A textile factory in Barkan, in the northern West Bank
Dani Rubinstein

TEL AVIVâ€" The recent wave of violence and Mahmoud Abbas' threats to dismantle the Palestinian Authority could represent not just a security emergency for Israel, but also an economic nightmare.

More than 1,000 factories in the West Bank rely solely on the manpower of Palestinian workers. And they're just a small part of the financial cost that Israel will pay in the event of the Palestinian administration's collapse.

When the Israeli government was passing power over to the Palestinian Authority 20 years ago, there were approximately 20,000 Palestinians working in government institutions, most in the health and education systems. Today there are more than 150,000 public workers to which we must add pensioners whose monthly checks support about one million people.

The Palestinian government's budget is around $4 billion, which mostly comes from foreign donations. If the Palestinian Authority collapses, who is going to administer all of these payments? Who will run public offices and services? These questions don't even account for the security issue, which will probably lead to a larger and more costly presence of Israeli military forces in the region.

The economic consequences help explain why Abbas continues to delay carrying out his threat to defy the Oslo Accords and unilaterally proclaim a "Palestinian state under occupation," dismantling the Palestinian Authority in the process.

The ultimate reason is clear: The Palestinian economy is completely dependent on Israel. Without Israel, the West Bank would quickly turn into a sort of Gaza II, with social upheaval and skyrocketing unemployment.

Economic coexistence

A good illustration of the Palestinian economic dependency on Israel can be seen in the data of more than 1,000 Israeli factories that operate in the West Bank. There are 14 Israeli industrial zones in the area, including Adumim near Jericho with 330 factories, Barkan in Samaria with 160 factories and the zone between Jerusalem and Ramallah.

At the Soda Stream plant in Adumim â€" Photo: Nir Alon/ZUMA

Without exception, the factories are low-technology operations and workshops that exploit the advantages of the West Bank: low wages, rents and property tax rates. The main domains of these factories include food processing, textile, printing, furniture manufacturing, construction and plastics.

As Israel's economy was undergoing its much discussed modernization, moving into the exportation of high technology, more traditional enterprises left the country. Textile left the Israeli development zones for the Palestinian Territories, and from there to Jordan, Egypt and Turkey. Moreover, according to data, this industry increasingly has left the region altogether, opting instead for China and other Asian countries. "Basic materials to make a pair of shoes cost more than a finished pair of Chinese shoes,” says a Palestinian shoe manufacturer from Hebron.

Traditional heavy industries, nevertheless, continue to be the main economic force in the Palestinian economy. In the Israeli industrial zones in the West Bank, more than 30,000 Palestinians are employed, with some 20,000 more working in construction, transport, supply and agriculture.

In total, more than 200,000 Palestinians make a living from activities in contact with Israel. Estimates indicate that they represent roughly more than one-quarter of the Palestinian workforce, and produce 20% of the Palestinian GDP.

Most of these workers have no alternative. Furthermore, the Western boycott movements on Israeli products made in the settlements sometime underestimate the number of Palestinians employed in Israeli factories in the West Bank â€" and the coexistence that has reigned in these factories.

The current wave of violence risks undermining the security arrangements in the West Bank, and could lead to an Israeli blockade of Palestinian territories. This would completely destroy the West Bank's already shaky economy. Then it would finally be connected with Gaza, but in a very unpleasant way.

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Economy

Merkel's Legacy: The Rise And Stall Of The German Economy

How have 16 years of Chancellor Angela Merkel changed Germany? The Chancellor accompanied the country's rise to near economic superpower status — and then progress stalled. On technology and beyond, Germany needs real reforms under Merkel's successor.

Chancellor Angela Merkel looks at the presentation of the current 2 Euro commemorative coin ''Brandenburg''

Daniel Eckert

BERLIN — Germans are doing better than ever. By many standards, the economy broke records during the reign of outgoing Chancellor Angela Merkel: private households' financial assets have climbed to a peak; the number of jobs recorded a historic high before the pandemic hit at the beginning of 2020; the GDP — the sum of all goods and services produced in a period — also reached an all-time high.

And still, while the economic balance sheet of Merkel's 16 years is outstanding if taken at face value, on closer inspection one thing catches the eye: against the backdrop of globalization, Europe's largest economy no longer has the clout it had at the beginning of the century. Germany has fallen behind in key sectors that will shape the future of the world, and even the competitiveness of its manufacturing industries shows unmistakable signs of fatigue.

