The Palestinian Economy. Theoretical and Practical Challenges

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Olivera
provisions – in particular those regarding movement and access of goods and labour – are
legally vague and subject to the interpretation of the Israeli Government.
Looking at trade issues, Palestine appears as a province of Israel, however goods’
movements are not free and markets are not perfectly integrated due to Israeli restrictions.
Palestine does not have a complete economic sovereignty and the commercial
asymmetries between the two countries are very large. Palestinians depend greatly on
Israel for trade flows. Imports from Israel accounted for 73% of total Palestinian imports
in 2003, while Israeli imports from Palestine accounted for only 0.8% of their total
imports in 2004. Besides, because of Israel’s control of all access routes to Palestine,
Palestinian trade with third countries depends thoroughly on Israel.
As regards currency issues, the Palestinian Monetary Authority (PMA), although in
charge of regulating domestic financial institutions, cannot run an independent monetary
policy due to the lack of a Palestinian currency, so there is also a de facto monetary
union. The Protocol recognized that the New Israeli Shekel (NIS) was to be “one of the
circulating currencies in the Areas, and legally serve as means of payment for all
purposes including official transactions”. Such sanctioned use of the NIS as a means of
exchange in the Territory results in a lack of a Palestinian national currency, giving rise to
the so-called “currency issue”. Thus, Palestine suffers a sizeable loss of seignorage
revenue. Moreover, this currency issue seriously constrains the functions of the PMA and
prevents any possibility of exchange rate policies.
As well as the trade and currency issues, the Palestinian dependence on the Israeli
economy is present in all major economic areas, from fiscal issues to the dependence on
Israeli labour markets.
As regards the workforce, labour flows from Palestine to Israel have been one of the
main sources of growth in the Palestinian economy, and these flows have also been
highly variable depending on the security situation and the decisions of the Government
of Israel, with a consequent sharp reduction after the beginning of the Second Intifada.
The percentage of Palestinian employees working in Israel fell from an average of 16% in
1994-99 to 7% in 2003-2005. By 2007 a man in the West Bank only had a 77% chance of
being employed compared to 1999. Based on the level determined by the share of
“Israeli” employment in total WBG employment in 1999-2000, the World Bank
calculates that the number of Palestinian workers in Israel in 2005 could have been