Palestinian Economic Dependency on Israel
At the same time Israel started to control the external borders of the OPT. A customs union was imposed, meaning that Israel designed both internal and external economic policies without negotiating or consulting the Palestinians. These economic policies were designed to "serve Israeli political, military and economic interests as perceived at the time."[1] Furthermore, there was no agreement on who would receive which share of tariff revenues.[2]
See also: 71% of Aid to the Palestinians Ends Up in the Israeli Economy
by Nikki de Beer
Shortly after the 1967 Middle East War, many economic boundaries for transactions between the Occupied Palestinian Territory (OPT) and Israel collapsed: both labor and goods could flow freely from the OPT to Israel and vice versa.
At the same time Israel started to control the external borders of the OPT. A customs union was imposed, meaning that Israel designed both internal and external economic policies without negotiating or consulting the Palestinians. These economic policies were designed to "serve Israeli political, military and economic interests as perceived at the time."[1] Furthermore, there was no agreement on who would receive which share of tariff revenues.[2]
In the 1990s the Oslo Accords resulted in a customs union that was no longer imposed on the OPT by Israel, but one that was mutually agreed upon.[3] The economic protocol of the Oslo Accords, the Paris Protocol, gives the Palestinian Authority "all powers and responsibilities in the sphere of import and customs policy and procedures" with regard to certain goods and limited to certain quantities. The Israeli government has powers over the rest, meaning the vast majority of products. The way in which the economic relations between the OPT and Israel are stipulated in the Paris Protocol demonstrates that the OPT has a dependent position. This article will outline how the Palestinian economy is not only dependant on Israel de jure because of the Paris Protocol, but also de facto.
Although the Palestinian Authority has free trade relations with the EU, the EFTA, the US, Canada, and Turkey, and the Arab League agreed to preferential treatment of Palestinian products in 2004, approximately 90% of Palestinian exports go to Israel. Imports from Israel represent an increasing share of total imports to the OPT and reached around 80% in 2008. The share of the total trade deficit that represents trade with Israel is also increasing and was around 80% in 2008 (see Figure 1). This shows that, in its international trade, the OPT is very dependent on the Israeli economy.
Figure 1. Trade with Israel as Percentage of Total Palestinian Trade 
A good estimate for how deeply the Palestinian economy is actually dependent on the Israeli economy can be achieved through a simple calculation: measuring the Palestinian trade deficit with Israel as a percentage of the Palestinian gross national income (GNI).[4] This shows how much of what is earned by Palestinians ends up in the Israeli economy. The results are shown in Figure 2.
Figure 2. Palestinian Trade Deficit as Percentage of Palestinian GNI
The Palestinian Central Bureau of Statistics (PCBS) trade data are used to calculate the Palestinian trade deficit with Israel. Palestinian GNI data from the PCBS website are also used. GNI is used rather than gross domestic product (GDP) because GNI also includes income from sources abroad, such as budget support for the Palestinian Authority and Palestinians working in Israel, which is not included in the GDP. So, GNI provides a more complete overview of the Palestinian economy than the GDP does.[5] The trade deficit is used because that shows the difference in the money flows from the Palestinian economy to the Israeli economy and vice versa.[6] It should also be noted that the PCBS data excluded East Jerusalem, which creates a significant distortion because East Jerusalem is the city with the highest per-capita income in the Occupied Palestinian Territories. Furthermore, because of the complex nature of the occupation, many transactions between Israelis and Palestinians are not registered and not recorded by the bureaus of statistics. Things like Israelis who shop or buy services in the West Bank and Palestinian workers in Israel who spend money in Israel while they are there are not included in the calculation and could alter the figures. Nevertheless, the figures from the Palestinian Central Bureau of Statistics can serve as an approximation of the dependency levels.
