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Class, Economy, and the Second Intifada

ADAM HANIEH is a researcher and human rights worker living in Ramallah, Palestine.

The current Palestinian Intifada and Israel’s brutal response has been the subject of countless articles over the last two years. There is however a disappointing vacuum within left analysis, with much of this writing attempting to explain the character of Israeli policy through the right-wing views of Ariel Sharon. Within this framework, Israeli strategy is presented as a racist extension of colonialist designs on the Occupied Territories sometimes including the expulsion of Palestinians from the West Bank and Gaza Strip (hereafter referred to as WB/GS).

What is strikingly absent from virtually all left analysis is any discussion of class and political economy in both Israel and the Occupied Territories. While this may seem a strange accusation to make of left-wing writing, I believe the absence of class-based analysis is in itself indicative of the confusion with which much of the left views the Israeli state. For much of the left, Israeli politics is simply understood as the binary opposites of the right-wing Likud and the more peace-inclined Labor Party. I aim to show below that such a view stems from a mistaken approach to understanding class formation in Israel and that without placing class at the center of our analysis, it is difficult to develop an adequate understanding of what is actually occurring on the ground.

In essence, I argue that Israeli capitalism was brought into being by the Labor Zionist movement (today represented by the Labor Party) and that the Oslo process was a key step in its formation.1 Israel’s war against the Palestinian people today is the logical extension of this process, aimed at creating a Palestinian canton-state. Because of the central role of the Labor Zionist movement in building Israeli capitalism, the terms “left” and “right” are often confused in the Israeli case.

Moreover, over the last ten years, Israel has progressively delinked itself from reliance on cheap Palestinian labor while strengthening the dependence of the Occupied Territories on the Israeli economy. The result is a Palestinian society with a highly distorted class structure—a capitalist class dependent on its privileged relationship with Israeli capital and a working class that has little strategic weight in the national struggle.

Class and State in Israeli Society

Much academic and popular commentary on Israel sees the predominant weight of Israel’s state in the first four decades since the country’s establishment in 1948 as evidence that Israel was a socialist economy. This belief found sustenance in the political writings of the Labor Zionist movement itself, through the role of collective settlement—particularly the kibbutz movement—and the strength of the trade union movement, the Histadrut, as the largest single employer throughout most of Israel’s history.2

Since the mid-1980s, and accelerating during the 1990s, Israel’s political economy has undergone a dramatic transformation. Over the last fifteen years, the country’s economic structure has changed significantly and Israel has embraced an outwardly expanding vision of global capitalism. Based largely on International Monetary Fund and World Bank prescriptions, the Israeli government has privatized state-owned enterprises, relaxed government control of the capital markets, and reduced real wages.

Traditional approaches to Israel’s political economy attempted to explain these changes as resulting from an ideological shift in Israel’s elite. According to this approach, Israel’s leaders used to ascribe to a version of socialist ideology and then in the mid-1980s they rapidly embraced a neoliberal capitalist prescription for their economic woes.

In contrast, a new generation of Israeli scholars writing over the last decade have argued that a new approach is required towards understanding Israel’s establishment.3 They have argued that the development of the Zionist movement is best understood in the context of a settler movement attempting to win control over the land and labor markets. The private capitalist class of the original settler movement was weak and divided, and a collectivist approach to settlement led by the Labor Zionist movement was the most effective way of settling the land and evicting the indigenous population. The strength of the Histadrut and the leading role of the Labor Zionist movement were best explained through the weakness of the Jewish capitalist class that existed pre-1948 and the need to provide work for Jewish immigrants as well as exclude the indigenous Palestinian working class from the labor market as a prelude to expulsion.

Because of the embryonic nature of both the capitalist and working class during the settlement period, the Israeli state that developed after 1948 was concerned not only with settling the land, but also in building classes themselves. This class formation passed through two key phases in the period between 1948 and 1985:

1. 1948–1973: This period was characterized by high levels of growth financed by unilateral capital transfers from German reparations and foreign Jewry. It was an initial period of state and class formation, thus the state directed virtually all capital transfers to favored business groups considered allies in the “national project.” These groups eventually developed into the key conglomerates that dominated the Israeli economy in the following years. The Israeli working class was formed through the high levels of immigration of Arab, African, and Asian Jews—who were to become ethnically defined as “Mizrahim.”

