In his 2005 State of the Union address, President George W. Bush, hailing “the beginnings of reform and democracy in the Palestinian territories,” pledged $350 million in US aid to the Palestinian Authority. One day before the heralded meeting of Israeli Prime Minister Ariel Sharon and Palestinian President Mahmoud Abbas at Sharm al-Sheikh on February 8, the State Department announced the immediate transfer of another $40 million in aid to the Palestinians. Though Congress may not approve the entire $350 million package, the announcements seemed to symbolize Bush’s intent to lead the international community in using donor funds to smooth what all expect to be a rocky peace process.
But this time around, both the Palestinian Authority (PA) and its domestic critics are armed with lessons learned from years of receiving politically motivated donations. In 2004, the Palestinians in the Occupied Territories had already become beneficiaries of the highest amount of donor aid per capita in the world. While Palestinian society and its leadership are desperately in need of an additional bailout, the World Bank has warned that unless Israel makes strenuous efforts to end the checkpoint and permit system that blocks the flow of Palestinian people and goods, all donor efforts will be for naught.
“The traditional critique of foreign aid,” says Ghassan al- Khatib, planning minister in the new Palestinian cabinet, “has been that it was intended to achieve political aims. The results of this were twofold: it had a negative impact on the politics and it sacrificed development goals. I have no doubt,” he adds, “that this also encouraged corruption in the Palestinian Authority.” Khatib was first named labor minister under the ill-fated administration of then-Prime Minister Mahmoud Abbas in April 2003. In 2004, after Planning Minister Nabil Kassis retired from his post, Khatib was drafted to add to his plate the duties of managing the PA’s monetary relationship with the donor community. Now his term has been renewed, and Khatib sits at the crux of Palestinian economic woes, a public revolt against PA corruption and ineptitude, and the donor community’s growing refusal to bankroll the Israeli-generated social breakdown in the Occupied Territories.
He has been in the donor world before. Leaning forward in a lounge chair in his home in the middle-class Ramallah neighborhood of al-Tira, Khatib recounts sitting in meetings with Warren Christopher as the US envoy lamented the Palestinians’ refusal in the early 1990s to accept the conditions that were tied to foreign aid. Later, as political progress commenced, those same conditions were gradually eased. “What was political ‘progress’?” Khatib asks rhetorically. “It meant political concessions [to Israel].” With the outbreak of the second intifada, the international community turned again to outing PA financial excesses.  Khatib counts the days since the first Abbas administration as a period of fiscal maturity for the Palestinian Authority. But newly transparent accounting practices cannot vanquish all the demons that may attend the expected onrush of US and other foreign aid.
In December 2004, the World Bank completed a remarkable study on the implications of the planned Israeli “disengagement” from 17 Gaza Strip settlements and four settlements in the West Bank. Using recent economic projections, the World Bank determined that the disengagement plan alone, as described by Israel, would not be enough to stop the Palestinian economy’s downward spiral into poverty and despair. For the first time, the World Bank recommended that no additional funds above current subsistence infusions be given to Palestinians until Israel takes significant steps to remove the system of checkpoints, barriers and permits that hinders the travel of Palestinians and their products throughout the West Bank and Gaza and between the two separated blocks of land. “While money, and in particular donor money, has an important role to play in reviving the economy,” asserted the report, “it is not the determining factor. The last four years exemplify how little donor assistance can achieve in the absence of a positive policy environment — while donor disbursements doubled to almost $1 billion per annum, real personal incomes fell by almost 40 percent in the same period.” 
Currently, some 47 percent of Palestinians in the Occupied Territories (1.7 million people) live below the official poverty line of $2.10 a day.  While this percentage is down from 2002 rates — that year marked by weeks of 24-hour curfew during Israeli invasions of the West Bank — all signs point to continuing deterioration. The Gaza Strip has been hit particularly hard in recent months by travel restrictions, internal closure and military incursions. Further, Israel has embarked on a course of “separation” aimed at severing most contacts between Israel and Palestinians in the West Bank and Gaza. By 2008, Israel plans to cease issuing entry permits for Palestinian laborers. A crucial element of the separation plan is the series of patrol roads, fences and walls that Israel is constructing between itself and the West Bank (Gaza is already surrounded by an electrified fence), scheduled for completion late in 2005. Israel has long promoted the view that the barrier will remedy its stated need for at least some of the 700 checkpoints and immovable obstacles that now restrict travel within the West Bank and Gaza. In fact, because the path of the barrier also separates Palestinian population centers from each other while integrating Israeli settlements into the Israeli network of roads and infrastructure, it appears that major checkpoints will be absorbed into the barrier itself, while most other obstacles will remain. In the northern West Bank, where the barrier was complete in July 2004, the number of checkpoints in the Jenin, Tulkarm, Nablus, Tubas, Salfit and Qalqilya governorates increased from 20 to 22, while “the number of unmanned obstacles only decreased from 242 to 212.”  Additionally, construction of the barrier has devastated agricultural communities, some of them previously well off, by destroying crops, blocking access to land or making it impossible to work the fields properly.
