Contents

Introduction

Chapter I - Data

Chapter II - Analysis

Chapter III - Discussion and recommendations

Recommendations

Conclusions and Implications

The two parties view the economic domain as one of the cornerstones in their mutual relations with a view to enhance their interest in the achievement of a just, lasting and comprehensive peace. Both parties shall cooperate in this field in order to establish a sound economic base for these relations, which will be governed in various economic spheres by principles of mutual respect of each other's economic interest, reciprocity, equity and fairness.

Preamble of the Protocol on Economic Relations between the Government of Israel and the PLO, representing the Palestinian people.

After the euphoria brought on by the signing of the Israeli and Palestinian agreement on the Declaration of Principles on Interim Self-Government (DOP) in 1993, and Israeli redeployment from major Palestinian towns, Palestinians quickly realized that the peace process and return of the PLO created little more than an ambiguous political and economic future. Despite the slow pace of negotiations and shattered expectations, however, both Palestinians and Israelis continue to place high hopes on a peace which rests upon a sound Palestinian economy that is supported, but not fueled, by international donations.

Improved living conditions, a strong infrastructure in the West Bank and Gaza Strip, and the necessary institutions are all elements vital to the peace envisaged by the DOP. With this in mind, the international community met in Washington on October 1, 1993 at the US-hosted Conference to Support Middle East Peace. This conference concluded with the donor community pledging US $2,996,32 million to the Palestinians, to be disbursed between 1994 and 1998. At the Donor Countries Conference in Washington DC on November 30 1998, donors pledged a further US$3.8 billion for the next five years, the US alone pledging to increase donations US$500 million to US$900 million.

Despite massive amounts of foreign aid, unemployment rates between 1993 and 1997 shot up, household incomes and expenditures declined, and public confidence in the peace agreements was fundamentally shaken. Since the signing of the Declaration of Principles in 1993, Palestinian living standards have fallen by over 30 percent and unemployment hovers between 15-20 percent, rising sharply during closures. An estimated 20 percent of the West Bank and 60 percent of Gaza lives on less than US$650 per year. A variety of factors contributed to the Palestinian economic decline. Israeli-imposed closures restrict the movement of goods and people, financial mismanagement and corruption on the part of the PA channel wealth into the hands of a few, and a dearth of development projects focusing on industrial and agricultural development leave farmers and workers alike without the equipment or ability to make a decent living. The tension between increasing poverty and the massive inflow of funds led many to question the international development initiative, its framework and impact.

The West Bank and Gaza Strip remain in need of assistance. That assistance has been directly linked to perceived progress in the peace negotiations, to demands from donors for transparency and accountability from the Palestinian Authority (PA), and to the various priorities set by individual governments and multilateral organizations (e.g. World Bank, International Monetary Fund, United Nations).

Often contradictory priorities among the donor community, Israeli security and economic concerns and PA emphasis on aid as opposed to development, brings an inconsistency to the development process, hampering economic growth. On one hand, the true state of the PA's finances is unclear and on the other the levels of foreign assistance disbursed differ significantly from amounts initially pledged and committed. In addition, Israeli closures restrict the flow of goods in and out of Gaza and the West Bank. There is an urgent need to gain a greater understanding of this situation, as transitory structures become more permanent, and as a Palestinian development strategy materializes on the ground. Furthermore it is vital that the population feel confident that this development strategy is one that will not create mechanisms that actually prevent people equal access to wealth, education and health. If the peace process is to be successful, Palestinians must feel that the PA is working with the donor community to raise their median standard of living, not splitting Palestinian society into the wealthy and the poor.

Within this context, the Jerusalem Media and Communications Centre (JMCC) initiated the "Foreign Aid and Development in Palestine" project, which is supported by NOVIB. This book represents the culmination of three studies the first of which was published in 1997 under the title Foreign Aid and Development in Palestine. and is included here with current figures as Chapter I. Mortgaging Self-Reliance was also published in 1997 and is added in its entirety to this book as Chapter II. The final study has not previously been published in any form and is presented here as Chapter III.

The aim of this project is to examine whether the donor community and Palestinians are distributing funds in a way which will help ensure sustainable development, or whether they are instead helping to create structural dependency. It is hoped that this information will serve as the first step in establishing a forum to discuss economic development and the role of the donor community in Palestine. Chapter I is not meant to be analytical in nature, but essentially a compilation of various materials pertaining to the donor community and the Palestinian economy, including pledges, commitments, disbursements, and sectoral concentrations for the period 1994-1998. Chapter II identifies and prioritizes the key issues relevant to the responsible use of funds received, through interviews, workshops, and other fora.