Following the 1967 Israeli occupation of the WB/GS, the Israeli economy underwent the so-called Palestinian boom. The occupation significantly increased the size of Israel’s domestic market and provided another source of cheap labor. This labor force was cheap and highly exploitable, and by the mid-1980s, Palestinians from the WB/GS made up around 7 percent of the Israeli labor force.4 Around one-third of the WB/GS labor force worked in Israel in 1985, with 47 percent of this number working in the construction industry. This cheap labor force provided a large boost to the Israeli economy by filling the lowest rungs of the labor market and covering some of the shortfall caused by prolonged Israeli military service. It also enabled some Mizrahim workers to move up to positions of foreman and supervisors, thereby reducing some of the ethnic tensions that had arisen during the 1970s between Mizrahi and European Jews.

2. 1974–1985: In the late 1960s the large core conglomerates had coalesced into five key business groups—Koor, Hapoalim, Leumi, Clal, and Israel Discount Bank Holdings (IDB). The first four conglomerates were controlled by the state, Histadrut, and the Labor Zionist movement, while IDB was privately owned. Beginning with the Israeli occupation of the WB/GS in 1967 and accelerating following the 1973 war, military production moved to the center stage of the Israeli political economy. This military spending was directed by the state to the key conglomerates and led to massive rates of accumulation for the core business groups while the economy as a whole suffered from stagflation.5

In the mid-1980s, this system began to break down due to a number of different factors. On a global level, a worldwide recession and a drop in demand for military hardware in the international market due to global political realignment began to limit conglomerate profits. Locally, the onset of hyperinflation began to strangle the economy as a whole and made financial planning difficult.

In response to these changes, the state—under the tutelage of the Labor wing of the Zionist movement—undertook a significant change of direction that began with the Economic Stabilization Plan of 1985 (ESP). This change consisted of four interrelated processes:

1. A change in the relationship between the state and the key conglomerates: The ESP inaugurated a new phase in the relationship between the state and the capitalist class. The key conglomerates were separated from the state apparatus and passed into the hands of the new capitalist class. The state would no longer shelter these conglomerates but rather, the conglomerates became the key sites of capital accumulation for a truly private capitalist class. This was achieved through breaking up the Histadrut empire, passing its remnants into private hands and the privatization of government and quasi-state bodies.

2. The coalescence of a new capitalist class: This capitalist class came from a fusion of three different sources: global capital—often with links to the Zionist movement—such as U.S. businessman Ted Arison and Canadian billionaire Charles Bronfman; local private capital that had previously been supported by the state, such as the Recanati and Ofer families; and thirdly, elements of the state bureaucracy that had led the ESP and privatization process.

3. The insertion of Israel into the globalized economy: Beginning in the mid-1980s, the Israeli economy was opened up to the world economy through relaxation of foreign ownership and investment laws and the joint listing of local companies on stock exchanges around the world. The capitalist class detailed in (2) was not homogenous. The third sector of the capitalist class identified above, previous state bureaucrats, tended to become managers of the new private companies. Following the onset of negotiations with the Palestinians in the early 1990s, large indigenous Israeli private capitalists were integrated into a new globalized world order through significant investments and ownership ties with foreign capital, in particular in the United States and Asia. Thirdly, international capital—particularly U.S. capital—began to invest heavily in Israel as the Israeli economy was integrated into the global capitalist order.

4. Restructuring the worker-capitalist relationship: Breaking up the conglomerates and the Histadrut empire had a significant impact on the relationship between the worker and the capitalist owner. The old system that had seen a privileged layer of workers exist alongside a highly exploited sector was broken down through severing the link between the Histadrut and the economy. There was a large increase in the rate of exploitation experienced by the working class reflected in productivity rate increases that exceed real wage growth. Several state policies were responsible for this, in particular, the devaluation of the shekel and the weakening of cost-of-living allowance that had been paid to compensate for inflation. In addition, government fiscal policies such as ending or lowering subsidization for certain goods contributed to a transfer of wealth from the poor to the new capitalist class.

