The Two-State, Two-Economy Solution

By Raja Khalidi*

RAMALLAH – For some people, the bloody war in Gaza may have shattered the 35-year-old consensus that the only feasible solution to the region’s troubles is to have two states, Israel and Palestine, living peaceably side by side. Yet others suggest that the horrors we have witnessed since October 7 could augur the revival of that very goal.

In recent statements, American, Palestinian, and Arab officials have all stressed that a two-state solution must emerge phoenix-like from the ashes of this war. Reasonable people everywhere can only hope that this might still provide the framework for a definitive and mutually agreed end to a century-old struggle.

The timing of this renewed interest is ironic. November is when Palestinians commemorate the Palestine Liberation Organization’s (PLO) 1988 “Declaration of Independence,” which was adopted from exile in Algeria at the height of the first intifada. All Palestinian factions – including the most radical of the period – accepted the partition of Palestine and Israel’s de facto existence within its pre-1967 borders.

In making that breakthrough declaration, the PLO officially identified only one major condition for peace: the 22% of Palestine comprising the occupied West Bank, including East Jerusalem, and the Gaza Strip must be liberated of all Israeli settlers. Otherwise, the territory could never be viable as the space for a sovereign, independent state with its own natural resources and recognizable borders. 

Immediately following the Algiers declaration, Palestinian economists started grappling with the economic implications of a two-state configuration. In 1990, a comprehensive PLO-led study concluded that a contiguous Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital, could indeed be economically viable. But, given the weak resource base, the miniscule land area, and the expected challenges of absorbing Palestinian refugees and returnees, viability depended, to begin with, on Israel’s military withdrawal and evacuation and the dismantlement of settlements. Without such a retreat by Israel, economic development could not be assured, because no investor would have confidence in Palestinian sovereignty. 

The 1993 Oslo Accords, which the PLO accepted, fell far short of meeting this condition. Instead, they provided largely civil autonomy to the Palestinian Authority (PA) amid continued Israeli settlement, which forced economic planning into the hitherto unknown domain of “sub-sovereign state-building.” Over the subsequent five years, interim negotiations were supposed to reach a “permanent status” agreement on all contentious issues; and such an outcome was almost achieved at Camp David in 2000.

But those negotiations ultimately failed, leading to the 2000-05 outbreak of the second Palestinian intifada, which quickly turned violent, and an overwhelming Israeli military response. A two-state solution came to seem even more distant, and the PA’s already limited jurisdiction was further reduced. The Fatah-Hamas (West Bank-Gaza) division since 2006 created not only political disunity, but also greater economic distortions and a range of dependencies on the pre-eminent Israeli economy, which was experiencing a long boom.

For the past 20 years, Palestinian economists (including me) have devoted much time and energy planning for a Palestinian “national economy” within the two-state configuration. Yet in arguing that a coherent, independent, productive Palestinian economy could still be built even under occupation or siege, we implicitly abandoned the earlier PLO maxim that there can be no development without sovereignty.

Now, the economic legacy of Oslo is clear. Israel dominates – and can easily manipulate – the Palestinian macroeconomy, from currency and fiscal revenues, trade channels, and labor markets to energy, natural-resource access, and all the other attributes of economic viability. So it is no longer credible to argue that an independent Palestinian state could arise amid the archipelago of Israeli settlements in the West Bank, the eco-demographic strangulation of East Jerusalem, and now the destruction of Gaza and the humanitarian catastrophe to which its 2.2 million non-combatants are being subjected.

Even the most starry-eyed economist would be humbled by the scale and complexity of the reconstruction effort that this war has necessitated. Making matters worse, an indirect outcome of the war is that the Palestinian economy in the West Bank, including East Jerusalem, is also collapsing.

Well before October 7, Palestinian economic development had become a chimera, especially with the rise of an Israeli government fully committed to the agenda of religious nationalists and messianic settlers. They have pushed the West Bank’s three million Palestinians to the brink since the war began, explicitly calling for their forceful subjugation or displacement.

As The Elders (an independent group of global leaders) argued in a recent open letter, the international community must move quickly if it hopes to turn today’s catastrophe into a last-gasp opportunity to achieve – or to impose, if need be – a two-state outcome. Of course, many of the Israelis currently in power consider such an idea radioactive. But since the extremism within the current Israeli coalition cannot be ignored, it will need to be contained, especially by peace-loving Israelis and their US allies. 

Even at this dark hour, there may still be a chance to forge a “real” two-state deal, because we already know what it must include. The original PLO prerequisites for economic viability are as valid today as they were 35 years ago, because they represent the only material basis for a viable and permanent political solution. 

For decades now Palestinian economists and planners have been preparing the economic foundations of a sovereign state of Palestine. We have continued pursuing this goal despite seeing its prospects recede before our eyes. Having peered into the bottomless pit of this war, are there still enough Israelis and Palestinians with the courage and political foresight to opt for peace instead of more violence?

*Raja Khalidi is Director-General of the Palestine Economic Policy Research Institute (MAS).

 Copyright: Project Syndicate, 2023.