Aid effectiveness in West Bank and Gaza – Japan and World Bank study

43064

The Secretariat of the Ad Hoc Liaison Committee

AID EFFECTIVENESS IN THE WEST BANK AND GAZA

Draft Report

18 December 1999

Table of Contents

Table of Contents – i

Figures – ii

Text Boxes – iii

Executive Summary – iv

1.0 Introduction: Asessing Aid Effectiveness

Aid, Development, and Peacebuilding: The Challenge of Assessment – 1.5

Relationship to Previous Work – 1.19

2.0 Overview of the Aid Effort

Political and Economic Developments – 2.3

Development Planning and Economic Policy – 2.11

Donor Coordination – 2.15

Patterns of Donor Assistance – 2.17

Macroeconomic Effects of Donor Assistance – 2.36

Sectoral Impacts of Donor Assistance – 2.47

Conclusions – 2.102

3.0 Benficiary Assessment of Donor Assistance

Economic Conditions – 3.5

Donor, PA, and NGO Performance – 3.8

Public Perceptions of Sectoral Impact – 3.12

Variations in Beneficiary Assessment of the Development Effort – 3.32

Building Social Capital: Perspectives on Palestinian Civil Society – 3.54

Aid and Support for the Peace Process – 3.61

Conclusions – 3.63

4.0 Towards Sustainable Palestinian Development

Fiscal Challenges – 4.4

Demographic Growth – 4.14

Shifts in Donor Assistance – 4.17

Permanent Status Arrangements and Palestinian Economic Development – 4.25

Conclusions – 4.36

5.0 Donors, Aid, and Policy Reform

The Context and Impetus for Reform – 5.5

The Role of Donors in Supporting Good Policies and Strong Institutions – 5.19

Conclusion: Putting It All Together – 5.35

Bibliography

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Executive Summary

• The aid effectiveness study examines the impact of donor assistance in the West Bank and Gaza since 1993. The project is undertaken jointly by Japan and the World Bank, with the financial support of the Government of Japan and UNDP. This report reflects field-level consultations with donors and the Palestinian Authority, as well as discussion in the Joint Liaison Committee. It also reflects input received on an interim progress report presented at the October 1999 AHLC meeting in Tokyo. The report addresses four major areas: the macroeconomic and sectoral impact of donor assistance (Section 2.0); Palestinian public perceptions of the aid effort (Section 3.0); issues of sustainable social and economic development in the WBG (Section 4.0); and the role of donor aid in supporting institutional and policy reform (Section 5.0).

• The WBG has represented a complex operational environment for the donor community, characterized by a highly dynamic economic and political context. Moreover, donor assistance in the WBG has been intended to meet not only the traditional goals of sustainable development, but also the imperatives of peacebuilding. This assessment fully reflects those requirements and constraints.

Economic Performance and Sectoral Accomplishments

• Overall Palestinian economic performance through 1994-97 was weak, characterized by declining per capita incomes and rising unemployment. A variety of factors—most notably closure and other restrictions—accounted for this. During this period, donor assistance played an important role in offsetting economic decline and stimulating employment. It also played a crucial role in supporting the establishment of those institutions critical to self-government. Since 1997, the WBG economy has experienced modest economic growth, including rising per capita incomes and employment growth. Overall, donor assistance has served to increased annual GDP per capita growth rates by 1-2%, and GNP per capita in 1998 was an estimated 6-7% higher than it would have been without donor assistance.

• During this period, both Palestinian development planning process and the structures of donor coordination have undergone significant evolution since 1994. This has served to enhance the effectiveness of donor assistance. Donor assistance too has undergone change. There has been a relative shift away from budgetary and transitional support to infrastructure investment—although there has been little absolute increase in the latter. There is evidence that loans are accounting for an increasingly large share of donor commitments. Finally, while aid remained at a fairly constant rate of disbursement in 1994-97, it declined markedly in 1998-99. Although many factors may have caused this, it would appear that reductions in disbursements by several larger donors account for much of the decline. If continued, this represents a worrisome trend: in addition to reducing the level of resources available to support peacebuilding and economic development, it also hampers PA economic planning and erodes donor credibility.