These changes characterize the “new” Israeli political economy, and have been reflected on the political and cultural levels. Some indication of these changes include: (1) the growth in civic organizations and extraparliamentary movements as the state has withdrawn from the public sphere, (2) an increasing “McDonaldization” of Israeli culture as U.S. capital has increased investment in the country, and (3) political developments such as the Oslo process which was a key step in allowing Israeli capital to move onto the global and regional stage.

It must be stressed that the Labor Party was the guiding force in this transition to neoliberal capitalism. Its social base has traditionally been wealthier Jews from Europe and America, whereas the rival Likud began to win allegiance from the poorer layers of Jews from Africa and the Middle East (Mizrahim) in the 1970s. The Likud Party won their first elections in 1977, largely due to support from the poor and disadvantaged Mizrahim and the view that Labor represented the European Jewish elite. Today, there is very little difference between the economic policies of Labor and Likud—both have wholeheartedly embraced U.S.-style neoliberalism. On the political level, there is also remarkable congruence between mainstream Labor and Likud on the Israeli-Palestinian conflict. Today the head of the Labor Party, Benyamin Ben Eliezer, is overseeing the brutal repression of the Palestinian population in the Occupied Territories in his position as Defense Minister. It is this convergence of the Labor and Likud that explains the collapse of Labor as a political force in Israel.6

Oslo and Israeli Capitalism

At the beginning of the Oslo process, the emerging capitalist class was a vocal supporter of the negotiations. A typical example of this support was Benny Gaon. Gaon became CEO of the Histradut’s flagship company, Koor, in 1987, and led the transformation of Koor into a private company. For Gaon and the new Israeli capitalist class, Oslo was a critical step in the opening up of Israel to the global marketplace. According to this view, it would be impossible to attract significant foreign investment to Israel while conflict persisted. It would also be very difficult for Israeli companies to invest in the United States, Europe, and the so-called emerging markets without a political resolution to the Israeli-Palestinian conflict. Koor launched its Peace Project shortly after the signing of the Declaration of Principles in 1993 which united Israeli, Palestinian, Arab, and European business in joint investment projects in the region. It also was a chief partner with the Palestinian Authority (PA) in infrastructure projects and exporting goods to the WB/GS.

The reasons for this support largely stemmed from the need to end the Arab boycott of the Israeli economy and ensure the stability of the business environment in Israel. Israel aimed to subcontract low-technology industry such as textiles to factories in Egypt and Jordan at a much cheaper labor cost than inside Israel. To a large extent this has been successful, with Israeli companies now producing their goods in industrial zones in Jordan, Egypt, and the Occupied Territories.

Beginning in 1993, Israel consciously moved to substitute foreign workers from Asia and Eastern Europe for the daily Palestinian labor force that had worked in Israel since 1967. While foreign workers were slightly more costly as they had to be housed and brought to the country, they were highly exploitable and were often brought “illegally” (although with full knowledge of the Israeli government). They were brought by labor-hire firms set up in Thailand, the Philippines, and Romania, with employers taking their passports on arrival, employing them in very poor conditions and often withholding pay. They formed an ideal reserve army of labor, as they could easily be deported to their home countries on charges of being in Israel illegally.

Importantly, the foreign workers that arrived in the hundred thousands following Oslo meant that the Israeli economy was no longer dependent upon Palestinian workers. Instead, Palestinian labor became a “tap” that could be turned on and off depending on the economic and political situation. Between 1992–1996, Palestinian employment in Israel declined from 116,000 workers (33 percent of the Palestinian labor force) to 28,100 (6 percent of the Palestinian labor force). Earnings from work in Israel collapsed from 25 percent of Palestinian GNP in 1992 to 6 percent in 1996.7 Between 1997 and 1999, an upturn in the Israeli economy saw the numbers of Palestinian workers increase to approximately pre-1993 levels. However, following the beginning of the current Intifada, the number of workers dropped drastically due to border closures and refusal to issue permits. Since September 2000, around 75–80,000 Palestinians have lost their jobs inside Israel or the settlements. These figures indicate that the Palestinian labor force in Israel has become a second reserve army of labor alongside foreign workers.