A February 2004 survey found that the poverty rate in areas intersected by the barrier was 65 percent compared with 57 percent  in the Occupied Territories as a whole. Twice as many respondents in areas bisected by the barrier reported losing their jobs or having to find a new job in the past six months, as compared to the rest of the West Bank and Gaza. Half of Palestinians affected by the barrier had trouble getting to their school or university, as compared with 25 percent of Palestinians not directly affected. In query after query, respondents who lived in the shadow of the barrier were poorer, hungrier, had more difficulty traveling and saw more aggressive behavior in their children. It is clear that the barrier, even at its earliest stages, has created a new Palestinian underclass.  Overall, the World Bank has concluded that the barrier could result in a decline of 3–5 percent in Palestinian gross domestic product.
The World Bank sketched out four scenarios. If the status quo prevails and Palestinian labor flows to Israel continue to decline, by 2008 the unemployment rate will have risen from 27 percent (according to World Bank methodology) to 37 percent. With the implementation of disengagement and some Israeli efforts to lift the closure (what the bank terms “Disengagement Plus”) alongside decreasing labor flows to Israel, unemployment would still rise to 31 percent. Indeed, the only two scenarios that manage to bring the Palestinian economy into recovery are those that require Israel to abolish its system of loading Palestinian goods from one truck to another as they pass through border areas, open up the system of internal checkpoints within the West Bank and Gaza, allow travel between the West Bank and Gaza, and maintain the current levels of Palestinian employment in Israel, all of which would be accompanied by significant additional donor funds.
The World Bank presented these findings to the donor community at a December 8, 2004 Ad Hoc Liaison Committee Meeting in preparation for a coming donor conference. Cleverly, the PA also made a presentation at the conference of its “Medium Term Development Plan 2005–2007.” The three-year plan is the second such document ever drafted.  It sets out a strategy to reduce poverty by shifting donor relief from emergency aid to job creation and accelerating the reform process. Not coincidentally, the plan addresses both the grim predictions of the World Bank and the bank’s recommendations to the PA: to carry out elections, solidify judicial reform, enact a revised pension law and further address issues of corruption.
Always a Mixed Bag
Palestinian officials were pleased at the pointed World Bank censure of Israel’s restrictions on Palestinian freedom of movement. The pressure on Israel to relieve the “closure regime” offered them a new diplomatic opening. Further, that opening dovetailed perfectly with the primary complaints of the Palestinian public. Polls showed that Palestinians voted for Mahmoud Abbas not because he was the Fatah candidate or Yasser Arafat’s natural successor, but because they perceived that he was the person most likely to have the international clout to relieve their ongoing economic distress. 
There were still those, however, who noted that the World Bank recommendation meant that whether or not Palestinians fulfilled their commitments, it is they who will be forced to forgo donor contributions if Israel does not make serious efforts to alter its closure policy. In 2002–2003, Israel received some $702 million in economic aid from the US, Germany, France, the European Commission, the Netherlands, Spain, Italy, Sweden, Japan and Switzerland, as well as perhaps equivalent amounts of special loans and grants.  Yet there has been no real attempt to link that aid to Israeli practices since Secretary of State James Baker linked loan guarantees to Israeli settlement construction in 1992. The European Union has been equally loath to sanction Israel for illegally claiming duty-free status for exported goods produced in the Occupied Territories.
It is no surprise, then, that the US ignored the World Bank’s recommendations and forged ahead. Of the $40 million to go immediately to non-governmental organizations, $7.3 million will go to higher education and training programs, $8.9 million toward community services like youth programs and job creation, $7.9 million toward private sector development and $3 million toward support for primary health care, while $13.9 million will help to build wells and pipelines for distributing water. These target areas roughly fit with Palestinian development guidelines. An additional $200 million requested by Bush, however, is set to go directly to the PA (one reason why some pro-Israel members of Congress are wary). This package is allotted for overtly political programs, including “developing the economic infrastructure for a Palestinian state,” “helping to improve the Palestinian social safety net to provide social services to the poor” and “‘building bridges’ to help improve the flow of people and goods between Israel and the West Bank and Gaza.” 
The last target area, in particular, is simply a euphemism. As part of the disengagement plan, Israel has requested an estimated $76 million in outside assistance for the construction and upgrading of nine “terminals” (read, checkpoints) to handle traffic between Palestinian lands and Israel. While the PA was informed through its Washington public relations firm that the US plans only to help Israel fund those terminals located on the Green Line, Palestinian officials are amazed that money allotted for Palestinian development should go to fortifying a barrier that has caused such Palestinian loss — and been declared illegal by the International Court of Justice. 
