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A Post-Keynesian Model of the Palestinian Economy: The Economics of an Investment-Constrained Economy

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  • Alberto Botta
  • Gianni Vaggi

Abstract

The 60-year-old Israeli-Palestinian conflict has deeply influenced the evolution of the Palestinian economy. In the last two decades political instability and the Israeli closure policy have generated protracted economic stagnation and poor capital formation. The paper describes the consequences on the Palestinian economy of existing high transaction costs and market fragmentation. We propose a simple one-sector Post-Keynesian model that describes Palestine as a demand-driven economy. We show that high transaction costs and market fragmentation discourage investment by curtailing expected profitability, reducing the size of the market and depressing entrepreneurs' animal spirits. In the short run, these two factors induce low levels of capacity utilization and low rates of capital accumulation. The situation is even more worrying in the long run when entrepreneurs can revise their expectations. Depressed animal spirits and low levels of capacity use give rise to a low-growth trap from which Palestine can hardly escape. We also highlight the possible positive impact of the removal of high transaction costs and of market fragmentation, and the ensuing beneficial effects on the long-run equilibrium values of capital accumulation and capacity use. The conclusions place these analytical results into the historical situation of the Palestinian economy, and consider what is needed, politically and economically, in order to establish a sustained development process. The division of labour is limited by the extent of the market . (Adam Smith, Wealth of Nations , Book I, chapter III)

Suggested Citation

  • Alberto Botta & Gianni Vaggi, 2012. "A Post-Keynesian Model of the Palestinian Economy: The Economics of an Investment-Constrained Economy," Review of Political Economy, Taylor & Francis Journals, vol. 24(2), pages 203-226, April.
  • Handle: RePEc:taf:revpoe:v:24:y:2012:i:2:p:203-226
    DOI: 10.1080/09538259.2012.664332
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    References listed on IDEAS

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    1. Naqib, Fadle M., 2002. "Economic Aspects of the Palestinian-Israeli Conflict: The Collapse of the Oslo Accord," WIDER Working Paper Series 100, World Institute for Development Economic Research (UNU-WIDER).
    2. Peter Skott, 2012. "Theoretical And Empirical Shortcomings Of The Kaleckian Investment Function," Metroeconomica, Wiley Blackwell, vol. 63(1), pages 109-138, February.
    3. Sebnem Akkaya & Norbert Fiess & Bartlomiej Kaminski & Gael Raballand, "undated". "Economics of 'Policy-Induced' Fragmentation: The Costs of Closures Regime to West Bank and Gaza," Working Papers 2008_09, Business School - Economics, University of Glasgow.
    4. Eckhard Hein & Marc Lavoie & Till van Treeck, 2011. "Some instability puzzles in Kaleckian models of growth and distribution: a critical survey," Cambridge Journal of Economics, Oxford University Press, vol. 35(3), pages 587-612.
    5. Alberto Botta & Gianni Vaggi, 2011. "Palestine: a theoretical model of an Investment-Constrained Economy," Economics and Quantitative Methods qf1105, Department of Economics, University of Insubria.
    6. Fontana Magda & Marchionatti Roberto, 2007. "Endogenous animal spirits and investment an agent-based model," CESMEP Working Papers 200709, University of Turin.
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