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

During the past four and a half years, the number of Palestinian workers in the Israeli labor market how significantly contracted primarily as a result of restrictions on the movement of Palestinian labor imposed by the Government of Israel. The restricted access of Palestinian workers to the Israeli labor market 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 income opportunities. This article develops 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 to Israel tends to reduce the capacity of the Palestinian industry to export goods. Secondly, that— even under optimistic assumptions on the trade-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 income losses incurred with the closure of the Israeli labor market. Thirdly, 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.