Will Massive Infusions of Aid Rescue the Palestinian Economy?

The US and EU have undertaken a massive infusion of aid to the Palestinians in an effort to promote the moderate government of Salam Fayyad and Mahmoud Abbas as an alternative to the Islamic extremists of Hamas. Yet past efforts to use aid as an incentive for moderating Palestinian sentiment have yielded disappointing returns. Despite receiving the highest per capita aid in the world over the past fifteen years, the Palestinian economy has declined since the Oslo peace accords. This decline occurred after more than two decades of strong growth in the Palestinian economy in the absence of substantial aid. In fact, comparisons of annual economic and aid data exhibit an inverse relationship between the level of aid given and economic growth in the West Bank and Gaza.

Aid to the PA represents only a portion of the total support provided by Western and Arab governments to the Palestinian people. The EU has funnelled nearly $1.5 billion in aid to the Palestinians this year, which is a substantial increase over the previous year’s total of $916 million (International Herald Tribune, March 21, 2007). The Palestinians and their government in the West Bank seem to be awash in foreign donations. All of this aid appears to be intended to show the Palestinians the benefits of following a moderate path and to convince them to reject those who cling to an uncompromising hard-line position.

The Years Prior to Substantial Foreign Aid
During the Six Day War in June,1967, Israel took over the administration of the West Bank and Gaza from Jordan and Egypt, respectively. From 1968 to 1986, a period of economic growth and rapid improvement in standard of living ensued for Arab residents of the West Bank and Gaza.. By 1986 per capita GDP had doubled, and the Palestinian economy’s growth rate was higher than even the rapidly growing Israeli economy (See “The Palestinian war-torn economy: aid, development and state formation,” The United Nations Conference on Trade and Development – UNCTAD, 2006). Arabs in the West Bank and Gaza enjoyed a higher standard of living than their immediate neighbors in Jordan and Egypt. Despite recent setbacks in the Palestinian economy, the Palestinians still remain above the regional average by all standards of measuring health and education. Palestinian literacy is the highest among Arab states and their lifespan, childhood mortality rates, immunizations, access to clean water and school attendance are all among the highest in the region.

Table 1 (Figures from UNICEF of various states in the region – 2005)

Entity	Average life span (years)	Under 5 mortality (per 1000)	Literacy %	Primary school attendance %
Syria	74	15	80	95
Palestinians	73	23	92	92
Jordan	72	26	90	99
Lebanon	72	30		93
Saudi Arabia	72	26	79	59
Egypt	70	33	71	83
Morocco	70	40	52	86
Yemen	62	102		75
Iraq (1999)	60	125	74	78

Improved well-being did not stop the Palestinians from launching a campaign of violence in 1987. It is a curious fact that both the first and second Intifadas were launched during economic upswings. The first intifada broke out on the heels of the highest annual growth in 12 years and the second highest on record. This suggests that economic progress and political progress are not linked.

“The turning point was the Oslo Accords. The entire world volunteered to help the Palestinian Authority [get] established following the Accords. The Palestinian Authority did, indeed, grow and flourish. Big money began to flow in. But the Palestinians themselves did not enjoy the fruits of peace. On the contrary, they went into an economic decline.” (Ben-Dror Yemini, Ma’ariv, Jan. 5, 2007)

After an initial economic decline from 1993 through 1996, the diminished conflict with Israel in the late 1990s ushered in a period of economic growth, although never achieving pre-Oslo levels. During this brief period of mild economic improvement, aid declined, reaching its nadir in 1998. The second intifada, which broke out on September 26, 2000, ended a short-lived upward trend in the Palestinian economy and caused the GDP to plummet. However, aid to the Palestinians increased rapidly. During the second intifada, from 2001-2004, annual foreign aid nearly doubled, reaching $1023 million per year (UNCTAD, 2006). The following graph depicts how GDP declined as foreign aid was scaled up. GDP and aid are normalized to 100 for 1993, the year that the Oslo accords were signed. The GDP is scaled on the left and aid is scaled on the right.

 

Data from World Bank Reports

Ben-Dror Yemini observed, “huge sums of money given to the Palestinians went down the drain, and opportunities to win independence and prosperity were rejected in favor of the supreme objective: wiping Israel off the map.”

The years 1999-2006 show the strong correlation between the decline in GDP and the increase in total aid to the Palestinians (both governmental and non-governmental aid) and donations to the Palestinian Authority. In the following charts, the GDP for 1999, the year before the second Intifada, is set at 100. The relative GDP (percent of  normalized value in 1999) is scaled on the left and aid is scaled on the right.

 

Sources of data:

Two Years After London, Restarting Palestinian Economic Recovery, World Bank, 2007

Memorandum to executive directors and the President: West bank and Gaza : An Evaluation of bank assistance, World Bank, 2002

Developing the Occupied Territories: an Investment in Peace, World Bank, 2004