The Economic Implications of the Israeli-Palestinian Conflict

The Economic Implications of the Israeli-Palestinian Conflict

Lynx Fellow Zayad AL-Marayati

The ongoing conflict in Israel-Palestine has been a central issue in the Middle East for most of the past century. The current situation provides little hope in terms of a sustainable and equitable solution to the conflict. However, one element of both Israeli and Palestinian societies affords motivation for perseverance: the economy. Even though the Palestinian and Israeli economies are so seemingly contrastive, they are bound together with ties that cannot be severed by any political decisions. The Israeli shekel has resounding implications for Palestinians, as do price hikes for certain products and services in Israel. Additionally, tens of thousands of Palestinians work in Israel and pay income tax according to Israeli tax brackets. The Palestinian Authority and Gaza do not have a currency of their own and instead utilize the Jordanian dinar, the U.S. dollar, the Israeli shekel, and the Egyptian pound. Yet more than 40% of Palestinian bank accounts are in shekels, and about 20% of their deposits and loans are made in shekels.[1] Although the Israeli economy is far stronger and undoubtedly influences the Palestinian economy far more, the two are inseparable and are vital elements of any peace negotiations.

Economic progress is perhaps the highest incentive for all stakeholders involved, including the United States and other countries who have heavily invested both political and financial capital into reaching a settlement. Regardless of the position of any investor, billions of dollars have been expended to support, oppose, or resolve some portion of the conflict. Despite such investment, the conflict has endured with periodic eruptions of violence, the most recent of which was the bloody 2014 war in Gaza. The recent protests that took place along the Gaza-Israeli border, known as the “Great March of Return”, resulted in the death of more than 60 people while more than 2,700 were injured. As the current administration attempts to revive a moribund peace process, the real prospects for a resolution are minimal given the status quo in the region. The Israeli occupation of the West Bank and increasing number of Israeli settlers pose a serious obstacle to any viable conversation about a two-state solution, while the blockade of Gaza has enacted severe economic and humanitarian tolls on its residents. The current political climate in Israel-Palestine, much like that of the United States, has shifted to more ideological and identity-based extremities. As the Trump administration seeks to resuscitate the peace process, the economy may be the best entry point as other political options, such as addressing settlers in the West Bank, are not as accessible.

Even in the absence of a peace deal, steps can be taken to improve the Palestinian economy. The World Bank considers external constraints to be the “most important factor” in affecting the economy. This does not absolve the Palestinian Authority (PA), headed by Mahmoud Abbas, of its malfeasance in administering and running the limited governance of the West Bank. According to the World Bank, removing Israeli restrictions on Palestinian movement in Area C of the West Bank, where Israel maintains overt security and civil control, could augment the size of the Palestinian economy by one-third.[2] The growth would be catalyzed not only by better access to critical resources, such as land and water, but would allow Palestinians to utilize Area C’s comparative advantages in agriculture, mining, and tourism. Israel’s control of water aquifers throughout the West Bank has also crippled Palestinian capacity to farm. Area C, designated during the Oslo Accords, represents 61 percent of West Bank. Less than 1 percent of Area C is designated by Israel for Palestinian use, while the remainder is heavily restricted or off-limits to Palestinians.

The dire situation in Gaza has been exacerbated by the Israeli-led naval, land, and air blockade. Israel and Egypt maintain tight border restrictions that prevent the movement of goods and people that are critical to trade and infrastructure. The Hamas-led territory has hardly been able to rebuild or reinforce infrastructure after the devastation of the 2014 war. Although the blockade is the most significant factor in Gaza’s economy, Hamas’ rule has proven ineffective and harmful to the economic wellbeing of its populace. The most recent protests along the border were prompted by the terrible conditions in which the people of Gaza live. After an 11-year long siege, they suffer from a shortage of electricity, a serious lack of potable water, and restrictions on their movement.[3] The situation in Gaza is a product of the Israeli-led blockade and the political failures of both the PA and Hamas. The PA-led peace process and the armed resistance administered by Hamas have only worsened the conditions in Gaza, the West Bank, and East Jerusalem. The people of Gaza undoubtedly face the worse circumstances of all. Gaza’s economy suffers from an astounding 44 percent unemployment and the United Nations has warned that it will be unlivable by 2020. Hamas faces major, and perhaps insurmountable, obstacles to improving the lives of Gaza’s residents. The recent protests demonstrate the necessity and inevitability of political change, whether or not it is produced by the will of the PA and/or Hamas.

Currently, the United States faces substantial pressure as it tries to press Israel to ease its control on the Palestinian economy. As President Trump and his administration attempt to broker the “ultimate deal”, they will have to address the growing settler presence in the West Bank, the status of Jerusalem with regard to a Palestinian state, the blockade of Gaza, Palestinian refugees, and the central role of a Palestinian economy. The Trump administrations faces an Israeli electorate that has drastically shifted towards the right and a government that has seemed to abandon any commitment to a two-state solution. However, if things are to get any better, it must start with economy. Providing economic opportunity is the most effective way to produce political will and incentive.


[1] Amit, Hagai. “Is an ‘Economic Separation Barrier’ the Key to the Future of Israel-Palestine?” Haaretz, 2017.

[2] Heller, Jeffrey. “World Bank Calls for Steps to Bolster Palestinian Economy.” Reuters, 2017.

[3] Shaban, Omar. “Gazans are protesting their economy, not Israel’s existence.” Foreign Policy, 2018.