Money for nothing and occupation for free: The 1994 Paris protocols on economic relations between Israel and the PLO

Simone Daud on September 28, 2011 | Mondoweiss

I’m familiar with Stanley Fischer’s research before he became a central banker. I also know his books with Dornbusch and Blanchard very well. Fischer is a Rhodesian born economist who has been the governor of Israel’s central bank since 2005. Last year Fischer was declared Central Banker of the Year by Euromoney magazine. This is not surprising because Israel has almost entirely avoided the effects of the financial collapses that have occurred in Europe and the US. Indeed, most Israelis trying to find a job in Tel-Aviv or in Haifa or in Jerusalem will probably have a much easier time than most unemployed Americans.

Euromoney magazine, however, neglected to tell its readers that as the central banker for Israel Fischer has also been the central banker for people living in areas administered by the Palestinian Authority. While the five million Jews in Israel have been well served by Stanley Fischer, the period of his tenure has been a disaster for the five million Palestinians living in the Israel-Palestine economic zone.

Stanley Fischer effectively oversees the monetary union between Israel and Palestine, which is administered by the Bank of Israel alongside a virtually toothless Palestinian Monetary Authority. This monetary union was established as part of the Israel-Palestine economic zone envisaged in the 1994 Paris protocols (an annex to the Oslo agreements). During Fischer’s tenure this monetary and economic union has emerged as a crucial facilitator of the occupation. Indeed, during Fischer’s tenure the union has transformed into the principal way by which Israel finances its occupation of Palestine.

This post is not about Stanley Fischer but it is about one aspect of Israel’s disregard for its obligations to the Israel-Palestine economic zone and monetary union established in the 1994 Paris accords.

The 1994 Paris accords formalized the areas controlled by the Palestinian Authority as part of Israel’s economic zone with a single currency the Israeli Shekel. This is in line with the vision of the 1947 United Nations General Assembly Resolution 181, which called for an economic union in Palestine. The Paris protocols are also, more or less, in line with standard economic thinking regarding economic zones, economic unions, and monetary unions between large industrialized economies and small agriculturally based economies.

In this agreement, the Palestinian Authority gained the ability to set and collect consumption tax, impose tariffs on imports, and fully determine the level of Palestinian income taxes. Essentially, the Palestinian authority was afforded some independence in fiscal policy with agreements regarding Israel’s obligations to transfer tax collected by Israel on behalf of the Palestinian Authority: income tax on Palestinian labor, revenues from tariffs, and even consumption tax. A Palestinian-Israeli Joint Economic Committee was established to implement these parts of the agreement.

On the monetary front the Palestinian Authority gained limited independence. The Paris agreement establishes the Palestinian Monetary Authority whose purpose is basically limited  to prudential regulation of Palestinian financial institutions. Prior to the Paris protocols the Jordanian Dinar was commonly used in the West Bank and Jerusalem. The protocols  established a monetary union between Israel and Palestine based on the Israeli Shekel. All monetary instruments remained in the hands of the Central Bank of Israel. In the agreement the Palestinians cannot issue currency and, in fact, have no say whatsoever in monetary policy. The Israeli central bank determines all monetary policy for both Palestine and Israel and the protocols provide no say for Palestinians in Israeli central bank decisions. So for example if Israel wants to increase short term interest rates it can do so without regard to the economic situation of the Palestinians.

Now the Palestinian negotiators in 1994 understood monetary and economic unions. An important element of any monetary union with heterogeneous areas with differing economic characteristics is labor mobility. In the case of Palestine this mainly means the ability of Palestinian workers to work in Israel. The Paris protocols provide assurances for this and the very nature of the union that the Palestinians and Israelis agreed to means that it is reasonable to suppose that these assurances are essential to the agreement.

Palestinian labor mobility was undoubtedly on the minds of the negotiators of the Paris protocols for a number of reasons. I’ll highlight two of these here. The first has to do with standard economic thinking associated with Optimal Currency Areas theory, to which Fischer earlier in his career made some contributions. The idea is that labor mobility provides an adjustment mechanism that can counteract the negative effects associated with a monetary union (in this case Israel making all the monetary decisions). Second, because the Palestinians are compelled under the protocols to use a foreign currency, entirely controlled by the Bank of Israel, they have limited ability to generate revenue using seigniorage and so Paris protocols relies on the ability of the Palestinian Authority to collect revenue from Palestinians who work in Israel.

The monetary and economic union envisaged by the Paris protocols is inconceivable without the ability of Palestinian workers to work in Israel. Over the last decade however Israel has gradually imposed hermetic restrictions on the mobility the Palestinians living in the Israel-Palestine economic zone. Israel has effectively boycotted Palestinian labor and because of this the Palestinians have turned into simply an imprisoned population with almost no capacity for economic activity. Israel’s boycott of Palestinian labor has turned the monetary and economic union between Israel and Palestine into a situation that is worse for Palestinians than Apartheid was for black South Africans. Israel’s boycott of Palestinian labor has turned the Paris protocols into an unmitigated economic disaster for the Palestinians.

Further, because of Israel’s boycott of Palestinian labor, the Palestinian Authority has lost much of its capacity to generate the revenue needed to run an effective public service or implement any sort of economic policy. Indeed, the main activity of the Palestinian Authority is now essentially begging the EU and the US to help pay the wages of its public service. Anyone who frequents Palestinian internet forums, especially those frequented by Gazans, will be familiar with the monthly ritual associated with whether or not public service wages will be deposited into personal accounts.

The EU and the US are happy financing the Palestinian public service since without such financing the Palestinian Authority will quickly collapse. Further, because of the limitations imposed by Israel on Palestinian labor, and thus the potential for Palestinian economic activity, all the subsidies and handouts by the EU and the US to the Palestinian Authority can be reasonably understood as simply direct subsidies to Israel for the maintenance of the occupation. I am not surprised, therefore, by the Arab world’s reluctance to subsidize the Palestinian Authority. After all, each dollar given to the Authority has no capacity to generate any extra indigenous economic activity but is simply a dollar for maintaining the occupation, and a dollar that effectively goes directly into Israel’s coffers.

We are now at the point where the Palestinians need to either scrap the Paris economic agreements with Israel altogether or vigorously advocate for their implementation; in particular with regard to the ability of Palestinians to move and work freely in the Israel-Palestine economic zone. If we maintain the Paris accords, then the need for free mobility of Palestinian labor in the whole of the land of Palestine (Israel-Palestine) is as great as the need of any of the political rights that have yet to be afforded to Palestinians.

A few days ago Stanley Fischer was quoted as saying that the Palestinian bid for statehood was unlikely to have an effect on Israel’s economy because “they are a small economy relative to us, they are a small economy in the region.” Well Stanley that is the situation that has transpired under your watch in your capacity as effective governor of the Israel-Palestine monetary union. Perhaps Stanley, you should go back and read your own work on monetary unions from the 1980’s the next time you chair a board meeting of the Central Bank of Israel and you ignore half of the population affected by Israel’s economic and monetary policies.

Fisher also said that if the Palestinian request leads to violence or other negative political developments, then it “could be very important economically.” Well to my mind Israel’s willful disregard for its obligations to the Israel-Palestine economic and monetary union, its boycott of Palestinian labor, provides compelling reasons for an international boycott of Israel.

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