Figure 2 shows that Palestinian dependency on the Israeli economy increased by 52% between 2000 and 2008. The figure also shows that, during the Second Intifada, dependency decreased between 2000 and 2003. On the eve of the Second Intifada, which started at the end of 2000, Israel used economic pressure to hurt the Palestinians. One of these means of pressure by the Israeli government was the imposition of different sorts of distortions in the OPT, such as the closure of borders, curfews, and checkpoints. Another way to hurt the OPT economically was issuing only a vastly reduced amount of working permits for Palestinians to work in Israel and the Israeli settlements. The only way in which Palestinians could hurt the Israeli economy was through military attacks, which caused a recession in Israel. As a result of these hostilities, both economies were damaged. According to Arnon, the Israeli GNP was damaged by 8% during a three-year recession.[7] This means that, without the Second Intifada, the Israeli GNP would have been 8% higher than it was in reality. In the West Bank and Gaza Strip, poverty and unemployment increased drastically.[8] Between 1999 and 2002 the Palestinian GNI decreased by 34%. In the period 1994-1999 the average annual increase in GNI was about 9%. If this growth had continued until 2002, the GNI would have reached almost US $7 billion in 2002. This means that the Israeli attacks on the Palestinian economy actually resulted in a GNI that was 49% lower than without the Intifada. Even if a more modest growth rate of 4% per year is assumed, the actual GNI is 41% lower than it would have been without the Intifada.
Obviously, due to the closures imposed by Israel, trade between the OPT and Israel declined. Trade decreased relatively more than income in both the OPT and Israel. During the Second Intifada, Israel enforced stricter movement restrictions and border closures, making trade between the OPT and Israel difficult. According to the World Bank, movement of commercial trucks between the West Bank and Israel was only half of its pre-Intifada level.[9] This, together with the imposed "back-to-back" system[10] and sieges, resulted in a decrease in employment and income.
One of the reasons for the initial decrease in dependency on Israel during the Second Intifada might be that in 2001 official development aid declined "only" by less than 9%, while the indicators regarding trade between the OPT and Israel decreased by more than 20%. Another reason might be that the increased restrictions forced Palestinians to look for substitutes for their imports from Israel and some of the goods that were usually exported to Israel could function as these substitutes. For instance, certain types of vegetables that were usually imported from Israel might have been replaced by other locally produced vegetables that were usually exported to Israel. What is also possible is that the internal economy was not affected as much as trade. Since both imports and exports to Israel as a percentage of total imports and exports respectively grew between 2000 and 2001, it can be said that the OPT did not substitute its trade with Israel with trade with other countries, e.g. Jordan and Egypt. Israel also imposed closures on borders between the West Bank and Jordan and between the Gaza Strip and Egypt.
In 2002 the GNI reached a level only slightly above its 1994 level, while the GNI per capita was about $450 lower than in 1994. Trade between the OPT and Israel also reached its lowest value of the period for which data are available. In 2002 the main Palestinian cities, towns, and villages were reoccupied by Israel, while 24-hour curfews were imposed.[11] This severely affected the economic situation in the OPT. Another negative influence on the Palestinian economy was the (administrative) detention of 15,000 Palestinians, as well as the killing and injuring of 1,970 and 21,500 Palestinians in 2000 and 2002.[12]
In order to prevent a humanitarian crisis, the international community decided to drastically increase aid to the Palestinians (see Figure 3). Net official development assistance,[13] which is documented by the World Bank, increased 85% between 2001 and 2002. This was mainly in humanitarian aid, providing food and other basics to Palestinians who did not have the means to buy (sufficient quantities of) these goods. At the end of 2002 Israel issued more work permits for Palestinians who wanted to work in Israel or the illegal settlements. However, the still existing closures within the OPT and between the OPT and Israel resulted in only half of the issued permits actually being used. In the same period employment within the OPT increased. The majority of the newly created jobs were only temporary or seasonal, e.g. rehabilitation of destroyed/damaged buildings and olive harvesting. The rest of the created jobs were in the form of unpaid family labor.[14]
Figure 3. Net Official Development Assistance (in million US$)
In 2003, violence modestly declined while there were fewer imposed restrictions. The Israeli government had previously refused to transfer the taxes it collected on behalf of the Palestinian Authority to the PA, but paid the withheld money in 2003.[15] This eventually resulted in a 14% increase of GNI and an increase in trade with Israel of approximately 17% in 2003, which led to an increase in dependency on the Israeli economy of 2%. The increase in GNI was probably the result of the huge increase in international aid in 2002.
In the beginning of 2004, military activity escalated significantly, particularly in the Gaza Strip.[16] However, in 2004, the GNI increased by about 418 million dollars. The economy as a whole grew slightly because more economic activity took place in the West Bank, while the Israeli attacks were relatively more concentrated against the Gaza Strip. What also contributed to the increase in GNI is that ODA increased by 14% in 2004. In the same year, imports from Israel increased by about 438 million dollars and the trade deficit with Israel increased by about 413 million dollars. So, nearly the entire increase in national income was spent in the Israeli economy. This means that the Israeli economy actually gained from the decline in imposed restriction as begun in 2003. The trade deficit with Israel reached one third of Palestinian GNI in 2004.
