The political economy of Israeli-Palestinian interdependence

The Israeli and Palestinian economies are asymmetrically interdependent. Some scholars argue that the Palestinian economy cannot be viable alone. Others believe that economic links with Israel will promote peace. Supporters of separation argue that these links distort Palestinian development. I show that the current interdependence is associated with a cyclical Israeli-Palestinian violence and Palestinian economic decline. Assuming that an independent Palestinian state forms in most of the West Bank and Gaza Strip, I argue that Israeli-Palestinian relations require economic separation to be stable. Economic separation will deteriorate Palestinian welfare in the short run. Policies to make it viable are considered.