The Construction of the Security Wall in Israel-Palestine:
The effects of the wall on the economics and security of the Israeli and Palestinian nations
Sarah Israel and Jonathan Moy
EDGE Fall 2004-2005
December 1, 2004
The conflict between Arabs and Israelis is an old one – older than many other communities on Earth. These two groups of people come from a common background, yet they cannot agree on one accepted historical narrative. With the upsurge of violence since the start of the twenty-first century, Israel has taken steps in an attempt to insure the security of its citizens. Peace talks to this point have failed – while the two groups are unable to live together, they are unwilling to make the compromises necessary to live apart. A large part of the question of peace is what exactly it is going to take to make peace happen. To answer that question, one has to look at what the two sides are fighting for. The immediate answer is land. The more complicated answer is that the two sides are fighting over definable interests, motivated by comprehensive value systems, in pursuit of identifiable goals. For each side though, those goals are different.
Israel believes that the building of the wall around the West Bank is taking the steps necessary to maintain security inside the borders of Israel. With this added security comes hardship on both sides. Those living in the West Bank have lost access to Israel, and to jobs that they might hold there. Israel now faces the economic burden of building the wall, and the cost of maintaining guards at the crossings. The question then arises whether the costs to both sides will balance out by the added security the wall provides? In order to asses this question, one has to examine the history of violence in the region, and juxtapose the current terror situation with the economic costs of the wall. By critically analyzing economic statistics and looking at possible ways to strengthen the Palestinian economy, we will show that although the Wall will provide Israeli citizens with increased security, this security will come at a large economic price.
Part I of this paper addresses the history behind the Arab-Israeli conflict. Part II analyzes the economic ramifications of the wall. Part III addresses the pan-Arab political and foreign aid response to the 2000 Intifada and the construction of the wall, while Part IV addresses the effects of the wall on security within both Israel and Palestine.
Part I: The History of the Arab-Israeli Conflict
The Arabs and the Jews have a long history of violent conflict. Although interactions between Arabs and Jews started thousands of years before the founding of the state of Israel in 1948, with the rejection of the UN Partition Plan by the Arabs came the rise of a Jewish state, without an Arab state counterpart. In ancient history, the Israelites inhabited the modern day land of Israel, after being taken there after leaving Egypt. Twice after the building of the holy temple in Jerusalem, it was destroyed by enemies of the Israelites and the Israelites were forced into exile. The second of these exiles was in the year 4 CE, just after the Babylonian takeover of the land and destruction of Jerusalem. In this case, it was the Babylonians who caused the exile that would remain until 1948 and the founding of the state of Israel. The modern idea for a Jewish state started with Theodore Herzl, who in 1894, decided that the Jews needed a political center in order to solve the problems of anti-Semitism. The Dreyfus Affair was the catalyst for Herzl’s vision, and it became the symbol of Jewish inequality in Europe, and the spark for early Zionism. Zionism, defined as the movement for the reestablishment of a Jewish nation in the land of Israel, was first established under Herzl, commonly called the father of political Zionism (Ovendale 9). The present day state of Israel is the same land to which Moses brought the Israelites following their departure from Egypt. Since that time, the city of Jerusalem and the holy temple within its walls have been destroyed twice, and the Jews have been sent into exile each time. Although the Jews were offered the territory now occupied by modern day Uganda, Herzl believed that the Jewish homeland had to be the same land that was occupied by their ancestors. Herzl, along with other early Zionists, planted the seeds for a return to the holy land of Israel and the formation of a Jewish state.
With Herzl’s death in 1904 came troubling times for the Jews of Russia and Eastern Europe. As Chaim Weizmann stepped forward as the successor to Herzl and the one who would carry on the Zionist dream, Jews from areas of anti-Semitism started to migrate to what is currently the land of Israel. This migration, supported by Prime Minister Balfour of England, took place in the early part of the twentieth century, resulting in many Jews of Eastern Europe and Russia being saved from the pogroms and violence of the time. At this time, however, the Jews made up less than 10% of the population of the land that would later become Israel. Much of the rest of the land was settled by Arabs, there as a result of the falling of the Ottoman Empire. With this collapse of power came British authority in the region, and a war with France to insure British sovereignty. While the war for the map of Europe was being fought in the Middle East, there became a growing dispute between the Jews and the Arabs – one centered on land. The culmination of the challenge between England and France was in 1915, with the Sykes-Picot agreement. In this agreement, France gained control over the northern half of present day Israel, with England having sovereignty over the south. For England, the idea of a Jewish state became more and more appealing. Sympathizing with the Zionist cause, Britain under the direction of Lord Balfour felt that the founding of this state could help them hold territory in the region (Ovendale 32).
