A computable general equilibrium analysis of trade policy options for the Palestinian economy

The Palestinian economy is a small open economy with poor endowments of natural resources and unmarked national borders. Almost 80% of its foreign trade is conducted with a single trading partner, Israel. It currently exports 17% of its output, which in turn finances only about 25% of its imports. The rest of the import bill is financed by wage income earned in Israel, foreign aid, and remittances from abroad. This dependency on foreign capital inflows has severely retarded the Palestinian export sector. Moreover, the presence of high transaction costs and other non-tariff barriers have reduced the competitiveness of its export sector. At the Oslo peace accords in 1993, the Palestinian Authority sought to implement a policy of export-led growth with the assistance of both Israel and the international community. The cornerstone of this outward-oriented strategy was the Paris Protocol which formalized the de-facto economic relations between Israel and the West Bank & Gaza that had existed since 1967. Due to political reasons, the Paris Protocol was not implemented and the Palestinian Authority sought alternative strategies to promote exports. An important means to achieve this objective is to raise the share of manufactured exports as a source of import finance. This dissertation constructs a static trade-focused computable general equilibrium model to analyze the effects of four policy scenarios on the Palestinian export sector. The first scenario is a 50% reduction in transaction costs, and the second is a 50% reduction in Palestinian labor employed in Israel. The remaining two scenarios simulate the effects of a full-separation between Israel and the WBGS. One separation scenario---the "peace" scenario---simulates simultaneous increases in foreign aid, labor demand in Israel, and domestic labor supply. The other scenario---the intifada or "war" scenario---simulates a simultaneous increase in transaction costs and a decrease in labor demand in Israel. The results of these four simulation exercises demonstrate that first, reductions in transaction costs substantially increase the volume of trade and improve the Palestinian terms of trade. Second, the lower dependency of the Palestinian workforce on Israel also increases exports by 8%, but real household income falls since workers who were previously employed in Israel are now forced to work at the lower Palestinian wage rate. And third, simulations of the full-separation scenarios demonstrate that the outcome primarily depends on whether separation is achieved through peaceful negotiations or unilaterally through the intifada. The simulation results of this last scenario show that the volume of trade is substantially reduced.