Relationship between the Palestinian Authority and Israel

The crux of Israeli strategy for the WB/GS is control over the Palestinian population without direct military rule over Palestinian towns and villages. Oslo aimed to keep Palestinian movement, goods, the economy and borders under Israeli control, while the Palestinian population was to be ruled by a Palestinian Authority (PA) whose power rested upon the blessing of the Israeli and U.S. governments. The primary responsibility of the PA was to ensure the “security” of Israel—i.e., to act as a police force for the occupying force. In the classic colonialist sense, the natives were to be given “self-rule,” carefully circumscribed within the context of Israel’s continuing control and domination.

The Palestinian economy is completely integrated into and dependent upon the Israeli economy. Approximately 75 percent of all imports to the WB/GS originate in Israel while 95 percent of all WB/GS exports are destined for Israel. Israel’s complete control over all external borders mean that it is impossible for the Palestinian economy to develop meaningful trade relations with a third country. The WB/GS are highly dependent on imported goods, with total imports amounting to approximately 80 percent of GDP. In such a situation of very weak local production and high dependence on imports, the economic power of the Palestinian capitalist class does not stem from local industry or production, but is comprador in nature. Its profits are drawn from the exclusive import rights on Israeli goods, and control over large monopolies that were granted to those loyal to Arafat. The privileged relationship with Israeli capital is the defining feature of the Palestinian bourgeoisie. Since 1993, this bourgeoisie has fused with sections of the PA bureaucracy and forms a major pillar of Arafat’s rule.

From the very beginning of the Oslo process, the PA has been completely dependent upon Israel, the United States, and Europe for its continued existence. Between 1995 and 2000, 60 percent of the total PA revenue came from indirect taxes collected by the Israeli government on goods imported from abroad and destined for the Occupied Territories. This money is collected by the Israeli government and then transferred to the PA each month according to a process outlined in the 1995 Paris Protocol economic agreement between the PA and Israel.8 This means that if the Israeli government chooses to withhold payment of this money—as it has since December 2000—then the PA faces a major fiscal crisis.

The other major source of PA income is foreign disbursements from the United States, Europe, and Arab governments. In 2001, these funds covered about 75 percent of the PA’s salary budget. Without this money, 122,000 PA public sector employees would not have been paid. In addition, foreign donors supported emergency programs such as food relief, employment creation schemes and reconstruction of destroyed infrastructure. The total WB/GS trade deficit is 45–50 percent of GDP and this is principally financed by foreign aid.

This relationship between the Palestinian areas and the Israeli economy, and the comprador nature of the Palestinian capitalist class, has produced a distinctive character to the Palestinian working class. The labor force is divided into three broad areas of employment—workers in Israel and the settlements who are severely affected by the current political situation, a large number of employees in the PA public sector, and a private sector dominated by small business. There is virtually no industrial working class to speak of in the WB/GS.

While Palestinian labor employed in Israel has declined in importance for the Israeli economy, it still makes up a very significant proportion of the Palestinian labor force. In the months prior to the beginning of the Intifada in 2000, just over 20 percent of the Palestinian labor force in the WB/GS (excluding Jerusalem) worked in Israel or the settlements.

In 1988, during the first uprising in the Occupied Territories, the proportion of the Palestinian labor force working inside Israel exceeded 50 percent. Thus over twelve years, there has been a 60 percent drop in the proportion of the Palestinian labor force working for Israeli employees. Where have these workers gone?

The large growth area in employment since the Oslo process has been public sector employment within the PA, which accounts for nearly 25 percent of employment in the local economy. The proportion of the labor force employed in the public sector has almost doubled since mid-1996. More than half of the PA’s expenditure is on wages for the public sector.

The third major sector of employment is the private sector, particularly in the area of services. What distinguishes this sector is that it is overwhelmingly dominated by small family-owned businesses. The Palestinian territories lack any significant large industry due to thirty years of Israeli de-development policies. Over 90 percent of Palestinian private sector businesses employ less than ten people.