Much before the founding of the state of Israel, there was an influx of Jewish people into the land to settle and live in their ancient homeland. Migration started as an escape from anti-Semitism, a political and social Zionism different from the religious Zionism of later decades. Escaping the persecution of Europe, a third migration of Jews from Russia and Poland migrated to Israel between 1919 and 1923. During these years, riots started to erupt demonstrating Arab opposition to the migration of Jews into the land of Palestine. In 1922, the Churchill White Paper was published by Winston Churchill, reaffirming the right of Jews to be in Palestine. The paper discriminated between the idea that Palestine should be turned into a Jewish homeland and the idea that a Jewish homeland should be established within Palestine, supporting the latter. Also with this letter, it was maintained that anything past the Jordan River was not open for Jewish settlement, and that the Jewish immigration would be determined by the economic absorptive capacity of Palestine. In addition, both Jews and Arabs would establish their own groups to manage affairs in each community.
During World War II, the dynamics of populations migrating to Palestine started to change. Following World War II and the Holocaust in Europe, more than ever Jews felt the need for a piece of land in which they could be safe from the anti-Semitism they had been experiencing all over the world. During the Holocaust the Jews faced anti-Semitism from the Nazis in Germany, as well as from other European nations. Like the Babylonian exile almost 2000 years before, the Jews were being forced out of their homes by the surrounding Anglo society. With the war in Europe and the annihilation of millions of Jews, those youth who could escape were sent to Palestine to be safe and start a new life. With the immigration of about 235,000 Jews to Palestine erupted an Arab Revolt in the years between 1936 and 1939. In order to appease each side and put an end to the violence, a bi-national plan to separate Jewish and Arab states was established – the Partition Plan (Ovendale 117).
The Partition Plan, with the support of Britain, Russia, and the United States, was passed by the United Nations general assembly on November 29, 1947. On this date, the United Nations Special Committee on Palestine agreed that the British mandate should end as soon as possible so that independence could be grated to the state of Israel and the state of Palestine at the earliest possible date. The plan called for a bi-national state with economic unity. The Jewish territory would include the Eastern Galilee, the Jezreel Valley, most of the Coastal Plain, and the Negev. The Arab territory would include the Western Galilee, Samarian and Judean Hills, and coastal plains from Ashdod to Sinai. Both Jerusalem and Bethlehem would be international zones. Following the vote of 33 countries in favor of the plan, it was taken to the two parties involved. While wholeheartedly accepted by the Jews, the plan was rejected by the Arabs. After the rejection of the Partition Plan by the Arabs, a jihad was declared by the Mufti of Jerusalem and a general strike on the Jews ensued, including ambushes on the roads, attacks on buses, and attacks on settlements. The Jews retaliated with efforts to seize arms and defense of rural and urban settlements (Bregman 9).
In the months following the rejection of the Partition Plan, Jews and Arabs had many conflicts; the Jews were trying to gain access to different parts of the country, and the Arabs were doing everything in their power to keep that from happening. On May 15, 1948, the state of Israel was officially established. Hours later, soldiers in the different defense organizations swore allegiance to the state and combined to form the Israeli Defense Force. That same night, Israel was attacked from all sides by its Arab neighbors.
