Palestinians invest in Israel and Jewish settlements

Why are so many Palestinian investors putting their money into Israel rather than the Occupied Palestinian Territories? This summary of Issa Smeirat’s groundbreaking research on the issue reveals the reasons why and highlights how the occupation keeps Palestine from getting on its economic feet


Palestinian women working at a factory in the Ramallah area 

Since the Paris Protocols, which were signed in 1994 in the frame of the Oslo Accords, the interdependency of the Palestinian economic system on the Israeli economic system has increased. As Dr. Sara Roy summarized: “The Israeli government pursued a policy of de-development based on the structural containment of Palestinian domestic economy and the deliberate dismantling of that economy over time.” This process, which started at the very beginning of the Israeli occupation of the Palestinian Territories, was entrenched by Oslo and the accords that followed.

While in 1970, 70% of the Palestinian food consumption was produced in Palestine, nowadays the Palestinian Territories import more than 85% of their total needs from Israel. The traditionally strongest sector – agriculture – accounted right before the Oslo Accords for 20% of the Palestinian Gross Domestic Product (GDP), while today it represents less than 4%. The Palestinian agricultural productivity is only a fraction of the Israeli one under the same geographical conditions: while every dunum (1000 m²) in an Israeli settlement in the West Bank produces an average of 6 000 to 10 000 NIS, the average productivity of every dunum in the Occupied Palestinian Territories (OPT) reaches not more than 2000 NIS.

Nor has Palestinian industry developed since the the First Intifada, which spanned 1987 to 1993, and its GDP has seen a steady decline. Until 1997 any foreign and Israeli investment in the West Bank was forbidden to ensure the impossibility of competitive business on the Palestinian side. The efforts by the Palestinian National Authority to enforce the industrial sector face the high competitiveness of the 17 well developed Israeli industrial zones in the settlements on the one side, and in general of the cheaper production costs in Israel, where the raw material costs are more than 30% lower than the average cost in the Occupied Territories, and the labor force can be easily imported from the OPT for a cheap rate. The employment of Palestinians impacted the Palestinian economy in two ways:  the remittances from Israel increased the inflation, injecting considerable capital without corresponding production process. On the other side, it increased the dependency of the Palestinian labor force from the Israeli labor market demand. After Oslo, the Israeli labor demand went back – from 135 000 workers before 2008 to 75 000 after 2008 – creating unemployment among the Palestinians and increasing the cost of work in the OPT. The Head of the Industry Union in Israel Dankatarevas declared once “Israel would lose $2 billion every year and 76 000 jobs if the economic relation of dependency between the Palestinian Territories and Israel would change.”

In 1960 the Israeli GDP was twice the Palestinian one; nowadays it is more than 5 times higher. The annexation of the Palestinian economic system has been a key-element in the development of the Israeli economy, and has been pursued in the financial sector too. After the military occupation of Palestine in 1967, Israel closed down all Palestinian banks, and all the financial transfers were enabled exclusively through Israeli banks flourishing in the West Bank. Between 1967 and 1984, 36 Israeli branches have opened in the Territories, enabling Israel to pull all the Palestinian savings to the Israeli economy. Even after the re-opening of Palestinian banks, the only access to the external financial market is possible just through the Israeli financial system. The Israeli economist Klaiman reported that since 1987 the amount of Palestinian tax money transferred to Israel reached 9.4 billion US dollars.

While Israeli is monopolizing the Palestinian economy, some Palestinian investors managed to integrate into the Israeli economic system. More and more Palestinian businessmen do direct investment in Israeli economy in spite of continuous shortage of Palestinian trade balance, the distortion and skewed economic integration with Israel. Today 53% of Palestinian companies have direct and indirect contracts with Israeli companies. In the sole period 2009-2010 16 000 Palestinian businessmen hold Israeli permits that allow them to enter Israel on a daily base.

Palestinian direct investments in Israel and its settlements (1993-2010)

According to the empirical study by Smeirat (Al-Quds University) on the “Determinants of Palestinian Direct Investments (FDI) from the West-Bank in Israel and the Settlements”, the restrictions for investments by the Israeli occupation and  the savings by Palestinians workers employed in the Israeli market were the key-element in the increase of Palestinian investments in Israel. According to official statistics, in 1989 36.2% of the Palestinian labor force were employed in Israel, while in 1991 the remittances reached $2.3 billion, which is equivalent of 4% of the Israeli GDP at that time. Although the share of workers in the Israeli market decreased to 9.3% in 2009 and as consequence of this the total amount of remittances decreased – 16% until 2008 back to 9% of Palestinian GDP after 2008 – the chance for Palestinians to invest as the Israeli investors moved to more profitable and innovative sectors as the high technology-sector. In addition to that, the lack of facilitations for investments by Palestinian banks discourages Palestinian investments in the Territories. Due to the instable economy, the facilitations (loans etc.) in Palestine accounts for 28 % of GDP – compared to the 111% in Jordan and 56% in Egypt).

