PROPOSAL: GAZA  February 21, 1995


          Sound economic policies, effectively implemented, are essential elements of the peace process in the Middle East. The Palestinian people must benefit materially from the fruits of peace if they are to support, or even tolerate, the gradual process of negotiating the creation of their state.


Amra, Jordan           1972

          The economic fruits of peace must flow primarily from the private sector, but enterprise can flourish only in an environment of sound laws and policies, efficiently administered. The capacity to design economic policies, to formulate state budgets, to prepare public investment programs, and to determine development strategies must be created in West Bank and Gaza (WBG) from scratch. Other economic management tasks, such as tax policy formulation and administration, controlling expenditures, and providing social services, need to be adapted to the requirements of the Palestinian National Authority (PNA).

          Although the Palestinian people are among the most highly educated and experienced in the Middle East, many of those living outside of Gaza and the West Bank have yet to return. Even those within the territories may not be attracted to government service at prevailing rates of remuneration. At a time when economic and political uncertainties remain high, the PNA needs assistance to create conditions conducive to economic growth and the climate of negotiation.


          This is a proposal to provide technical assistance to the PNA from a consortium under the auspices of Harvard's Institute for Social and Economic Policy in the Middle East (ISEPME). In the consortium, economists from Harvard University and the Massachusetts Institute of Technology would join members of the Palestine Consultancy Group in advising the PNA on economic policies and would assist the PNA to strengthen its capacity for economic management.

          Assistance on economic management has already been rendered by ISEPME with funds from a private donor. Consulting visits on tax policy, tax collection and computerization have taken place. Preliminary explorations have been made into the means of assisting with the budget process and economic planning. Opportunities to participate in HIID summer workshops on public budgeting, computerized tax administration and other elements of economic management have been offered to six PNA officials. These efforts would be expanded under the proposed program. In addition, a panel of senior economists would advise PNA ministerial policy-makers on macroeconomic issues as they arise.


          Under the peace process through which the Palestinian people seek national independence, the PNA gains authority only gradually over territories and over the policies that determine economic outcomes. During this transition period, capacities for policy-making and economic management need to be expanded in the new ministries being established to govern the territories.

          A Protocol on Economic Relations signed by the PLO and Israel in Paris in April 1994 attempted to lay the groundwork for strengthening the economic base of the WBG and for PNA decision-making in economic areas. The Protocol provides for free trade between WBG and Israel, and allows for the possibility of free trade between the Palestinian entity and its Arab neighbors. It sets out the framework for monetary and fiscal policies and for other aspects of Palestinian economic management. Customs and other taxes were established in the negotiations, and provision was made for the creation of a Palestinian Monetary Authority.

          During the eight-month period between the signing of the Declaration of Principles in Oslo and the beginning of PNA self-rule, the Palestinians and the donors agreed upon the need for an agency to coordinate, negotiate, and receive foreign assistance. The Palestinian Economic Council for Development and Reconstruction (PECDAR) was set up to formulate projects under the Emergency Assistance Program, designed with the help of the World Bank, to undertake economic research and planning, to coordinate foreign assistance, and to deal with specialized agencies and organizations.

          PECDAR was created as a transitional agency before ministries of the PNA were created. It is expected to phase out within three years, of which one year has nearly elapsed, with its functions being assumed by various ministries. This process has begun, but is mid-stream, with some of the functions, such as economic policy formulation and foreign aid coordination, somewhat in limbo. Authority for economic policy is fragmented between PECDAR and several PNA ministries, and among the ministries.

          The government's role in the economy in these early years will be substantial. Foreign aid is expected to run from $500 to $800 million per year, and tax receipts could rise to around $400 million per year. In all, PNA expenditures will likely equal one-fourth to one-third of Palestinian GNP in this period.

          In addition to the tasks of managing foreign aid negotiations and allocations, and administering an effective tax program, the government requires the capacity to establish an economic development strategy, to devise a macroeconomic policy framework conducive to growth and employment creation, and to negotiate trade agreements with neighboring countries. Unfortunately, neither PECDAR nor the economic ministries are sufficiently established to carry out these tasks. They are embryonic organizations with relatively inexperienced staffs.