The war of independence continued on and off for over a year, with battles for territory and land being waged throughout the region. Syria was attacking from the north, and Israel held their forces at Degania, insuring that Syria would not move in any farther. They were also attacked by Lebanon, where positions were exchanged and the battle was finally won by the Israelis. The Arabs attacked the Jewish Quarter of the old city of Jerusalem, and while the Israelis held out for 10 days, the city was surrendered on May 25. Finally after over a year of fighting and much bloodshed and land exchange, Israel signed armistice agreements with Egypt (Feb 24), Lebanon (March 23), Transjordan (April 3), and Syria (July 20). At the end of the war in 1949, Israel held all of the territory it was given by the United Nations in November of 1947, plus land it had obtained while defending land that was being threatened by attacking neighbors. This land included small pieces of the Negev desert, and a perimeter of land around what is the present day West Bank (Bregman 38). The West Bank was annexed by Transjordan, an action opposed by the Arab League of Nations, and only recognized by two members of the United Nations (Britain and Pakistan). These borders, established in 1949, remained the de facto borders until 1967, although in those eighteen years, none of Israel’s Arab neighbors agreed to make piece, or to recognize Israel as a state. Though historians might argue, this war was not about ideology – it was about land. The gain and loss of land in the war following Israel’s declaration of statehood and in the subsequent wars serves as fodder for the fire burning between the two nations today.
Although the state of Israel was peaceful for about two years following the War of Independence, from 1951-1956 the Fedayeen (Palestinian terrorist groups) began systematic raids into Israel. In those five years, 967 Israelis were killed by Arab terrorists inside Israel’s borders. The Fedayeen moved from Jordan and Egypt, through the areas that today are the Gaza Strip and the West Bank. Though they were not attacking themselves, Syria, Lebanon, and parts of Egypt were sending military aid and political encouragement to the Fedayeen. During these years, the Arab nations closed the straights of Tiran (leading to the port of Eilat) to Israeli shipping, and with the assistance of Russia nationalized the Suez Canal to insure that Israeli shipping was prohibited there as well. The culmination of these attacks came in 1956, when Israel started to launch a counterattack into Jordan (particularly the Gaza Strip) and Egypt. With combined forces from Egypt, Jordan, and Syria lined up on the border between Israel and Egypt, Israel’s goal was to divide the troops into two groups, in the hopes of making them less strong. With the help of Britain and France, Israel secured areas of the Sinai peninsula, as well as regained control of the Suez canal. At the end of the three month long battle, Israeli troops withdrew from the Suez canal, leaving UN forces to take up positions there. One month later, Israel withdrew from all the territory gained in the Sinai peninsula, with the exception of Gaza and Sharm-e-Sheikh (two strategic port cities), which they held for two more months before being replaced by UN troops (Wasserstein 122).
Eleven years following the Sinai Campaign, Israel was again attacked by her neighbors. In the two years before the outbreak of war, there were many border clashes between Syria and Israel, including aerial fighting, bombing of settlements in Hula and the Jordan Valley, and terrorist attacks. Three weeks prior to the outbreak of total war (May 15), Egypt announced a military emergency and mobilized all of her troops to the border. In addition, the UN emergency forces were evacuated from Egypt, Syria, and Jordan. Five days later, Israel mobilized her reserves, and a full alert was called. Once again, Egypt closed the Straights of Tiran to Israeli shipping. From May 25 – June 4, the United Nations made every attempt to avert the crisis, however when President Nasser of Egypt declared that his ultimate goal is the destruction of Israel and that was followed four days later by a joint military command of Egypt, Syria, and Jordan, Israel had to take action. To preempt her enemies, Israel flew an air attack on all fronts on the morning of June 5, the first day of the Six Day War. During this day, two thirds of the Arab aircrafts were destroyed, and armored divisions from both sides moved along the Sinai-Egyptian front. On the Jerusalem-Jordanian front, after Israel sending a message through the UN to Hussein to not enter the war, he bombed Jerusalem and Tel Aviv (Ovendale 189). On the third day of the war, Israeli troops were able to enter Jerusalem and liberate the Old City. In this campaign, the West Bank was controlled and military government was established. By the end of the six days, Israel controlled not only her original territory, but also the Gaza strip, the entire Sinai Peninsula, the West Bank, and the Golan Heights. Seven hundred and sixty six of the 264,000 Israeli soldiers were killed during the Six Day War, and the amount of the 547,000 Arab military casualties was never announced. With Israel’s 800 tanks to the Arabs 2.504 and her 300 aircraft to the Arabs 957, Israel not only fought a battle on three different fronts, but gained territory on each one (Bregman 64).