Palestinian capital increasingly moved from the Territories to Israel after 1993, being invested foremost in industry (23.5%), in constructions (22.7%), in the tertiary sector (15.2%) and in trade (13.1%). Direct investments from the West Bank (FDI) –  to be defined as the investment occurring when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset – constituted in 2009 60% of the total FDI in Israel, calculated on all the intervals from 1993 to 2010. The total Palestinian capital resulting as invested in Israeli market in 2010 reached an average of $5.8 billion. More than 1 billion turned out to be invested in settlements. Accounting just the fixed capital invested by 11.2% of the investors working as investors before and after Smeirat’s the case study 1993-2010, the average amount reaches $2.55 billion.

Who is investing in Israel and its settlements? 

76% of the total invested capital came from Palestinian savings. The majority of the Palestinian investors were from Hebron (1), Nablus and Ramallah (2), and Bethlehem (3). Only 11.2% of the total 16 000 investors has been working as investors in the period 1993-2010. The empirical study found the expectation of high returns, the age, the experience, the proficiency in foreign languages and the availability of starting capital to be the most relevant demographic determinants of Palestinian direct investments in Israel. The research proofed a positive relation between the age of the investors and the amount invested: 42% of the 420 investigated cases had more than 19 years’ experience and was between 41 and 50 years old (38%); while the more language-skilled the investors were, the more often they invested in Israel. Average-educated Palestinians become more frequent investors in Israel than their highly-educated counterparts, while the 7% of the investors holding a university degree invested the same amount as all the average educated investors – holding Tawjihi or less – together.

Many Palestinian investors showed to prefer business relations with Arab Jews (Mizrahi), while 16% were partners with Arab Palestinian living in Israel. A large number – 20% of the case study – were Palestinians subcontracted to Israeli companies, while just 13% were fully Palestinian investments. Despite the fact that 17% of the interviewed investors was investing in both Israel and the West Bank, one third of the total declared that they do not have any role in developing the Palestinian economy and reducing unemployment; while 3.5% declared to re-allocate the capital in Israel and the West Bank and to contribute to unemployment reduction on both sides of the separation barrier.

Major pull-factors for the investments

Having said that the long-term restructuring of the Palestinian economy by the Occupation has forcibly tied the Palestinian economy to the Israeli one, there are various element determining the attraction of Palestinian capital to Israel. Concerning Israeli interest, the state managed to keep the cost of the military occupation as low as possible, financing it by Palestinian taxes and swallowing the whole Palestinian economic process. As far as Palestinian investors are concerned, the major pull factors have been indicated as following: the import of raw materials to Israel is obviously easier than to the border-controlled- OPT (1); electricity costs in Israel are lower (2), while a higher return is expected (3). The advanced communications means and the higher labor qualifications available on the Israeli market, together with the bank facilities and easier tax procedures make Israel a much more attractive and secure investment environment. A crucial determinant for the singular dependency relation between an occupied and an occupying market is the ability to import cheap labor force from the OPT, eliminating the major element which normally determines high production costs in developed market economies.

Major push factors for Palestinian investors

Looking at the development difficulties of an economy under occupation, there are five main elements pushing private investors to seek profit outside the OPT. The import of raw material is not only expensive but also dependent on the arbitrariness of the Israeli military controlling the Palestinian borders (1). In a situation of political uncertainty, trust in the Palestinian economy is low (2) as well as the competitiveness of Palestinian products, subject to unfavorable production conditions, Israeli taxes (3) and export restrictions (4). Finally, the long term occupation led the majority of Palestinian trade relations to be withIsrael (5). One third of the investors interviewed declared their readiness to retract their capital from Israel and reinvest in the OPT if the Palestinian National Authority (PNA) would offer investment facilitations, while another third would keep on investing in Israelanyway.

Meaning for the Palestinian economy and political implications

Calculating only the fixed capital – invested by 11.2% of the Palestinian investors in the period 1993-2010, the Palestinian capital invested in Israel and its settlements means a loss of 255.5 million US dollars for the Palestinian economy, which represents half of the total Palestinian GDP for 2010. Moreover, the PNA loses a tax income in the amount of $256 million yearly. In 18 years this amount will reach $4.6 billion. According to Smeirat’s study, if the same average capital invested in Israel (2.5 billion US dollars) would be invested in the PNA areas, this would create 213 000 new jobs. Smeirat suggests different measures to be taken by the PNA to decrease the effect of the Israeli economic annexation and improve the capability of the Palestinian investors in the Palestinian environment, such as the construction of a port and airport in Gaza as well as in the West Bank, building and developing the trust relationships of the investment environment, enhancing the Palestinian public administration and institutions  to better control the capital and to develop infrastructures and industrial zones.

As professor of economics Mahmoud Jaffari of Al-Quds University stated, “the end of the Israeli Military Occupation should be treated as a necessary condition if any trade promotion program is to have any meaning.” It is unlikely that a market under occupation would be more attractive than a free market such the Israeli one, as much as it is unlikely that the private sector would re-orientate itself toward a less favorable market out of moral or political believe. More than the sole economic implications for the OPT, obviously deepening the economic dependency from Israel and impeding any sustainable and independent development, the political aspect has to be considered. Such an important economic interest of Palestinian investors in the Israeli market has a considerable potential to exert pressure on the Palestinian political class and to condition its political performance to reach the first priority of the Palestinian people: End the Israeli occupation.

 ( / 06.12.2011)

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