In August 2005, Israel withdrew its settlers from the Gaza Strip and four smaller settlements in the West Bank, but continued to put pressure on the Palestinians. Israel obstructed economic activities, leading to a constant feeling of risk and uncertainty for the Palestinians.[17] Restrictions and the ongoing construction of the Separation Wall still make trade within the OPT and between the OPT and Israel inefficient and expensive. However, according to PCBS data, the GNI per capita increased by 7% between 2004 and 2005. Dependency on the Israeli economy decreased slightly. ODA remained at the same level and was still an important source of stimulation of the Palestinian economy.
In January 2006, elections were held in the OPT. Hamas won a clear majority in the Legislative Council. Israel and the United States did not accept this democratic decision and decided to boycott the OPT. Budget support to the Palestinian Authority was cut, and the VAT, customs, and tariffs transfers from the Israeli government to the Palestinian Authority were frozen. By doing so, the Israeli government violated its obligations under the Paris Accords. The European Commission decided to make some direct money transfers to poor individuals and civil servants, while the World Bank transferred money directly to certain projects, both without using the Hamas government as an intermediary.[18] As a result of the financial boycott, the GNI per capita decreased by 6%, falling further below its pre-Intifada level, and dependency on the Israeli economy increased further to 35%.
In 2007 the Fayyad government was installed in the West Bank. This led to a change in the way in which EU money was funneled into the Palestinian economy in the West Bank. This new mechanism started functioning in 2008. Fayyad designed a program to attract foreign investors to invest in the West Bank, the Palestinian Reform and Development Plan (PRDP) for 2008-2010. Being a former World Bank economist, most of his plans are in line with World Bank policies. At the donor conference in December 2007, donors pledged to donate 7.7 billion dollars, 2.1 billion dollars more than Fayyad asked for. Donors from the West are very interested in the PRDP because of its neoliberal agenda.[19] The fact that a non-Hamas government was installed in the West Bank and that its prime minister was a former World Bank and IMF economist with a neoliberal agenda led to an increase in international trust in the West Bank economy, or at least in its government. ODA to the Palestinians increased by almost 80% between 2006 and 2008 to more than 2.5 billion dollars in 2008, while the GNI and the GNI per capita increased only by 11% and 5% respectively. In the same period the trade deficit with Israel increased by almost 40%, while dependency on the Israeli economy increased by 23%, to 44% of the GNI, in 2008.
So, in the period 2000-2008, dependency on the Israeli economy has increased by 52%, from 29% to 44% of the GNI in 2008. Over the years, at least part of the increase in GNI ended up in the Israeli economy, because, with GNI, dependency on the Israeli economy increased during those years. Since ODA has increased in this period as well, it seems that this has covered (part of) the trade deficit with Israel. This is a disturbing situation, because it means that a large part of foreign aid to Palestinians in practice actually benefits the Israeli economy.
Endnotes
1 Arnon, A. and J. Weinblatt, (2001), "Sovereignty and Economic Development: The Case of Israel and Palestine," The Economic Journal, Vol. 111, No. 472, p F292.
2 Arnon, A., (2001), "Israeli Policy towards the Occupied Palestinian Territories: The Economic Dimension, 1967-2007," Middle East Journal, Volume 61 Number 4 Aut 2007, p 575.
3 The Palestinians preferred a free trade agreement to a customs union, but Israel would not agree to a free trade agreement and told the Palestinians that Israel would only allow Palestinian workers to work in Israel if the Palestinians agreed to a customs union. Since many Palestinians worked in Israel, the Palestinians had no choice but to agree to the customs union.
4 In its 2003 Report on UNCTAD's assistance to the Palestinian people, the United Nations Conference on Trade and Development (UNCTAD) has made a similar calculation, but with different data. UNCTAD used gross domestic product (GDP) rather than GNI, used a different period and used estimated data for 2001 and 2002.
5 The difference between GNI and GDP is between 200 and 600 million US dollars a year. So, when using GDP instead of GNI the Palestinian dependency on the Israeli economy is a couple of percentage points higher.
6 Because it is difficult to make exact calculations for the Gaza Strip, the PCBS data might not be as reliable as we would want. However, the PCBS data are the best data available. The PCBS is the only institution publishing data regarding total imports from and exports to Israel.
