Keeping A Grip on the Palestinian Economy

By Joost R. Hiltermann

VISUAL IMAGES OF the uprising in the occupied territories usually stress the daily demonstrations and the role of young, discontented Palestinians in pushing the Arab-Israeli conflict back to the top of the international agenda. Such confrontations may capture the cameras, but the media's focus on the struggle in the streets overlooks a significant development: The Palestinians are gradually withdrawing from the complex economic relationship that has tied them to Israeli society.

In so doing, the Palestinians of the West Bank and Gaza are reversing 20 years of economic colonization and laying the cornerstones for autonomous projects and institutions that could emerge in the years to come.

Neglected under Jordanian and Egyptian rule, the economies of the territories were completely integrated with Israel proper during the 20 years of military occupation that followed the 1967 war. This was a result of both explicit Israeli policy and the free play of market forces.

The most prominent advocate of the integration process was Moshe Dayan, the Israeli Minister of Defense in 1967. Dayan wanted to solve the territorial question by eliminating economic barriers, which he hoped would eventually erase the geographic, national boundaries as well. The main features of his policy included the free flow of workers from the territories to jobs in Israel, while giving Israeli producers free access to markets in the territories.

Until the current protests, the system was a huge success--from the Israeli point of view. During the 1970s, land confiscations and growing market restrictions on West Bank production drove increasing numbers of Palestinians to seek work in Israel.

Official Israeli statistics show the number of Palestinian workers from the territories has increased steadily, from 20,000 in 1970 to about 90,000 last year. But according to Palestinian trade unionists, even those totals are severely understated. The best estimate is that at least 120,000 workers from the territories are employed in Israel, a figure which may easily rise to 150,000 during the harvest season.

Based on these estimates, Palestinians from the occupied lands now account for more than one-tenth of the Israeli work force, concentrated mostly in the unskilled or semi-skilled trades.

To facilitate the flow of workers, the Israelis have set up a number of labor exchanges in the territories. These are aimed less at finding jobs for unemployed Palestinians than they are at satisfying the demand for inexpensive labor for Israeli entrepreneurs. The exchanges only handle about one-third of the Palestinian workers employed in Israel, but are an important tool in institutionalizing Israeli control over the labor market.

For Israeli entrepreneurs, Palestinian workers constitute an important reserve of cheap labor. They are not protected by the Histadrut, the giant Israeli trade federation, and the Palestinians' own unions, which have no jurisdiction in Israel, face repression from military authorities in the territories. (See story, page 31)

The Hidden Surplus
The Palestinians have been a boon to the Israeli economy in more ways than one: Most of the taxes deducted from their paychecks are not returned to them either in cash benefits or in public services. This has vastly enriched the Israeli Treasury.

Attempts to force the Israeli government to reveal the size of this surplus have failed so far, although estimates run into the hundreds of millions. Exactly where this money goes also is not clear. When asked, Israeli officials give conflicting answers.

Officially, the government claims the money is spent on unspecified "development projects" in the territories. An official in the Israeli labor ministry, however, says the funds are being held in a separate account "until peace comes." Treasury officials say the money simply is added to the government's general revenue account.

The overall effect of Israeli labor policy in the territories is the emergence of a disenfranchised commuter work force that takes jobs not coveted by Israelis at wages which enable Israeli businesspeople to avoid mechanization, thus keeping afloat inherently inefficient sectors like the textile industry.

Israeli dependence on these workers is minimal in the more advanced sectors, like the defense industries--for which a security clearance is needed--and tremendous in other sectors, like the construction industry, where as many as 80 percent of the workers hail from the territories.

Significant numbers of West Bank and Gaza workers also are employed in agriculture (citrus picking), industry (textiles and fruit packing), municipal services and in the hotel and restaurant business. They have become, as the phrase goes, the "hewers of wood and drawers of water" of Israeli society.

At the same time, the difficulty of obtaining business permits and the general political instability have crippled capital investments by Palestinian entrepreneurs in the territories themselves. Job creation has been minimal, and production has been limited to the manufacturing of textiles on a subcontracting basis with Israeli and foreign firms, and to those goods which do not compete with Israeli products or for which no Israeli counterparts exist.

In 1985, Minister of Defense Yitzhak Rabin bluntly stated that the Israelis would not allow any economic activity in the territories that might undercut the productivity of Israeli producers. In fact, this has been the reality of the past 20 years.

The scarcity of locally produced goods turned the territories into a dumping ground for Israeli consumer products. By the mid-1970s, the West Bank and Gaza had become the second-largest market for Israeli products, after the United States and before Great Britain.

Sales to the territories now exceed $1 billion, according to trade officials, allowing Israel to achieve a trade surplus with the West Bank and Gaza that topped $500 million in 1986. This has helped counteract Israel's giant trade deficit with the rest of the world.

To some extent, Israeli entrepreneurs also have been able to circumvent the Arab boycott by changing the labels on their products and passing them through the West Bank and across the open bridges with Jordan, where they can be re-exported to the Arab countries. (See MM Levi's in Arabia, November, 1986)

Other features of the integration process include the hook-up of the Palestinian electricity grid to the Israeli system, Israeli control over the territories' vital water resources, and the expansion of an east-west network of roads linking all areas of the West Bank to the main urban centers in Israel.

