Introduction

The basic dilemma concerning economic relations between Israel and a (future) Palestinian state is the extent to which the two units should be economically integrated (or separated). On the one hand, it is argued that integration would generate more gains from trade, facilitate economic growth and maximise the peace dividend. On the other hand, it is argued that Israeli occupation has undermined economic development in the West Bank and the Gaza Strip, and that some separation is needed in order to turn things around. The former is sometimes considered as the economic approach, while the latter is sometimes described as an ‘alternative’ approach, which puts politics before economics. Indeed, as we shall see below, at least in some cases the international development agencies have used the ‘economic argument’ in order to advocate more economic integration.