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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.


A Flood of Foreign Aid
On October 31, the US announced a commitment of $435 million to the Palestinian Authority (PA), a sixfold increase in US aid over prior commitments according to the Washington Post. The World Bank recently reported that the PA has already received $450 million in the first half of 2007. This puts the PA on track to receive far more than the $738 million reported for all of 2006, which in turn was more than double the $350 million provided in 2005.

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 Oslo Peace Process and Increased Aid
The violent outbreaks damaged the Palestinian economy, but did pay political dividends. The first intifada produced the Oslo "peace process" in 1993 and a subsequent period of increased aid to the Palestinians. But the Palestinian economy actually declined from its pre-Oslo levels. As Ben-Dror Yemini noted,
"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.

 

 
While it is not proven that the aid played a direct role in causing the economy to decline, clearly the increasing aid was unable to improve the Palestinian economic situation absent improvements in the political situation. Yet aid to the Palestinians has only increased. 2006 saw record levels of foreign aid and continued deterioration of the Palestinian economy. 2007 promises far greater aid. The increased aid may yet prove successful where past aid failed, but only because of better linkage to promoting political change. A recent announcement by the Palestinian government to reduce security forces by more than 30,000 is a welcome step in the right direction.

The assessments of none other than George Abed, a Palestinian and senior IMF economist, and of James Prince, a consultant to the Palestinian Investment Fund, offer an important summary of the phenomenon of increased aid correlating with economic deterioration. Abed recognized the futility of providing donor aid, asserting that it was counterproductive. What was needed, he said, was investment. This view was echoed in Prince's conclusion that, "many of the donor programs have not only been ineffective, they have harmed the economy." ( "Expert says Palestinians don't need financial aid," San Francisco Chronicle, Sept. 5, 2005)

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


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