Extract from cover story of Issue 18, December 24, 2007 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. Ahmad, a Hebron businessman who owns a stone-cutting company, has been waiting for months for the arrival of new tools. "The Israeli authorities always hold up the delivery, supposedly for security reasons that I cannot understand," he grumbles. Ahmad (who asked that his family name be withheld) exports the distinctive rose-tinted stone, extracted from Hebron's natural limestone quarries, used for polished surfaces and building facades. More than 15,000 families in Hebron depend on this industry. But even with his old tools, Ahmad cannot always do business. He frequently waits hours to move his truckloads of stone past IDF checkpoints in the West Bank to buyers in Israel, Jordan and the Far East, via the Jordanian port of Aqaba. Sometimes, the merchandise never reaches its destination at all because the IDF imposes a closure on Hebron - usually as a result of a terror alert or a search for wanted militants. "If a client can't get what he ordered in a timely manner, he will likely cancel a contract. These are not conditions under which business can be conducted," bemoans Ahmad, whose business has been floundering in recent years. Ahmad is not alone. Palestinians throughout the West Bank and Gaza Strip are in a dire economic situation. Along the road between Jerusalem and the Etzion Bloc, Palestinian laborers desperate for work risk arrest by Israeli authorities, by climbing over earth barriers to be picked up on the other side by Israeli employers who smuggle them into Israel. The Erez industrial zone, once a place of work for thousands of Gazans, is ghostly quiet now, abandoned since 2005 because it was targeted regularly by Palestinian armed factions. The border crossings into Gaza have been shut to regular trade since the Hamas takeover in June, with only humanitarian deliveries permitted, and even those sporadically halted when the crossings and the vicinity come under Palestinian fire. In short, the Palestinian economy is in shambles. According to the World Bank, the scale of economic losses the Palestinian territories suffered in the first half of this decade exceeds that of the United States in the Great Depression, with Palestinian GDP contracting nearly 40 percent. This grim fact may have more impact on the attempts at getting peace talks going than any of the declarations made at Annapolis. Unless the Palestinian people are given hope for a better future, they will place little trust in any diplomatic initiatives, say decision-makers. Palestinian President Mahmud Abbas, speaking at Annapolis, warned: "We do recognize - and I presume that you share with me this view - that the absence of hope and overwhelming despair would feed extremism." There has been a flurry of activity to address the economic issue. A conference of the major donor countries to the Palestinian Authority - mainly the United States, European nations and Arab countries - is to be held in Paris in December to discuss the continuation of aid to the PA. Former British Prime Minister Tony Blair, now the special envoy of the "Middle East Quartet" consisting of the U.S., the EU, Russia and the U.N., has set the goal of improving the Palestinian economy as a central target of his mission to advance the peace process. In November he announced a major new initiative called the "Quick Impact Project" that includes plans for a Japanese underwritten Agro-Industrial Park in Jericho and a Turkish-backed industrial zone in Hebron, in order to create local jobs. "A strong beginning for what is a critical part of the whole [peace] process," Blair called the project. Whether these initiatives will be sufficient to resurrect the Palestinian economy, which has been nose-diving since 2001, is questionable. With the outbreak of armed conflict between the Palestinian Authority and Israel that year, the Palestinian economy shrank 17 percent, and a further staggering 27 percent in 2002. Even with the moderate economic recovery that occurred between 2003 and 2005, it would take years to bounce back - and the Palestinian economy contracted again in 2006 by 6 percent. This, of course, took place against the backdrop of an already immense economic gap between Israel and the Palestinian Authority. In 1967, when the two economies first began interacting, the average Israeli citizen was 10 times wealthier than the average Palestinian in the West Bank and Gaza Strip. Today, Israeli per capita GDP is more than 20 times that of the Palestinians - $27,000 in Israel versus less than $1,200 in the Palestinian territories. The Palestinian economy is kept afloat by about $1 billion of annual direct donations to the Palestinian Authority from foreign governments and additional humanitarian assistance. The Gaza Strip, now all but entirely cut off both from the West Bank and most of the world, has become an economic disaster zone of frightening proportions. The percentage of Gazans who live in deep poverty - defined as an income of less than $460 per month for a household of two adults and four children - increased from 21.6 percent in 1998 to nearly 35 percent in 2006, according to the World Bank. And that is considered an under-estimate: without remittances and food aid, the poverty rate is thought to be closer to 67 percent. The situation is only expected to get worse, after Israel declared the Gaza Strip "hostile territory" in September, due to the failure of Gaza authorities to curb rocket attacks. The government has threatened to impose punitive measures on Gaza, including heavier restrictions on the movement of civilians through border crossings, and cutbacks on fuel and electricity supply. The architects of the 1993 Oslo Agreement saw an explicit link between economics and the peace process. Oslo was in part perceived as a security-for-economics deal: In exchange for the creation of a Palestinian Authority that would rein in terror against Israel, the Palestinians would be the beneficiaries of a major international donor effort - the first donor conference for the Palestinians was held in December 1993 - as well as open trade borders with Israel, which would provide them with an unprecedented economic boost. These "confidence-building" steps, were supposed to be self-reinforcing. Economic growth, it was reasoned, would lead to smaller numbers of Palestinians taking up terrorism out of desperation, which would in turn embolden Israelis increasingly to ease restrictions. Ultimately this would facilitate negotiations over difficult political issues, such as a Palestinian state, the future of the settlements and the status of Jerusalem. The deal unraveled spectacularly. A wave of Palestinian terrorism perpetrated by opponents of the agreement dealt a blow to Israeli confidence in their Palestinian negotiating partner. Over a thousand Israelis were killed by terrorist attacks between September 1993 and August 2007, with Magen David Adom estimating it treated over 7,000 terrorist casualties in this period. The Palestinian economy only worsened. In fact, Palestinian GDP per capita peaked at about $2,000 per year in 1992 - the year prior to the signing of the Oslo agreement. The envisioned cycle of confidence-building turned into a vicious cycle: Israel responded to terrorist threats with ever increasing checkpoints and closures of the passages to the Palestinian territories, culminating in the construction of the separation fence. These measures in turn choked off both internal and external Palestinian trade, increasing Palestinian feelings that the Oslo process only served to move them backwards, and leading many Palestinians to blame Israeli policies for their continuing economic difficulties. Today Palestinians - and many international observers - point to the Israeli closures and checkpoints as the main obstacle to Palestinian economic growth. "We are sandwiched in," says Abdel Hafiz Nofal, Assistant Deputy Minister of the National Economy in the Palestinian Authority. "We have the separation wall Israel has constructed to our west, and the borders to the east are also controlled by Israel. How can our small economy generate international trade under these conditions?" Nofal is particularly angered at the proliferation of Israeli checkpoints in the West Bank. "Most of them exist to protect the settlements, not Israel." That view was reinforced by The World Bank's latest monitoring report, issued in September, which accused Israel of using movement and access restrictions primarily "to expand and protect settlement activity." The report bears out the claims of many Palestinian businessmen - including Ahmad, the Hebron stone-cutter - who say that the impact of the closures also becomes less reversible with time, as suppliers and purchasers cancel contracts and seek alternative supply chains. The report does state that "Israeli security concerns are valid and undeniable," but it immediately then calls for "a revision of Israel's approach to security as a balance between short- and long-term gains." The removal of checkpoints and the easing of restrictions on transport over the Israel-Palestinian Authority borders - especially along the border of the Gaza Strip - is the most widely presented prescription for jump-starting the Palestinian economy, among Palestinians and international observers. "There should be at least 100 trucks a day crossing into Gaza at minimum just to maintain humanitarian levels," says Nofal. "Instead we are getting an average of only 30. In general, we are facing unfair competition. Israeli goods move easily into the West Bank, but Palestinian-made goods can scarcely ever get out of the Palestinian Authority areas." Israeli-Palestinian trade is estimated at over $2 billion annually. The Palestinian territories depend on Israel for basic services and goods such as electricity, milk, sugar and rice, while Israel imports textiles, olive oil, stone and marble, and fruits and vegetables. But wouldn't the removal of checkpoints lead once again to an increase in terror - as it did in the wake of the Oslo Accord? Extract from cover story of Issue 18, December 24, 2007 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.