7 Supra 1, at p 593.
8 Ibid.
9 The World Bank, (2003), "Twenty-seven Months -- Intifada, Closures and Palestinian Economic Crisis," The World Bank, p 3.
10 Transport of goods between the OPT and Israel and within the OPT is subject to this system, meaning that goods crossing the Green Line or certain checkpoints in the West Bank have to be reloaded from one truck to another. This system is time-consuming and resulted in empty trucks driving from one place to another and is therefore quite expensive and inefficient.
11 Ajluni, S., (2003), "The Palestinian Economy and the Second Intifada," Journal of Palestine Studies, Vol. 32, No. 3, p 66.
12 Ibid, at p 70.
13 This includes only a share of total aid to the OPT. This excludes for instance budget support for the Palestinian Authority. It also excludes the aid sent to Islamic charities by Arab states, because this is not reported to the World Bank or the UN. No organization documents all aid provided to the Palestinians. See Hever, S., (2008), "The Economy of the Occupation. Political Economy of Aid to Palestinians under Occupation," The Alternative Information Center.
14 Supra 8.
15 The World Bank, (2004), "Four years -- Intifada, Closures and Palestinian Economic Crisis", The World Bank, p. 11.
16 Ibid, at p. 1.
17 Hever, S., (2008), "The Economy of the Occupation. Political Economy of Aid to Palestinians under Pccupation", The Alternative Information Center, p. 15, 20-21.
18 Ibid.
19 Ibid, at p. 22-23.
Source: Alternative Information Center, 23/9/2010
71% of Aid to the Palestinians Ends Up in the Israeli Economy
by Nikki Tillekens
The article "Palestinian Economic Dependency on Israel,"[1] published on the Alternative Information Center's website on 23 September 2010, briefly mentioned official development assistance (ODA) to Palestinians.[2] This article will elaborate more fully on foreign aid to the Palestinians, particularly in relation to the Israeli economy.
Trade Deficit
The Occupied Palestinian Territory (OPT) has an increasing trade deficit with Israel, which reached 44% of gross national income (GNI) in 2008, the latest year for which trade data is available.[3] The total Palestinian trade deficit was 55% of GNI. Comparing these two numbers shows that Palestinians are dependent on the Israeli economy for trade and even for most of their consumption. It is an unsustainable situation for any economy to carry a trade deficit that is about half the volume of the economy for an extensive period of time. When a country has a trade deficit, it means that money is flowing out of the country. If these money flows are not compensated by other sources, wealth will flow out of the country. Mainstream economic theory says that the local currency will then devalue,[4] making it more expensive to import foreign goods and services while other countries will find it relatively cheap to import goods from this country. According to mainstream theory, this situation would eventually lead to a stabilized trade balance. In practice, however, it is not that simple because exchange rates are also used as political instruments. Exchange rates are much less flexible than theory assumes. So, in practice this is not a useful "tool" to deal with a trade deficit.
Even if this economic theory worked in practice, it would not be a solution for the Palestinian trade deficit. The lion's share of the Palestinian trade deficit is a trade deficit with Israel (79%), while the OPT do not have their own currency but are obliged to use the Israeli currency (NIS). In 2008 the economy of the OPT was not even 3% of the Israeli economy,[5] so Palestinian trade with countries other than Israel does not have a large impact on the exchange rate of the NIS with other currencies. So, the natural adjustment via the exchange rate does not work for the Palestinians.
Trade deficits can be paid for with foreign currency reserves. Since the OPT has neither its own currency nor its own central bank, the use of foreign currency reserves is negligible.
Another way to pay for the trade deficit is by borrowing money and increasing national debt. This is sustainable only for a short period of time because if the trade deficit remains, the debt will continue to grow. For highly indebted countries, it is very difficult if not impossible to borrow more money. Conditions attached to the borrowed money such as usually imposed by the International Monetary Fund (IMF) and the World Bank are very likely to include a change in policy to reach a situation of no trade deficit. The Palestinian Authority, however, cannot borrow significant amounts of money because it lacks the income sources to repay its debt. It is not a sovereign state and is thus not trusted by investors to be a reliable debt holder.