Palestinians who deal with the massive donor aid enterprise are split over the implications of accepting foreign aid.  Some argue that international aid is clearly intended to further the donor country’s foreign policy — and that therefore accepting the aid means accepting the policy. Others are less resigned, arguing that recipients of aid must use any leverage they have to influence how money gets spent, including rejecting the aid if necessary.
One arena where this debate has played out is in the ongoing boycott of US Agency for International Development (USAID) funds by the non-governmental organization network, PNGO. Palestinian organizations balked at signing a clause recently added to USAID paperwork, which certifies that aid recipients will do everything in their power to avoid providing material support or resources to anyone who has committed or attempted to commit a “terrorist act.” Negotiations over the clause resulted in three drafts, the last of which was rejected by PNGO in September 2005. Palestinians defend this stance on the basis of principle: health care providers and educational institutions, they say, cannot decline to serve members of Hamas, the al-Aqsa Martyrs’ Brigades or the Popular Front for the Liberation of Palestine (all blacklisted by the US as terrorist organizations) when those groups form an integral part of Palestinian society.  Some of the strongest Palestinian NGOs are indirectly run by the far left, which has always rejected the 1993 Oslo accords. Two PNGO affiliates have broken the boycott, though most organizations have managed to find alternative funding.
Clearly, the years of experience in working with donor agencies have forced Palestinians to clarify their positions about the political aims of the money they receive. This awareness is not limited to civil society. Despite teetering on the brink of financial collapse, the PA has shown itself willing to object when donors overstep their limits. In February, when the PA became aware of a controversial USAID tender, it sent an envoy armed with detailed objections to the agency. USAID was proposing that nearly $60 million be used to “preserve” 400 hectares of high-tech greenhouses remaining on the Gaza Strip settlements soon to be abandoned by Israel. An international contractor was to select a Palestinian agricultural firm to take over the greenhouses — a firm “acceptable to the government of Israel, including Israeli security forces, and Palestinian authorities.” The firm would then “take control” of the greenhouses during the Israeli withdrawal and act as “caretaker,” restoring damaged greenhouses and building new ones. Despite all World Bank recommendations, the initial tender neither included a legal framework for the rights of Palestinian landowners, nor included the PA as a stakeholder in the transfer, nor considered the public relations implications of a US contractor deciding who should control previously colonized land. USAID says it revised its tender, but it remains to be seen if the new document falls into line with Palestinian concerns.
As the Oslo “peace process” failed, its eulogizers noted that a major source of its failure was the manner in which the agreements maintained the structures of Israeli colonization – principally the settlements — while encouraging false hopes of independence in the form of the impossibly weak Palestinian Authority. Practically speaking, the initial $2.4 billion in donor aid intended to help the Oslo process speeded its failure, for example by funding roads that allowed Israeli settlers to bypass Palestinian communities (also in the name of “separation”), thereby guaranteeing the viability of the settlement project. Because the PLO was virtually bankrupt, the leadership invested in the Oslo accords as the price of relining its coffers.
Millions in donor funds were spent on implementing agreements that were never viable to begin with. A case in point was the development of the West Bank’s eastern aquifer, the only underground water resource located entirely in the West Bank and purported by Israel in negotiations to hold significant amounts of exploitable water. After the European Union and USAID had spent hundreds of millions of dollars on plotting and drilling the land, the aquifer was found to be largely overexploited. In 2000, a damning report by a watchdog group criticized the European Investment Bank’s role in funding this fiasco, finding that “the role of foreign funding has encouraged potentially unsustainable development of regional water resources.”  Now donor states are telling Palestinians that their only hope for more water lies in the construction of expensive desalinization plants. This project, of course, stands in lieu of pursuing a foreign policy that would force Israel to relinquish Palestinian water resources now used to irrigate illegal Israeli settlements. When Palestinians resist the pressure to move to desalinization, they are represented as somehow anti-development or backward. Noah Kinarty, a negotiator for the Israeli side, told Bitterlemons.org: “There is no agreement with the Palestinians because some of them are still insisting on water rights from aquifers that in any case are empty and becoming saline.”
But the donor agencies themselves have become exhausted. The exhaustion was first publicly visible in November 2003 when the International Red Cross shut down $40 million in emergency relief operations. “[W]hat began as an emergency situation facing hundreds of thousands of Palestinians has now turned into a long-term collapse of the local economy,” said the Red Cross press release. “In the long term, humanitarian aid cannot be a viable solution to the crisis in the West Bank. Israel has legitimate security concerns. Nonetheless, it must make it possible for Palestinians to deal with this crisis using their own means.”
