Main features of the SAM for the West Bank

Compared to the existing SAMs developed for Palestine, the newly developed SAM has various unique aspects as follows:

1. It focuses on the West Bank, which is currently the only Palestinian territory with workers employed in Israel, while other SAMs consider the whole Palestine – i.e. the West Bank and Gaza together.

76 2. It is much more disaggregated as it comprises 376 accounts. Such a level of detail enables future users to aggregate this SAM to one or more alternative classifications. The list of this SAM accounts is provided in Appendix 2.

3. It includes 83 commodity groups and 49 activity sectors. The separation between activities and commodities allows for an activity to produce several commodities and for a commodity to be produced by several activities. It also enables the valuation of income and expenditure flows in the activity accounts at producer prices, while the flows in the commodity accounts are valued at market prices.

4. It recognises the importance of the agricultural sector in the West Bank through its explicit representation of agriculture by eight commodities and four activities.

5. It provides comprehensive information on transaction costs represented by three margin accounts respectively for wholesale, retail trade and transport.

6. It includes a separate account for non-profit institutions serving households (NPISH). These institutions play a significant role in the West Bank economy, which heavily relies on the services they provide. The NPISHs are depicted in the SAM in two ways. First, as an institution, they consume goods and services and make transfers to households. Second, as a productive activity, they employ labour and capital to produce services that are consumed by the households.

7. To our knowledge, this is the first SAM to include an explicit account for the religious transfer payments that flow from the rich to the poor households (Zakat). In most Muslim-majority regions, like the West Bank, Zakat contributions are voluntary, though considered in principle as a religious charitable obligation. The size of the contributions is not negligible, as it is customarily about 2.5% of a household’s total savings and wealth above a certain minimum.

8. The West Bank SAM that is constructed differentiates 59 factor classes and 110 household groups with clear interconnections between the two classifications. This high disaggregation of factor and household accounts aims at providing a good basis for the analysis of distributional effects of trade integration as well as changes in the factor markets.

9. It exhibits transactions with seven trade partners: Israel, Jordan, Turkey, the Greater Arab Free Trade Area (GAFTA), USA, EU-28 and the European Free Trade Area (EFTA) zones, and the rest of the world. This separation builds on the major trade agreements of which Palestine is a member and on the customs union with Israel. The differentiation of Palestine’s trade partners allows for a detailed analysis of future trade policy options for the West Bank.

77 10. This SAM takes proper account of the remuneration of labour for the self-employed, who make about 36% of the total number of workers in the West Bank. Restricting the labour share of value added to the compensation of employees suffers from a major limitation, as it omits the contribution of the self-employed to labour income as discussed in Section 2.3 of Chapter 2. A combination of the Gindling et al. (2016) and the Young (1995) approaches is adopted in this thesis to estimate the labour share of value added. First, the self-employed are identified from the labour force survey database and are matched with wage-workers based on socioeconomic characteristics such as the sector of employment, age, gender, and the education level. Then, the wages for the wage-workers are attributed to the self-employed, plus the earning premium estimated by Gindling et al. (2016) for the Middle-East region.

11. This SAM also recognises that households derive income from unincorporated capital. Household activity is often disregarded as it usually refers to small-scale, informal and non-market activities (Round, 2003). Household activity includes both family enterprises (which employ family members) and micro enterprises (which hire employees). The income earned by such an activity clearly represents both returns to labour and to capital. The extent to which earlier SAMs have taken proper consideration for household income from unincorporated capital is unclear in most cases. However, this problem is explicitly tackled in constructing this SAM.

12. This SAM is based on the most recent set of data available about the structure of the West Bank economy, consumption and expenditure behaviour of households and the structure of the labour force. The reference year for this SAM is 2011.

The SAM provides data for 59 production factor groups including 57 labour groups, one factor capital and one factor land. The labour factor is well disaggregated in order to capture the participation of the West Bank labour in different labour markets. The domestic labour is first disaggregated by labour market considering that Palestinians are either employed in the domestic market or the Israeli market. In the domestic market, labour is either employed by domestic employers or foreign employers, mainly foreign diplomatic missions residing in the West Bank. Labour employed in the domestic market by domestic employers is further disaggregated by activity and according to their eligibility to obtain a work permit in Israel. This detailed disaggregation allows for the simulation of various degrees of relaxing the restrictions on labour movements between Israel and the West Bank.

Households are extensively disaggregated so as to assess the distributional effects of various policies. The SAM provides data on 110 household groups classified according to consumption quintiles, the skill level of the household members and the labour market which employs them. Tax accounts are also well disaggregated in order to capture the different sources of government revenue. In total, 58 tax accounts are incorporated, among

78 which 45 are factor use taxes, nine are commodity taxes, three are direct taxes, and one is production tax.

East Jerusalem is not included in this SAM, because it is excluded from the main data sources used, which are the national accounts and the balance of payments. Moreover, from a theoretical point of view, the East Jerusalem economy is more connected to the Israeli economy than to the rest of the West Bank. Therefore, it is reasonable to exclude it from a West Bank SAM.