Among the several reasons motivating the outbreak of the Intifada during the declining days of 1987, socio-economic factors occupied a prominent place. During that period, the Palestinian Authority as a formal governing entity did not yet exist. Furthermore, the Palestinian population’s economic dependence on Israel was almost absolute. With the signing of the Oslo Agreements and the establishment of the Palestinian Authority, the scope of the Palestinian economy could be delineated more accurately. The degree of damage brought on by these and other events could then be estimated. It soon became clear that the Israeli economy would likewise suffer negative impacts from such disruptions. The consequences of those events leads us to the necessary conclusion that if the planned separation between the two economies is implemented, the economic damages to both economies will snowball.

Prior to the signing of the Oslo Agreements, GDP per capita in the West Bank and the Gaza Strip was estimated at about U$2,500; as a result of the border closing effective since 1993, GDP per capita fell to about U$1,700, while unemployment rose to more than 30%. This trend has since been dramatically reversed, especially in 1999 and the first half of 2000. The rate of unemployment has fallen to 11%, and GDP has risen by 7%, accompanied by a growth in exports to Israel and other markets, as well as an increase in foreign investment.

Recent events have halted these positive developments, with negative impacts sustained in a number of areas:

1. Internal impacts: Assuming that estimated total GDP for the West Bank and Gaza is valued at U$5 billion, the losses incurred by the pause in economic activity are an estimated U$8 million for the three-week period between 30 September and 20 October 2000.
2. External impacts: The employment of Palestinian workers in Israel has ceased as a result of the border closing. The value of wages lost for the same three-week period is estimated to be about U$38 million.
3. Balance of trade: The value of Palestinian exports to Israel is estimated to be U$45 million monthly. Following the interruptions to trade, the loss of income from exports in this market is estimated to be about U$2 million per working day. The flow of imports from Israel, valued at U$136 million monthly, has also been disrupted. The value of losses to Israel is estimated at about U$6 million per working day.
4. Miscellaneous economic effects: The value of the damages to property and infrastructure is considerable and yet to be estimated.

To conclude, the combined losses resulting from the recent violence are estimated to be U$186 million (about U$10 million per working day) or 4% of GDP per annum. This estimate represents the effects of frozen commercial, production, and service delivery activities during the three-week period 30 September to 20 October 2000.

Israel’s National Bureau of Statistics has estimated that Israel’s annual rate of economic growth, ignoring the latest events in the West Bank and Gaza, will reach the rate of 5.8% in 2000. This rate is considerably higher than the rate of growth in GDP witnessed during the past two years (2.2% during both 1989 and 1999). GDP per capita was expected to rise by 3.2%, to a level of U$17,500 per annum. In contrast to the growth that characterised the early 1990s, which was based on rising demand stimulated by the waves of immigration from the former USSR, current growth rests on a substantially different source, exports, primarily in the hi-tech industry. These exports are expected to increase by 19.9% by the close of 2000.

If the unrest continues, Israel’s economy will be effected in several areas. Long-term border closings will harm construction, which recently began to absorb Palestinian workers once more; tourism is expected to decline by 15%-20% in 2001; exports to the Palestinian Authority, which represent about 5% of Israel’s total exports, will also decline. Two more comprehensive effects will be the pessimism that, once it pervades Israeli households, will reduce demand for non-basic goods should as internal tourism, entertainment, and even clothing. In addition, foreign as well as local investment is expected to decline as uncertainty regarding the future intensifies. We should repeat, however, that the source of present growth lies in exports, particularly hi-tech. This industry is less responsive to relations with the Palestinian Authority than it is to factors such as the state of local infrastructure and communications networks, the general level of market stability (which has not significantly changed), and factors influencing global trends, such as the US stock market. Hence, if the violence continues, it appears that growth for 2000 will decline by approximately 0.5% to 1% of GDP. In addition, we can expect that some measures may be adopted with respect to relations with the Palestinian Authority that will influence Israel’s economic ties with its trading partners, at least in the mid term.

1. Total separation: This option involves the establishment of hermetic borders between the two entities, including the limitation of the movement of labour and goods by means of quotas and other measures. In such a case, we can expect Palestinian income to decline by tens of percent per capita, unemployment to grow considerably, and income from taxation flowing to Palestinian Authority coffers to decline significantly. On its part, Israel will be forced to raise the number of wage earners from foreign countries, exclusive of Palestinians, permitted to enter the labour market. Israel’s dwindling export surplus to the West Bank and Gaza will also induce some decline in its GDP.

2. Maintaining the status quo with some modifications: Prospects exist for the region to enter into a drawn-out interim period until the tension subsides and an agreement defining the region’s future is signed. In such a case, present relationships can be sustained with the addition of procedural modifications affecting areas such the reimbursement of taxes paid on imports to the Palestinian Authority passing through Israel, or trade in agricultural goods.

Adoption of this option would anchor determination of the future character of economic relations between the two entities within the framework of a political solution. Of the two policies, this option is most likely to minimise the economic damages that would intensify following total separation of the two economies.