On the Jewish holiday of Rosh Hashanah (the New Year), Israeli military intelligence ascertained that the threat of an all out attack from Syria and Egypt was low. With growing evidence over the next ten days that this was not the case, the intelligence refused to call up the reserves and initiate preparation for another war. When Syria and Egypt attacked on October 6, 1973, it was during the Jews’ holiest day of the year – Yom Kippur. The Yom Kippur war was launched at 2:00 in the afternoon, and by nightfall the Egyptians had taken control over most of the Sinai Peninsula and the Suez Canal. The Syrians, similarly, had most of the control over the Golan Heights. This held for two days, at which time Israel launched her counter attack. In the Sinai, Israeli paratroopers and armored forces crossed the Suez canal and established two bridgeheads, which in the north, Israel moved back to the 1967 cease fire lines in the Golan Heights, although she failed to take back the Mt. Hermon position. Days later, Israel crossed the 1967 cease fire line, headed on the road to Damascus. On the last days of the war, Israel attacked Syria on Mt. Hermon, and regained her strategic position there. At the end of the warm there were over 2,000 soldiers dead on the Israeli side, with no number announced on the Arab side. Days after the start of the war, President Assad of Syria said, “Our forces will continue to pursue the enemy and strike at him…until we restore our positions in our occupied land. After that, we shall continue until we liberate the whole land” (Alexander Muss High School in Israel 56). When a land and the entirety of the people living within the borders are threatened, the state not only has the obligation to protect the citizens, but also the land of the state of Israel.
In the aftermath of the Yom Kippur war, Israel and Egypt came to a peace agreement in 1979. A treaty was signed by Egyptian President Sadat and Israeli Prime Minister Begin, with American President Jimmy Carter there as a witness. Since the peace treaty, there has not been full out war between Israel and Egypt. There was, however, war between Israel and Lebanon just three years following the peace treaty with Egypt. The 1982 war, unlike other wars in Israel’s past, was a preemptive strike against the Palestinian Liberation Organization (PLO). During these years, it was Prime Minister Begin’s strategy to prevent the ability of the PLO to hit Israel by inflicting blows on the bases of terror in Lebanon. In June 1982, the Israeli Ambassador to London was assassinated, and this together with the renewed PLO shelling into northern Israel gave the country apt reason to launch “Operation Peace for Galilee.” The fight for this land and for the eradication of the PLO continued until August, and a peace treaty was signed between Lebanon and Israel in December of that same year. Although all Israeli troops were withdrawn from Lebanon, Syria refused to withdraw her troops from the same region.
With the 1982 war came a new kind of warfare and a new reason for fighting. Prior to this time, war had been carried out mostly between armies. It is inconceivable that there would be no civilian casualties, but the numbers were miniscule when compared to those in the armed forces. With the rise of the PLO and other anti-Israel groups came terrorism. With terrorism one is not shooting at another soldier, but is launching rockets into civilian towns across the border and using bombs to injure and kill. The Intifada from 1987-1993 was unlike any other war fought by the Israelis and Arab nations, except for the similarity to the Six Day War and Yom Kippur War – it was a total surprise to the Israelis. In the years preceding the Intifada, there was much unrest in the territories. Although a very small incident triggered the start of the fighting, it was the straw that broke the camels back, rather than the sole reason for the uprising. When a car accident between an Israeli driver and a Palestinian driver killed four Palestinians coming home from work, the Gaza Strip erupted into violence against the Israeli soldiers in the territories. This violence continued for weeks, and the Israeli government assumed that it was backed by either Syria or the PLO. A reporter, speaking of the feelings of tension in the region just before the start of the Intifada said, “You can feel the tension. Worshippers – Jews and Moslems alike – scurry rather than walk. Tourists cluster together and are protected by armed soldiers…In Gaza, you drive a car with Israeli plates at peril…The marketplaces are empty of Israeli shoppers and thousands of Gazans have stayed away from jobs in Israel – some in protest, others out of fear…Fear, suspicion, and growing hatred have replaced any hope of dialogue.” This reporter was right – even with extended peace talks, the situation has little improved since the start of the Intifada in 1987 (Bregman 202).
