Message 4: Can We Improve the Situation in the Short-Run Without Harming the Two-State-Solution?


The Palestinians in the West Bank and Gaza live under Israeli occupation for almost 50 years. These have been years of suffering from loss of life in many confrontations, from land confiscations, mobility restrictions, house demolitionsand lack of economic development. In some of these years, they have experienced better economic conditions, especially in the first twenty years, and in some years, they suffered worse economic conditions, especially since the Second Intifada. It is clear that the burden of life under occupation and the economic burdens are strongly related. We have shown it and elaborated on that in many of our research papers, especially in our recent paper on how the occupation hurts Palestinian economic growth. As stated in this paper and in many other papers of the Aix Group, we strongly think that a peace agreement, which brings with it an end to occupation, will reduce the Palestinian suffering significantly. It will reduce the daily suffering of life under occupation, but it will also reduce the long run suffering, as it will enable the Palestinian economy to grow and increase income levels in the future. But the strong connection between the occupation and Palestinian suffering raises a very difficult question, which is whether we can reduce the suffering even under the occupation. In other words, what can be done to reduce Palestinian suffering in the meanwhile, especially in the area of Economics, before the occupation ends?


This is not an academic question. There have been a lot of talk about improving the economic situation for the Palestinians. Israeli politicians even talked about ‘Economic Peace,’ meaning that in lack of a political agreement, they can at least improve the economic conditions of the Palestinians in order to reduce their suffering and as a result reduce their motivation to revolt against the occupation. Another example for such thinking has been the ‘Kerry Economic Plan,’ which accompanied the failed attempt to renew the peace talks in 2014. The intention of this plan was not to accompany the future peace agreement, but rather to improve the current conditions of Palestinians in the present, in order to help them move ahead toward a peace agreement. Another example for such thinking is the concept of ‘confidence building measures,’ or steps. These ideas surface once in a while, especially in periods of stalemate in the peace process, and they usually promote short-run measures like removal of barriers to mobility, some improvements in trade, some temporary halt to settlement building, etc.


The history of recent decades shows that such short-run plans or measures, which intend to have an immediate effect in improving the standards of living of Palestinians, fail miserably. Sometimes the Israeli government only declares on such moves, but does not implement them in reality. Sometimes implementation begins, but stops shortly afterwards, when bursts of violence lead to retreat from the measures taken. For example, the Netanyahu government from 2009 declared that it will reduce the number of roadblocks and checkpoints, to enable improvement of the Palestinian economic conditions, but a careful examination of the data shows that this did not happen. Barriers moved from one region of the West Bank to another, but their overall number did not change, as shown in our paper on Palestinian development. The Kerry Economic Plan did not even start. In this message we claim that there is a deep reason why these attempts for short run improvements have failed, and that is because they did not fit progress toward the long-run political solution of the two states. We claim that as long as the short run measures contradict progress toward the long run Two-States solution, they cannot function, they cannot change the short run situation, and instead of building confidence, they fail, increase despair and reduce confidence between the two sides even more.


There are a number of explanations to this claim on the need to align the short run improvements with progress toward the long run solution. The first reason is purely economic. One of the main reasons for the lack of economic growth in Palestine are the grim expectations for the future, which deter investors from putting their money in what they view as very risky investments. Our study on Palestinian development shows that as a result, investment and capital accumulation in Palestine are very low and there is actually no capital deepening in the occupied territories. This means that the capital labor ratio does not grow, but remains at past levels. Any economic improvement at the present, which does not signal to investors that the future may be different and more positive for the Palestinians, cannot boost investment in Palestinian projects. This is due to the theory of Rational Expectations. This theory, which developed in the 1970s by Robert E. Lucas and other important economists, claims that the public forms its expectations about the future based on all the available information and not just on the immediate present.As a result, these expectations are very accurateHence, if investors see some economic improvements in the present, but understand that they do not harbor political progress in the future, they will deduce that there is no decline in future risk and as a result, they will still avoid investing their money in Palestine. Furthermore, many times the Israeli authorities try to improve short run Palestinian conditions as a way to avoid progress in negotiation on the long run solution, as some of the examples above show. In that case, the effect of rational expectations is amplified. The attempt to improve short run conditions sends a strong signal that chances for a long run solution become smaller and thus the prospects for future economic well-being should decline. Such negative expectations reduce investment even further and that hurts the Palestinian economy even more. Hence, the attempt to bootstrap the Palestinian economy is destined to fail.


The second explanation for our claim is a combination of politics and security. Actually, most of the economic restrictions and hardships thatthe Palestiniansfaceare relatedto security. Such are the roadblocks and checkpoints of various types, such are the denied access to roads used by settlers, such are the restrictions to import certain investment goods due to possibility of ‘dual use,’ the limitations on labor of Palestinians in Israel and many other measures that the Israeli authorities impose due to security considerations. Even if some may claim that many of these measures use security only as a pretext and they actually serve other goals, like improving the situation of the settlers, security still plays an important role in these measures. As a result, policies that aim at improving the present economic state of Palestinians involve lifting some security restrictions. Lifting roadblocks, increasing quotas of Palestinian workers, etc. are standard examples for such measures. The problem with such measures is that despite the fact that they can improve conditions in the short run, they leave the basic political situation in bad shape. As a result, the despair, lack of hope and frustration among Palestinians do not disappear, but keep boiling and at some point lead people to activities against the situation, to rebel against it. The resulting bursts of violence cause harshening of the security measures by Israel and that reverses the few positive measures that came before and worsens the economic situation even more. An interesting example is the recent wave of violence in East Jerusalem. Many Palestinians from the East part of the city work in the West to earn higher incomes. At the same time, the political situation in East Jerusalem is deteriorating, due to the continuous pressures by settlers and by their supporters in the government, in Silwan, in Sheikh Jarrah, in Haram Esh-Sharif and other places. This leads Palestinians to resistance, mainly by the very young ones. Butthis resistance affects all Palestinians of all ages, because it leads Israel to increase its security measures in East Jerusalem, which increases the costs of mobility between the two parts of the city, whichalso reduces labor in the west. Thus, economic measures intended to improve the life of Palestinians never operate for a long time, if they are not joined by moves to improve the political situation, namely to lift the burden caused by the occupation.As a result, such measures do not build confidence but rather destroy iton both sides. The Israelis feel that the measures they took did not pay back and the Palestinians feel that the change was fictitious and not real.