In effect, a "common market" has come into place during the 20 years of occupation, but in this arrangement Palestinians pick few of the fruits and carry most of the burdens. In addition to their direct economic exploitation, they face high taxes, including a value-added--or sales--tax which was imposed illegally in the late 1970s.

With elections in the territories banned by the military authorities since 1976 and Palestinians excluded from decision- making levels in the planning department of the Israeli military administration, Palestinians in the territories have had no control over the budgets for those areas.

Given the generally poor condition of public services such as health care, education and social benefits, there is a common perception among Palestinians that their tax dollars are being used to subsidize their own occupation.

The Master Plan
The economic domination of the territories, coupled with the growing number of Israeli settlements and the political segregation of the Palestinians, amounts to a well-laid plan for annexing the West Bank and Gaza--without formally declaring Israeli sovereignty over them.

This is the often-ignored backdrop to the uprising that began last December. It also explains the call by Palestinian leaders for an economic disengagement from Israel.

Pamphlets distributed by the United National Leadership of the Uprising have called on the Palestinians to take a number of steps to disengage themselves economically from Israel. These include:

  • Boycotting Israeli products for which there are Palestinian counterparts;
  • Non-payment of taxes, especially the value-added tax;
  • Increasing the production of Palestinian goods; and
  • Boycotting jobs in Israel on general strike days.

In Statement No. 10, issued on March 10, for example, the United Leadership ordered all merchants "not to deal with Israeli products or foreign products for which a local alternative can be found."

The statement also issued a call for economic cooperation to ease the hardships of such actions: "We call on all sectors to reduce their prices to the masses--the merchants, the factories, the doctors, the pharmacies, the pharmaceutical companies and the lawyers. This is the time for full solidarity between all the different sectors of our population."

At present it is still not clear to what extent the boycott of Israel is being enforced, nor what impact it has had on the Israeli economy. In early March, the Jerusalem Post reported that sales by Israeli food processors had dropped by 2 to 5 percent. More recently, the Palestinian paper Al-Fajr reported that some Israeli factories were on the verge of shutting down.

On the other hand, according to Al-Fajr, the campaign to "buy Palestinian" is helping cushion the blow to manufacturers in the territories who have been damaged by the disruptions or by the economic punishments--such as cutting off gasoline shipments-- meted out by Israeli authorities. A drug manufacturer in Ramallah, for example, told the paper his loss in sales over the past few months probably would have been twice what it has been without the economic campaign.

Considering the total compliance of the Palestinian people with other directives issued by the United Leadership, it is likely that the economic measures, too, will be carried out over the long run, despite the sacrifices they require.

The People United
There are several obvious signs of popular discipline. All the Palestinian tax collectors in the Gaza Strip--as well as the civil servants employed in the tax department of the Israeli administration in Gaza--resigned in February, making further tax collection impossible. Merchants have started submitting copies of their accounts to the Israeli authorities to underline their refusal to pay the sales tax.

In any case, tax revenues in Gaza have been drastically reduced due to the extended commercial strike and the resulting loss of income. Similar developments have been reported on the West Bank.

The boycott of Israeli products also seems to be tightening. Palestinian checks to Israeli wholesalers began bouncing in January, triggering an announcement by the Bank of Israel that it would refrain from declaring those shopkeepers bankrupt because of the wide-ranging ramifications such a move might have for the Israeli economy.

To an increasing extent, workers have been staying home on general strike days, and even on other days work attendance has been reduced by transportation difficulties and Army-imposed curfews in the villages and refugee camps. On March 1, the Jerusalem Post reported that 58 percent of Palestinian workers employed in Israel were absent from their jobs at the end of February.

The Israeli authorities have not taken the measures announced by the Palestinian leadership lightly. In recent weeks the Israelis have cut the supply of fuel--including kerosene for heating--to the territories; they have closed Palestinian markets, cut telephone lines to the territories and tried to break the commercial strike by force. The military administration also has placed restrictions on the amount of money individuals can bring into the territories from abroad.

Additional measures, such as cutting off water and electricity-- something that already has happened in a number of refugee camps--are reportedly under consideration.

The overall outcome of the economic struggle is still in doubt. Israeli entrepreneurs have called on the government to open the country to replacement workers from Turkey, Portugal and Spain, but officials have resisted such a move, fearing it would only add to the unrest in the territories.

If guest workers eventually are allowed into the country, however, Israeli employers will have to get used to paying considerably higher wages than they have in the past, an Israeli trade official conceded.

Although the Israelis argue they can overcome this inflationary threat with automation and higher productivity, it is not clear where they will get the needed capital. Direct investment in Israel has been largely stagnant for the past several years. (See story, page 22) So far, the immediate reaction of Palestinians has been to regard whatever the authorities do as doomed to failure. As one shopkeeper said, Palestinians need very little to survive and can therefore hold out for a long time.

"I don't need money," he said. "Only enough to buy some bread for my family. Just some bread. No more."

Joost R. Hilterman, a graduate student in economics at the University of California, Santa Cruz, has spent the last three years living on the West Bank.