Trade, employment and conflict: Evidence from the Second Intifada1

Abstract: Do trade shocks affect conflict? The evidence on this question has so far focused mainly on commodity price shocks. This paper moves beyond this focus and use data from the entire trade sector to examine whether changes in Palestinian trade in the second half of the 1990s affected the subsequent Palestinian uprising (‘second Intifada’). The findings support the opportunity cost hypothesis. An increase of USD 10 million in Palestinian exports of a sector employing 10 percent of the locality’s private employment reduces conflict intensity in that locality by 2.1-2.8 percent. On the other hand changes in Palestinian and Israeli imports have no significant impact on conflict. We provide evidence that these trade shocks were determined by factors exogenous to Palestinian localities, including the emergence of new global suppliers and the unilateral trade opening of Israel, i.e. the main Palestinian export destination