The future of Palestinian economy: The role of Aid

• Autores: Nassar Tawfiq
• Directores de la Tesis: Javier Alfonso Gil (dir. tes.), Maricruz Lacalle Calderón (dir. tes.)
• Lectura: En la Universidad Autónoma de Madrid ( España ) en 2017
• Idioma: español
• Número de páginas: 186
• Tribunal Calificador de la Tesis: Antonio Vázquez Barquero (presid.), Silvia Rico Garrido (secret.), Javier Márquez Vigil (voc.)
• Programa de doctorado: Programa Oficial de Doctorado en Economía
• Materias:
  • Ciencias económicas
    • Economía general
• Enlaces
  • Tesis en acceso abierto en: Biblos-e Archivo
• Resumen

  • For the past sixteen years, the Palestinian economy has been suffering deeply on all fronts. It has had a continuous budget deficit, a trade deficit and negative domestic savings. These three major problems have existed despite the high flow of foreign aid, and, sometimes, the high flow of personal remittances.

    Although growth, as measured by GDP, has been positive, except between 2000 and 2002, and slightly negative in 2004, the above problems have continued to exist. In addition to these problems the areas controlled by the Palestinian Authority have suffered from high unemployment, low Labour Force Participation Rate (LFPR) and high poverty levels.

    The above economic situation has been accompanied by a positive level of economic growth acted as the stimulus for this research in which we will try to answer the following question: How can such problems exist despite the high levels of external inflow, especially aid? The main goal of this thesis, therefore, is to examine the effect of foreign aid on the Palestinian economy from 1994, when the Palestinian Authority (PA) was established, until 2013. This was done using two different approaches: 1. A descriptive analysis was conducted using macro data for the Palestinian economy, where growth, GDP by expenditure and GDP by activity were thoroughly discussed. In addition, the fiscal, foreign exchange and saving gaps were discussed, along with the effect of remittances and foreign aid on those gaps. Such a comprehensive analysis covering the age span of the PA was done for the first time.

    2. An empirical model examining the effect of aid on per capita income was constructed using three simultaneous equations, with the first equation examining the effect of foreign aid, local investment, exports, FDI, and other factors, on the per capita GDP. The second equation examined the effect of investment, exports and population growth, among other factors, on aid. The third equation examined the effect of aid, FDI, exports and other factors on investment. This is the first time such a model has been applied to the Palestinian economy, and it is also the first time the effect of aid on the per capita GDP has been analyzed in the areas controlled by the PA.

    In the descriptive analysis, it was realized that the major factors affecting growth and per capita GDP were political stability, investment and exports. When political stability is acceptable, as in the years 1994-1999, both investment and exports increased, but when political stability is low, as in the years 2000-2002, investment and exports sharply decreased and hence the per capita GDP reduced. It was also noted that, despite the high level of aid in the years between 2000 and 2003, growth was negative and the per capita GDP dropped. This economic behaviour clearly shows that aid is not the major factor in promoting sustainable growth.

    Examining the use of aid further, it was seen that most of the aid was to support the budget, and hence was used for the salaries and current expenses of the PA, as well as on humanitarian help to people in need; very little was spent on investment in infrastructure, especially in the period between 2000 and 2013. This means that aid has been promoting consumption, which has been the main driver for the non-sustainable growth. Since this consumption is highly dependent on aid, however, this growth will never be sustainable.

    The empirical analysis showed that aid negatively affected per capita GDP, this agrees with some previous theories, and means that no matter by how much aid is increased, the GDP per capita will be affected negatively in the long run, as long as aid is spent in such a way as to promote only consumption.

    When testing investment, it was found that exports affected investment positively. This shows that there is a need to invest in export´s related industries, since this investment will positively affect per capita GDP.

    The main conclusion of this research shows that, despite the negative effect of aid on per capita GDP, aid is still needed to cover the budget deficit, as well as to provide the foreign currency needed for imports. It was also concluded that in order to promote sustainable growth, more aid should be directed towards investment, both in the private and public sectors.

    It was also evident that economic growth in the areas controlled by the PA is very much affected by the relationship between the PA and Israel, since Israel largely controls the Palestinians’ life and economy. For this reason, and to achieve sustainable economic growth, Israel must relax its iron fist from the Palestinians, amending its agreements with the PA on the way to achieve full Palestinian independence and control over their territories.

    Based on these conclusions the research recommended the following:  An increase in aid to the 2008-2009 levels, with around 30% of this aid restricted for development, through an investment fund.

     The establishment of an investment fund, with a capital of US$ 3.5-4 billion collected over ten years. The main purpose of the fund is to oversee the disbursements of funds through the local banking system for development projects, as well as to monitor the effects of this investment on the economy of the PA.

     A new economic agreement should be signed with Israel, or major amendments made to the existing agreements. The new agreement should give the Palestinians more control over their economy, including control of imports and exports.

     Pressure must be exerted on Israel to relax its measures relating to the Palestinians, especially in Area C, including the Palestinian right of free movement and their right to build and invest in area C.