Palestine Economic Policy Research Institute. Habib Hinn

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2 Palestine Economic Policy Research Institute Assessment of the Impact of Direct Foreign Aid to The Palestinian Private Sector Samir Abdullah Habib Hinn 2016

3 The Palestine Economic Policy Research Institute (MAS) Founded in Jerusalem in 1994 as an independent, non-profit institution to contribute to the policy-making process by conducting economic and social policy research. MAS is governed by a Board of Trustees consisting of prominent academics, businessmen and distinguished personalities from Palestine and the Arab Countries. Mission MAS is dedicated to producing sound and innovative policy research, relevant to economic and social development in Palestine, with the aim of assisting policy-makers and fostering public participation in the formulation of economic and social policies. Strategic Objectives Prtig wedgebased picy fruati by cductig ecic ad scia picy research i accrdace with the expressed pririties ad eeds f decisiaers Evauatig ecic ad scia picies ad their ipact at differet eves fr crrecti ad review f existig picies Providing a forum for free, open and democratic public debate among all stakeholders on the socio-economic policy-making process. Disseminating up-to-date socio-economic information and research results. Providing technical support and expert advice to PNA bodies, the private sector, and NGOs to enhance their engagement and participation in policy formulation. Strengthening economic and social policy research capabilities and resources in Palestine. Board of Trustees Samir Hulileh (Chairman), Ghassan Khatib (Deputy Chairman), Magda Salem (Treasurer), Luay Shabaneh (Secretary), Ismail El-Zabri, Jawad Naji, Jihad Al Wazir, Lana Abu Hijleh, Sabri Saidam, Nafez Husseini, Khaled Osaily, Mohammad Nasr, Bassim S. Khoury, Nabeel Kassis (Director General of the Institute - ex officio member) Copyright 2016 Palestine Economic Policy Research Institute (MAS) P.O. Box 19111, Jerusalem and P.O. Box 2426, Ramallah Tel: /4, Fax: , info@mas.ps Web Site:

4 Palestine Economic Policy Research Institute Assessment of the Impact of Direct Foreign Aid to The Palestinian Private Sector Samir Abdullah Habib Hinn 2016

5 Assessment of the Impact of Direct Foreign Aid to The Palestinian Private Sector Senior Researchers: Research Assistants: Statistical Analyst: Samir Abdullah Habib Hinn Bashar Gharabeh Ahmad Hassan Mohammad Ziadeh Ali Jabarin This study was funded by The Islamic Development Bank (IDB) Al-Aqsa Fund Palestine Economic Policy Research Institute (MAS) Jerusalem and Ramallah ISBN

6 Foreword The Ministry of National Economy (MoNE) asked the Palestine Economic Policy Research Institute (MAS) to conduct an assessment of the delivery and the impact of foreign aid to the Palestinian private sector over the period between 2002 and MAS was pleased to accept to do the work as part of the second phase of the PNA Economic Development Research Priority Program, which is funded by a grant from the Arab Monetary Fund via the Islamic Development Bank, Al-Aqsa Fund. Completing this work has taken longer than expected because the Institute ran an unusually busy research program in 2015 and also because data collection required more time than planned. Now that the analytic part of the study is also completed, we are delighted to make the study available to all concerned donors as well as to the public and private sector decision-makers. We trust that the concerned reader will find the conclusions and recommendations of the study particularly useful as they shed light on the impact of direct external aid on the private sector and give guidance with regards to the best ways to channel aid to this sector.. This is especially important for the development of the private sector, which is considered as the engine of economic growth and the main source of jobs creation and income generation. On behalf of MAS, I would like to thanks the authors of the study. I also express my gratitude to the Islamic Development Bank/Al-Aqsa Fund for supporting this study. Nabeel Kassis, PhD Director General i

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8 ABSTRACT This paper assesses several aspects of direct foreign aid to the Palestinian private sector in the period including its effectiveness, efficiency, and overall impact on the private sector in general and the target companies in specific. As this is the first study that looks into this topic, it was necessary to provide background information about the size and role of the private sector in the Palestinian economy, as well as the volume of direct support to the sector, the sources of that support, its forms, channels, and sectoral distribution. In spite of the lack of adequate and accurate data, we have managed to reach important conclusions on these key assessment indicators. Generally speaking, the recognition in theory of the leading role of the private sector in economic growth in Palestine has not translated into actions, and the sector has received neither the appropriate attention nor the proper financial support, which amounted to barely 5.2 percent of total aid to the Palestinians in In the 1990s, aid was specifically allocated to the development of physical and social infrastructure, while from 2000 on, donors focused on humanitarian relief and budget support. The results suggest that the impact of the efforts to develop the private sector has been only marginal as a sizeable part of that support went for helping the sector overcome the encumbrances and additional costs resulting from the Israeli occupation, its hostile actions and impediments, which have escalated markedly since The aid was not sufficient to bring concrete and sustainable improvements in the private sector investment climate or the enabling environment, particularly in terms of reducing the costs for private investment and doing business. Our findings suggest that it is problematic to claim that external support to the Palestinian private sector has left a detectable overall effect. The desired outcomes have adversely been affected by the non-focused, fragmented projects/programs, poor coordination among donors and between donors and the relevant public agencies. With effective coordination, aid would have been channeled more adequately to national priority programs. Furthermore, the impact of aid was negatively affected by politicizing support by some major donors, including the funds allocated to the private sector. There have been incidents in which donors stopped altogether or at least reduced their support to the private sector as a reaction to some steps taken by the Palestinian leadership to assume its political responsibilities. After analyzing a number of selected donor programs as well as the questionnaires of the companies which received external aid, we found that 1

9 support has been in line with the needs of the private sector and has improved the performance, productivity, and employment of the target companies. Moreover, it has enhanced the efficiency of staff through training and capacity-building programs, as donors allocated a significant part of their support to institution-building and developing technical and administrative capacities.. Taking all these features into account, the impact of foreign aid on the private sector is limited and will remain so as long as the occupation retains control over the Palestinian Territory. The cost of the occupation to the private sector is well beyond the humble support that the sector receives from donors. The paper has also identified flaws in the methods of information collection and in donors transparency in information dissemination, which weakens accountability on delivering aid to the right goals. The last section of the study provides a set of recommendations for the better use of foreign aid. In particular, donors support should be placed in line with the national policies that have been designed within a framework of cooperation among various agents of the private sector in specific areas of action, with a special focus on early-stage enterprises run by youth and women. Meanwhile, aid recipients need to consider investments with high social impact. Finally, the foreign aid information system should be improved, which requires collecting and disseminating detailed information on the supported projects/programs in a manner that makes it possible to draw conclusions and benefits from past experiences. 2