The World Bank recommendations are the most specific indication to date that the donor community may not continue to throw money blindly into the conflict. While a parallel concern has been diversion of donor funds by the PA into private accounts, the administration of Mahmoud Abbas has set into motion many of the fiscal remedies prescribed by the various commissions that have examined PA abuses. Elections have at least temporarily renewed the legitimacy of the Palestinian president, and local and parliamentary elections are soon to follow. Abbas’ dismissal of Gaza police officers, justified externally by the ongoing firing of rockets at Israeli settlements and internally by a prison break-in, signaled that he is serious about preventing lawlessness. Abbas lacks the charisma of his predecessor and therefore must lodge his power in institutions; in order to stay at the helm, he will have to strengthen both the courts and the legislature. The recently approved Palestinian cabinet is made up mostly of new faces, because Palestinians are demanding that those involved in corruption scandals be held accountable. The freshman class will test anew the strength of PA institutions.
The question remains, then: is Israel ready to lift its stifling closures, at least to the extent called for in the moderate World Bank recommendations? “In the talks that started two weeks ago after elections, Israel said that they are willing to remove a portion of the checkpoints. The reason was that Israel offered immediately to evacuate five cities, and the Palestinians responded, ‘Not if you are going to continue to have checkpoints on the entrances of these cities.’ And so they started to talk about it,” says Khatib. “We know that the political situation [and] the economic situation are significant factors in determining the balance of power.”
The Palestinian Authority and its centrist base know that political and economic progress is the key to its survival. But one cannot help observing that without the donor community, the PA would already have suffered its demise. The loss of Israeli- commandeered tax revenues, the withered economy and the lack of foreign investment have meant that the only means of PA survival are cash infusions into the budget. In 2005, that may well mean outside contributions of $500 million.  There are also Palestinians who would argue that the repeated decision to bail out the PA — like Bush’s embrace of Abbas — has been the donor community’s most political contribution of all.
 Those excesses included investment of public funds to bail out private companies in Egypt and elsewhere. See Financial Times, February 8, 2005.
 World Bank, Stagnation or Revival: Israeli Disengagement and Palestinian Economic Prospects (Washington, DC, December 2004), p. 1.
 World Bank, Four Years: Intifada, Closures and Palestinian Economic Crisis (Washington, DC, October 2004).
 Stagnation or Revival, p. 5.
 Poverty rates and unemployment data vary according to methodology. Typically, World Bank data is on the low end of the scale, while other surveys are higher.
 Riccardo Bocco, Matthias Brunner, Isabelle Daniels, Jalal al-Husseini, Frederic Lapeyre and Jamil Rabah, Palestinian Public Perceptions, Report VII (Geneva: Graduate Institute for Development Studies, 2004).
 Stagnation or Revival, p. 8.
 Khalil Nakhleh, in his book The Myth of Palestinian Development (PASSIA, 2004), reports that Palestinians had just completed an extensive development plan prior to the signing of the 1993 Oslo accords. With the creation of the PA, the plan was discarded, as it no longer fit the political requirements of the peace agreements.
 See Palestinian Center for Policy and Survey Research, “Results of PSR Exit Polls For Palestinian Presidential and Local Elections, December 2004–January 2005,” accessible online at http://www.pcpsr.org/survey/polls/2005/exit05.html. These polls showed that in the presidential election, voters chose Abbas because they saw him as better able to bring economic stability and peace. In preliminary local council elections, voters chose Hamas candidates as a rejection of what they perceive as the corruption and ineffectiveness of the PA.
 See the data on the website of the Organization for Economic Cooperation and Development at http://www.oecd.org/dataoecd/63/10/1877956.gif.
 Bush’s $350 million pledge is completed by $150 million to be inserted into the 2006 budget, over and above the currently budgeted $75 million.
 In a February 16, 2005 written response to questions about the “building bridges” funds, USAID West Bank/Gaza said it has no information concerning the use of these funds, although “nearly all [news reports] are false.”
 Sari Hanafi and Linda Tabar write, “While donors sought to empower Palestinian society, the outcome was that this society, already weakened by the occupation, became even more fragmented during this period.” Hanafi and Tabar, “Donor Assistance, Rent-Seeking and Elite Formation,” in Inge Amundsen, Mushtaq Husain Khan and George Giacaman, eds. State Formation in Palestine: Viability and Governance During a Social Transformation (New York: Routledge, 2004).
 See Charmaine Seitz, “USAID, Palestinian Civil Society at Impasse Over Anti-Terror Clause,” Palestine Report, January 14, 2004. http://www.palestinereport.org/article.php?article=233.
 Sanitation and Environment Program of the Palestinian Hydrology Group (authored by Jennifer Moorehead), Water for Palestine: A Critical Assessment of the European Investment Bank’s Lending Strategy in the Rehabilitation of Water Resources in the Southern West Bank, sponsored by the Reform the World Bank Campaign (Italy) (2000).
 International Monetary Fund, Fiscal and Macroeconomic Developments, Outlook and Reform in the West Bank and Gaza (November 2004).