          During this transition period, with all its political uncertainties, the PNA has entrusted its economic policy decisions to a ministerial committee of three members: the Ministers of Finance, Planning and International Cooperation, and Economy. This committee will guide the budget process, which in turn will set the strategy for development and employment creation. This committee would be the focal point for policy advice provided under the proposed project. Their ministries would be focal points of training and consultations designed to improve their economic management capacities in such areas as public budgeting, tax administration, economic research and analysis, and project evaluation.


          ISEPME, founded in 1983, has been a research institute at the John F. Kennedy School of Government at Harvard since 1988. Its goals are to undertake research and projects on policies that will further economic and social cooperation between Israel and its Arab neighbors. The Institute is financed primarily by individuals and family foundations from North America, Western Europe and the Middle East. These individuals include Arabs and Israelis who have a keen interest in promoting peace and prosperity in the Middle East.

          In 1991, following a conference it sponsored on "The Economics of Middle East Peace," ISEPME staff realized that the Middle East conferees meeting in Madrid were not yet ready to engage seriously on economic issues. ISEPME decided to attempt to fill this gap by organizing Israeli, Jordanian and Palestinian economists into a collaborative project, with senior Harvard and MIT economists participating in working groups, to address five major economic topics: 

         Regional Trade in Agriculture, Industry and Services, chaired by Prof. Raymond Vernon of Harvard;

         Labor Policies, chaired by Prof. Richard Freeman of Harvard;

         Fiscal Policy, chaired by Prof. Thomas Schelling of Harvard and the University of Maryland;

         Monetary and Financial Arrangements, chaired by Prof. Lester Thurow of MIT; and

         Management of Foreign Aid, chaired by Prof. Dwight Perkins of Harvard.

          Apart from the chairs, the working groups were entirely composed of economists from the regions. Their report, "Securing Peace in the Middle East: Project on Economic Transition," was published in June 1993, and has become a document of reference in the peace talks on economics.

          Since that time, ISEPME has published a series of Near East Economic Progress (NEEP) Reports. Their goal is to promote economic progress in the region by analyzing developments, identifying potential impediments to progress, and offering constructive suggestions for solving emerging problems. NEEP Reports are aimed at policy-makers, opinion-makers, researchers and the general public in the Middle East and elsewhere concerned with economic and general progress in the Near East. As with the earlier study, the Reports are written by economists from the region, Harvard and MIT.

          ISEPME also sponsors the Harvard Middle East Water Project, which proposes a rational economic approach to analyzing water issues that may help the parties of the peace negotiations to perceive the conflict and approaches to its resolution in a new way. The Project seeks to calculate the value of water in the region at present and for each of several years in the future. The Project envisages a water authority, jointly operated by Jordan, Israel and Palestine, which would transfer water from one country to another at prices reflecting the full social value of water as determined by each party.

          ISEPME also sponsors a Trade Project, in which Israeli, Jordanian and Palestinian teams of economists consider the merits and dynamics of alternative trade arrangements in the region, propose practical cooperative measures to facilitate trade, and identify outstanding issues needing to be resolved.

          In the proposed project, for policy advice to the committee of ministers, ISEPME will rely upon the group of economists who participated in the original study (depending upon individual availability), supplemented by members of the staff of the Harvard Institute for International Development (HIID) as needed. For technical assistance to the ministries in improving selected economic management capacities, ISEPME will rely primarily upon HIID staff and training programs.


          HIID was established in 1974 to enable Harvard University to respond to the diverse needs of the developing world for research, technical assistance, and training; and in turn to bring the practical development experience gained in the field into the university's educational environment. The Institute, and its predecessor organization the Development Advisory Services (DAS), have participated in the development process in over forty countries during the last thirty years. HIID currently has development assistance projects in thirty countries in Africa, Asia, Latin America, the Newly Independent States, and Eastern Europe.

          HIID has about fifty-five resident advisors overseas, usually within specific government ministries and departments. Each year, HIID fields about 200 consultants to work with these resident teams and decision makers on specific problems. The annual budget of HIID is around $40 million. Its sources of funds are diverse, including private foundations, international organizations, foreign assistance programs, and foreign governments.

          The core of the Institute's work has been helping country authorities move toward market economies. It has done this by providing resident advisors and short-term consultants to assist institutions in developing countries. From the beginning, the Institute's strength has been working in the field with policy-makers and managers - those who actually make and implement the decisions upon which economic development depends. Primarily, HIID does this by mobilizing the knowledge and experience gained in other development efforts throughout the world and making that knowledge and experience available to those who must ultimately decide what is to be done.

