Tuesday, November 14, 2006

Palestinians Face Budget Crisis

Palestinians Face Budget Crisis
Economics HL, Commentary No 4
Source of Extract: http://news.bbc.co.uk/2/hi/business/4672690.stm
Date :February 2,2006
Candidate Name: Samar Al Ansari
Candidate Number:0554-007

The World Bank’s warning of worsening prospects for the Palestinian economy comes after the sweeping victory of Palestinian militant group Hamas in its parliamentary elections last week. The World Bank, an international organization designed to provide loans as well as sources of funds for investments mainly for the less developed countries[1], has withheld loans from the Palestinian Authority(PA) in the past and will probably do so once again due to recent events.

Furthermore, many have threatened to cut off their aid to Palestine because of the fear that they might be funding terrorists. Countries such as the USA and the EU have threatened to cut off the unilateral aid, aid given by a specific government, to the PA. The PA is heavily dependant on the foreign aid, whether it multilateral, aid given by a organization such as the WB, or unilateral aid. Thus the cut of foreign aid could have drastic effects on an already suffering Palestinian economy.

In spite of Saudi Arabia and Qatar’s immediate aid to the PA, the worsening of economic conditions is still a probable event as the magnitude of the gain in aid is incomparable to the magnitude of the loss in aid.

Foreign aid is one of the major sources of income to the PA and since the PA is the major employer in Palestine, unemployment in addition to recessionary pressures in the business cycle are probable. Many expect this, thus business pessimism will spread throughout the Palestinian economy. The threats of the WB, the US, and the EU have caused many to speculate and thus the level of investment, a major component of aggregate demand(AD) that is already low due to the political uncertainty of the region, will decline further. Furthermore, the PA will have less money to spend on the economy, thus government expenditure, another major component of AD will decline as well. Thus the multiplier effect will prevail, which is when a reduction in AD has an even more magnified effect on the level of output. Bearing in mind the multiplier effect, which intensified this downturn pressure, the Palestinian economy will be pushed more and more towards collapse.

However, organizations such as the WB pay little regard to the possibility of assisting Palestine. Palestine is not capable of development without aid. It lacks the funds and resources needed to modernize and develop. As the PA will have less to spend on Palestine, many of the indicators of economic development such as higher literacy rates and improvement in the overall standard of living[2] will not be enhanced.
The PA will not be able to spend more on health and social benefits. It will be incapable of improving the already struggling educational system, which could lead to a decline in both literacy rates and the level of high school graduates. Most importantly, since the Palestine mainly produces primary goods, the decline in the general price levels will have an impact on the economy. Usually as the price declines, total revenue will increase. However, since primary goods are both income and price inelastic, a change in the price level will not lead to an increase in the consumption of Palestinian goods by Palestinians and its trading partners The cut of foreign aid not only stunts economic growth, but makes development in Palestine an unachievable goal.

On the other hand, in the absence of multi and unilateral aid, NGOs, nongovernmental organizations such as the Red Cross that aim to decrease both environmental problems and the suffering of the poor by providing basic social service, will have a more prominent role in the Palestine which could be of immense benefits to Palestine. But the prevailing effects on the Palestinian economy are probably going to be for the worse.

The WB’s aim is to help the less developed, thus it shouldn’t punish the Palestinian people due to speculations concerning a supposedly terrorist political party. Aid being given to the PA can be monitored, but a cutoff is not a reasonable solution. Through funding the PA, ultimately the Palestinian people can be helped. International financial institutions such as the WB have a responsibility towards less fortunate countries, and more importantly to the people of these countries.

Note: Figure was excluded from original document

[1] Alan Glanville, Economics From a Global Perspective, (Oxford, UK: Glanville Books Ltd., 1998) p.471

[2]Alan Glanville, Economics From a Global Perspective, (Oxford, UK: Glanville Books Ltd., 1998) p.574

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