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Political Economy of Aid in

delayed development & faded nationhood
By Sahar Taghdisi Rad
African Development Bank
Palestine: highest intl per capita aid allocation for several years, yet
near economic collapse
Aid has in cases prolonged the conflict
Theoretical and empirical inadequacies of the macroeconomic
framework for aid effectiveness in conflict zones
Mismatch: socio-economic needs of conflict economies AND donor
policies in conflict zones
Why mismatch?
Inability of the neoclassical macroeconomic framework to
incorporate a comprehensive analysis of conflict within its confined
boundaries and restrictive assumptions
Unwillingness of donors to take effective account of the conflict,
stemming from the donors often originates from donors political,
strategic and ideological interests and alliances in the conflict.
Significance of the Aid Debate
Recent surge in international aid flows + signed
of ineffectiveness
More ambitious tasks of bringing peace in
conflict zones
Creating room for donor conditionalities
Up to 60% of aid remains in donors hands
Development of the Aid Effectiveness Debate
Post-war: aid as a lump sum addition to the capital stock
minimising the savings gap (H-D model); ignoring aid
dependency, and other factors affecting growth
To-Gap Model: aid can also minimise foreign exchange gap
(Chenery and Strout); aid viewed in isolation from other
political and economic factors
1990s and the rising prominence of neoliberal economic
frameworks: the workings of aid is affected by other factors
in the recipient country: from environmental geographical, to
institutional and governance aid only effective if disbursed
in good policy environment.
Aid and good policy environment
The interactive variable: aid x policy [Boone (1994, 1995),
Dollar & Burnside (1997, 2000)]
Aid only effective in a good financial, trade and fiscal policy
environment e.g. low inflation, high exports and imports,
and small budget deficits.
Definitions of good policy/governance broad enough to allow
for a new chapter of conditionality
The basis of much of aid programmes of multilateral and
bilateral donors since the late-1990s.
Weaknesses of the aid debate
Irrelevant economic assumptions:
That economic institutions and policies are the main
determinants of long-term economic growth in conflict zones
Assumptions of competitive factor markets, perfect credit
markets, no exogenous technical progress and constant
Not accounting for the fact that markets are subject to
substantial disruptions as a direct (e.g. physical destruction) or
indirect (e.g. increased risk and uncertainty) result of conflict
e.g. Palestinian trade.
Depoliticisation of conflict
Despite adding a political twist to the area of economic policy
making, the aid effectiveness debate calls for a depoliticisation
of the political process paradox:
Channelling aid towards government reforms and budgets
support while calling for a reduction in the size of the
Donors effective formation of the political and institutional
structures of the recipient economies.
An incomplete and partial democratisation and economic
liberalisation according to universal values can increase the
risk of further conflict by undermining the countrys
institutions and central governance mechanisms.
Weaknesses of the aid debate
Lack of supply-side analysis:
Little analysis of the role of donors in the current aid debate
Fungibility has justified a focus on the recipient side
Fungibility of aid is rather an illusion of the expected
differences in donor and recipient processes of allocation and
monitoring of aid expenditure, and not a difference in their
preferences, as is commonly believed
Weaknesses of the aid debate
Incorporating Conflict in aid debate
Neoclassical economics treatment of conflict: a temporary,
exogenous factor, measured by the number of battle-related
deaths, and not deserving a special or proper treatment in
any economic analysis.
The real costs of conflict
Economic performance under conflict
Conflict vs. post-conflict
Aid during conflict
The real costs of conflict
Socio-economic costs of conflict significant for policy options
and effectiveness of aid.
Mainstream analysis: cost of conflict defined in humanitarian
terms the number of battle-related deaths per annum e.g.
costs of conflict in Palestine.
does not represent its true extent and severity, particularly in
terms of short-term and long-term social, economic, infra-
structural and political costs of the conflict.
The economic damage of conflict should be analysed in terms
of its overall effect on a countrys economy e.g. an expanded
version of the entitlement failure approach
Economic performance under conflict
Neoclassical economics is concerned with the question of whether
the existence of conflict or peace affects the growth rates of the
economy, ignoring the mechanisms through which conflict affects
economic performance and growth.
