The Palestinian Aid Trap

Reliance on NGOs distorts the Palestinian economy and makes self-determination harder.

The recent unification of Hamas and Fatah may show just how unsustainable the Palestinian economy has become. With massive amounts of donor aid propping up the economy, and a foreign-aid community that is hostile to the inclusion of Hamas in the Palestinian governing structure, an end to the flow of aid money could prove painful.

Yet, while the reduction in donor aid may hurt in the near term, it would also be an important stepping-stone for Palestine in the development of a strong, self-sufficient economy – and, ultimately, an independence from the pressures of foreign-donor states.

Palestinians are among the highest recipients of foreign-donor aid per capita in the world. While the Israeli occupation stifles economic growth in the Palestinian territories by restricting freedom of movement and controlling all imports and exports, international donor aid is permitted to pour into the Palestinian economy to “sustain” Palestinians.

The large flow of aid has also resulted in the growth of non-governmental organizations (NGOs) throughout Palestine. Offering public services and development aid, international and local NGOs are designed to fill the void created by underdeveloped governments that are incapable of serving their people.

The growing number of NGOs has made it exceptionally difficult for Palestinian businesses to find professional human capital in the West Bank. In 2007, I moved to the West Bank to establish MENA Geothermal, a startup company dedicated to bringing sustainable urban development and renewable-energy technology to the Palestinian territories. During the last three years, we have created real-life examples of financially feasible, replicable, and energy-efficient buildings. Yet, in addition to the challenges of running a business under Israeli military occupation, Israel denied me entry into Palestinian territories three times in 2009. To complicate matters, my business has to compete with NGOs.

Due to the enormous amounts of donor funds provided as “development aid,” many NGOs are able to lure educated and professional Palestinians by offering salaries that are three to four times higher than what the local private sector can afford. This causes labour costs to rise significantly, and directly undermines the local private sector’s ability to recruit educated professionals and build an autonomous Palestinian economy.

When Palestinian businesses do hire employees, they are forced to offer exaggerated salaries that reduce overall capital returns and hinder Palestine’s competitiveness in attracting investments. Limiting private investment stifles Palestine’s economic growth and reduces government tax revenue that can otherwise be utilized to fund the public services currently provided by NGOs.

This dynamic compromises the “non-profit” status of NGOs, which receive all the tax benefits of charitable organizations. This means that, for NGOs, offering high salaries is the equivalent of a business distributing profits among its employees. If Palestinian businesses were to triple the salaries of their employees and offer “hazard pay” for their locally stationed expatriates, as NGOs do, they could surely arrange their income statements to report zero profit. Would private businesses then become non-profit organizations? Could they receive tax exemptions? Clearly, the answer is no. The private sector cannot flourish in an environment where it is forced to compete with the financial prowess of donor governments. This is an example of a much greater problem that has enormous implications for Palestinians.

Today, international aid accounts for 30 per cent of Palestinian gross domestic product (GDP), with a large number of educated and professional Palestinians flocking towards NGOs and donor-sponsored projects, thus further exacerbating Palestinian donor dependency.

To complicate matters, international aid is highly political, and is provided in the interests of a donor states’ foreign policy rather than due to a genuine interest in helping Palestinians. Palestinians saw the detrimental effects of this donor dependency when they elected their own government in a free and fair election only to have donor states boycott them because of whom they elected. The international community turned off the tap of donor aid, leaving roughly 150,000 Palestinians who were employed by the Palestinian Authority and NGOs helpless without income. Only the employees of the private sector continued to receive paycheques and maintain their independence regardless of how they exercised their right to vote.

The recent Hamas-Fatah agreement could cause a repeat of the donor boycott that took place in 2006. It may, however, also prove to be another example of how the private sector can play a vital role in empowering people in developing nations while liberating them from the shackles of foreign-donor dependency.

The point is that the more independent Palestinians are from donors, the more capable they are of determining their own future. But, if Israel’s occupation continues unabated and the Palestinian economy remains dependent on donor aid, we will be far from creating a truly independent Palestinian state.