Last updated on: 6/26/2008 12:18:00 PM PST

What Impact Did the 1994 Paris Protocol Have on the Economy of the Palestinian Territories?

General Reference (not clearly pro or con)
The World Bank, in a July 1, 2002 West Bank and Gaza sector report titled "Long-term Policy Options for the Palestinian Economy" wrote:

"Despite high expectations for economic normalization and growth following the peace accord and Paris Protocol, economic performance was modest at best, and suffered periods of sharp decline....

[L]oopholes in the trade rules for customs crossing procedures and inadequate dispute settlement mechanisms enabled Israel's politically-motivated closure policy to circumvent the agreed economic objectives of cooperation and Palestinian development. Arguments that the protocol was destined to fail are based on continued Palestinian dependency and vulnerability doomed to generate poor growth outcomes due to low value-added activities and a lack of technology transfer, or simply the fact that the Paris Protocol represented a temporary agreement falling mid-way between sovereignty and full partnership, but with no Palestinian recourse to address shortcomings. In this sense, the protocol was an unenforceable and incomplete contract that worked to Israel’s advantage.

The Paris Protocol aimed to correct some of the observed development disparities, especially on the trade and income side, by improving the environment for private investment and growth in WBG [West Bank and Gaza] through eliminating Israeli trade barriers on Palestinian agricultural products, removing restrictions on economic activities, reducing political and economic uncertainty by phasing-out military occupation, developing financial institutions, and creating a legal and regulatory framework. The Paris Protocol also led to the revenue-sharing, or clearance, mechanism under which Israel transferred the taxes it collected from trade, purchase and value-added taxes on behalf of the PA [Palestinian Authority], less a 3 percent administrative fee. These measures were accompanied by substantial donor support in terms of infrastructure investment and technical assistance. Nevertheless, the economic integration model failed as incomes diverged between Palestinians and Israelis during the Interim Period."

July 1, 2002 - World Bank 

The Peres Center for Peace, an Israeli NGO founded by Shimon Peres, in a June 2004 policy paper published by the Business and Economics Unit of the Peres Center for Peace titled "Future Economic Relations Between Israel and Palestine" wrote:

"The Benefits of the Paris Protocol

  • The credit worthiness of all countries in the region improved after the Madrid Conference and continued to improve after the Oslo Accord. This improvement stopped after the terror attacks commenced in 2000. The improvement in the credit worthiness of Israel after the Oslo Accord caused a huge change in foreign investments in Israel.
  • The Palestinian economy experienced a large increase in real GDP [Gross Domestic Product] growth immediately after the Oslo Accord. After the terror attacks started, the rate of GDP growth started to decline more and more until it became negative after the events of 2000.
  • An important result from the Paris Protocol was the fact that institution building in the Palestinian areas was commenced. Among the economic institutes established were: The Ministry of Finance with a Treasury and a Budget Department, a Palestinian Monetary Authority and a Central Bureau of Statistics. In addition, monopolistic behavior is lessening, a unified pension system for government employees and security personnel is developing and there is greater transparency and accountability.
  • The Palestinian banking sector enjoyed a high degree of openness and freedom and there were no exchange restrictions. This attracted a lot of Palestinian investors from abroad in the years 1997-1999.
  • The adoption of the Israeli indirect tax system, including the single rate of VAT [Value Added Tax], resulted in a very buoyant and effective collection of indirect taxes for the Palestinian side. However, on the down side, it is possible that the Palestinian Authority did not need such large revenues from tax collection (the Israeli budget has large expenditures on welfare and defense that the Palestinians may not need). In that case, the optimum tax rates for the Palestinians should be lower. Similarly, the Israeli tariff levels in 1995 were quite protective. That type of protection was not consistent with the vision of a Palestinian economy which would be export oriented and completely open, and therefore would need very low protection.

  • The Shortcomings of the Paris Protocol

  • The main disadvantage, from the Palestinian point of view, was the lack of sovereign powers and national symbols allowed in the agreement. For the Israelis, the main complaint regarded the terror attacks that started almost immediately after the agreement. The effects of the declining security were reflected, from the Palestinian side, in a sharp decrease in the number of Palestinians working in Israel, and from the Israeli side in a steep increase in the number of foreign workers working in Israel.
  • The local political developments caused the CU [Custom Union] to become asymmetrical. Security related checkpoints, permits, searches and various impediments on the mobility of labor and goods prevented the Palestinian exporters from having full access to the Israeli market and to foreign markets. Another negative result of the developments and the asymmetry between the sides was the freezing of tax revenues due to the Palestinians.
  • A main friction arose over the tax agreement. While the Palestinians received the indirect taxes, customs and VAT on local production, they did not receive indirect purchase tax on local production. Achieving an agreement on that took six more years.
  • The Joint Economic Committee (JEC) was supposed to be the pillar of the agreement by being summoned every so often to deal with different issues. Unfortunately this important body has practically collapsed and has not convened, as intended, since the outbreak of the Al-Aqsa Intifada. One of the lessons learnt is the importance of creating a mechanism that will allow the JEC to be more than a committee that only meets, yet has no powers to enforce joint decisions."

