An Economic Analysis of the Palestinian Economy: The West Bank and Gaza, 1968-1991

17/10/1993 |  Arnon Arie, Gottlieb Daniel

Abstract

This paper presents a macroeconomic framework of the Palestinian economy and analyzes the main economic processes

that began after the 1967 war. The driving force behind these processes was the interaction between two very different

economies which met at the market place. The rapid rise in standards of living until 1987 was led by high employment in

Israel, while domestic growth of output was more limited. In an economic environment free of controls, it is not obvious that

income gaps between such different economies should have been narrowed mainly through labor flows. Part of the adjustment

could have taken place through capital movements and trade in goods. However much of the adjustment occurred through

labor movements to Israel, reflecting an unbalanced economic interdependence with Israel. In spite of growing standards of

living and high saving rates, only a small share of savings was channelled into productive investment and as a result industry

hardly contributed. to economic growth. Instead, small scale residential investment constituted an important instrument of saving

partly due to the absence of a well functioning banking system. The outbreak of the Intifada halted the growth process in the

Westbank. Output and especially incomes fell sharply, compared to their potential, as approximated by the model's forecast.

The effect on the Gazan economy has been left for future research. The present framework also helps in analyzing alternative

strategies of the economy at the outset of the new political situation of self-government.

 


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