Palestinian import - export trade modeling For the period 1968-1998, an application of seemingly unrelated regression equations

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 occupation of the area by Israel in 1967. Within this integration, area's trade affected markedly 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 Palestinian Territories. The objective of this study is to investigate main implications of this imposed customs on Palestinian trade. It uses Seemingly Unrelated Regression Equations estimation procedures (SURE) for import-export trade modeling vis-a-vis an Ordinary Least Square (OLS) one to forecast the behavior of trade. For this purpose the study uses three equations for both import demand and export supply respectively related to the main Palestine trade partners, Israel, Jordan and countries other than Jordan and Israel(the rest of the world). Clearly, empirical results depicts gains of employing with SURE estimation in a comparison with OLS estimation one in terms of both estimated coefficients (trade elasticities) and equations explanatory power (trade variations). Main feature of this imbalanced customs union between PTs and Israel is that while the Palestinian demand has a positive significant impact on imports from and export to Israel, both the Israeli and the rest of the world demand growth have an insignificant impact on the Palestinian exports. Also, under the prevailing relationship with Israel the Palestinian trade experienced losing of competitiveness, a situation let a shock in real exchange rate renders an increase in imports and a decrease in exports in trading with the ROW. Overall, this study reveals the necessity for the elimination of restrictions on Palestinian trade to both the rest of the world and to its regional context, a situation will lead to positive effects on the Palestinian economic-trade performance.