Argument

An expert's point of view on a current event.

‘Economic Peace’ With Israel Won’t Help Palestinians

Market integration only entrenches dependence on Israel.

By , an assistant professor of economics at Trinity College in Hartford, Connecticut.
Palestinian workers cross into Israel to reach their jobs at Tarkumiya checkpoint near Kiryat Gat, Israel, on Nov. 14, 2019.
Palestinian workers cross into Israel to reach their jobs at Tarkumiya checkpoint near Kiryat Gat, Israel, on Nov. 14, 2019. HAZEM BADER/AFP via Getty Images

Last month, Gaza once again faced the full brunt of the Israeli war machine, which killed hundreds of Palestinians and injured thousands. The international community is responding, as it has in the past, by organizing a humanitarian mission for aid and reconstruction in the besieged Palestinian enclave. Although a humanitarian response is sorely needed in Gaza, failing to also address the political and economic realities Palestinians face will only entrench the untenable status quo of Israeli occupation and likely lead to further violence.

But doing so by promoting unconstrained economic relations between Israel and Palestine—as has become fashionable in Western capitals of late—is not the answer. Such an approach would only deepen the Palestinian economy’s dependency on Israel’s labor and goods markets. Rather than reinforcing the status quo, international players should work to build an independent Palestinian economy while pressuring Israel to end its occupation of the West Bank and East Jerusalem as well as its devastating siege on Gaza.

Economic peace plans for Israel and Palestine are everywhere—from the 2013 Kerry Plan to the 2019 Kushner Plan to reports from institutions like the World Bank and the International Monetary Fund calling for unhindered economic ties between the Palestinian and Israeli private sectors. These proposals fall under the “economic peace” umbrella, a flawed theory that assumes there is an economic solution to a political problem. In other words, there is a pervasive belief among so-called “experts” that economic incentives will keep Palestinians from demanding their right to self-determination.

Last month, Gaza once again faced the full brunt of the Israeli war machine, which killed hundreds of Palestinians and injured thousands. The international community is responding, as it has in the past, by organizing a humanitarian mission for aid and reconstruction in the besieged Palestinian enclave. Although a humanitarian response is sorely needed in Gaza, failing to also address the political and economic realities Palestinians face will only entrench the untenable status quo of Israeli occupation and likely lead to further violence.

But doing so by promoting unconstrained economic relations between Israel and Palestine—as has become fashionable in Western capitals of late—is not the answer. Such an approach would only deepen the Palestinian economy’s dependency on Israel’s labor and goods markets. Rather than reinforcing the status quo, international players should work to build an independent Palestinian economy while pressuring Israel to end its occupation of the West Bank and East Jerusalem as well as its devastating siege on Gaza.

Economic peace plans for Israel and Palestine are everywhere—from the 2013 Kerry Plan to the 2019 Kushner Plan to reports from institutions like the World Bank and the International Monetary Fund calling for unhindered economic ties between the Palestinian and Israeli private sectors. These proposals fall under the “economic peace” umbrella, a flawed theory that assumes there is an economic solution to a political problem. In other words, there is a pervasive belief among so-called “experts” that economic incentives will keep Palestinians from demanding their right to self-determination.

The rhetoric of foreign diplomats is that the Israeli-Palestinian political conflict—that is, Israel’s occupation of the Palestinian territories—is hindering stronger economic ties between the two sides. If conflict suddenly disappeared, they argue, there should be full economic cooperation and open borders. In particular, the assumption is if two economies are in proximity and have open economic relations, there will be positive spillover effects in favor of the small economy (in this case, the Palestinian one) including, but not limited to, the transfer of technology and know-how. As a result, the two economies should start to converge.

This framework falsely assumes economic and political parity between Palestine and Israel, overlooking their grossly asymmetric power relationship. Indeed, the last 50 years have not brought convergence between Palestine and Israel. In terms of GDP per capita, the Israeli economy was twofold that of the Palestinian economy in 1967, when Israel captured the West Bank and Gaza; today, it is more than 11 times as much.

Moreover, the geographic proximity between Israel and Palestine has led to one of the worst versions of economic dependency imaginable. For decades, the Palestinian economy has been locked in a cycle of underdevelopment. It has been unable to develop a strong productive base in manufacturing or agriculture, its trade deficit has skyrocketed, and it has remained dependent on Israel’s labor and goods markets.

Between 15 and 40 percent of the total Palestinian labor force worked in Israel at some point in the last 50 years and even more worked for the Israeli economy via subcontracting in the occupied Palestinian territories. Furthermore, 70 to 80 percent of all goods imported and exported by Palestine were traded with the Israeli economy over the same time period.

In turn, the Israeli economy has made use of Palestinian labor to ensure low costs of production while opening Palestinian markets to its goods. Little has changed since the establishment of the Palestinian National Authority in 1994 through the Oslo peace process. Instead, new dependencies have risen from international aid and private debt.