During this time, the growth of Jewish settlements was occurring all over the country. Although many think that Jews were settling in the West Bank and Gaza Strip, in actuality the most growth of Jewish settlements was happening in the areas closest to Tel Aviv and Jerusalem. In actuality, of those who did settle in the post-1967 borders of Israel had multiple motives for doing so. While some were taking a stance against the return of the land to the Palestinians, most were responding to very inexpensive housing in areas close to metropolitan cities (Wasserstein 122). The map of the West Bank started to change in 1995, with the signing of the Oslo II agreements. With this treaty, the West Bank turned into a haphazard distribution of Palestinians and Israeli enclaves, bypass roads, and disconnected territories. This agreement was accepted by both sides as an interim agreement, with Palestinians awaiting the day that Israelis would pull out of more of the West Bank, leaving land for a Palestinian state. However with the outbreak of violence in the Intifada of 2000 came a large security threat from the West Bank and Gaza Strip territories. In addition to the fighting and attacks on Israelis within the territories, suicide bombers were crossing the border and detonating themselves in cafés, universities, buses, and public places (Wasserstein 126).
In the struggle for peace and for control of land in the West Bank and Gaza Strip, one has to look at the demographic distribution of people in the region. Although there are settlements in the midst of very largely Palestinian areas, the majority of settlements in the West Bank are centered around Jerusalem and the western part of the West Bank (the area bordering Israel). Although technically inside the green line, it is necessary for Israel to protect these large groups of Israelis by making sure they are on the Israeli side of the security wall. If the land to the east of the wall were to be given up for the creation of a Palestinian state, the hundreds of thousands of Israelis in these cities should be on the Israeli side.
Of course the issue is much more complicated than settlers and skirmishes between Palestinians and Israelis. One has to examine what the building of the security wall does economically to both sides. In truth it is harder to Palestinians to get to work within Israel, but then where are the other Arab countries of the region when their brothers are in need to help? By examining the economics and comparing different solutions, one can come up with a proposition by which the economics do not outweigh the benefits of security.
Part II: The Israeli and Palestinian Economies – The effects of The Wall
With our richer understanding of the history of the Israeli state, we can conclude that even prior to the construction of the wall, the Palestinians and Israeli Arabs faced serious barriers to economic prosperity due to the historical conflicts that occurred in the region. We can now look at the present and better understand how the latest Intifada, which broke out in September of 2000, and the construction of the wall affect the economies of both Palestine and Israel.
Israel initially responded to the Palestinian uprising by frequently employing “internal closures” and “external closures” of the occupied Palestinian territories. Under an “internal closure,” the Israeli military surrounds individual Palestinian villages, refugee camps, and cities in order to prevent the flow of goods and people between Palestinian areas; this inhibits normal commercial and financial transactions and labor mobility. Under an “external closure,” the Israeli military seals the West Bank and Gaza Strip from each other and the rest of the outside world. This form of blockade prevents any economic interaction between the West Bank and Gaza Strip, precludes the approximately 120,000 Palestinians employed in Israel before the outbreak of the Intifada from reaching their jobs across the Green Line, which is the border separating the West Bank and Israel as defined by the Israeli government. This harsh form of separation “stops Palestinian trade with the rest of the world because the Palestinians do not have an independent import-export route outside of Israel’s control” (Marshall 8). Israel maintains that its closure policy is designed to reduce general security risks by preventing Palestinians from entering Israel. Critics, however, say that Palestinians who “benefit from access to the Israeli labor market have rarely engaged in acts detrimental to Israel’s security, and Palestinians who have harmed Israel generally have been able to evade Israeli closures, especially through the West Bank” (Marshall 8). This contention has been the main force behind the Israeli political movement that supports the construction of the wall, but once we account of the cost of the wall to both the Israeli and Palestinian societies, we will call this logic of the “less of two evils” into question.