In 2004, a year before Merkel was first elected Chancellor, the British magazine The Economist branded Germany the "sick man of Europe." Ironically, the previous government, a coalition of center-left and green parties, had already laid the foundations for recovery with some reforms. Facing the threat of high unemployment, unions had held back on wage demands.

"Up until the Covid-19 crisis, Germany had achieved strong economic growth with both high and low unemployment," says Michael Holstein, chief economist at DZ Bank. However, it never made important decisions for its future.

Another economist, Jens Südekum of Heinrich Heine University in Düsseldorf, offers a different perspective: "Angela Merkel profited greatly from the preparatory work of her predecessor. This is particularly true regarding the extreme wage restraint practiced in Germany in the early 2000s."

Above all, Germany was helped in the first half of the Merkel era by global economic upheaval. Between the turn of the millennium and the 2011-2012 debt crisis, emerging countries, led by China, experienced unprecedented growth. With many German companies specializing in manufacturing industrial machines and systems, the rise of rapidly industrializing countries was a boon for the country's economy.

Germany dismissed Google as an over-hyped tech company.

Digital competitiveness, on the other hand, was not a big problem in 2005 when Merkel became chancellor. Google went public the year before, but was dismissed as an over-hyped tech company in Germany. Apple's iPhone was not due to hit the market until 2007, then quickly achieved cult status and ushered in a new phase of the global economy.

Germany struggled with the digital economy, partly because of the slow expansion of internet infrastructure in the country. Regulation, lengthy start-up processes and in some cases high taxation contributed to how the former economic wonderland became marginalized in some of the most innovative sectors of the 21st century.

Volkswagen's press plant in Zwickau, Germany — Photo: Jan Woitas/dpa/ZUMA

"When it comes to digitization today, Germany has a lot of catching up to do with the relevant infrastructure, such as the expansion of fiber optics, but also with digital administration," says Stefan Kooths, Director of the Economic and Growth Research Center at the Kiel Institute for the World Economy (IfW Kiel).

For a long time now, the country has made no adjustments to its pension system to ward off the imminent demographic problems caused by an increasingly aging population. "The social security system is not future-proof," says Kooths. The most recent changes have come at the expense of future generations and taxpayers, the economist says.

Low euro exchange rates favored German exports

Nevertheless, things seemed to go well for the German economy at the start of the Merkel era. In part, this can be explained by the economic downturn caused by the euro debt crisis of 2011-2012. Unlike in the previous decade, the low euro exchange rate favored German exports and made money flow into German coffers. And since then-European Central Bank president Mario Draghi's decision to save the euro "whatever it takes" in 2012, this money has become cheaper and cheaper.

In the long run, these factors inflated the prices of real estate and other sectors but failed to contribute to the future viability of the country. "With the financial crisis and the national debt crisis that followed, economic policy got into crisis mode, and it never emerged from it again," says DZ chief economist Holstein. Policy, he explains, was geared towards countering crises and maintaining the status quo. "The goal of remaining competitive fell to the background, as did issues concerning the future."

In the traditional field of manufacturing, the situation deteriorated significantly. The Institut der Deutschen Wirtschaft (IW), which regularly measures and compares the competitiveness of industries in different countries, recently concluded that German companies have lost many of the advantages they had gained. The high level of productivity, which used to be one of the country's strengths, faltered in the years before the pandemic.

Kooths, of IfW Kiel, points out that private investment in the German economy has declined in recent years, while the "government quota" in the economy, which describes the amount of government expenditure against the GDP, grew significantly during Merkel's tenure, from 43.5% in 2005 to 46.5% in 2019. Kooths concludes that: "Overall, the state's influence on economic activity has increased significantly."

Another very crucial aspect of competitiveness, at least from the point of view of skilled workers and companies, has been neglected by German politics for years: taxes and social contributions. The country has among the highest taxes on income in Europe, and corporate taxes are also hardly as high as in Germany anywhere in the industrialized world. "In the long run, high tax rates always come at the expense of economic dynamism and can even prevent new companies from being set up," warns Kooths.

Startups can renew an economy and lay the foundation for future prosperity. Between the year 2000 and the Covid-19 crisis, fewer and fewer new companies were created every year. Economists from left to right are unanimous: Angela Merkel is leaving behind a country with considerable need for reform.

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