By Steven Stotsky, July 01, 2008.
On December 17, 2007, eighty-seven countries and international organizations
met in Paris and pledged to provide $7.4 billion over three years to the
Palestinian Authority  (PA), an amount far in excess of any previous level of
U.S. or European aid to the Palestinians.
The conference participants justified the aid as a means of providing
“immediate support to the entire Palestinian population,” and as a reward
intended to strengthen those Palestinians who favor peaceful coexistence with
In the midst of the effort in Paris to bestow unprecedented sums of
foreign aid on the Palestinians, there was little discussion of the unintended
consequences – often deadly ones – of previous aid regimens. The recent history
of foreign assistance shows a distinct correlation between aid and violence.
Perhaps aid itself does not cause violence, but there is strong evidence that it
contributes to a culture of corruption, government malfeasance, and terrorism
that has had lethal consequences for both Israelis and Palestinians over the past
The Paris conference aid package continues fifteen years of international
funding that has established the Palestinians as one of the world’s leading per
capita recipients of foreign support. Figures published by the Organization of
Economic Cooperation and Development for 2005 show that Palestinians
received $304 per person in foreign aid, second only to the war-torn
Republic of Congo among entities with populations larger than one million.
Unlike the Congo, though, the Palestinians have received such subsidies for
Amidst the internal turmoil of 2006 and 2007, aid to the Palestinians increased
by more than 50 percent, and in July 2007 the Israeli government handed
over $300-400 million in import taxes it had collected on behalf of the PA.
This revenue windfall came despite the 2005 warning by George Abed,
head of the Palestinian Monetary Authority, that “if you poured in a lot of
financing at this time, it would not have a big impact. It would not be very
effective â¦ It would be wasted.” International organizations and diplomats
acknowledge Palestinian misuse and diversion of aid money, but they remain
reluctant to study the deeper implications of how such aid affects Palestinian
An examination of key measures of violence reveals a troublesome correlation
between the number of homicides committed by Palestinians and the level of
funding provided to the Palestinian Authority. As aid to the Palestinian
government increased, there was a corresponding increase in the number of
people, both Israeli and Palestinian, killed by Palestinians.
The correlation between aid and homicide statistics does not mean that
foreign aid causes violence, but it does raise a question about whether the flow
of aid to the Palestinian government has helped fuel Palestinian violence and
hindered efforts to restore calm.
Correlating Aid and Violence
Increased aid to the PA after the start of the second intifada in September 2000
precipitated an increase in the Palestinian murder rate of both Israelis and
Palestinians in 2001 and 2002. After June, 2002, Israeli countermeasures
against Palestinian terrorism, such as checkpoints and targeted killings of
terrorist leaders, began to reduce the number of Israeli dead.
By August 2003, the first portion of Israel’s security barrier was in place,
leading to a rapid decrease in Israeli fatalities. While Israel’s new security
measures reduced the number of Israeli victims, factional and societal violence
increased the number of Palestinian victims. By counting both Palestinian and
Israeli victims, the correlation between increased aid and violence continued
The correlation between aid and terrorism murders becomes even stronger
when the amount of aid given in one year is compared to the number of
terrorist murders the following year. The lag between increased aid and
increased homicides suggests a cause and effect association. However, when
comparing the number of attempted terrorist attacks against Israelis with the
level of aid, the correlation is stronger, without introducing any time lag.
To investigate the possible linkage between aid and violence, it is useful to
examine changes in how foreign aid was distributed during the second intifada.
Funding the Palestinian Authority
Prior to the outbreak of the second intifada, donors directed nearly all foreign
aid to the Palestinians to economic and infrastructure development programs,
so that by 1999 the Palestinian Authority could raise enough revenue through
taxation and private borrowing to pay its bills.
This era of relative self-sufficiency would not last long, however. The
Palestinian terror campaign launched against Israel in 2000 disrupted the three
main PA revenue sources – clearance taxes collected by Israel, taxes on wages
earned by Palestinians working in Israel, and domestic tax revenue. Israel
Defense Forces (IDF) measures against terrorists interfered with commerce in
the West Bank and Gaza and led to a 40 percent decline in domestic tax
revenues between 1999 and 2002.
At the same time, the Israeli government curtailed the number of
Palestinians working within its borders, reducing a lucrative source of tax
revenue for the PA. The Israeli government also decided to withhold tax
receipts it collected for the PA in response to the failure of Palestinian leaders
to make a serious effort to halt terrorism.
