Israel's Economic War in Context


There is a tendency to dehistoricize the Israeli-Palestinian conflict as a clash of personalities, Sharon versus Arafat, or as an intractable tribal and religious struggle. Recently this tendency has been magnified by an exaggerated focus on the military aspect of the conflict, typified by the ritualistic recitation of the latest body count. Since 9/11, saturation media coverage, especially in the United States, has obscured more than it has clarified of the underlying dynamics of the conflict. Lost amidst the rhetoric about terrorism and the infrastructure of terrorism, and in the debate as to whether Sharon or Arafat are capable of leading their respective flocks towards something called peace, is an understanding of the political and especially the economic factors that are shaping this latest phase of the crisis.

Israel has deliberately situated its war against the Palestinians in the context of the US war on global terrorism, with Arafat given the unflattering role of Palestinian bin Laden. This has proven effective at binding together US and Israeli policy even when the close allies appear to have divergent interests for example, in connection with US efforts to strong-arm reluctant client states into serving as an "Arab coalition" to support the overthrow of the Saddam Hussein regime in Iraq. (At the same time, it should be emphasized that Israeli policy and US policy currently share a strategic interest in the unilateral deployment of overwhelming military force against adversaries with little conventional military capability.)

It is important to understand Israel's current military strategy not as something "new" in the context of the war on terrorism, but rather as an intensification, perhaps even a culmination, of a longstanding policy of economic warfare. The consistent goal of this policy has been to extend Israeli control over Palestinian land, resources and population, so as to preclude the development of a viable state with a viable economic base to support the life of its people.

This can best be seen by reviewing briefly the two phases of Israel's recent economic policies towards the Palestinians: direct military occupation, 1967-93, and military occupation within the Oslo process, 1993-2000.

From 1967 to 1993 Israel's military occupation fundamentally restructured the economies of the West Bank and the Gaza Strip through a range of measures that damaged all spheres of Palestinian development: agriculture, industry, trade, income and employment, and general living standards. Israel's economic policy was based on explicit rejection of Palestinian sovereignty, in violation of inter- national law and the right to self-determination. This entailed the suppression of all forms of development and organization in Palestine that might support indigenous political aspirations.

In 1985, Defense Minister (and future Nobel laureate) Yitzhak Rabin bluntly summarized Israel's overall economic policy: "There will be no development in the Occupied Territories initiated by the Israeli government, and no permits given for expanding agriculture or industry which may compete with the State of Israel."1 Given that Israeli permits were required even to sink a family well, let alone undertake a coherent agricultural or industrial policy, this edict meant that there would be no development in Palestine, period.

This was imposed through a legal and administrative system (backed by raw military might) that forced Palestinians to navigate an Israeli bureaucracy structured to stifle all forms of commercial activity. These mechanisms were aimed at:

  • depriving Palestinians of critical factors for economic development, through expropriation of land, water and other resources;
  • impeding infrastructure development in agriculture and industry through restrictive permit systems and quotas on water use and industrial inputs;
  • stifling the economic base through lack of investment, credit and other financing; and
  • most important, re-orienting Palestinian production and labor to serve Israel's economic interests through trade barriers and restricted access to external markets.

As a result, the Palestinian economy was prevented from developing the capacity to sustain local livelihoods. Instead wage earners and their families were made dependent, quite literally, on jobs in the Israeli economy. As noted by an Israeli economist, the policy of sustaining marginal living standards while undermining indigenous economic capacity served the double purpose of pacifying the Palestinian population while deepening structural dependence on Israel:

While a better living standard was meant to diminish nationalist aspirations and contain violence and popular resentment through a policy of economic appeasement,... the weakening of the economic base was meant to create ties of dependence that would protect Israel's economic interests by eliminating any threat of competition with, or cost to, the Israeli economy and give Israel complete control over the territories' productive resources and their economic growth potential.2

To describe the singular impact of Israeli policies on the Palestinian economy, a political economist invented the term "de-development," defining it as "the deliberate, systematic deconstruction of an indigenous economy by a dominant power. De-development is an eco- nomic policy designed to ensure that there will be no economic base, even one that is malformed, to support an independent indigenous existence."3

Israeli policies of economic warfare were highly successful from 1967 to 1993. By the time of the famous handshake between Arafat and Rabin on the White House lawn that inaugurated the Oslo process, the Palestinian economy had almost no independent capacity to generate production or employment without access to Israeli markets and intermediaries. In fact, the Palestinian economy had no positive features that might provide a base for sustainable development, even under an internationally sanctioned peace process:

  • GNP was consistently higher than GDP, indicating that the economy depended on external sources of income, namely Israel, for national income.
  • There was structural unemployment; that is, the domestic economy was unable to absorb the domestic labor force, leading to dependence on jobs in Israel and overseas.
  • Agriculture had a declining share of GDP, industry remained minimal, and services dominated the local economy.
  • The economy suffered from a massive trade imbalance with Israel due to myriad trade restrictions and had no access to outside markets except through Israel.