• Sector-by-sector analysis of donor assistance shows substantial capital investments and measurable improvements in most areas of infrastructure and services. Electrical consumption is up sharply. More than 264 km of new roads, 1,755 km of new water pipes, 393 km of new sewage lines, 3,764 additional classrooms, scores of new clinics and hundreds of additional hospital beds have been constructed with donor assistance since 1994. Donors, the PA, and NGOs have undertaken a variety of measures to facilitate private sector growth. Donors have also played a key role in supporting institutional development in the public sector.

Public Attitudes

• Palestinians generally report a significant decline in their economic condition since 1993. However, a significant proportion are now optimistic about their future.

• A majority (60%) of Palestinians have a positive view of donor performance in the WBG, while few (17%) have a negative views. NGO performance is also rated positively, although somewhat less so. Public evaluations of PA performance are more mixed, although with more positive than negative assessments being offered.

• Palestinians report significant improvements in the education and transportation sectors since 1994, and mixed but generally positive evaluations with regard to health, solid waste and sewage. Only in the areas of water, and public institutions (including democracy and the rule of law) are evaluations negative overall. Over time, a significant deterioration can be seen in public appraisals of the transparency and accountability of the Palestinian Authority. This threatens to have a corrosive effect not only on the legitimacy of public institutions, but also on support for the PA itself.

• Education and health are rated by the general public as the most important areas for future donor assistance, followed by water and electricity. Support for gender programs, vocational training, democracy (in the West Bank) and solid waste (in Gaza) are rated as relatively low priorities.

• Overall, Palestinians in the West Bank (and especially those in rural villages) have seen less improvement in services and infrastructure than those in Gaza, notably in the sectors of health, roads, and solid waste. Those living in refugee camps report slightly greater improvements than the average in these same sectors. Lower-income Palestinians and those residing in high poverty areas tend to offer slightly more positive evaluations of donor efforts than others. Women also tend to be more positive. Political affiliation and attitude to the peace process are only weakly correlated with attitudes towards donor efforts. However, public opinion leaders tend to be much more negative in their appraisals of development efforts than do members of the general public.

• There are a number of important warning signs with regard to the state of Palestinian civil society. These include both the declining level of resources available for NGO activities since 1993 and the ability of NGOs to freely organize and operate.

Sustainability

• The sustainability of development efforts in the WBG must be assessed against a backdrop of fiscal stability, demographic change, and possible shifts in donor assistance. Despite success in revenue mobilization and balancing the recurrent budget, the medium-term fiscal outlook for the PA remains fragile. Population growth rates are high, and expanding social need can only be met through overall economic growth. Donor disbursements have declined in 1998-99, and there may be a shift to greater use of loan-based assistance.

• Continued growth of public sector employment would be a serious threat to the sustainability of development efforts. It is also essential that both the PA budget and the development planning process more effectively address the recurrent (wage and non-wage) implications of donor investments. The PA must also assume greater responsibility for capital investments, particularly those (such as school construction) that it will continue to face annually for the foreseeable future. A more systematic approach must be adopted for tracking, prioritizing, and managing loan-based development assistance.

• Permanent status arrangements will have profound implications for the sustainability of development efforts in the WBG. In the case of the refugee issue, for example, future demographic growth, the delivery of social services, fiscal stability, and patterns of private investment, consumption and savings will all depend to a large degree on the nature of political agreements reached by the parties. The social and economic implications of other permanent status issues are equally profound. While recognizing the political sensitivity of these matters, economic planning now is important to assure a smooth transition to future arrangements.

Donors, Aid, and Policy Reform

• Comparative evidence from other developing countries underscores that effective institutions and good policies matter a lot. Without them, aid is rarely effective in the long term. In the WBG, there have been notable successes in these areas, but there are also serious challenges that need to be met.

• In pressing forward an agenda of institutional and policy reform, Palestinian leadership of (and ownership of) the reform process is essential. However, donors also have an important supporting role to play.

• The simple provision of assistance—money—can have both positive and negative effects on institutional development. Some donor practices have served to fragment, rather than reinforce, Palestinian capacities. Conditionality is not likely to be a major, or effective, component of encouraging institutional development and policy reform. Technical assistance can play a useful role, but only if demand- rather than supply-driven. While some donor TA has been very useful, there is substantial evidence that much of it has been of only limited value.

• Donor support for institution-building and policy reform must focus not only on structures but also on underlying political dynamics. It must include frank policy dialogue with the PA, built on a sense of genuine partnership, and backed by positive incentives for progress in these areas.

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