The international community responded to the ensuing Palestinian financial
crisis by replacing much of the lost revenue. Foreign donations to the
Palestinians nearly doubled, from $482 million in 2000 to $929 million in
2001. The changes in how the aid was distributed were even more
dramatic: In 1999, no foreign aid went directly into the Palestinian Authority
budget; by 2001, 58 percent of it went to the government budget and less than
20 percent to development programs.
In a classic example of the creation of perverse incentives, the decision to fund
the government budget made the Palestinian Authority less dependent on
revenue derived from commerce, detaching the PA’s solvency from the health
of the economy. Thus, while the intifada sent the Palestinian economy into free
fall, the PA’s coffers swelled. The conditions were thus established that
ensured the separation of Palestinian governance from responsibility for the
economic health of the Palestinian people.
A comparison of the proportion of aid allocated to the government budget with
the number of homicides yields a correlation similar to the previously discussed
correlation of aid and homicides.
By 2003, the ratio began to shift so that aid was more evenly distributed
between the PA budget and development programs. However, the proportion of
aid allocated to the government began to rise again in 2005, so that by January
2008, Palestinian economist Samir Barghouthi estimated that the Paris
conference aid package would commit 70 percent of donations to paying the
wages and pensions of Palestinian employees.
In other words, a higher proportion of aid will be allocated to the
government and a lower proportion to development programs than even at the
height of the terrorist violence of the intifada.
The new flow of funding to the Palestinian government will likely replicate the
dynamics of the past decade: In 1999, the PA had 98,500 on its payroll; by
2002, the payroll had grown to nearly 125,000, and by 2007, it stood at
Rising Palestinian government employment was reflected in the
proportionate growth of the security services, which accounted for nearly half
of all government wage earners. Security personnel on the PA payroll grew
from 44,400 in 1999, to 53,600 in 2002, to 78,000 in mid-2006.
In addition, the Jordanian foreign ministry has confirmed plans to
increase the Palestinian police force in the West Bank from 7,000 to 50,000
men, an increase that will create an unprecedented police presence and require
an investment of several billion dollars beyond what was promised at the Paris
conference. These dramatic increases in the number of security personnel
have never resulted in a reduction in terror attacks against Israelis – and as the
history of the intifada shows, such attacks in fact increased from 1999 to 2002.
Palestinian Security Forces’ Terrorist Ties
Not only did the security forces fail to prevent terrorist attacks, in many cases
they colluded with terrorist groups and sometimes perpetrated attacks
themselves. For example, on January 30, 2004, a Palestinian policeman
belonging to the Al-Aqsa Martyrs’ Brigades boarded a crowded bus in
Jerusalem and detonated a bomb strapped to his body, killing ten Israelis.
The Palestinians responded that they could not prevent terrorism because the
Israeli military had destroyed their capacity to do so.
In A Police Force without a State, Brynjar Lia, a Norwegian Defense Research
Establishment analyst, suggests that the Palestinian leadership gave preference
in police recruitment to those who had served prison terms in Israeli jails for
This, he argues, allowed terrorists to shape the police force “as a vehicle
for achieving national independence [rather] than as a non-political law and
order agency.” Fatah paramilitaries, he contends, “made themselves
indispensable as popular forces in anti-Israeli riots and clashes.”
Lia offers a plausible path by which foreign aid ended up in the hands of
terrorists. As early as 2003, the World Bank recognized there was a problem
with how aid was used, noting in its annual report on the West Bank and Gaza
that “donors should have spent more on oversight mechanisms in 2001 and
early 2002, thereby, putting themselves in a better position to answer
questions about the diversion of funds to support terrorism.”
Still, the World Bank justified the redirection of funds for emergency aid
in the belief that donors “had no choice if they wanted to keep alive the hope
of reconciliation, since a collapse of the PA service structure and the further
radical impoverishment of the population would have vitiated this.”
The Israeli government and military watched the diversion of funds but could
not change donor practices. On June 5, 2002, the IDF published a document
calculating that the Palestinian Authority only needed 55 to 65 percent of its
budget to fund legitimate government activities and estimated that the
Palestinian Authority siphoned off $100 million a year to fund terrorism.
The estimates of need versus budget are consistent with more recent news
Documents captured during Operation Defensive Shield in 2002 detail security
forces involvement in terrorist operations. An Israeli document describing
the interrogation of Fatah leader Nasser Aweis in 2002 revealed the links
between Tanzim operatives and the PA national security apparatus and showed
not only how Palestinian security officers instructed Tanzim operatives in
bomb-making, but also how they regularly updated Palestinian Authority leader
Yasser Arafat. Other documents detailed Palestinian Authority salary
payments to terrorists in the employ of security service officials.
