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The impact of foreign aid and donations to Palestine on development of its economy under alternative Israeli- Palestinian economic interaction regimes

Student thesis: Doctoral Thesis

  • Sharbel Shoukair
The main goal of the thesis is to examine whether the Palestinian economy suffers from "Dutch Disease" symptoms, and if so what are its sources. Dutch Disease has been widely used to explain why foreign development aid can be ineffective in generating economic growth, even though it can break the vicious cycle of low income, low saving, low investment, low sustainable growth and even negative growth. In most cases, the disease is due to appreciation of local currency. However, the Palestinians use the Israeli Shekel and also the Jordanian Dinar and the Egyptian Lira. Thus, the sources of the symptoms of the Dutch Disease in the Palestinian economy might be explained by the influx of foreign aid arising because of terror attacks and retaliations and the economic policy and constraints that are imposed mainly by Israel.

The theoretical and empirical efforts of the thesis to determine the causality direction between foreign aid and growth include the following:

I. The national accounting identities are used to express the gross domestic product (GDP) in terms of foreign currency and the proportion between import and uses. I found empirically that due to the political- economic constraints in the case of the Palestinian economy, the factors mentioned above are almost entirely exogenous and, under the existing economic- political constraints, foreign development aid had only a small chance to significantly boost the tradable sectors.

II. I separated the national accounting figures of the Palestinian economy into two sub periods, 1968 to 1993 and 1994 to 2007. In the first period the Israeli convenient policy was to employ the Palestinians in Israel rather than to encourage the development of the Palestinian economy. The first Intifada erupted in 1987 and led to years of terror attacks and retaliations and also caused a significant reduction of GDP. Over the period 1968 to 1993 the average annual foreign aid was less than 20% of that for the period 1994 to 2007. Thus, terror and the economic and political policy of Israel are the main factors for the disease in this period.
Terror clashes and economic-political constraints persisted also in the second period of post "Oslo peace accord", but in that period the foreign aid soared up to 64% of GDP in 2007. The per capita GDP in 2007 decreased to almost the same level of GDP per capita twenty years ago, unemployment soared, export (about 90% to Israel) remained relatively negligible while the weight of the tradable sectors went down and weight of the non-tradable sectors rose. These findings fit the symptoms of Dutch Disease's. The main question remains - did the unprecedented foreign aid replace the economic efforts of the Palestinians, or did the foreign aid only solve the humanitarian disaster?

III. In order to answer this previous question, I regressed the annual growth of GDP on previous, current and next year foreign aid and found that the annual GDP growth is significantly correlated only with the current year foreign aid. This finding indicates that both directions of causality hold and foreign development aid cannot boost GDP unless the political-economic constraints are removed, and Israel becomes a positive player in the Palestinian economy.

In sum, the original contribution of the thesis is four fold. First, to the best of my knowledge, for the first time macro data of almost forty years on the Palestinian economy has been collected and analysed. It was not an easy task, due to collection difficulties at the first Intifada period and the 1994 transfer of statistical bureaus from Israel's Central Bureau of Statistics to the Palestinian Central Bureau of Statistics. Thus, I had to also estimate data from the first Intifada period and smooth conflicting figures between 1993 and 1994.

Second, to my best knowledge this is the first work that has expressed and analysed GDP in terms of foreign currency constraints. This approach adds a unique economic insight, since almost all sources of foreign currency are exogenous in the special case of the Palestinian economy.

Third, for the first time the Dutch Disease symptoms of the Palestinian economy and its major factors are theoretically and empirically analysed. The symptoms at the period of high foreign aid were reflected in following four observations. First, increased unemployment; second, low growth of GDP; third, an increased share of the non-tradable sector and a decreased share of the tradable sector; and four, a decreasing proportion of exports out of GDP.

Fourth, this is the first stock market event study that analysed the impact of terror on the two sides of the barricade (Tel Aviv Stock Exchange vs. the Palestinian Security Exchange). The main findings of this analysis are as follows. Firstly, major terror attack events significantly depressed both stock markets; secondly, the Israeli stock market is more sensitive to terror attacks; thirdly, terror attacks affect negatively both economies but the negative relative impact on the Palestinian economies is more significant.

Original languageEnglish
Awarding Institution
Award dateDec 2013


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