The Palestinians claim that Israel’s closure policy is not designed to address its security concerns. Rather, the policy is a form of collective punishment that is designed to purposefully inflict damage on the Palestinian economy in order to put pressure on Palestinians to adhere to Israel’s political agenda. As UN reports have stated, whenever Israel employs its closure policy, the results have been devastating for the Palestinian economy. In the table below, we can see the dramatic estimated drop of -16% real GNI for 2001, and a jump in the unemployment rate to almost 30%. In mid-December 2000, the UN released a report that documented global losses to the Palestinian economy during the first two months of the Intifada totaling over $500 million. If we extrapolate this series of discounted cash flows over the period from the beginning of 2001 through until the end of 2004 and assume that the cost of the Israeli closures inflicts a cost of $3 billion nominally per annum on the Palestinian economy and that the cost of capital is 5% (which is the current interest rate that long term bonds issued by the Israeli government pay in annual yield), we can see that the Israeli closure system has cost the Palestinian people over $10 billion; this amounts to over 200% of the Palestinian GDP for 2000 according to the United Nations. The UN also noted that the $500 million loss to the Palestinian economy represented over 250% of the value of donor disbursements to the Palestinian Authority (PA) in the first half of 2000. The late PA President Yasser Arafat has estimated even larger losses to the Palestinian economy stemming from the Intifada and Israeli border closures. Arafat noted at an emergency meeting of the Arab Labor Ministers on November 23, 2000, that the Intifada and its resulting closures had cost the Palestinian economy over $800 million.
The construction of the wall will only solidify the effects that closures have on the Palestinian economy. Communities that are blocked off from Israel, or in the parlance of the Israeli military “hermetically sealed,” will not have access to markets or jobs on the other side, thus creating a permanent external closure for large swaths of Palestinian territory. However, the economic loss to the Palestinian community extends further than just lost trade through restriction to seaports. It also extends to the lost income and jobs resulting from the construction of the wall and the separation of Israeli territory and the West Bank which will prevent Palestinian workers from the West Bank from entering into Israel.
Rising unemployment, resulting in higher levels of poverty, has been the most prominent feature of the wall’s impact upon the Palestinian economy. As noted above, Israel’s “external closure” of the West Bank and Gaza Strip has prevented Palestinian workers from reaching their former jobs inside the Green Line. The Governor of the Palestinian Monetary Authority, Dr. Douad Beseiso, has “estimated that this costs the Palestinian labor force $4.5 million daily in lost wages, and has led to unemployment levels of up to 50%” (Marshall 9). Even when Israel slightly relaxed its external closure policy in mid-December of 2000 by reissuing 6,000 work permits for the Gaza Strip and 9,000 permits for the West Bank, Beseiso notes that only a few thousand Palestinians took up the offer and returned to work within Israel. Note in the table on the previous page how unemployment in December of 2000 has already increased by a dramatic 18%. The lack of Palestinian workers who want to return to their jobs in Israel at present can only mean one of two things: “either Palestinians fear for their personal security in Israel and at home, or their former Israeli employers are re-evaluating their economic dependence on the Palestinian labor force” (Marshall 9). Thus, we can clearly see how the construction of the wall, coupled with Israel’s policy of closures, has caused economic havoc in the Gaza Strip and the West Bank, and how it has affected the Palestinian people.
Going into more detail, we can see that although all sectors of the Palestinian economy have been damaged by the Intifada and the construction of the wall, the agricultural and tourism industries have been the hardest hit. “Both sectors are particularly vulnerable to exogenous shocks: the agricultural sector is subject to time sensitivities regarding the harvesting and marketing of produce and the tourism sector is subject to the security concerns and perceptions of tourists and travel agents” (Marshall 9). As a result of the closures, Palestinians were largely unable to harvest their fields and much of the fall crop rotted in the field, not only leading to large economic losses but contributing to the overall poverty and lack of a source of food for some families. Given these closures, the construction of the wall, and the loss of access to the road network in the West Bank, output per worker has fallen dramatically, as the table on the previous page shows.