An interesting example for economic measures that fail because they do not fit the long term goal of the Two-State-Solution is the Paris Protocol, which is the economic agreement that accompanies the Oslo interim agreement. This agreement defines the whole area of Israel and the occupied Palestinian Territory as one ‘customs envelope’ and does not grant any independence to the Palestinians to run their own economic policies.The design of the protocol reflected mainly the previous concept of occupation instead of the need to build the seeds for future Palestinian independence. As a result, it began to hurt the Palestinians very soon and to derail their economic situation, as analyzed recently by the Aix Group. The main problem is that the Paris Protocol does not enable the Palestinians to import cheaper lower quality goods from the near Arab countries. As a result, they suffer from very high cost of living relative to their income. If such a policy could be justified in the past as a way to block such goods from reaching Israeli markets, this justification does not hold any longer. Today there is a serious wall between Israel and the Palestinian areas with very few border passes. Goods cannot travel any longer between the two areas without control, as used to be in the past. Hence, economic measures that did not fit the future goal of Palestinian independence hurt the Palestinians and have reduced their standards of living already at the present.


This analysis leads us to the conclusion, that the only measures that can really have positive economic effects at the present are steps, which are in tandem with the final two state solution, as implied by our concept of ‘reverse engineering.’ Only measures that send a strong signal of a shift toward the final status agreement can be effective in the short run as well. We list here a number of such steps, which we discussed in detail in our studies:


  1. Israel and Palestine should move from the Paris Protocol to another economic regime in the West Bank and Gaza, as described in the Economic Road Map (2003).This should be a free trade regime, which enables the Palestinians to form their economic policies in greater independence within their territory, including an independent trade regime between them and other countries. While the Paris Protocol reflects the spirit of the occupation, increasing Palestinian economic independence points at the future relationship between two states.
  2. Israel has committed itself in the Oslo Agreements to withdraw gradually from most of Area C in three separate redeployments until 1997. It never implemented this commitment. Beginning such redeployments now should be a significant confidence-building step, which also brings significant economic gains to the Palestinians.
  3. For the Palestinians, the Jordan Valley is the main area for developing their future agriculture. It is their main land reservoir and it fits very well extensive agriculture. Currently, Palestinians have almost no access to this area, except around Jericho, and the few farmers scattered in the Jordan Valley suffer from continuous harassment. If Israel will enable the Palestinians to build large agricultural projects in the Jordan Valley, it will improve the current economic situation, but also signal a change toward a political settlement.
  4. Israel should start planning and building the territorial link between Gaza and the West Bank. According to calculations made by the Aix Group, implementing such a project should take at least 10 years, due to the need to confiscate large areas of land from many current owners and due to the size of the project. Furthermore, there is no dispute between the sides on the location of the link, as both agree that Israel should determine the location and as it is the interest of both sides that the location should be as short as possible. Hence, there is no point in waiting for the final agreement to start building the territorial link and it should start immediately.
  5. Israel has developed in the recent two decades a significant system of water desalination and does not suffer from water shortages any more, while the Palestinians still suffer significant water shortages. Israel can stop using the mountain water aquifer and enable the West Bank to increase its water consumption significantly.
  6. Israel should remove the siege on Gaza. We have discussed this issue as well in the recent book of the Aix Group. The siege policy failed to stop violence from Gaza and Israel should seriously consider other ways to grant security to its southern citizens. One possibility is to ensure better life conditions for the population in Gaza. In this respect, the Palestinians can also contribute by making greater efforts to bridge the sharp political split between the West Bank and Gaza. This will have many results, including presentation of a stronger and more unified partner at the negotiation table. This can increase the willingness of Israelis to give peace a chance.



We can generalize the message we present above as a claim that the common view of economics and politics as substitutes is deeply flawed. If political progress is blocked, you cannot resort to economics to compensate for it. If the economic situation is deteriorating, it is not due to economic reasons alone. The right way to think about the two channels, the political and the economic, is as complements that must go together. Only steps that support the future goal of national independence to the Palestinians can support the economy in the short run as well. The reason is that only such measures will help to induce finance to flow to investments in Palestine and only such measures will reduce the tensions between the two sides and thus avoid renewed bloodshed every now and then.



References from research by the Aix Group:The Economic Road Map (2003); Economic Dimensions of a Two State Solution between Israel and Palestine, volumes I (2007) and II (2010).The paper on Reconstruction of Gaza in Economics and Politics in the Israeli Palestinian Conflict (2015),Twenty Years after Oslo and the Paris Protocol, Palestinian Economic Development, Palestine-Israel Relations: Alternative Visions to the Future, The Role of Economics in the Israeli Palestinian Conflict, all from Economics and Politics in the Israeli Palestinian Conflict (2015).

Can We Improve the Situation in the Short-Run Without Harming the Two-State-Solution?