JMCC hopes that the discussion and analysis Chapter II will help to determine the respective roles of the PA, NGOs and international donors and agencies within the development process, and encourage communication between all parties on how to strike a balance between short-term needs and long-term sustainability. Accordingly, Chapter III prioritizes the various components of the development process and formulates policy guidelines and recommendations. The project as a whole intends to establish a local, informal forum for discussion of the various development issues and priorities, with an eye to future policy-making.

Based on the knowledge gleaned in the first two project phases JMCC convened a conference in December 1997 to discuss alternatives to the current development process. The results, presented in Chapter III, stressed the Palestinian response to development divorced of Israeli interference in the Palestinian economy. Participants agthat while Israeli policies such as border closures exacted a high price on Palestinian economic life much could be done by the PA, the international community and Palestinian civil society to improve the effectiveness of aid. Recommendations to the PA addressed their poor hiring practices and information systems as well as a dearth of transparency and lack of accountability. Recommendations also address the role of the Palestinian Diaspora in stimulating the economy and ways in which the donor community could play a more active political role in development.

While the Palestinians face similar challenges to other developing countries, their education and relatively generous levels of foreign assistance also offer the hope of true prosperity. Israeli economic policies towards the Palestinians, however, make it difficult for Palestinian producers and consumers alike. JMCC hopes that donors and Palestinian officials use the observations and recommendations presented here to develop a comprehensive development strategy designed to bring the Palestinian economy in line with the developed world.

By no means is this a comprehensive study of the Palestinian economy and the donor community; the issues are far too numerous and complex. We have attempted, however, to provide an opportunity for input from individuals involved directly and indirectly in Palestinian development. It should be noted, however, that since interviews and discussions were a main source of information, the accuracy of information could not always be confirmed.

Chapter I - Data

I. Pledges

2. The Flow of Donor Pledges 1993-1998

3. Sectoral Profile of Donors’ Assistance

1. Core Factors in Effective Foreign Aid

2. Situation Assessment

3. Structure of Foreign Aid Mechanism in the Palestinian Context

4. Foreign Aid in the Palestinian Context: An Assesment

5. Economic Growth in the WBGS 1992-1996

Ideally, the recommendations put forward in this concluding chapter will be adopted by an ABC structured coalition which could put them on the agenda of policy-makers and work toward building public awareness about what must be done in order to achieve equitable and efficient development in Palestine. There are three important elements which must be thought about in relation to development.

Clearly, as information grows exponentially and as its incorporation into production processes becomes increasingly complex, the ability of both policy-makers and the public to acquire, adopt and adapt to new knowledge is crucial to economic development.

Secondly, given imperfect information and incomplete markets, government intervention should be geared toward improving any imbalances rather than creating them, i.e., if a reallocation of resources leaves someone better off, someone else is not worse off.

Finally, the function and performance of government institutions must be addressed. This is a crucial area, where much can be done to stimulate development and make obstacles surmountable.

Specific recommendations that emerged from this project are outlined below.

1. Improved Government Performance

Within government agencies and public institutions, four areas of improvement should be targeted: enhancing information systems; tightening procurement procedures; decentralizing operations; and improving staffing policies. Staffing public positions according to professional qualifications and experience rather than political affiliation and party loyalty is particularly important in ensuring greater governmental accountability and transparency.

2. Greater Transparency and Public Accountability

Appropriate mechanisms for ensuring public participation and public sector accountability and transparency must be installed. For example, public sector agencies should be regulated; public hearings or public announcements by each agency implementing development works should be made mandatory. Monitoring and evaluation procedures must be formalised and made mandatory. And the development process must be made public, “privatised” to a certain extent through the abolition of red tape that stands between the government and the public.

In addition, set criteria should be established by which development projects are assigned. This will reduce the frequency of disputes between communities and districts which often exacerbate frustration with the development process.