Foreign investment can also cover the trade deficit. This is the case in the United States. The US consumes more than it produces, so American imports exceed American exports and a trade deficit results. Foreign investors, of which the Chinese government is very important, buy for instance (parts of) US companies with which the US pays for its trade deficit. Because of Israeli policies towards the OPT, e.g. imposing closures, confiscating land, and destroying buildings and infrastructure, the investment climate in the OPT is unappealing, making it difficult to find foreign investors.
The OPT has a different source of money that is used to pay for its trade deficit: foreign aid.
Aid to the Palestinians
Figure 1 illustrates how official development assistance has grown from 179 million dollars in 1993 to 2.6 billion dollars in 2008, an increase of 1,350%. With the signing of the Oslo Accords in September 1993, the international community was eager to assist in creating a viable Palestinian economy. Development aid was given to the Palestinians in order to ease the transition process from occupation to independence.[6] Figure 1 shows that aid increased by 157%, from 179 million dollars in 1993 to 460 million dollars in 1994.
Figure 1. Net Official Development Assistance (in million US$) 
The start of the Second Intifada at the end of 2000 again led to an increase in foreign aid. While during the Oslo Process in the 1990s the lion's share of aid was development aid (a ratio of 7:1), during the Second Intifada this was mainly humanitarian aid (a ratio of 5:1).[7] In order to prevent a humanitarian crisis, NGOs provided food, shelter, and other basics to Palestinians in need rather than building the economy. This resulted in an increase in official aid of 213% from 516 million dollars in 1999 to 1.6 billion dollars in 2002, of which the largest increase took place between 2001 and 2002, when the humanitarian situation was worse than in previous years. After a decrease of 40% in 2003, official development assistance started to grow again in 2004.
Although in 2006 the United States and Israel decided that the democratically elected Hamas government had to be financially boycotted, a decision followed by the European Union, foreign aid increased by 30% in that year. The reason for this was that the United States and the European Union were afraid that the boycott of Hamas would lead to a humanitarian crisis among the Palestinian population, leading them to directly funnel even more money to the Palestinians through the Temporary International Mechanisms (TIM).[8]
As the article "Palestinian Economic Dependency on Israel,"[9] described, the Fayyad government in the West Bank designed the Palestinian Reform and Development Plan (PRDP), a neoliberal program for the reform in the West Bank which made donors so enthusiastic that they pledged to donate 7.7 billion dollars. The increased confidence in the West Bank led to a further increase in aid starting in 2007.
Figure 2 illustrates how, with some ups and downs, aid has become a larger and larger share of GNI between 1994 and 2008. In this period of 15 years, aid increased from 14% of the GNI in 1994 to 49% of GNI in 2008. Since the first year of the Second Intifada, aid has been at least 20% of GNI. As explained above, the humanitarian situation worsened in 2002. This led to an enormous increase in aid, while the GNI decreased by 14%. As a result, official development assistance reached 46% of GNI, a remarkably high percentage especially when considering that official development assistance is only a share of total aid given to Palestinians. The decrease in official aid in 2003 led to an increase in the share of GNI that represented ODA. The fact that foreign aid increased faster than GNI eventually resulted in a 49% share of GNI in 2008. With the promised aid to Gaza following Israel's 2008-2009 military attack, the pledged aid to support the PRDP, and the fact that there has not been any incentive to make the Palestinian economy grow faster, it is very likely that aid as a percentage of GNI would be even higher for 2009 and probably also for 2010.
Figure 2. Net Official Development Assistance as a % of GNI
Aid to the Palestinians and the Israeli Economy
With all the aid given to the Palestinians in the previous decades, one would expect that the economy would have grown and that by now the Palestinians would be self-sufficient. The opposite is true. Although in several years Palestinian GNI has grown, this growth should be attributed to the population growth. As is shown in figure 3, GNI per capita has in fact decreased in this period of 15 years, from $1,590 in 1994 to $1,459 in 2008. Part of the aid might have covered up the population growth in this period, but the amounts of aid given to the Palestinians are simply too large for this to have been the only destination of the aid. While in the period between 1994 and 2008 ODA was 15.5 billion dollars, in the same period total GNI increased by only 1.8 billion dollars. For the years 1995 until 2008 the cumulative increase in GNI compared to 1994 is 14.8 billion dollars. If this total increase in GNI would be attributed to foreign aid, there would have been no normal economic growth. Which would be a strange situation indeed. Furthermore, ODA represents only a share of total aid given to the Palestinians, meaning that total aid given in this period is (much) higher than the cumulative income growth. Therefore, it seems that part of the aid has vanished.