Furthermore, Palestinians found it very difficult to market the portion of the harvest that was salvageable because, as mentioned above, external closures and the construction of the wall prevent Palestinian exports from reaching their intended destinations. Mohammed Shtayyeh, Director of the Palestinian Economic Council for Development and Reconstruction (PECDAR) estimated that the agricultural sector suffered losses of $120 million (Marshall 10). The construction of the wall has also caused serious disruption in the Palestinian people’s ability to use the existing infrastructure in the West Bank, especially the road networks. The wall has caused “considerable damage to the physical infrastructure and private property, including the leveling of agricultural land and the destruction of buildings and roads” (von Allmen 19).
Anecdotal evidence suggests that the tourism industry is suffering from even greater economic damages. For instance, in Bethlehem, where the PA recently invested $200 million to expand the city’s tourism infrastructure, most hotels have been closed for a lack of guests and many services associated with tourism, restaurants, souvenir shops, etc., have reported a sharp loss of business (Marshall 10).
However, we should also not underscore how much damage the Palestinian Intifada and the construction of the wall have done to the Israeli community as well. And it is this fact that drives home the point that while the wall may be a political necessity, the economic and human costs that it takes on both sides may very well be so great that the Israeli government will have no choice but to take a second look at whether its choice to build the wall was reasonable in the first place. When completed, the Wall will be approximately 720 kilometers long and will have cost Israel approximately $1.4 billion (http://www.palestinemonitor.org/Special%20Section/Closure/analysis_under_us_international_law.htm).
Additionally, the price does not include the cost of installing security terminals. Maintaining the fence alone will cost NIS 160,000 per km, which comes to a converted cost of $38,600 per km, which sums to a total of approximately $25,760,000 annually (http://www.globes.co.il/serveen/globes/docview.asp?did=736547&fid=942). In a much more telling analysis, if we assume that the cost of maintaining the wall will grow at a reasonable rate of 3% a year, and that the discount rate that Israel faces is 5%, which is the current interest rate that long term bonds issued by the Israeli government yield, then we can calculate the net present value of all future costs of maintaining the Wall by the following formula:
Net Present Value = (Cost of Wall Annually) x (1 + 3%) / (5% - 3%)
This formula assumes that the cost of the Wall will be charged to the Israeli government indefinitely, and is notably identical to the formula which we use to calculate the net present value of a perpetuity that demonstrates a constant growth and a constant discount rate. The formula gives us a monumental net present value of $1,287,500,500 for maintaining the wall. Considering that the Wall will cost well over $1 billion alone to maintain on a net present value basis, we must question the Israeli government’s decision to go through with the construction of the wall, especially considering that this money can be used to fund numerous social programs that can benefit both Israelis and Palestinians alike.
To better understand the economic effects of the border closures and the construction of the wall to both economies, we must also have a better understanding of the relative size of the economies. Though gross losses to the Israeli economy could exceed gross losses to the Palestinian economy, the relative sizes of the two economies – Israel’s GDP ($99 billion) was roughly 25 times greater than the Palestinian GDP ($4 billion) in 1999 – have meant that the per capital impact has been much greater on the Palestinian economy (Marshall 10). If we also analyze the macroeconomic impact of the wall and the border closures on the West Bank and Gaza Strip, we can see that certain sectors of the Israeli economy that rely upon Palestinian labor, especially the agricultural and construction sectors, have also been severely impacted. The external closure has resulted in an immediate supply-side labor shortage, causing wages in these sectors to rise dramatically. Such wages hikes could place inflationary pressures on the economy as a whole in the mid to long run periods.
Another macroeconomic effect of the Intifada and the construction of the wall is an increase in the risk premium that foreign investors attach to investing in Israel. Therefore, the uprising and the ensuing turmoil surrounding the wall may have the long term effect of making Israel a less attractive place for foreign direct investment (FDI) because it becomes more difficult for Israeli companies to attract portfolio investments as international financial institutions raise their estimates of the cost of capital of investing in Israel and subsequently lower the expected internal rate of return (IRR) of investing in such companies. There are already indications that the Intifada and the wall are taking a toll on Israeli companies listed on foreign stock markets. For example, “Israeli technology stocks listed on the NASDAQ lost over $20 billion in value during the first two months of the Intifada” (Marshall 11), and their losses have only deepened as the international crisis caused by the construction of the wall has continued to raise the level of uncertainty surrounding the Israeli economy.
