TECHNICAL ASSISTANCE

X - Prospects for sustained development of the Palestinian economy: Macroeconomic simulated framework

Context and rationale

Within the context of the secretariat's intersectoral study on prospects for sustained development of the Palestinian economy completed in 1994, UNCTAD designed a computerized quantitative framework (QF) for use as a research instrument for the secretariat and an illustrative reference tool for Palestinian economic policy makers. The framework charted the historical relationship between key macroeconomic aggregates and projected alternative paths for the development of Palestinian economy over the period 1990-2010 based on different assumptions affecting future demographic and policy variables. These ranged from a baseline scenario which implied long-term economic and social collapse, to an alternative scenario which featured a different set of supply- and demand- side policies and factors, and illustrated the Palestinian economy's potential for sustained economic growth and development.

Although the QF was conceived and largely completed prior to the Israel-Palestine peace accords of 1993, the underlying assumptions and findings of the econometric analysis and projection exercise anticipated a gradual removal of long-standing restrictions on the economy and the improved policy environment that was ushered in during the interim period. Also, QF explored the long-term opportunities for a major transformation of the Palestinian economy in the context of exercise by a Palestinian authority of sovereignty over natural and human resources, as well as its full empowerment in the management of economic development.

In particular, the QF demonstrated that with an enhanced aggregate trade and investment policy framework to address major structural gaps (trade, investment and employment), the economy could recover and prosper. It demonstrated the economy's capacity to reverse historical trade deficits, enhance national savings and investment capacities, and reduce a large reserve of unemployed and underemployed labour, dependent on work opportunities outside the domestic economy. Moreover, this can be done while one million Palestinian returnees are productively absorbed over 10 year, their integration into the economy being underpinned by significant flows of international aid and investment.

The findings of this research project were confirmed and further elaborated in publications issued in 1993 by the Palestine Liberation Organization and by the World Bank. In order to maintain it and refine it in the light of post-1994 realities, the QF has been transformed from a mainframe-programming context to a suitable, user-friendly personal-computer environment. Consequently, the secretariat included this project in its 2000-2001 work programme, with the aim of making available the updated database and software of the revised qualitative framework as technical material for use by the PA.

A new version of the framework, redesignated as a "macroeconomic simulation framework (MSF)", was completed and presented for discussion to the PA and relevant research and private sector institutions and will eventually be published by UNCTAD. A software and database version of it will be made available to the PA.

Objectives

1. Demonstrating the long-term viability and development prospects of the Palestinian economy in the context of a successful outcome of the Middle East peace process;
   

2. Helping to build a Palestinian and international consensus on immediate priorities for economic reconstruction and the requisite policy measures;
   

3. Assisting Palestinian economic policy makers in making use of macroeconomic and analytical tools.

The key policy goals that the MSF attempts to achieve by the year 2010 are as follows:

• A high and sustained rate of economic growth;
  

• A significant reduction in the overall share of private consumption in GDP;
  

• Gradually bringing government consumption down from the high levels and share of GDP reached in the 1990s;
  

• Maintaining a strong investment rate (of around 30 per cent), with government investment more significant than historical levels;
  

• Exports to regain historically strong levels;
  

• A major reduction in the share of imports in GDP;
  

• A reduced trade gap (trade deficit to GDP) and a current account balance;
  

• Attaining a savings /investment surplus;
  

• A significant reduction in the reliance on net factor income from labour in Israel;
  

• Sustainable, if not insignificant, unemployment rates;
  

• Sustained growth in living standards, as reflected in per capita income levels;
  

• Productive, phased absorption of one million Palestinian returnees.
  

Activities

Using the updated MSF software, it is proposed to undertake further development of the framework in conjunction with other economic modelling exercises. This would involve joint work with PA ministries and research institutions in strategic policy analysis exercises, as well as helping to organize training workshops for practitioners.

Status

The secretariat and the PA are currently discussing the most appropriate context for installation of the MSF, as well as Palestinian training needs in the field of economic modelling and forecasting. The required extrabudgetary support (US$ 50,000) for this project of remains to be identified.