This article was originally published by The Jordan Times and is republished with the author's permission.

A woman in Bethlehem looks at antique Palestinian coins at a Chamber of Commerce exhibition in the West Bank. (Magnus Johansson, Maan Images)

The phrase "Ugly American", which epitomised American arrogance, corruption and tragic blunders in Southeast Asia in the early sixties is no longer in vogue in that region. But "Ugly Israeli" is alive and well in the Middle East, wherever there is an agreement of any kind between Israel and an Arab partner.

Much has been written after the Al-Aqsa Intifada of 2000 about the imminent "collapse" of the Palestinian economy. Not as well known is how structurally hobbled this economy has been from the start and how amazing it is that it even has a pulse now, that people are able to discuss GDP and trade balances and labour, as though the Palestinians had a sovereign state and were in control of their borders, of all their remnant "territories" from A to Z, and of their natural resources.

There are two essential rules to follow for anyone attempting in good faith to "normalise" relations with Israel: avoid ambiguity in any transaction and make sure that working procedures as well as processes of arbitration and enforcement are firmly in place.

In an agreement between two parties, where there is an imbalance in power, as with the Israelis and Palestinians, the rights of the weaker party must be protected. The big secret of the Paris Protocol of 1994 on economic relations between the PLO and the Palestinians is that it failed to protect the Palestinians from Israeli predation. Economists have a fancy phrase for what resulted from the Paris agreement. It is called "asymmetric containment" and refers to the economic constraints placed on the Palestinian Authority from the get go.

Anyone trying to understand or rail against the performance of the Palestinian Authority must link that performance to Israel's policy of "asymmetric containment", which means separation and deliberate resistance to integration.

Both the Jews and the Palestinians, wherever they are, have acquired the reputation of being sharp businesspeople. But in the occupied territories and in their economic dealings with Israel, the Palestinians are so far removed from a level-playing field in business and commerce, they must be judged as the superior businesspeople to have just survived.

On a daily basis, Palestinians have had to deal with sharks, with institutionalised Israeli systems whose hallmarks since the establishment of the state of Israel have been segmentation, exclusivism and separation.

Before the Paris Protocol, Israel exploited the Occupied Palestinian Territories and took in more taxes than it put back in basic services. After the Paris Protocol, Israel's capital investment in the West Bank is, and continues to be, in the form of hundreds of Jewish settlements, related infrastructure and industrial zones all along the north-south main Palestinian highway at the expense of Palestinian land and water and operated outside the Palestinian legal economic framework.

After Israel's flow of capital into the West Bank in the form of Jewish islands high on hilltops, overlooking the main Palestinian commerce highway, and in spite of repeated but bootless protests from the Palestinians (faintly echoed by the US), Israel, as the world knows, has now moved on to the next logical step â€" safeguarding its illegal and ugly real estate and industrial gains and its expropriation of neighbouring Palestinian arable land â€" for security.

The military protection from people Israel is robbing in broad daylight took the form of an extensive network of checkpoints and virtual boundaries designed to control the flow of movement of Palestinian labour into those shining Jewish industrial stations, also known as "Israeli controlled areas". When Palestinian anger erupted, the move from already established virtual boundaries and checkpoints to concrete walls and more checkpoints was but a small one â€" simply the logical next step in Israeli capital investment in the West Bank.

The Palestinian economy is characterised by "profound structural imbalances and high external dependence". The occupied territories are dependent on imports (90 per cent of Palestinian imports are from Israel) and its exports (88 per cent of which go to Israel) are restricted. Because of restrictions on foreign trade and lack of protection from Israeli imports, the Palestinian economy has a chronic trade deficit.

Since the Israeli occupation, the GDP per head in the occupied Palestinian territories has risen in only one year (1994). The GDP per head in 1999 was about one-eighth of what it was in 1993, when economic growth was infused with substantial foreign aid meant to lay the foundation for future development.

Israel's power to switch the internal and external prison gates on and off at will has a simple name among economists â€" "closures". The news has seeped out even into the pages of The New York Times that Israel has now effectively divided the West Bank into three sectors and isolated them form one another, delaying people who are on their way to jobs or schools for hours, rerouting them, as well as truckloads of goods to dirt roads and sometimes turning them back altogether â€" all to safeguard their ill capital gains in the West Bank. The main north-south West Bank highway suddenly dead ends as it approaches Jerusalem, making Bethlehem a lengthy detour for Palestinians on a narrow, winding road through barren hills circling Jerusalem eastwards. Bethlehem is divided from Jerusalem by 8-metre-high concrete walls.

