Political Economy of Aid in Palestine:

delayed development & faded nationhood

By Sahar Taghdisi Rad

African Development Bank

Introduction Palestine: highest intl per capita aid allocation for several years, yet

near economic collapse

Aid has in cases prolonged the conflict Theoretical and empirical inadequacies of the macroeconomic

framework for aid effectiveness in conflict zones

Mismatch: socio-economic needs of conflict economies AND donor policies in conflict zones

Why mismatch? Inability of the neoclassical macroeconomic framework to

incorporate a comprehensive analysis of conflict within its confined boundaries and restrictive assumptions

Unwillingness of donors to take effective account of the conflict, stemming from the donors often originates from donors political, strategic and ideological interests and alliances in the conflict.

Significance of the Aid Debate Recent surge in international aid flows + signed

of ineffectiveness

More ambitious tasks of bringing peace in conflict zones

Creating room for donor conditionalities

Up to 60% of aid remains in donors hands

Development of the Aid Effectiveness Debate

Post-war: aid as a lump sum addition to the capital stock minimising the savings gap (H-D model); ignoring aiddependency, and other factors affecting growth

To-Gap Model: aid can also minimise foreign exchange gap(Chenery and Strout); aid viewed in isolation from otherpolitical and economic factors

1990s and the rising prominence of neoliberal economicframeworks: the workings of aid is affected by other factorsin the recipient country: from environmental geographical, toinstitutional and governance aid only effective if disbursedin good policy environment.

Aid and good policy environment The interactive variable: aid x policy [Boone (1994, 1995),

Dollar & Burnside (1997, 2000)]

Aid only effective in a good financial, trade and fiscal policyenvironment e.g. low inflation, high exports and imports, and small budget deficits.

Definitions of good policy/governance broad enough to allow for a new chapter of conditionality

The basis of much of aid programmes of multilateral and bilateral donors since the late-1990s.

Weaknesses of the aid debate

Irrelevant economic assumptions:

That economic institutions and policies are the main determinants of long-term economic growth in conflict zones

Assumptions of competitive factor markets, perfect credit markets, no exogenous technical progress and constant population

Not accounting for the fact that markets are subject to substantial disruptions as a direct (e.g. physical destruction) or indirect (e.g. increased risk and uncertainty) result of conflict e.g. Palestinian trade.

Depoliticisation of conflict

Despite adding a political twist to the area of economic policy making, the aid effectiveness debate calls for a depoliticisationof the political process paradox:

Channelling aid towards government reforms and budgets support while calling for a reduction in the size of the government

Donors effective formation of the political and institutional structures of the recipient economies.

An incomplete and partial democratisation and economic liberalisation according to universal values can increase the risk of further conflict by undermining the countrys institutions and central governance mechanisms.

Weaknesses of the aid debate

Lack of supply-side analysis:

Little analysis of the role of donors in the current aid debate

Fungibility has justified a focus on the recipient side

Fungibility of aid is rather an illusion of the expected differences in donor and recipient processes of allocation and monitoring of aid expenditure, and not a difference in their preferences, as is commonly believed

Weaknesses of the aid debate

Incorporating Conflict in aid debate

Neoclassical economics treatment of conflict: a temporary, exogenous factor, measured by the number of battle-related deaths, and not deserving a special or proper treatment in any economic analysis.

The real costs of conflictEconomic performance under conflictConflict vs. post-conflictAid during conflict

The real costs of conflict Socio-economic costs of conflict significant for policy options

and effectiveness of aid.

Mainstream analysis: cost of conflict defined in humanitarian terms the number of battle-related deaths per annum e.g. costs of conflict in Palestine.

does not represent its true extent and severity, particularly in terms of short-term and long-term social, economic, infra-structural and political costs of the conflict.

The economic damage of conflict should be analysed in terms of its overall effect on a countrys economy e.g. an expanded version of the entitlement failure approach

Economic performance under conflict

Neoclassical economics is concerned with the question of whether the existence of conflict or peace affects the growth rates of the economy, ignoring the mechanisms through which conflict affects economic performance and growth.

Neoclassical economics focuses on economic incentives as the main stimulants of conflict (Collier and Hoeffler) treating war as an essentially chaotic and irrational eruption of violence triggered by individual economic gains (greed) as the main stimulus to rebellions in Palestine: conflict is rooted in nationalist and anti-occupational struggles, much of the economic analysis based on the greed-grievance framework cannot be used to achieve a comprehensive analysis of the economy

Economic performance under conflict

The interaction between conflict and economics changes the behaviourand the role of economic agents including the state require new developmental approaches to utilise local capacities and emergence of new forms of social capital, led by firm and constructive government action.