  • June 2004 - Peres Center for Peace 

    Samir Huleileh, MA, former Cabinet Secretary General and Chief of Staff of the Palestinian Authority government, in an interview published in the Vol.6 No.3 1999 Palestine Israel Journal of Politics, Economics and Culture titled "Restructuring Palestinian-Israeli Economic Relations - An Interview," was quoted saying:

    "I would say that, despite the problems and difficulties we faced in the implementation [of the Paris Protocol], we have achieved certain results that should be mentioned. The first is that a banking system was built, monitored and supervised by the Palestinian side and a Monetary Authority was established. This is an important achievement. Second, as a result of the agreement, import and export activities were established between the Palestinians and the international community, particularly with Jordan and Egypt, leading to the rise of a new class of traders. Close to 1,600 new merchants have started importing and exporting from and to the region and the international community during the last three to four years; this was the first chance the Palestinians had of connecting directly with the world. We have started to have agents, direct representatives which provide better services to the consumer and cheaper prices in most cases. Also regarding agricultural exports to Israel, we now have, at least from the legal point of view, the right to export all our produce to Israel, although we still have problems with the Israeli Ministry of Agriculture and some lobbies here and there, but we have made great strides in that area.

    On the negative side, however, I have to admit that the basic source of revenue to the Palestinian economy, the work force, suffered heavily during the process. The average number of workers in Israel decreased from 120,000-130,000 to a maximum of 35,000-40,000; this was a significant decrease. Also, exports to Israel or through Israel have dropped during the process as a result of the Israeli siege on the territories. Furthermore, although investment opportunities in the Palestinian areas were initially considered highly favorable due to improvements on the political scene, the situation deteriorated dramatically, particularly during the Netanyahu government. So, an increasing number of companies that had registered in the WBGS [West Bank and Gaza Strip] folded and went home, and the results that could have been achieved from the peace process did not materialize.

    The conclusion of the three to four years of the implementation of the Protocol were marked by a reduction in the Palestinian GDP per capita and, of course, by a higher unemployment rate. This said, at the end of the fifth year, we see greater stability in the availability of a job market for the Palestinian work force in Israel and, consequently, an increased revenue reaching the Palestinian areas through its labor force. In 1999, and after five years of the agreement, the average rate of unemployment in Palestine has dropped to around 13-14%, whereas it started with 30-35% in 1993-1994. Here, I must mention that the establishment of a Palestinian public sector, but also the private sector, have been instrumental in this improvement on the employment scene. At any rate, from this point of view there has been some progress, but it is a progress that depends solely on Israel‘s willingness to open its borders to Palestinian workers, to issue more permits not only to workers, but also to traders, industrialists, businesspeople and so on."

    1999 - Samir Huleileh, MA 

    B'Tselem, the Israeli information center for human rights in the Occupied Territories, in an article titled "The Paris Protocol" on its website (accessed July 6, 2007) under the topic of "Restrictions on Movement," wrote:

    "The practical effect of selecting this model [Paris Protocol] was preservation of the economic relations that had existed until then, i.e., a Palestinian economy integrated in and dependent on the Israeli economy....

    Israel collects the import taxes on the goods and transfers to the Palestinian Authority the taxes on goods that were intended for the Occupied Territories. The Protocol further provides that Israel may unilaterally establish and change the taxes imposed on imported goods...

    The Paris Protocol transferred to the Palestinian Authority several powers relating to economic policy, such as the authority to impose direct and indirect taxes, set industrial policy, establish a monetary authority to regulate financial mediation, and employ persons in the public sector. The Protocol also stipulated the gradual cancellation of export restrictions on agricultural produce exported from the Occupied Territories to Israel that had been in effect until then and protected Israeli farmers from competition...

    The customs union agreed upon gave Israel sole control over the external borders and collection of import taxes and V.A.T., thus enabling Israel to delay transfer of taxes that it collected for the Palestinian Authority, or threaten delay in transferring the monies, as a means of pressure or punishment, which indeed occurred in the summer of 1997...

    The necessity of obtaining Israeli approval to conduct trade leads to substantial economic loss to Palestinians whenever Israel imposes a comprehensive closure on the Occupied Territories and cancels all the relevant permits, as was often the case between 1994 and 1997.

    Although the customs union framework was intended to ensure free flow of workers, the Paris Protocol did not expressly prevent Israel from prohibiting workers to enter its territory. During the first four years of the Protocol's implementation, Israel imposed prolonged comprehensive closures on the Occupied Territories, causing a significant drop in income of Palestinians from employment in Israel and a substantial increase in poverty and unemployment."

    July 6, 2007 - B'Tselem