Figure 3. Gross National Income (total and per capita) 
A share of the aid given to Palestinians is used to construct buildings and infrastructure. During the past decades, Israel has put a lot of effort in destroying these buildings and infrastructures for supposed "security reasons." The response of the donors that paid for these buildings and infrastructure is surprisingly not to demand compensation from the Israeli government. Instead, donors on the whole rehabilitate and rebuild what Israel destroys. While foreign aid is spent on such rehabilitation, this action does not lead to economic growth.[10]
Another part of the aid is paid to Israel as tariffs on imported goods and services for the Palestinians, or used to buy goods and services for the Palestinians in Israel. This share of aid therefore flows directly into the Israeli economy and is most important for the contention of this article.
Figure 4 compares the trade deficit with Israel with net official development assistance. Apart from 2002, in which the Second Intifada caused development aid to be almost doubled and trade with Israel to fall to a low level, there seems to be a correlation between the two. The Pearson coefficient shows a correlation coefficient of 0.71. With 1.0 being perfect positive correlation and 0.0 being no correlation, 0.71 is quite a large number. One could draw the conclusion that on average 71% of aid given to the Palestinians ends up in the Israeli economy, meaning that, of the more than 12 billion dollars of foreign aid given to the Palestinians between 2000 and 2008, 8.7 billion dollars ended up in the Israeli economy. It also means that a larger share of the aid that is actually meant for the Palestinians ends up in the Israeli economy than in the Palestinian economy. This sounds very disturbing, because it demonstrates that Israel has subverted the purpose of the aid and has erected a system which steals most of the benefits of aid from the Palestinians.
Figure 4. Net Official Development Assistance and Trade Deficit with Israel
The Israeli economy is much larger than that of the Palestinians. The Palestinian trade deficit with Israel accounts for about 1% of Israeli gross domestic product (GDP) on average.[11] This means that the aid which ends up in the Israeli economy contributes less than 1% to Israel's GDP. This does not seem to be much, but we are talking about billions of dollars flowing into the Israeli economy for free during the last decade. Furthermore, foreign aid seems to be increasing, meaning that every year more foreign aid will flow into the Israeli economy.
Although for now this is the most accurate estimation we can make given the existing data, some remarks should be made.
The first distortion is that the data used for aid represent the net official development assistance as calculated by the World Bank. This includes only a share of total aid to the OPT. This excludes, for instance, budget support for the Palestinian Authority. It also excludes aid sent to Islamic charities by Arab states, because this is not reported to the World Bank or by the UN. No organization documents all aid provided to the Palestinians.[12] So, the Pearson coefficient only represents part of the aid that is given to the OPT.
Another distortion is that the trade data are collected from the Palestinian Central Bureau of Statistics (PCBS) and that PCBS calculations do not include East Jerusalem. Trade between East Jerusalem and Israel is therefore not measured as trade between the OPT and Israel. Hence, the trade deficit can be either larger or smaller than what is derived from PCBS data. Furthermore, the situation in the Gaza Strip makes it very difficult to collect data that truly represents the current reality. There is always a margin of error for data collected from the Gaza Strip. Since the PCBS is the only source to have data available on total Palestinian imports from and exports to Israel, the best data available are used. Due to the continuous border closures of the Gaza Strip, trade between the Gaza Strip and Israel is very limited.
By only looking at the trade deficit with Israel, money that flows into the Israeli economy because it is spent as tariffs for imported goods and services is not taken into account. Israel is obliged to transfer tariffs collected for goods and services imported to the OPT and other taxes it collected on behalf of the Palestinian Authority to the Palestinian Authority. However, Israel is allowed to deduct money from these funds. These deductions are, for instance, costs that Israel said it incurred to collect the money.[13] Israel has also frequently delayed these transfers to the Palestinian Authority. Since Israel and the United States decided to financially boycott the democratically chosen Hamas government, Israel has not transferred any of these funds to the Hamas government in Gaza. According to the annual reports of the Palestinian Authority Ministry of Finance,[14] gross clearance revenues have not decreased since the election of Hamas. Israel has continued transferring money to the Fayyad government in the West Bank.
Furthermore, many international NGOs have their offices in Jerusalem and their employees thus live in Jerusalem, paying rent, buying groceries, and spending time in the city. Thus, a large part of their incomes, which are paid for by donor money, is spent in the Israeli economy. This share of foreign aid that ends up in the Israeli economy is not taken into account when comparing foreign aid with the trade deficit.