Neoclassical economics focuses on economic incentives as the main
stimulants of conflict (Collier and Hoeffler) treating war as an
essentially chaotic and irrational eruption of violence triggered by
individual economic gains (greed) as the main stimulus to rebellions
in Palestine: conflict is rooted in nationalist and anti-occupational
struggles, much of the economic analysis based on the greed-
grievance framework cannot be used to achieve a comprehensive
analysis of the economy
Economic performance under conflict
The interaction between conflict and economics changes the behaviour
and the role of economic agents including the state require new
developmental approaches to utilise local capacities and emergence of
new forms of social capital, led by firm and constructive government
Consideration of such economic changes can result in unexpected, non-
mainstream policy choices in a conflict-affected country, counter-
inflationary measures can depress the purchasing power and economic
growth in an already-weak economy; privatisation can bring benefits only
to a small elite of entrepreneurs; import liberalisation at these times can
intensify the process of capital flight which is already happening as a
result of conflict; and, deregulation can reduce the power of a strong
central government which is needed to maintain stability and manage the
process of primitive accumulation under conflict.
Conflict vs. post-conflict
Most recent works on the role of aid in conflict situations are
based on post-conflict situations and assumptions , with their
conclusions being stretched to ongoing conflict situations.
Avoiding challenge to neoliberal uniform analytical
frameworks and rigid assumptions
Definition of post-conflict post-Oslo Palestine?
Donors attempt to bring forward an arbitrary post-conflict
situation, in which their neutral involvement could be more
easily justified .
Aid during conflict
When disbursed in the context of conflict and violence, aid becomes an
inevitable part of that context: it can exacerbate the conflict if it is not well-
targeted, but it can also reduce the local severity of conflict by
strengthening local capacities.
Despite James Fergusons claim that the aid system is able to suspend
politics from even the most sensitive political operation and thus to
operate as an anti-politics machine, the record of donor interventions in
global conflict settings prove otherwise.
The ideological mix of neoliberal concepts of democracy and market forces
combined with current approaches to conflict resolution has given rise to
contemporary strategies of intervention by external actors and donors.
The liberal peace paradigm gives priority to rule of law rather than social
justice, to quick-fix elections rather than political accountability, to
neoliberal economics rather than state direction to increase purchasing
power, and to widening external influences rather than strengthening
autonomy in the undeveloped world (Duffield in Pugh et al., 2004: 6).
Palestinian economy
Small but undiversified economic structure
Heavy dependence on the Israeli economy & international aid
High levels of poverty, inequality and economic decline
Period of donor involvement in the territories coincided with
the height of the Post-Washington Consensus and the latters
focus on good governance practices and the emergence of
the aid effectiveness debate
World Banks Investment in Peace
Paris Economic Protocol
Palestinian economy
The post-Oslo years witnessed the weakest state of the
Palestinian economy since 1967.
19938, the cumulative total of financial donations to the PA
was $3.55 billion in pledges and $2.45 billion in disbursement
Yet GNP dropped by 3.4%, 10.1% and 2.9% in 1993, 1995 and
By 2000, after seven peace years and five years after the
establishment of the PA, per capita income in the West Bank
and Gaza was estimated to be 10 per cent below the pre-Oslo
Intifada struck yet another powerful blow to the Palestinian
economy: GDP declined by 12.9% during 1999-2004 & per
capita GDP declined by 25.6% during this period
Palestinian economy sectoral structure
Determinants of Palestinian
economic decline
Legacies of occupation
Forced integration and isolation
Elements of conflict
Closures and territorial control
Labour market access
Development of Israeli settlements in the Palestinian
Aid allocation in Palestine
Pre-Intifada period: annual donor disbursements averaged around
US$500 million (or US$150 per capita).
Post-Oslo construction efforts and the hopes associated with the
creation of an independent Palestinian economy
At the onset of the second Intifada: above figure doubled to around
US$1 billion per annum in 2001 and 2002 (US$500 per capita) the
highest sustained rate of per capita aid in the world since the
Second World War.
A shift took place in donor activities: regular (development) support
has been increasingly replaced by short-term humanitarian aid and
budget support.
