Bubble in aid-dependent West Bank bound to burst, say economists.

This article is actually a pretty good demonstration of why the foreign aid arguments that became popular for developmental models starting in the 1950s are not necessarily beneficial. If anything just as machines can’t make up for human capital, foreign aid does not guarantee that sound investment will occur, if any. Those against foreign aid will not agree with the conclusions drawn in the article, but the numbers don’t lie regardless of position. It also offers interesting insight to the effects of trade restrictions and regulation:

RAMALLAH (IPS) - A bubble in the economy of those West Bank cities, towns and villages managed by thePalestinian Authoritycannot be sustained, according to analysts. “It [the bubble] will collapse, and the collapse will be harder when it happens later,” said Tareq Sadeq, a Palestinian economist and professor atBirzeit University.

“It will mean that people will lose their homes. They will lose their cars. They will lose their land sometimes because of the collapse of the bubble. This will affect the whole economy and will also reflect on the Palestinian Authority. So this may be a collapse of the PA itself,” Sadeq said.

The Palestinian Authority has announced it is facing a funding crisis; it is now relying on donor aid to cover a budget deficit of $1.1 billion and cash shortfall of $500 million.

“The Palestinian economy has become more and more dependent on wages, on salaries, for the whole economy, not just for the public sector; around 70 percent of all employees are wage employees. As a result, there is no production in the Palestinian economy. People consume and consume and consume and there is nothing to produce,” Sadeq said.

TheInternational Monetary Fundturned down an appeal from the Israeli government in early July for a $1 billion loan to fund the PA. The West Bank economy is almost entirely upheld by international aid; in 2011, donors promised the PA $1 billion in support, of which $800 million was transferred.

“The whole economy is constrained to financial aid from international donors, which created more vulnerability in the Palestinian economy,” Sadeq said.

“Not strong enough”

Salam Fayyad, the PA’s prime minister, has nevertheless pushed economic development and investments in the private sector as a means to secure a Palestinian state. To date, most international economic bodies and foreign governments have praised Fayyad’s approach, pointing to Palestinian gross domestic product (GDP) growth rates as a measure of its success.

Palestinian GDP grew 7.7 percent between 2008 and 2011. In its 2011-2013 development plan, titled “Establishing the State, Building our Future,” the PA estimated the GDP would grow by 12 percent in 2013.

But aWorld Bankreport released in July found that the Palestinian economy is unsustainable (“Towards Economic Sustainability of a future Palestinian State,” [PDF].)

“The Palestinian Authority has made steady progress in many areas towards establishing the institutions required by a future state but the economy is currently not strong enough to support such a state,” said economist John Nasir, lead author of the study.

The report said that removing Israeli restrictions on market access and to natural resources is the necessary first step in expanding the Palestinian private sector, and that the PA must stem its reliance on foreign aid.

(Read more at Electronic Intifada.)