Another distortion is that Palestinians working in Israel are very likely to spend money in Israel. Their incomes are included in Palestinian GNI but these expenses are not counted as trade, meaning that this money flows into the Israeli economy is also not included in the calculations above.
Foreign aid to the Palestinians comes in foreign currency. When buying goods and services in the OPT or in Israel, this foreign currency has to be exchanged for NIS, because that is the currency used in both the OPT and Israel. As a result, the foreign currency reserve in the Israeli central bank increases. This reserve can be used by Israel to pay for its trade deficit if it has a trade deficit, but it also functions as an emergency stock or a means of strengthening the NIS. This is another way in which aid contributes to the Israeli economy, but which is not included in the calculations above.
Finally, the Pearson is a flawed statistical tool for dealing with such a complex relation as aid compared to trade deficit. It does not indicate causality, but only correlation, which could also stem from a third factor not considered in this article. The Pearson coefficient was calculated based on only nine data points (due to a lack of historical data on GNI and aid), which additionally weakens its statistical significance.
It follows from the above that the trade deficit is likely to be either higher or lower than can be calculated from the data available at the PCBS. On the other hand, foreign aid is higher than the data from the World Bank suggests. The share of foreign aid that actually ends up in the Israeli economy can therefore be either somewhat smaller or somewhat larger than the 71% calculated above. Nevertheless, the available data indicates that 71% is as close to the real number as we can get. Hopefully more detailed data will be published in the future that will allow for a more accurate estimate of the proportion of aid that is being subverted by Israel.
Endnotes
1 De Beer, N., (2010), "Palestinian Economic Dependency on Israel," The Alternative Information Center.
2 This is calculated by the World Bank and represents only a part of the aid given to the Palestinians. This will be discussed later in this article.
3 Data in this article referring to trade or income is derived from publications of the Palestinian Central Bureau of Statistics (PCBS) website: www.pcbs.gov.ps.
4 Based on the precondition that exchange rates are allowed to float. If the exchange rate is fixed, the government of the country with the trade deficit (A) should buy local currency and sell the currency of the country with which it has a trade deficit (B) in order to keep the exchange rate fixed. When country A runs out of the currency of country B, the currency of country A would be devalued. If not, the exchange rate will become unsustainable and a black market for the currency will emerge.
5 Palestinian GNI is compared with Israeli GDP. GNI is used for the OPT because that also includes budget support. GDP is used for Israel because that is the most frequently used measure to define the size of an economy. Palestinian GNI is derived from the PCBS website (www.pcbs.gov.ps) and Israeli GDP is derived from the ICBS website (www.cbs.gov.il). Since Palestinian GNI is higher than the GDP, the figure of 3% is actually an overestimation of the comparison between the two economies.
6 Hever, S., (2008), "The Economy of the Occupation. Political Economy of Aid to Palestinians under Occupation," The Alternative Information Center, p. 12-13.
7 Le More, A., (2004), "Foreign Aid Strategy," in: Cobham, D. and N. Kunafani, The Economics of Palestine -- Economic Policy and International Reform for a Viable Palestinian State, Routledge, p. 210.
8 Erlanger, S. (2007), "Aid to Palestinians Rose Despite an Embargo," The New York Times.
9 Supra 1.
10 An example of foreign aid that did not lead to economic development of the OPT is the Dutch government's "investment" in constructing the Gaza Seaport. Although the Dutch government spent millions of dollars on this development project, the Gazans still do not have a seaport. For a more detailed description of the Gaza Seaport what went wrong, see: De Beer, N., (2010), "Destroyed Gaza Seaport: Why Doesn't Dutch Government Demand Compensation from Israel?", The Alternative Information Center.
11 This is a percentage of Israeli GDP. GDP is derived from the Israeli Central Bureau of Statistics website: www.cbs.gov.il.
12 Supra 6, at p. 20.
13 According to article 4 of Annex V of the Israeli-Palestinian interim agreement on the West Bank and the Gaza Strip, Israel deducts 3% of every transfer to the Palestinian Authority in order to cover administrative costs.
14 Table 1 of both the annual reports of 2006 and 2007 of the ministry of finance of the Palestinian Authority, at www.pmof.ps.
Source: Alternative Information Center, 26/9/2010
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