Gains from Trade: Lessons from the 2007-2010 Gaza Blockade

by on November 26, 2012 at 2:27 am in Current Affairs, Economics, History, Law | Permalink

I haven’t read this paper, by Assaf Zimring, a job market candidate from Stanford economics, but I pass it along for its obvious current relevance.  Here is the abstract:

This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).

The link and the author’s home page you will find here.

prior_approval November 26, 2012 at 3:27 am

‘I show that this discrepancy is due to a combination of resource reallocation and reduced productivity.’

So, a blockade is bad for business?

‘Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export.’

So, a blockade is particularly bad for industries that require imported inputs, and those industries that export?

Such deep insights, especially in light of recent events.

Andrew November 26, 2012 at 3:39 am

Science is about measurement and theory.

Mike Hess November 26, 2012 at 11:27 am

He’s providing empirical support for the microfoundations of trade theory. This is a good thing.

MC November 26, 2012 at 2:08 pm

Trade theory? Doesn’t everyone already know that trade is good for poor countries with no discernible manufacturing base? I would be more interested if he could show that the blockade was bad for the Israeli economy.

Andrew' November 26, 2012 at 5:26 am

So, welfare is reduced by >1/5th. Thus, a blockade might be the first salvo in a Total War campaign.

pjt November 26, 2012 at 5:52 am

What would be the impact of the blockade on the Gini index of Gaza? Is it actually making people more equal within Gaza, as households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses?

Bill November 26, 2012 at 5:53 am

I haven’t read this MR post, but I pass it along for its obvious current relevance.

Robert Easton November 26, 2012 at 6:29 am

This surely has to depend massively on the size of the country. At 1.5 million people Gaza Strip is a relatively small “country”. The United States might lose a lot less if it were cut off from trade. If I alone were a “country” I would lose much more than 28% of my standard of living if I was cut off from trade.

ad*m November 26, 2012 at 8:12 am

Elegant. I am looking forward to his study of the change in GDP and labor productivity after a small country destroys 30% of its greenhouse capacity.

http://www.msnbc.msn.com/id/9331863/ns/world_news-mideast_n_africa/t/looters-strip-gaza-greenhouses/

Mark_H November 26, 2012 at 10:49 am

“These effects are substantially larger than the predictions of standard trade models.”

If they have super excess capacity for exports and no capacity for the things that they import, then a total blockade would make them a lot worse off in the short run than it would in the long run. Don’t “standard trade models” focus on the long run?

Donoby November 26, 2012 at 2:46 pm

Many of my neighbors would congratulate them on their commitment to buying local, reduction in carbon footprint, and reduction in income inequality.

David Jinkins November 26, 2012 at 7:14 pm

This a really neat paper, but it contains a flaw so large it makes me skeptical of the conclusions. The basic idea of the paper is to compare welfare in the West Bank and Gaza, arguing that the main difference between the two places is the blockade of Gaza. However, there is another big difference between Gaza and the West Bank during this period–in 2008/2009 Israel launched operation Cast Lead in Gaza, killing thousands of people, and leveling many factories and homes. The author thinks this isn’t important for his conclusions:

“These strikes led to some disruption in the Gaza economy, though reports about the extent of the damage vary widely by source. An important evidence that these strikes had relatively small effect can be found in price data. As can be seen in Figure 3, which shows prices in Gaza at a monthly frequency, the strikes had no effect at all on prices, especially relative to the very noticeable effect of the blockade.”

I find this argument unconvincing. For one thing, if the strikes were anticipated, this would alter prices before the actual event. At a more basic level, though, I just can’t believe that production and consumption were not affected by war/the threat of war. I suggest changing the title to: “The gains from trade and not getting blown up”.

David Jinkins November 26, 2012 at 7:43 pm

That post came out more snarky than I intended…I should also say that the paper is a creative way of getting at a really important question. While most economists believe that gains from trade should be large, state of the art trade models imply very small gains from trade. The Gaza paper attempts to show that gains from trade are much larger than implied by these models, which means that the models are missing something important.

LL November 27, 2012 at 9:22 pm

“killing thousands of people”
Well that shows clearely why you can’t believe it, since you believe the propaganda.

Meanwhile maybe you should read this to give you a taste of Gaza, it isn’t what appears usually in media : http://macdailynews.com/2012/10/15/apples-new-iphone-5-snapped-up-in-gaza-strip-despite-high-prices/

jay November 26, 2012 at 10:46 pm

The results are worse than what is described here because it fails to adjust for the large amount of trade (fajr missiles, lions, etc.,) conducted in the Gazan underground tunnel economy,

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