Israel has world-class economists, but too few of them work on the problems of their region. That makes this volume from four Ben Gurion University economists—Arnon, Israel Luski, Avia Spivak, and Jimmy Weinblatt—all the more welcome.
Their analysis exemplifies the strengths and weaknesses of economic modeling. They have gathered much interesting data not readily available elsewhere and explain their statistical analysis in terms that could be understood by a dedicated college-educated layman. The number-crunching highlights some features that seem to have escaped political notice, especially the financial advantage that Israel draws from the use by Palestinians of the Israeli currency, which is in effect a $1 billion interest-free loan to the Israeli government. More questionable is their argument that "the Palestinian economy would gain a great deal from the reallocation of workers from the Israeli labor market to domestic employment"; the assumptions they used to construct their model guarantees this result.
Perhaps their most interesting prediction concerns growth rates. Assuming status quo policies and the Palestinian Authority having "a relative abundance of resources" with only modest foreign aid, they find growth should be 4 percent a year. They propose modest policy changes that could raise growth to between 7 and 9 percent a year. Instead, despite $2.5 billion in foreign aid, the actual performance in 1994-98 was growth averaging less than 2 percent a year. The chasm between forecast and reality demonstrates the limitations of economic modeling, which cannot readily incorporate such vital factors as political stability and quality of governance.