The correlation between donor aid and violence becomes murky when
examining the affiliations of the terrorists.
Palestinian terrorism is conducted by a variety of organizations, many of which
derive their support from foreign sources separate from Western government
aid. Islamist groups such as Hamas and Islamic Jihad, which have carried
out the majority of attacks against Israel, have had an uneasy and
frequently adversarial relationship with Fatah-dominated Palestinian
Groups directly linked to Fatah, such as Al-Aqsa Martyrs’ Brigades and
Tanzim, account for only about 20 percent of the suicide bombings against
Israel. Suicide bombings have been responsible for more than half of all Israeli
fatalities since 2000. These circumstances make it difficult to understand why
the correlation between aid to the Palestinians and terror homicides appears so
The organizational affiliations of terrorists, however, may be multiple. Despite
their strong internal differences, Fatah and the Islamists enjoy a high degree of
cooperation in terrorism against Israel. The Palestinian Authority’s
Preventive Security Apparatus, for example, supported both Hamas and Islamic
Jihad in Jenin. Fatah’s Al-Aqsa Martyrs’ Brigades and one or the other
Islamist groups have carried out a number of joint operations. These
collaborative relationships continue. There remains ongoing concern that donor
funds given to Palestinian Authority leader Mahmoud Abbas are subsidizing
Hamas members on government ministry payrolls.
And then there is the larger problem of the fungibility of money: Every
dollar Hamas saves on having to fund jobs and programs unrelated to security
is a dollar the organization can devote to terrorism. While collusion is clear, fully
explaining the correlation requires better data on funds supplied covertly by Iran
and sources within Saudi Arabia and better understanding of the role of tacit
support from the Palestinian security services.
Perhaps U.S. and European officials still believe that supporting those suffering
from the Palestinians’ damaged economy outweighs the negative effect of the
diversion of funds to terrorists. While international officials often say they seek
to promote a more moderate political culture among Palestinians, the Hamas
victory in the January 2006 elections suggests such hope may be misplaced.
At the time, the Palestinian economy had begun to improve. Similarly, in
1998 and 1999, the two years immediately preceding the second intifada
Palestinian gross domestic product increased by 7 and 6 percent
respectively. Perhaps the bitterness of conflict outweighed the moderating
influence of the aid – or, perhaps, the theory that aid moderates is itself
What Changed between 2000 and 2007?
The aid windfall promised at the Paris conference will seek to strengthen the
Palestinians’ West Bank leadership in the wake of Hamas’ violent expulsion of
Fatah from Gaza in June 2007. Western officials regard the Palestinians’
West Bank leadership as moderate while Prime Minister Salam Fayyad is
viewed as a technocrat who will ensure fiscal transparency in the PA.
Nevertheless, the West Bank leadership retains armed militias incorporating
How much control Abbas and Fayyad have over these armed elements remains
unclear. The commander of Israeli forces in the West Bank, Major General Gadi
Shamni, recently told Israeli president Shimon Peres that “without the massive
presence of the IDF in the West Bank, Hamas would take over the institutions
and apparatuses of the Palestinian Authority within days.” 
The aid windfall comes amid the PA’s refusal to take responsibility for
Palestinian rocket fire on Israeli towns. In 2006 and 2007, 1,719 rockets
launched from Gaza hit Israeli territory. On January 3, 2008, an upgraded
122 mm rocket fired from Gaza reached the major Israeli city of Ashkelon.
Nor has any Palestinian leader repudiated terrorism. Attacks by Fatah
continue. While the security barrier has curtailed terrorist attacks, the
terrorist groups have not stopped trying.
Yet even some prominent Palestinians are troubled by the current determination
to fund the Palestinian Authority. Abed of the Palestinian Monetary Authority,
although supportive of financial assistance to the Palestinians, has spoken
openly of the futility of providing donor aid, asserting that what is needed is
investment. This view was echoed by James Prince, consultant to the
Palestinian Investment Fund, who cautioned that “many of the donor programs
have not only been ineffective, they have harmed the economy.”
Infusions of foreign funds into the Palestinian Authority budget from late 2000
through 2002 correlated with increased violence. Increased aid in 2005 and
2006 corresponded to increasing internal violence, which is consistent with the
fact that money was still finding its way to militant groups to purchase
weapons and pay the salaries of the expanding militias.
