Evaluating the Effectiveness of External Funding on Economic Development in Conflict-Torn Environments: The Palestinian Experience رسالة دكتوراة

Abstract

This dissertation examines the influence of external financial flows on economic development in conflict-affected environments, with a focus on the Palestinian economy from 2000 to 2023. The study aims to assess how foreign aid, foreign direct investment (FDI), compensation of employees (mainly Palestinian workers in Israel), and private transfers influence key development indicators—namely, real GDP per capita, unemployment, and poverty—under conditions of political instability and institutional fragility. The research was conducted in Palestine, using quarterly macroeconomic data covering Q1 2000 to Q3 2023. The study population encompasses the entire Palestinian economy. At the same time, the analytical sample includes time-series data obtained from official sources such as the Palestinian Central Bureau of Statistics (PCBS), the Palestine Monetary Authority (PMA), the World Bank, and the OECD. The study employs a quantitative econometric approach, applying the Autoregressive Distributed Lag (ARDL) bounds testing methodology to examine both the short- and long run relationships among variables. The ARDL model was chosen due to its robustness, small sample sizes, and mixed order of integration. Data analysis was performed using EViews software. Key diagnostic tests were applied to ensure model reliability, including tests for heteroscedasticity, serial correlation, normality, and stability (CUSUM and CUSUMSQ). The results show that foreign aid significantly boosts GDP per capita and reduces unemployment in both the short and long run, but has no discernible impact on poverty. FDI likewise lowers unemployment yet fails to raise GDP per capita or alleviate poverty. Labor compensation from Israel yields long-term benefits in GDP growth and poverty reduction, but it also risks discouraging domestic job creation. Private remittances provide modest short-term poverty relief and a slight increase in GDP per capita, yet they are correlated with higher short-term unemployment and lack lasting developmental effects. Conflict intensity depresses GDP per capita growth over the long run and reduces poverty in the short run, without significantly altering unemployment rates or long-term poverty trends. Policy recommendations include redirecting aid and foreign direct investment (FDI) toward high-employment, resilient sectors (e.g., decentralized infrastructure, green energy, small and medium-sized enterprises); transforming remittances into long-term capital through diaspora bonds and matched savings; strengthening institutional capacity and governance; and integrating conflict sensitivity into economic planning.