Exporting Labor or Goods? Long-Term Implications for the Palestinian Economy

Abstract

The restricted access of the Israeli labor market to Palestinian workers is a major negative shock for the Palestinian economy, and naturally raises the question of whether an alternative strategy to exporting labor is feasible and presents at least similar growth opportunities. In this paper, we develop a dynamic general equilibrium model to assess the impact of restricted access to the Israeli labor market on the Palestinian export performance, and in turn, on GDP growth. The results suggest first that exporting large flows of Palestinian workers in Israel tends to reduce the capacity of the Palestinian industry to export goods. Second, that - even under optimistic assumptions on the export-led growth potential of the Palestinian economy - the induced depreciation of the real exchange rate after the closure will not have sufficient growth effects to avoid large per capita income losses. Third, that the adoption of appropriate trade and fiscal policies in this context could significantly magnify the potential growth impact of a real exchange rate depreciation. Fourth, that external assistance is likely to have then a larger developmental impact, than in the case of a re-opening of the Israeli labor market to Palestinian workers.

Keywords: West Bank and Gaza, trade, labor, dutch disease, general equilibrium

JEL Classification: D58, F11, J3