ROBY NATHANSON Israelis and Palestinians: the Need for Economic Cooperation R ecent events have forced many Israelis to reassess the cliché, which they firmly believed, especially after Oslo, that economic cooperation would be a major tool for improving economic conditions while cementing peace. Cooperation certainly has accomplished the former: The data indicate that in the period after Oslo, despite the ups and downs of the peace process as expressed in border closures, the percentage of Palestinian wage earners within the total number of workers employed in Israel steadily grew(see Table 1 ). This means that in the absence of conflict, economic cooperation contributes to the rise in Palestinian income either directly, through wages, or indirectly, through the value-added tax( VAT ) and other taxes paid by Palestinian workers in Israel and later reimbursed to the Palestinian Authority. My purpose here is to suggest some avenues for sustaining economic cooperation without assuming that such efforts automatically lead to peace; they can only enhance the peace process in the presence of political will on both sides. As events during the last six months dramati­cally show, equating economic with political normalization is foolhardy. I hope to avoid such delusions. Interdependence, Prosperity and Peace Some view the structure of economic relations to which I will allude as symptoms of dependence, not signs of interdependence. For example, the taxes transferred to the Palestinian Authority( PA ) provide sixty percent of the PA ’s budget. But, if we view the process in the long term, this figure simply indicates the earnings potential of Palestinian workers once political preconditions are in place. Again, between 1994 and the first nine months of 2000 , before eruption of the Intifada El-Aqsa, Israel absorbed about forty five percent of new Palestinian entrants into the work force(see Table 1 ). This means that Israel has provided a»natural« source of income for Palestinians for years; it also means that the two entities, at least at present, are intimately linked in several economic sectors. This brings us back to the political framework; the peace process that economic cooperation was thought to cement. Recent events have revised our conceptions of this cement. In its present form, it is inadequate; it easily crumbles in the absence of the appropriate political preconditions. Prior to the signing of the Oslo Agreements, gross domestic product( GDP ) per capita in the West Bank and the Gaza Strip was estimated at about 2,500 US -dollars; as of 1993 , in response to the sporadic border closures, GDP per capita fell to about 1,700 US -dollars, while unemployment rose to more than thirty percent. This trend was drama­tically reversed in response to positive economic trends, related to the altered political environ­ment. Hence, foreign investments, especially in 1999 and the first half of 2000 , began to flow into the region. The rate of unemployment in the PA fell to eleven percent, and GDP rose by seven per­cent, accompanied by growth in exports to Israel and other markets, as well as increased foreign investment. The negative impacts that replaced these positive trends began with the out­break of violence. ̈ Internal impacts: According to the latest announcement released by the Office of the UN Special Coordinator, direct losses in GDP during the first four months of restrictions are estima­ted as seventy five percent of annual wages earned by Palestinian workers in Israel, or twenty percent of projected GDP for the year 2000 assuming no border closures. In addition, unemployment has risen to about thirty eight percent, or 250,000 persons, mainly because employment of Palestinian workers in Israel effectively ceased with the border closures. IPG 3/2001 Roby Nathanson, Israelis and Palestinians: the Need for Economic Cooperation 253