation of the status quo — would mean increased sales for the “strong” sectors (those at a relatively high technological level), and benefit some Palestinian enterprises which are labor-intensive and already sell their products in the Israeli market. Some 40 percent of leather goods and footwear bought in Israel is imported, with 18 percent coming from the territories; in printing, 3 percent is imported, with 1 percent from the territories; in building materials, 16 percent is imported, nearly 9 of which is from the territories. About 2 percent of local consumption of rubber and plastic goods and about 3 percent of paper goods are from the West Bank.

The NAFTA Model

For Lautman, the model of economic relations between the states of Israel and Palestine should be “the free trade agreement that exists between Mexico and the US.” For him, there is no doubt about who will play the role of the US and who will play Mexico.

On several occasions Lautman has also presented the manufacturers’ “minimum demands” regarding their counterparts on the other side, demands to be incorporated into the government’s position in the peace talks. Senior officials in Israel’s Ministry of Trade and Industry have said that these positions are acceptable to the government. They include:

• Taxes and customs duties: No duties between the two states; equalization of value-added tax rates. Israel has relatively high tax rates, and Israeli manufactures will have to compete with cheaper Palestinian products. A high Palestinian VAT and prohibition of tariff barriers to Israeli products will ensure the preservation of the status quo.
• Agriculture: Open borders will not apply to agricultural products, the sector in which the Palestinians have the greatest relative advantage.
• Standardization: Israeli manufacturers are demanding uniform standards on both sides of the border. Israeli standards are higher than in any other Middle Eastern market. Palestinian manufacturers would need large investments to achieve the level demanded.
• Workers: Continuation of employment of Palestinians inside Israel. Some economists believe that even with Palestinian independence the number of Palestinian workers employed in Israel (about 120,000 prior to the recent closure) will grow by 20 percent. [4] The industrialists are also demanding a Palestinian minimum wage, better benefits and social insurance which will make the labor component of Palestinian manufacturing more expensive. (During the past 25 years of occupation the industrialists never demanded that the authorities apply Israeli labor law in the territories.)
• Joint ventures: Lautman spoke of the possibility of joint ventures which would combine Palestinian labor, Israeli know-how and financing from the advanced industrial countries.

The realization of the Israeli industrialists’ demands and their acceptance by the representatives of the Palestinian bourgeoisie would amount to a transition from colonialism to neocolonialism — a situation similar to the relations between France and many of its former colonies in Africa. But until a Palestinian state is established, Israel’s policy is clear. As Lt. Col. Hillel Sheinfeld, the Israeli coordinator of operations in the territories, put it, the declared goal of his work is to “integrate the economy of the territories into the Israeli economy.” [5]

Translated from the Hebrew by Zachary Lockman


[1] Davar, February 17, 1993.
[2] Yediot Aharonot, July 17, 1992. A government committee was established in 1990 by then-Finance Minister Yitzhak Moda‘i and is headed by Prof. Haim Ben-Shahar. The other committee is composed of members of the Bank of Israel research staff: Aryeh Arnon, Daniel Gottlieb and Dan Zakai.
[3] Yaron Koren, ed., The General Branch: Data and Structure, December 1992 (Tel Aviv: Association of Israeli Industrialists, 1992). The General Branch includes shoes and leather, flour mills, cosmetics, office equipment, building materials, rubber and plastic, printing, paper and carton, wood and furniture.
[4] Davar, December 20, 1992.
[5] Davar, February 14, 1993.

How to cite this article:

Asher Davidi "Israel’s Economic Strategy for Palestinian Independence," Middle East Report 184 (September/October 1993).

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