The Competitiveness of the Palestinian Foreign Trade: A Cointegration Analysis

Abstract Over the past three decades the Palestinian areas in the West Bank and Gaza Strip experienced the impacts of compulsory integration into the Israeli economy in the aftermath of the area’s occupation by Israel in 1967. Within this integration, the area's trade was markedly affected by a forced customs union, which mainly implies sharing the same common external tariff with Israel on imports from the rest of the world and free movement for Israeli goods into Palestine. In addition to the implications of the imposed customs union with Israel, the competitiveness of Palestinian trade was also affected adversely by the transmission of the dominant inflationary pattern of the Israeli economy. The rise in both price and wage levels were transmitted completely to the Palestinian areas. However, the disruption in economic relationships between the West Bank and Gaza Strip and Israel since the eruption of the first Palestinian Intifada in 1987 and the frequent closures of the border with Israel has led markedly to a decrease of the number of Palestinian workers in Israel. This situation led to wage levels decline in the Palestinian areas, and hence, it is expected to influence the competitiveness of Palestinian tradables. This study investigates the competitiveness of the Palestinian trade. It computes two measures of competitiveness, one of which is based on price indices, and the other on wage indices. By using cointegration dynamic analysis using data covering the period 1968–2000, it includes that competitiveness measures in the main determinants of Palestinian trade to highlight price-wage difference implications on this trade. Mainly, it shows an improvement in the competitiveness resulted from the disruption in economic labor relation with the highest wage price Israeli dominant trading partner. Arabic Abstract: