The Palestinian Economy. Theoretical and Practical Challenges

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Olivera
3. Traditional economic theory vs heterodox economic approach
Several authors have described the effects of such an economic environment in Palestine.
The choice of the underlying theoretical approach bears fundamental consequences for
the outcomes simulation exercises and its policy implications; that is why it would be
advisable to link very closely the choice of a certain conceptual apparatus with the
specific macroeconomic situation on the ground (if not even carrying out “robustness
checks” under alternative macro-closures).
In 2001, Astrup and Dessus (2001) have implemented a neoclassical CGE model on
Palestine, which is used by the World Bank (henceforth, WB). In addition, UNCTAD
(2009) has developed a complex macro framework to simulate the effects of a wide range
of institutional and political changes. However, the framework applied by Astrup and
Dessus does not show a “good fit” with the specificities of the Palestinian context. In
particular, the WB CGE model on Palestine is a standard real-side neoclassical CGE
model that describes a price-driven economy in which relative prices freely adjust to
ensure macroeconomic equilibrium, productive factors are fully utilised and savings
determine investments. Indeed, these models overlook by construction the “currency
issue”, the prominence of the financial sector and the related complications concerning
the financial account of the balance of payment. Moreover, the supply-driven in-built
logic of the WB CGE implicitly deprives precautionary savings of any relevance; a
choice that raises some questions in a conflict-torn economy. So they fail to give due
relevance both to the demand side of the problem and to the role of investments. Actually,
some theoretical implications of the WB CGE model seem to be at odd with data and
empirical evidence on Palestine.
Given these intrinsic limits of the neoclassical framework, in the three-year research
project we have also studied the alternatives to the traditional approach in order to better
understand the Palestine reality. By so doing, we suggested the need to integrate the
financial sector into the analysis, and argued that a structuralist approach may be more
attuned to study the evolution of the macroeconomic and financial outlook in Palestine.