Political Implications

On the economic level, Oslo pushed the development of a parasitic Palestinian capitalist class that was reliant upon its relationship with Israeli capital for its profits. Meanwhile, Israel ended its dependence on cheap Palestinian labor through a massive influx of highly-exploited foreign workers. Instead, Palestinian workers became a reserve army of labor that could be turned on and off at whim. Decades of de-development and Israel’s complete control over its Palestinian hinterland means that domestic Palestinian labor is either dependent on a public sector paid for by foreign aid or concentrated in small, privately-owned family businesses.

This structure of the Palestinian working class is highly significant in terms of political strategy. Although the Palestinian working class is large, there is no organized sector with the economic weight to place a class-based strategy at the center of the Palestinian national liberation movement. This differs, perhaps, from the example of the antiapartheid movement in South Africa, in which the organized working class—particularly mine workers—were able to play a central role in the movement.

The reality of this class structure is clearly apparent on the ground today. Since April of this year, around 700,000 people in the West Bank have been living under curfew for most of the time. Curfew—essentially house arrest—means that no one living in a major Palestinian town can leave their house without threat of being shot dead by the Israeli army. The days on which curfew is lifted for a few hours gives residents of these towns enough time to buy food and see friends, not sustain any meaningful productive activity. In such a context, basic life planning becomes an impossibility. From one day to the next it is impossible to know if you will be able to go to work, school, or university or whether you will be confined to your home. The result is a population whose life has been put on hold.

The reality of curfew illustrates perfectly the changes in both Palestinian and Israeli class structures since Oslo. In a regularly functioning capitalist society, this kind of curfew would be impossible because it brings work and industry to a complete halt for months on end. During the first Intifada, that began in 1988, Israel imposed regular curfews on some villages but never for the length and scale as the current period. These measures, as well as absenteeism during the first Intifada caused by general strikes, led the head of the Israeli Employment Service to call the situation “traumatic” for the Israeli economy. Today, all Israeli political leaders support the permanent curfews and closures and champion economic separation.

The structure of the Palestinian working class deeply effects political strategy in the current Intifada. The concept of strikes or other labor actions are nonexistent, as they have virtually no effect on the Israeli economy and only hurt Palestinian workers and their families. Another suggestion for political action that has regularly been raised throughout the Intifada is a boycott of Israeli goods. Despite some symbolic attempts, the economic relationship between Israel and the Palestinian economies makes this virtually impossible as most goods are imported from Israel. There are no local sources of dairy products, meat, cement, many fruits and vegetables, or electrical products. Electricity, phone lines, water and even the Palestinian internet is ultimately controlled by the Israeli government.

Is Oslo Dead?

A common refrain heard in the mainstream media as well as from sections of the PA and Israeli government is that the current Intifada means the end of the Oslo process. Some Palestinian commentators accuse Israel of wanting to destroy the PA and return the so-called Israeli Civil Administration that ruled the WB/GS until 1993.

The problem with these statements is that on close examination they bear little resemblance to what is actually happening on the ground. It is important here to distinguish between what Oslo was claimed to represent and what it was intended to achieve.

If the Oslo process is understood as a strategy to create a canton state—regardless of handshakes on the White House lawns—then it is clear that Oslo is far from dead. Over the last month, the Israeli government has been carrying out a plan aimed at expropriating land in the West Bank and forcing Palestinians into these cantons. This plan resembles the reservations set up by the South African government for the black population of that country during the years of apartheid. A nine-meter-high wall stretching for hundreds of kilometers is being finished around the northern West Bank towns of Nablus, Jenin, Qalqilya, and Tulkarem. A similar wall is being built around Jerusalem. In conjunction with this construction, a new pass-card system has been put in place that requires any Palestinian wishing to move between Palestinian towns to obtain a special weekly permit issued by the Israeli military commander of the West Bank. All goods moving into Palestinian areas must pass through one of three transit points under the control of the Israeli military. In essence, the West Bank has been divided into three cantons—in the north, center, and south of the West Bank—with all movement of goods and people between these areas under the control of the Israeli military.

These three cantons in the West Bank are separated by large Israeli settlement blocs and sprawling highways that are off limits to Palestinians. Special license plates distinguish between Palestinian and Israeli drivers and constitute another pillar of the emerging apartheid system in the West Bank.

The Palestinian population in the Gaza Strip has been effectively cut off from any connection with the West Bank for over a decade and constitutes the fourth canton under the Israeli plan. The Gaza Strip has been surrounded by a fence for many years and is now one of the most densely populated areas on the planet—with one million people literally locked into a few square kilometers. Permits are even required from the Israeli military for Palestinian fishermen to venture out into the sea to earn their livelihood.

Behind this process lies the economic changes outlined above: an attempt by Israeli capitalism to impose a political solution to the conflict that would assist Israel’s participation in the global marketplace; permit the Israeli economy to liberalize and reduce military expenditure; and open up both labor and consumer markets in the Middle East.

The major impediment to this process are the Palestinian masses, not the PA. The aim of current Israeli strategy is not the destruction of the PA but exactly the opposite, strengthening it in order to better repress the population. Some members of the PA will go in this process, but it is not individuals that are important but rather the structure as a whole and its role.

It is difficult to talk today of an “Intifada” in the sense of a mass, popular movement. For the reasons outlined above, there is little mass participation in the actual uprising. There is however a strong spirit of resistance summed up in the Arabic expression “samideen”—or the steadfast. This is why the form of repression adopted by the Israeli government is characterized by mass collective punishment of the population—tactics aimed at demoralizing and starving a population to submission.


  1. The Declaration of Principles (DOP), commonly called the Oslo Agreement, was signed between the government of Israel and the Palestine Liberation Organization on September 13, 1993. It was the product of secret negotiations between the Israeli government and Palestinian negotiators. Despite the widespread illusion that Oslo was an agreement intended to achieve peace and establish a Palestinian state in the West Bank and Gaza Strip, it was a highly flawed agreement that gave the illusion of Palestinian sovereignty but perpetuated Israeli dominance in all areas as I shall demonstrate later in the article.
  2. The Histadrut (General Federation of Workers in Eretz Israel) was the administrative backbone of the pre-state settlement, controlling the colonization effort, economic production and marketing, labor employment, and defense. The Histadrut was not a trade union in the classical sense, instead, its priorities were defined by “national” objectives not the interests of workers. Indeed, in 1960, the General Secretary of the Histadrut Pinhas Lavon characterized the organization,

    The General Federation of Workers was founded forty years ago by several thousand young people wanting to work in an under-developed country where labor was cheap, a country which rejected its inhabitants and which was inhospitable to new comers. Under these conditions, the foundation of the Histadrut was a central event in the process of the rebirth of the Hebrew People in its father-land. Our Histadrut is a general organization to its core. It is not a worker’s trade union.” Quoted in Haim Hanegbi, Moshe Machover, and Akiva Orr, “The Class Nature of Israel,” in New Left Review 65 (January–February, 1971).

  3. For some examples of this analysis, see Gershon Shafir, Land, Labor and the Origins of the Israeli-Palestinian Conflict, 1882–1914 (Cambridge: Cambridge University Press, 1989); Zeev Sternhell, The Founding Myths of Israel: Nationalism, Socialism and the Making of the Jewish State (Princeton University Press, 1998) and Ilan Pappe ed., The Israel/Palestine Question: Rewriting Histories (London: Routledge, 1999).
  4. 4. Lewin-Epstein, Noah and Moshe Semyonov, “Occupational Change in Israel: Bringing the Labor Market Back,” Israel Social Science Research 2, no. 2, (1984): 3–18.
  5. 5. For detailed discussion on this issue see the work of Jonathan Nitzan and Shimson Bichler, particularly, “From War Profits to Peace Dividends: The New Political Economy of Israel,” Capital and Class, vol. 60 (Autumn 1996).
  6. 6. There are recent signs that Israeli big business may be attempting to rebuild the Labor Party as a political force with considerable business support shifting to Haifa’s Labor Mayor Amram Mitzna as a candidate for Labor Party leadership against Ben Eliezer in recent months.
  7. World Bank, Trade Options for the Palestinian Economy—Working Paper No. 21 (English), March 2001.
  8. The Paris Protocol was an economic agreement signed in 1995 as part of the Oslo process. It gave precise expectations of which goods Palestinians were allowed to export and import, as well as tax regulations and other economic issues.

2002, Volume 54, Issue 05 (October)
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