But the groundwork for the deforming structural constraints on the Palestinian economy have been long in place and are a direct result of Israel's "interpretation" of the Paris Protocol and the lack of working procedures or an arbitration system between the two sides.

Here are some examples of the structural constraints imposed by Israel on the Palestinian economy.

â€" In agriculture: Palestinian agricultural land is continually shrinking as a result of Israeli land expropriation; access to Israeli markets is unpredictable because of closures; the area of Palestinian land under irrigation is tiny (about a quarter of the total), because water is diverted for use by Jewish settlers and Palestinian water use (including the digging of wells) is restricted.

â€" In industry (mining, manufacturing, construction and utilities): manufacturing contributes only 10 per cent to the Palestinian economy because of Israeli-imposed limitations on the legal and regulatory system, e.g., in the process of industrial and commercial licensing, and agricultural production planning

Nearly 90 per cent of industrial enterprises in the occupied territories employ less than five workers each. The share of construction of the GDP exceeds that of manufacturing, but it is dependent on donor assistance.

â€" In the service sector (wholesale retail trade, transport, tourism, etc.): this sector is unusually large, in an attempt to compensate for the lack of opportunities in production. But growth in this sector has been underpinned by the doubling of employment in the public sector since the establishment of the Palestinian Authority. This growth has been under attack by the international community, first as part of the "reform" effort and then as a result of international sanctions that has left employees to languish without salaries for months and still counting.

The service sector has to contend with Israeli prohibitions on the development of financial and credit institutions. Tourism is hostage to the political situation, and manpower/expertise from outside the occupied territories is restricted, as Israel controls the Palestinian population registry, visas to the occupied territories and work permits.

â€" Fiscally: tax revenues provide the occupied Palestinian territories with basic public services, such as education and health. Capital spending in the occupied territories is covered by foreign aid. Although the Palestinian Authority has managed to triple its tax base (to 863 million, or 25 per cent of GDP in 1998), and even managed to balance the budget in 1998, its revenue clearance system is operated by Israel, which is therefore in control of the Palestinian Authority budget, and can choose to freeze, delay or withhold revenues from the Palestinian Authority for political purposes, as it has done most recently, after the January 2006 elections.

Israel has defrauded the Palestinians out of substantial sums in customs by interpreting "imports" into the occupied territories to mean only those imported directly by Palestinian companies via Israel but not those first imported by an Israeli company for onward shipment to the occupied Palestinian territories.

The bulk of imports into the occupied territories comes via Israeli companies, because imports by Palestinian companies are subject to "security" delays at Israeli ports. Therefore, all import charges paid on goods that come into the West Bank and Gaza as indirect imports are collected and pocketed by Israel â€" i.e., they are not refunded to the Palestinian Authority.

The Palestinian Authority is also prevented from taxing a very wide range of economic activities if any part of these activities could be shown to have originated in Israel. For example, because Israeli transportation is more likely to get through checkpoints, almost all transportation between Israel and West Bank and Gaza is carried out by Israelis. This includes tourist agencies and buses operated by Israelis for tourists visiting areas under Palestinian Authority jurisdiction. The Palestinian Authority cannot tax such transportation activity.

â€" In trade: Israel's imposition of security measures on Palestinian trade constitutes non-tariff barriers to Palestinian trade. The export routes running through Israel have been unreliable and costly.

Israeli measures include permits, import licences, security checks and delays, the stipulation of Israeli import agents, clearing/shipping agents and insurance agents. These measures result in high transportation, storage, insurance and clearance costs for Palestinian traders.

Direct trading through Jordan and Egypt could decrease the Palestinian Authority's fatal dependence on tax revenues that Israel agreed to remit in the Paris Protocol. Attempts have been made in that direction, for example: the technical Economic Cooperation Accord between the Arab Republic of Egypt and the PLO of January 25, 1994, (ease border restrictions, create free-transit areas, make use of Egyptian ports, airports and land borders); and the trade agreement between the Jordan and the Palestinian Authority, of January 26, 1995, (duty-free import by the other party of 77 products originating in Jordan and 60 products originating in the occupied territories).

However, at present, imports through Jordan and Egypt do not exceed 2 per cent of total. Israeli control of the borders of the occupied territories, as well as Jordan's and Egypt's readiness to receive such trade are the two major obstacles.

Whereas foreign aid helps Palestinians survive, it has little or no structural impact on the economy. The daunting task of the Palestinian Authority is to dismantle Israel's policy of asymmetric containment.