linkages (Donaldson and Hornbeck (2016)). Although all industries would benefit from the removal of mobility restrictions, part of the development of the ICT sector is attributable to a reallocation of resources away from manufacturing and retail trade, which are more affected by the mobility restrictions. And yet, the ICT sector still suffers from the introduction of mobility restrictions, impaired by low domestic demand. Most of the ICT firms interviewed do not export abroad, but rather produce for the domestic market. Palestinians spend only 9% of their income in ICT goods and services;<sup>8</sup> and ICT constitutes only a small fraction of the material inputs used by other industries.<sup>9</sup> The result is an anemic growth, even in the presence of a favorable shift in the opportunity costs to invest in the industry. Input-output linkages are an extremely important mechanism: in their absence, mobility restrictions have almost no impact on the economy.

No single industry lives in isolation. Industrial policies supporting more competitive sectors increases productivity growth (Aghion et al. (2015)). In these times of automation, policy makers often propose industrial policies and employment protection programs focused on promoting a specific industry. However, the relevance of input-output linkages suggests a scope for designing industrial plans that focus on the harmonious development of all industries, rather than focusing on a single one.<sup>10</sup> Industry-specific projects that do not acknowledge the interconnectedness of the industries are bound to fail. To get the most out of the development of the ICT sector, countries also need to work on improving the overall competitiveness (The World Bank, 2016). The COVID-19 outbreak and the resulting disruption of the global supply chain also point at the importance of the domestic market for the resilience of industries.

Although the paper does not deal with agglomerations, our results speak to the geographical clustering of ICT firms. The industry’s sensitivity to mobility barriers could be a contributing factor to explaining why ICT firms are clustered in or near high-populationdensity centers, rather than in rural areas. In this sense, the industry might be similar to older industries, such as manufacturing.

The rest of the paper develops as follows. Section 2 describes the institutional background. Section 3 reports the data used for the project, including details from the survey. Section 4 develops the model. Section 5 describes the mechanisms through which changes in market access affect the industrial composition of the economy and how they are linked to the model. Section 6 presents the results from the survey and the calibration. In section 7, we perform a number of counterfactual exercises. In section 8, we describe the role of input-output linkages. Section 9 concludes.

# **2 Institutional Background**

The West Bank is a patch of land of the size of Delaware. It has an area of 5,655 km<sup>2</sup> (2,183 sq mi). The largest economic sectors are manufacturing, wholesale and retail trade. It is

> 8PCBS data.

> 9With the exception of services.

> 10Ellison et al. (2010) point out their key role in explaining firm agglomeration.

5