In this situation, it is interesting to note how on both sides the outbreak of the Intifada has spurred calls for a geographic and economic separation of the two nations. As a spin off to this call for separating the two economies, at the popular level, some Israeli Jews have called for “breaking off economic relations” with Israel’s Palestinian Arab citizens in retaliation for their show of solidarity with the Palestinian brethren in the occupied territories (Marshall 11). For instance, in Tel Aviv, flyers were distributed calling upon Jews to boycott Arab-owned restaurants, and the Israeli rabbinate revoked the kashrut, or kosher, certificates of 16 Arab-owned food processing factories, thus effectively shutting them out of the Israeli Jewish market and placing them in danger of bankruptcy. In contrast, however, Palestinian leaders and leaders of Arab countries in the region have boycotted Israeli products for decades. An extended and wide spread boycott of the Israeli Arab sectors of the economy by Israeli Jews and the boycott vice versa could cast long-term doubts about the future of coexistence between the two communities in Israel.
We must also acknowledge the fact that the construction of the wall has been deemed illegal by the International Court at The Hague. In a ruling published on July 9, 2004, the court ruled that: “The route of the wall as fixed by the Israeli Government includes within the “Closed Area” (between the wall and the “Green Line”) some 80 percent of the settlers living in the Occupied Palestinian Territory. Recalling that the Security Council described Israel’s policy of establishing settlements in that territory as a “flagrant violation” of the Fourth Geneva Convention, the Court finds that those settlements have been established in breach of international law. It further considers certain fears expressed to it that the route of the wall will prejudge the future frontier between Israel and Palestine; it considers that the construction of the wall and its associated regime “create a ‘fait accompli’ on the ground that could well become permanent, in which case, . . . [the construction of the wall] would be tantamount to de facto annexation.” The Court notes that the route chosen for the wall gives expression in loco to the illegal measures taken by Israel, and deplored by the Security Council, with regard to Jerusalem and the settlements, and that it entails further alterations to the demographic composition of the Occupied Palestinian Territory. It finds that the “construction [of the wall], along with measures taken previously,…severely impedes the exercise by the Palestinian people of its right to self determination, and is therefore a breach of Israel’s obligation to respect that right” (http://www.icj-cij.org/icjwww/ipresscom/ipress2004/ipresscom2004-28_mwp_20040709.htm). One has to keep in mind, however, how small of an area the West Bank encompasses. By looking at the overlay map of the West Bank on California, Florida, Italy, and Great Britain, one can see how little area these two nations are fighting over. However, recent news articles in widely read periodicals indicate that Israel may be willing to compromise on the route of the wall, and changing the route to more closely match the pre-1967 Green Line border. If this is the case, Israel is much less likely to face negative ramifications in the court of international opinion.
With this in mind, we now consider the economic impact of the land that Israel gains within the West Bank due to the path of the wall. The land that Israel gains borders the Jordan River and therefore is the most fertile portion of the land in the West Bank. Given that the Palestinian economy after the start of the al-Aqsa Intifada has reverted to a predominantly agrarian economy, the seizure of this extremely productive land will seriously impact the financial well being of Palestinian farmers and families in the region. The loss of this land will not only affect those directly involved in agriculture but also the Palestinian businesses and workers who depend on agricultural exports (see overlay of aquifers and West Bank territory above). The economic impact of the loss of this land has been accounted for in our annual estimate of damages caused by the construction of the wall, which we have earlier calculated to be $3 billion annually, or 75% of the West Bank’s 1999 GDP.
We have already seen how the construction of the wall has led to immense economic losses for Palestinians, as on a net present value basis the Intifada and the permanent “closure” caused by the wall has cost them an estimated $10 billion from the period starting in 2001 to the end of this year, driven up unemployment to over 50%, and caused Palestinian workers to lose an estimated $4.5 million daily in lost wages. But we also must not underscore the immense cost of the wall to the Israeli people. Considering that the wall is expected to cost the nation of Israel an estimated $1,287,500,500 in net present value terms, or 4% of Israel’s GDP, we must question whether the construction of the Wall is a reasonable way for Israel to protect its security interests along the West Bank.
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