Aid allocation in Palestine
Pre-intifada aid allocation
Donors aim: development assistance and construction of
the much needed infrastructures
A belief in economic development as vital for establishment
and consolidation of peace.
By creating backward and forward linkages, local
employment opportunities, and encouraging local and
international trade and investment, a strong infrastructure
could be of enormous importance to the Palestine.
Infrastructure: 22.3 per cent of total pre-Intifada assistance
Budget support to the PNA, gender and youth support a very
small proportion of total commitment and disbursement
Pre-Intifada sectoral allocation of grants
and loans to the WBGS, 19942000
Post-intifada aid allocation
Intensifying conflict exposed the inadequacies of previous
donor operations
Sectors such as the agricultural sector, despite their critical
cushioning role in the face of worsening economic crisis
received a meager 1% of total international support.
Share of development assistance dropped from 88% of total
international aid to only 26% after 2000.
Much of what remained and was categorised as development
assistance during the post-Intifada period was, in fact,
emergency assistance in infrastructure and social sectors,
especially health.
Donor assistance towards budget support increased from
2.6% of total assistance before the Intifada to more than 40%
Institution-building and capacity-building (human rights, civil
society and democracy) also witnessed a doubling of budgets.
Post-intifada sectoral allocation of grants and
loans to the WBGS, 2000-2006
Post-Intifada aid allocation
Focus from development to institution-building and
governance reforms: reform of the Palestinian Authority
and the institutions that they had just created a few
years earlier
Such institution-building projects included support for
the Palestinian judicial system, reform of the tax system,
Palestinian NGO projects, strengthening parliamentary
democracy, and civil service reforms.
The main sources of the boost in budget support are the
EC, the World Bank, and the Arab donors.
Palestinian institutional reform a means of donor survival
and presence in the territories.
Table: Donor support to the PA by
major category (US$ million)
Aid and political leverage in conflict
The increased post-intifada budget support was combined
with an increase in donors influence in the internal
Palestinian budgetary decision-making, through a host of
economic and political conitions
Pro-Israeli lobby group pressures felt by the donors further
conditionalities on their budget support.
To avoid being blamed for financing illegal activities through
their non-targeted budget support, donors established the
Public Financial Management Reform Trust Fund in 2004,
which was a multi-donor budget support mechanism
administered by the World Bank. The Reform Trust Fund
would disburse budget support against a series of reform
benchmarks to be fulfilled by the PA.
Aid in Palestine
None of the weaknesses and needs of the Palestinian
economy are targeted by donor programmes, which often
create a state of aid dependency in the territories while
making the Israeli occupation less costly and more sustainable.
Economic growth and development is unlikely to precede
political stability.
Need to depart from frameworks which attempt to separate
the politics of occupation from the economic performance
and livelihood of the territories
Donors working around the conflict disintegration of the
Palestinian economy maintaining a deluxe occupation
Palestinian reform: a last avenue for donors to give some life
to a weakening peace process, and their role within it.
Aid in Palestine
Weakening Palestinian nationhood: rather than have the state
controlled by common people, [donors] would control the
local states withdrawal from the economy . . . tak[ing]
resources away from the state and plac[ing] in the market,
where all citizens will supposedly have equal access to them
Donors promotion of an international state, while using
neoliberalism as a form of governmentality, has deprived the
recipient country from policy ownership and promoted a form
of recolonisation of the developing countries.
Conflict interacts in various dynamic and complex ways with the socio-economic
structures of the country, hence making the aideconomydonor relationship a
dynamic and complicated one which cannot be understood through universal, cross-
section, and purely demand-side frameworks of analysis.
At the macro-level, it is donors political interests, their strategic alliances, and their
quest for diplomatic survival which dictates the general direction of their assistance.
At the micro-, project level, these political agendas manifest themselves in the
ideological and economic frameworks adopted by donors for setting their overall
pattern of allocation, and planning and programming their activities.
The neoclassical analytical framework is far too limited to incorporate a
comprehensive understanding of the interaction between conflict and economic
Importance of a viable political settlement to the conflict as a precondition for
effectiveness of any aid and development agenda.
When aid has attempted to act as a substitute for politics, it has either aggravated
the economic and humanitarian conditions, or contributed to the continuation of
the conflict.