Consideration of such economic changes can result in unexpected, non-mainstream policy choices in a conflict-affected country, counter-inflationary measures can depress the purchasing power and economic growth in an already-weak economy; privatisation can bring benefits only to a small elite of entrepreneurs; import liberalisation at these times can intensify the process of capital flight which is already happening as a result of conflict; and, deregulation can reduce the power of a strong central government which is needed to maintain stability and manage the process of primitive accumulation under conflict.

Conflict vs. post-conflict Most recent works on the role of aid in conflict situations are

based on post-conflict situations and assumptions , with their conclusions being stretched to ongoing conflict situations.

Avoiding challenge to neoliberal uniform analytical frameworks and rigid assumptions

Definition of post-conflict post-Oslo Palestine?

Donors attempt to bring forward an arbitrary post-conflict situation, in which their neutral involvement could be more easily justified .

Aid during conflict When disbursed in the context of conflict and violence, aid becomes an

inevitable part of that context: it can exacerbate the conflict if it is not well-targeted, but it can also reduce the local severity of conflict by strengthening local capacities.

Despite James Fergusons claim that the aid system is able to suspend politics from even the most sensitive political operation and thus to operate as an anti-politics machine, the record of donor interventions in global conflict settings prove otherwise.

The ideological mix of neoliberal concepts of democracy and market forces combined with current approaches to conflict resolution has given rise to contemporary strategies of intervention by external actors and donors.

The liberal peace paradigm gives priority to rule of law rather than social justice, to quick-fix elections rather than political accountability, to neoliberal economics rather than state direction to increase purchasing power, and to widening external influences rather than strengthening autonomy in the undeveloped world (Duffield in Pugh et al., 2004: 6).

Palestinian economy Small but undiversified economic structure Heavy dependence on the Israeli economy & international aid High levels of poverty, inequality and economic decline Period of donor involvement in the territories coincided with

the height of the Post-Washington Consensus and the latters focus on good governance practices and the emergence of the aid effectiveness debate

World Banks Investment in Peace Paris Economic Protocol

Palestinian economy The post-Oslo years witnessed the weakest state of the

Palestinian economy since 1967.

19938, the cumulative total of financial donations to the PA was $3.55 billion in pledges and $2.45 billion in disbursement

Yet GNP dropped by 3.4%, 10.1% and 2.9% in 1993, 1995 and 1996

By 2000, after seven peace years and five years after the establishment of the PA, per capita income in the West Bank and Gaza was estimated to be 10 per cent below the pre-Oslo levels

Intifada struck yet another powerful blow to the Palestinian economy: GDP declined by 12.9% during 1999-2004 & per capita GDP declined by 25.6% during this period

Palestinian economy sectoral structure

Determinants of Palestinian economic decline

Legacies of occupation

Forced integration and isolation Bantustanisation

Elements of conflict

Closures and territorial control Labour market access Development of Israeli settlements in the Palestinian

territories

Aid allocation in Palestine Pre-Intifada period: annual donor disbursements averaged around

US$500 million (or US$150 per capita).

Post-Oslo construction efforts and the hopes associated with the creation of an independent Palestinian economy

At the onset of the second Intifada: above figure doubled to around US$1 billion per annum in 2001 and 2002 (US$500 per capita) the highest sustained rate of per capita aid in the world since the Second World War.

A shift took place in donor activities: regular (development) support has been increasingly replaced by short-term humanitarian aid and budget support.

Aid allocation in Palestine

Pre-intifada aid allocation Donors aim: development assistance and construction of

the much needed infrastructures

A belief in economic development as vital for establishment and consolidation of peace.

By creating backward and forward linkages, local employment opportunities, and encouraging local and international trade and investment, a strong infrastructure could be of enormous importance to the Palestine.

Infrastructure: 22.3 per cent of total pre-Intifada assistance

Budget support to the PNA, gender and youth support a very small proportion of total commitment and disbursement

Pre-Intifada sectoral allocation of grants and loans to the WBGS, 19942000

Post-intifada aid allocation Intensifying conflict exposed the inadequacies of previous

donor operations Sectors such as the agricultural sector, despite their critical

cushioning role in the face of worsening economic crisis received a meager 1% of total international support.