These dependency dynamics do not merely suffocate the Palestinian labor and goods markets; they have structurally distorted Palestinian economic sectors. Open, unconstrained economic relations have led to the demise of productive sectors like manufacturing and agriculture and the rise of occupation-circumventing services. Such services, which include internal trade with Israel, attempt to evade Israeli restrictions on natural resources and cross-border travel, ultimately anchoring the Palestinian economy to the fluctuations of the Israeli business cycle and to the inclinations of Israeli decision-makers.

In a recent policy brief with Al-Shabaka: The Palestinian Policy Network, I explored the ascendance of trade services in the Palestinian economy as a microcosm of these structural distortions. Available data shows trade services are monopolizing the Palestinian economy today. In the last 15 years alone, trade services doubled to more than 22 percent of the total Palestinian GDP while, on average, both manufacturing and agriculture remained stagnant at roughly 10 percent each. Palestine’s main trading partner is Israel, which accounted for an overwhelming 60 percent of Palestine’s overall trade volume in 2019. Turkey (9 percent), China (6 percent), and Jordan (5 percent) followed.

Manufacturing and agriculture are both labor intensive and could decrease dependency on Israel.

According to the Palestinian Central Bureau of Statistics’ 2017 establishment census, 81,260 economic establishments were operating in trade in 2017. That figure accounts for a whopping 51 percent of all establishments within the Palestinian economy. The majority of what falls under this sector is wholesale and retail trade, and the three most prevalent subsectors were retail in “non-specialized stores with food, beverages or tobacco predominating”—that is, convenience stores, followed by retail shops in food and clothing.

Furthermore, data from the Palestinian Central Bureau of Statistics’ national accounts shows the contribution of trade to Palestine’s value added was 40 percent of the private sector’s GDP in the same year, by far the largest sector in that regard. As for employment, on average, trade employed 37 percent of all private sector workers covered in the census, which is by far the highest out of all economic sectors. Trade has also been the largest economic sector granted credit facilities and loans in the last 15 years, comprising between 20 and 25 percent of total private sector credit.

These trade services have replaced productive sectors. This is relevant for development because manufacturing and agriculture are both labor intensive and could decrease dependency on Israel. Manufacturing is associated with higher wages than trade services, and agriculture plays an important role in the steadfastness of an economy. In contrast, trade is both an outcome of and accelerates economic dependency on Israel.

Finally, the trade sector underrepresents women in the labor force and has one of the lowest wage shares compared to other economic sectors. In other words, it contributes to economic inequality, given that more value added is channeled to owners rather than workers compared to other sectors.


If the international community continues to overlook the economic consequences of Israel’s occupation, the political status quo will remain. This will make it harder to imagine any viable political solution to the Israeli-Palestinian conflict or a future with a sustainable and independent Palestinian economy. For the Palestinian people, it means millions of Palestinians will continue to endure dire socioeconomic conditions coupled with an oppressive military occupation that controls their everyday lives.

Some groups are at least admitting to this reality. In 2010, while working at the Palestine Economic Policy Research Institute, the World Bank invited our organization to a workshop on the results of its independent evaluation group in the West Bank and Gaza. In a presentation covering 10 years of intervention, the group deduced that the effectiveness of international aid was “heavily dependent on the Israeli-Palestinian political framework.” The workshop also concluded the World Bank needed to “rethink its mandate, role, and scope of activities in the West Bank and Gaza.”

These findings should not come as a surprise for the international missions working in Palestine. Indeed, the limitations of international interventions have recently contributed to a larger debate about the need for a “Triple Nexus” approach, one that suggests a stronger connection between humanitarian, development, and political (or “peace”) actors and objectives.

The international community must stop choosing the path of least resistance. In the short run, it should direct aid to support Palestinian farmers in areas that are facing the threat of annexation, including areas where illegal Israeli settlements and the separation wall are built as well as the so-called “buffer zone” in the Gaza Strip. They should also support Palestinian manufacturers by pressuring Israel to facilitate licenses in Area C—the portion of the West Bank fully administered by Israel, which accounts for about 60 percent of the occupied Palestinian territory—including building permits for residential and business structures. Such policies would support the Palestinian economy’s independence by increasing its ability to absorb a currently unsustainable level of unemployed workers and help alleviate current dire socioeconomic conditions.

South Africa’s experience is a reminder of the dangers of ignoring a country’s underlying economic structure when undoing an oppressive political reality. Although South Africa rid itself of political apartheid in the 1990s, it left the economic status quo mostly untouched—resulting in economic apartheid, whereby a minority of mostly white South Africans still own roughly 90 percent of the country’s wealth.

Policymakers should heed that lesson. The underlying economic dynamic in Palestine is of extreme, one-way economic dependency on Israel. Hiding behind debunked notions of market fundamentalism to promote unchecked economic cooperation between the two economies will only entrench this dependency while stifling development.

Ibrahim Shikaki is an assistant professor of economics at Trinity College in Hartford, Connecticut, and a policy analyst at Al-Shabaka: The Palestinian Policy Network.

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