Under the Oslo process, the PLO rejected its founding mission of working toward the establishment of a democratic state in the entire Palestine Mandate. By accepting a solution based on Security Council resolution 242, the PLO limited its sovereign aspirations to just over 20% of this territory. Moreover, the PLO recognized Israel's right to security within recognized state borders without gaining a corresponding recognition from Israel of its own statehood within secure borders. Palestinian national and human rights were essentially deferred to a "final status" period following an interim period in which Israel was meant to withdraw its occupying forces from Palestinian territory.

From the Palestinian side, it was expected that the deferral of political rights would be justified by more immediate economic benefits at the very least, a marked improvement in basic living standards. Instead the Palestinian economy suffered a dramatic meltdown, with virtually the entire population suffering increased hardship, even within the framework of the economic situation described above.

The basic facts of this debacle can be easily obtained from detailed economic analyses produced by the Office of the United Nations Special Coordinator, the World Bank, and a variety of non-governmental sources. To cite a few examples, per capita GDP declined by almost 20% from 1993 to 1999, edging back up toward the pre-Oslo level just before the start of the second intifada. This was not due to a regional economic crisis. On the contrary, the GDP of neigboring countries like Israel, Egypt, Syria all rose significantly during this period. In addition, the trade imbalance with Israel grew an additional 50% despite a promise of customs union and access to external markets (in the Paris Protocol and other economic agreements of the Oslo period). As might be expected, the economic shrinkage trickled down to the househeld level, with unemployment tripling and the poverty rate more than doubling.

The basic reasons for the economic collapse are not in dispute. The primary factor was Israel's policy of "closure," essentially a military blockade imposed through army checkpoints limiting the movement of Palestinian people and goods, not only between Israel and Palestine, but within areas of the Palestinian territories as well.

These restrictions on movement were supplemented by a fragmentation of Palestinian territorial contiguity and extension of Israeli territorial control. During the period of supposed peace-building, successive Israeli governments vastly accelerated the program of land and water confiscation, doubling the number of Jewish settlers to almost 400,000 while building a grid of "bypass" roads throughout Palestine. The effect was to isolate Palestinian communities from one another while linking the settlements to each other and to Israel proper-all under the protection of the army. As would be expected, the effect was to further weaken and fragment an already unsustainable Palestinian economic base.

For any country and people, these economic policies would constitute a crippling blow. But in the case of Palestine, the blow was magnified by the utter dependence of Palestinian labor on jobs within Israel. In effect, the policies of closure and settlement gave Israel the ability to turn the tap of Palestinian economic activity on or off at will.

Rampant corruption within what came to be known as the Oslo class the group of elites surrounding Arafat who moved from Tunis during the Oslo process added to the economic woes of ordinary Palestinians. Working with Israeli intermediaries, these cronies established monopolies on basic food and construction staples, often doubling and tripling the prices for consumers. The situation was exacerbated by the failure of the new Palestinian Authority to hire qualified local professionals who were most familiar with adminstration of basic services like health and education.

The role of the international community has been equally disturbing. Rather than protest Israeli policies for destroying the fabric of Palestinian society and any chance for a viable peace, bilateral and UN donors ended up subsidizing the closure and occupation through emergency job creation and welfare programs aimed at ameliorating the worst impacts of the economic crisis, while ignoring the root causes.

The implications of Israel's past economic policies for the current crisis are clear. The actual fencing in of Palestinian communities behind physical barriers that we see today is a logical extension of closure. So is the policy of issuing travel permits that imprison Palestinians within discrete zones of the West Bank and Gaza, directly reminiscent of South African pass laws. The system of military checkpoints under Oslo has given way to a full armored blockade, buttressed by re-invasions and re-occupation of Palestinian population centers. The economic warfare begun in 1967 and reinforced in the Oslo period has also reached its logical conclusion, resulting in a devastating economic collapse, increased unemployment and poverty, destruction of Palestinian government structures, and ruination of internationally-funded "development" projects.

One of the lessons to be drawn for the future is the primacy of Israel's economic policy in the strategy of denying to Palestinians the possibility of viable statehood. The mere granting of statehood, even by an Israeli government, will do little to improve the lives of most Palestinians if they do not have the economic freedom to control their own land, resources, movement, bodies, and dignity.

Another lesson is that these policies must be challenged as violations of fundamental human rights. Economic and social rights to health, education, housing, and work are enshrined in the 1948 Universal Declaration of Human Rights and numerous subsequent treaties. Virtually every member of the international community, and every UN agency, has sworn to uphold these principles. The Palestinian struggle should not be viewed as competing claims to the same land, or as a tragic cycle of mutually inflicted violence, but rather as a basic issue of justice denied.

The rights of Palestinians to a home and a homeland, to conditions of political and economic freedom, to a modicum of security for themselves and their children-none of this should be subject to negotiations between, on the one hand, a regional military giant backed by the world's lone superpower, and on the other, the corrupted leadership of a dispossessed nation. It is not pro-Palestinian or anti-Israeli to support human rights for all people. It is simply acknowledgement of the Golden Rule, the very first step in expressing a commitment to human relationships based on universal principles of our common humanity.


1. Jerusalem Post, February 15, 1985.

2. Meron Benvenisti, The West Bank Data Project: A Survey of Israel's Policies (Washington, D.C.: American Enterprise Institute, 1984), 11.

3. Sara M. Roy, The Gaza Strip: The Political Economy of De-Development (Washington, D.C.: Institute for Palestine Studies, 1995), 4.