Share of development assistance dropped from 88% of total international aid to only 26% after 2000.

Much of what remained and was categorised as development assistance during the post-Intifada period was, in fact, emergency assistance in infrastructure and social sectors, especially health.

Donor assistance towards budget support increased from 2.6% of total assistance before the Intifada to more than 40% after.

Institution-building and capacity-building (human rights, civil society and democracy) also witnessed a doubling of budgets.

Post-intifada sectoral allocation of grants and loans to the WBGS, 2000-2006

Post-Intifada aid allocation

Focus from development to institution-building and governance reforms: reform of the Palestinian Authority and the institutions that they had just created a few years earlier

Such institution-building projects included support for the Palestinian judicial system, reform of the tax system, Palestinian NGO projects, strengthening parliamentary democracy, and civil service reforms.

The main sources of the boost in budget support are the EC, the World Bank, and the Arab donors.

Palestinian institutional reform a means of donor survival and presence in the territories.

Table: Donor support to the PA by major category (US$ million)

Aid and political leverage in conflict

The increased post-intifada budget support was combined with an increase in donors influence in the internal Palestinian budgetary decision-making, through a host of economic and political conitions

Pro-Israeli lobby group pressures felt by the donors further conditionalities on their budget support.

To avoid being blamed for financing illegal activities through their non-targeted budget support, donors established the Public Financial Management Reform Trust Fund in 2004, which was a multi-donor budget support mechanism administered by the World Bank. The Reform Trust Fund would disburse budget support against a series of reform benchmarks to be fulfilled by the PA.

Aid in Palestine Conclusions

None of the weaknesses and needs of the Palestinianeconomy are targeted by donor programmes, which oftencreate a state of aid dependency in the territories whilemaking the Israeli occupation less costly and more sustainable.

Economic growth and development is unlikely to precedepolitical stability.

Need to depart from frameworks which attempt to separatethe politics of occupation from the economic performanceand livelihood of the territories

Donors working around the conflict disintegration of thePalestinian economy maintaining a deluxe occupation

Palestinian reform: a last avenue for donors to give some lifeto a weakening peace process, and their role within it.

Aid in Palestine Conclusions

Weakening Palestinian nationhood: rather than have the state controlled by common people, [donors] would control the local states withdrawal from the economy . . . tak[ing] resources away from the state and plac[ing] in the market, where all citizens will supposedly have equal access to them

Donors promotion of an international state, while using neoliberalism as a form of governmentality, has deprived the recipient country from policy ownership and promoted a form of recolonisation of the developing countries.

Conclusion Conflict interacts in various dynamic and complex ways with the socio-economic

structures of the country, hence making the aideconomydonor relationship adynamic and complicated one which cannot be understood through universal, cross-section, and purely demand-side frameworks of analysis.

At the macro-level, it is donors political interests, their strategic alliances, and theirquest for diplomatic survival which dictates the general direction of their assistance.At the micro-, project level, these political agendas manifest themselves in theideological and economic frameworks adopted by donors for setting their overallpattern of allocation, and planning and programming their activities.

The neoclassical analytical framework is far too limited to incorporate acomprehensive understanding of the interaction between conflict and economicdevelopment

Importance of a viable political settlement to the conflict as a precondition foreffectiveness of any aid and development agenda.

When aid has attempted to act as a substitute for politics, it has either aggravatedthe economic and humanitarian conditions, or contributed to the continuation ofthe conflict.

Political Economy of Aid in Palestine:delayed development & faded nationhoodIntroduction Significance of the Aid DebateDevelopment of the Aid Effectiveness Debate Aid and good policy environment Weaknesses of the aid debateWeaknesses of the aid debateWeaknesses of the aid debateIncorporating Conflict in aid debateThe real costs of conflictEconomic performance under conflictEconomic performance under conflictConflict vs. post-conflictAid during conflictPalestinian economyPalestinian economy Palestinian economy sectoral structureDeterminants of Palestinian economic declineAid allocation in Palestine Aid allocation in Palestine Pre-intifada aid allocationPre-Intifada sectoral allocation of grants and loans to the WBGS, 19942000 Post-intifada aid allocationPost-intifada sectoral allocation of grants and loans to the WBGS, 2000-2006Post-Intifada aid allocationTable: Donor support to the PA by major category (US$ million)Aid and political leverage in conflictAid in Palestine ConclusionsAid in Palestine ConclusionsConclusionSlide Number 31