A legal and regulatory framework addressing the issue of international borrowing should be established. A set criterion, by which the Palestinian Authority accepts loans, should be created, since the debt burden is, ultimately, borne by the public. The process of making loans rather than grants to the Palestinian Authority has only just begun, as donor concerns and donor priorities restructure the type of assistance given. However, indebtedness will become a serious problem for the Palestinians unless they can ensure continued generosity on the part of the donor community. An alternative course of action would be to convince donors to extend guarantees to direct foreign investments.

The role of the Ministry of Finance and the financial departments in each ministry in auditing and financial controlling must be enhanced. The office of the Public Auditor must be equipped with qualified personnel who are appointed for merit and integrity.

4. Encouraging Private Investment

Bank guarantees and other financial interventions or systems could be useful in encouraging private investment. The establishment of such arrangements either through the existing financial and banking systems or through an auxiliary system is very important in encouraging private business.

All indicators are that Diaspora and other private investment could be stimulated by greater political democracy, openness of the legal system, greater tax incentives and tax holidays, greater accessibility to world markets and freedom from the hegemony of power.

5. Activating the Role of Donors

The success of the Palestinian development effort is dependent on the donor community playing a more political role to put an end to the Israeli siege policies. Otherwise, the foreign assistance being given will effectively continue to subsidise Israeli policies, and the funds being given will virtually go to waste. In particular, the donor community can be effective in freeing up internal trade and movement, in and between the West Bank and Gaza Strip, and opening up world markets to Palestinian producers -- i.e., by pushing for resolution of issues such as border crossings, airport operations and the sea port.

Outlined above are some of the most pressing issues pertaining to the donor effort to Palestine. The obstacles are substantial, and the gravity of the situation should not be underestimated. One thing is clear: more coordination is needed — at every level —and a more participatory approach in general is required.

Given that delivering “visible” benefits of the peace process to Palestinians in the WBGS and thereby reinforcing popular support for the peace process has been central objective of the majority of foreign donors, public perceptions of the post-Oslo accord foreign assistance are an equally valid indicator of the success of the initiative. According to a poll conducted by JMCC in April 1997, Palestinians are dissatisfied with the donor initiative overall. Only one fifth, 20.2 percent of those polled, felt that services and infrastructure had improved greatly since the arrival of the Palestinian Authority; slightly over half felt there had been a little improvement, while 14.3 percent felt there had been no change, and just over 10 percent felt that things were either worse or much worse than before.

Cynicism about foreign aid and its distribution was evident in the survey. One third, 33.8 percent, of those polled felt that foreign aid was used randomly, and 26.8 percent felt that donor funds were not going to those most in need. Regional differences in opinions were sharply defined, reflecting the impact of donors’ political agendas. Only 3.3 percent of Palestinians in East Jerusalem felt that there had been a big improvement in services and infrastructure, compared with 15.2 percent in the West Bank and 31.3 percent of residents in Gaza. In addition, of those polled who felt that things had improved, only 31.8 percent of those living in Jerusalem attributed the positive change to foreign aid, compared with 87.8 percent of Gazans and 74.3 percent of West Bank residents. sharp difference in perceptions reflects the discrepancies in donor funding; many donors have stayed away from Jerusalem-based projects because of Israeli sensitivities.

The popular impression of the PNA’s performance within the development context appears to be better than that of the international donor community. Just over one third, 34.5 percent of those polled, felt that the PNA was doing a good job in implementing development policy; 48 percent felt that they were doing an average job; and only 13.8 percent a poor job. Of all the respondents, only 6.7 percent felt both that there had been no improvements since the handover to the PNA and that this was the fault of PNA actions or lack of action.

In general, the results of the survey indicate a lack of general awareness regarding the current situation of the Palestinian economy and the role of the donor community; it would appear that many people feel removed from the overall socio/economic development process. And, as the link between development and the peace process has been reinforced repeatedly, it is perhaps not surprising that the levels of satisfaction with the peace process mirror the declining popular disillusionment with the development initiative.

Clearly, as far as the overall population of the WBGS is concerned, the peace process — and the parallel development initiative — have yet to deliver significant benefits. This study, and this project in general, has attempted to highlight some of the major issues surrounding the international community’s expanded development program, to raise some key questions for further debate, and to lay the groundwork of a locally-based forum for that future debate. The culmination of this project was the JMCC conference in December that was designed to activate this forum and continue the debate on the current state of development. Hopefully the concrete guidelines and recommendations presented in this book address the problems of development in Palestine in a more realistic, participatory and sustainable manner.