Although the correlation does not prove cause and effect or provide irrefutable
evidence of a direct link, it seems likely that increased aid helps sustain
Palestinian violence in several ways: by creating the opportunity to divert funds
for militant activities; by insulating the Palestinian leadership from the fiscal
consequences of the economic fallout from terrorism; and by creating a revenue
surplus that allows the Palestinian government both to pay for salaries and
programs and to funnel money to terrorists.
As Western donors prepare to pour unprecedented amounts of money
into the PA, more discussion is needed to explain what controls will be imposed
to ensure that the aid is not diverted to terrorists or used to fund a broader
conflict with Israel.
 The New York Times, Dec. 18, 2007.
 Nicolas Sarkozy, president of France, speech to International Donors’
Conference for the Palestinian State, France Diplomatie, French Ministry of
Foreign and European Affairs, Dec. 17, 2007.
 Condoleezza Rice, U.S. secretary of state, remarks at the
International Donors’ Conference for the Palestinian State, U.S. Department of
State, Dec. 17, 2007.
 Calculations from World Bank Development Indicators Data Base,
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 USA Today, Dec. 17, 2007; The Washington Post, Oct. 31, 2007;
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 Reuters, July 1, 2007.
 The San Francisco Chronicle, Sept. 4, 2005.
 West Bank and Gaza: Economic Performance and Reforms under
Conflict Conditions (Washington, D.C.: International Monetary Fund [IMF], Sept.
2003), pp. 87-98.
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and Terrorism Information Center, Israel Intelligence Heritage and
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 Four Years: Intifada, Closures and Palestinian Economic Crisis
(Washington, D.C.: World Bank, Oct. 2004), p. 6; “West Bank and Gaza: Fiscal
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 Anti-Israeli Terrorism, 2006, IICC, p. 16.
 West Bank and Gaza: Economic Performance and Reforms, IMF, p.
71; Four Years: Intifada, World Bank, p. 20.
 West Bank and Gaza: Economic Performance and Reforms, IMF, pp.
 Four Years: Intifada, World Bank, p. 66.
 Ibid., pp. 65- 6.
 The Christian Science Monitor, Jan. 4, 2008.
 West Bank and Gaza: Economic Performance and Reforms, IMF, p.
92; “Two Years after London: Restarting the Palestinian Economic Recovery,”
World Bank, London, Sept. 24, 2007, p. 10; “West Bank and Gaza Update,”
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 West Bank and Gaza: Economic Performance and Reforms, IMF, p.
92; author’s calculation from data in West Bank and Gaza: Recent Fiscal and
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Table 3; James D. Wolfensohn, Quartet special envoy for disengagement,
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 Reuters, Feb. 9, 2008; The Jordan Times (Amman), Feb. 27, 2008.
 CNN News, Jan. 30, 2004.
 Saeb Erekat, interview, CNN, Sept. 19, 2002.
 Brynjar Lia, A Police Force without a State: A History of the
Palestinian Security Forces in the West Bank and Gaza (Reading, U.K.: Ithaca
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 Ibid., pp. 429-31.
 Ibid., p. 432.
 Twenty-Seven Months, Intifada, Closure and Palestinian Economic
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 Ibid., p. 52.
 “International Financial Aid to the Palestinian Authority Redirected
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 The Christian Science Monitor, Jan. 4, 2008.
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 “Senior Fatah Leaders Describe Arafat’s Link to Terrorism,” Israel
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 Rachel Ehrenfeld and Sarah Zebaida, “EU and the PA Money Trail,”
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 “Suicide and Other Bombing Attacks since the Declaration of
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2, Table 1.1.
 Claude Berrebi, “Evidence about the Link between Education,
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and Public Policy, Rand Corporation, Jan. 2007; Alan B. Krueger and Jitka
Maleckova, “Education, Poverty and Terrorism: Is There a Causal Connection,”
Journal of Economic Perspectives, Fall 2003; Jean Paul Azam and Alexandra
Delacroix, “Aid and the Delegated Fight against Terrorism,” Review of
Development Economics, May
2006, pp. 330-44.
 Associated Press, Nov. 24, 2007.
 USA Today, June 19, 2007.
 The Jerusalem Post, Feb. 27, 2008.
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 “Katyusha Rocket Fired at Ashkelon,” Israel Ministry of Foreign
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 The Jerusalem Post, Jan. 1, 2008.
 The San Francisco Chronicle, Sept. 5, 2005.