Palestine: a theoretical model of an Investment-Constrained Economy

Alberto Botta and Gianni Vaggi

Economics and Quantitative Methods from Department of Economics, University of Insubria

Abstract: The sixty-year-old Israeli-Palestinian conflict has deeply influenced the evolution of the Palestinian economy. In the last two decades persisting political instability and the Israeli closure policy have been sources of protracted economic stagnation and poor capital formation. The paper describes the consequences on the Palestinian economy of two particular conditions: high transaction costs and market fragmentation. We use a simple one-sector model which describes Palestine as a demand-driven economy and Palestinian capital accumulation as linked to desired investments by Palestinian firms. Into this framework, we show that high transaction costs discourage capital formation by curtailing expected profitability. Market fragmentation further reduces domestic investments by reducing the size of the market and depressing entrepreneurs’ animal spirits. We show that in the short-run, where expectations are given, the two above facts induce low levels of capacity utilization and of capital accumulation. The situation is even more worrying in the long-run when entrepreneurs can adapt their expectations. Depressed animal spirits and low levels of capacity use feed back into each other and 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 cost and of market fragmentation and the ensuing benefits on the long run equilibrium values of both capital accumulation and capacity utilization. The conclusions try to set this analytical results into the historical situation of the Palestinian economy and to envisage the roles of economics and politics in order to establish a sustained process of development.

Keywords: Palestine; low-growth trap; post-Keynesian models (search for similar items in EconPapers)
Pages: 35 pages JEL Classification: O53, O11, E12
Date: 2011-02
New Economics Papers: this item is included in nep-cwa and nep-mac
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.eco.uninsubria.it/RePEc/pdf/QF2011_05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ins:quaeco:qf1105

Access Statistics for this paper

More papers in Economics and Quantitative Methods from Department of Economics, University of Insubria Contact information at EDIRC.
Bibliographic data for series maintained by Segreteria Dipartimento ().