          HIID has always stressed the importance of building counterpart institutions through staff development, collaborative research, and training programs. Over the past two decades, HIID has developed a series of six-to-eight week short courses held in Cambridge each summer, emphasizing practical hands-on work, computer exercises, simulation games, and case studies specially created for these programs. These workshops, conducted at the level of a graduate course at Harvard, include reading, problem-solving, analysis of cases, and use of computer software packages for different analytical tasks. The lectures and case materials used in the workshops draw on more than two decades of HIID's experience assisting developing countries. Workshops and seminars can also be designed to meet particular needs and offered in the host country.

          The annual workshops offered in Cambridge are briefly described below:

         Budgeting and the Public Sector. This workshop is designed for senior officials who prepare, review, or oversee the implementation of national or ministerial budgets. The workshop seeks to improve participant skills by broadening their understanding of the entire public budgeting process through the analysis of different approaches to public budgeting. Topics covered include the budget and the national economy, the budget as a tool of management, recurrent and development budgets, parastatals and the budget, budget reforms in selected countries, and policy-making, planning and budgets.

         Macroeconomic Adjustment and Food Policy. The goals of the workshop are to enhance and broaden the thinking of macro-and microeconomic managers to improve their day-to-day skills in the design of economic policy, and to develop capacity for applying practical analytical tools to the solution of policy problems.

         Environmental Economics and Policy Analysis. Participants gain the tools necessary to evaluate quantitatively the value of natural resources and the environment and to formulate policies to protect the environment without restricting economic growth.

         Program on Information Technology for Fiscal Systems. This program is designed to enable tax professionals to initiate, manage, and evaluate the process of introducing new technology within their tax systems. The course, offered through the International Tax Program and the Lincoln Institute of Land Policy at Harvard, focuses on emerging trends in fiscal systems, computers, and the management of information technology for these fiscal systems. The four-week course consists of modules addressing organizational change, tax policy and administration, and technology choices. Separate sessions on customs, income, value-added, and property taxation are also offered.

         Program on Investment Appraisal and Management. This workshop is for professionals in public and private organizations who plan, assess, or execute projects, and for administrators who must evaluate investment proposals. The program develops the analytical and operational skills of participants so they can plan and assess all aspects of investment projects. Participants learn modern methods of conducting financial, economic and social evaluations of projects, and learn techniques for project planning and implementation. They become proficient in using microcomputers to make financial and management decisions.

         Public Enterprise. This workshop offers participants an overview of the potential and problems of public enterprises, and the tools for solving problems between public enterprises and the government. Topics explored include: public enterprise as an instrument of national development policy, organizational development and conflict management, marketing and communications strategies, strategic planning, pricing and financing policies, project appraisal, performance evaluation, and privatization.

         Educational Policy Analysis and Planning. Participants in the workshop learn techniques for conducting policy research to improve education. The workshop focuses on increasing the quality of education, extending access to educational opportunities through formal and non-formal methods, achieving equity, and lowering delivery cost.

          This year, six or seven places in these courses have already been reserved for Palestinian officials, to be financed with funds from a private donor.

          The Palestine Consultancy Group (PCG) was founded in 1993 by a group of influential people for the purpose of facilitating international cooperation on development activities. It is chaired by Dr. Sari Nusseibeh, who is also senior fellow of the ISEPME. PCG is a nonprofit organization. Its members are well acquainted with the leading figures in the PNA and in Israel who deal with WBG issues. The PCG will be in a position to identify priority issues on which project analysts should focus, identify appropriate counterpart consultants, and handle local logistics. The PCG will also be able to monitor progress made in the ministries on economic management capacity-building on a continuing basis.

          Since it was founded, the PCG has been active in several fields. Together with the Truman Institute at Hebrew University, the PCG organized workshops on health, tourism, education and water where Israeli and Palestinian experts joined with experts from various countries abroad to address common problems and to devise cooperative means of resolving them. The PCG conducts joint research with ISEPME on investment opportunities, water as a market commodity, and the refugee problem. Additional research on waste management and marine sciences is being planned in conjunction with the University of Michigan.


          The proposed project would be under the overall direction of a Steering Committee, composed of a ministerial-level person appointed by the Chairman of the PNA; the Chairman of the PCG, Dr. Sari Nusseibeh; the Director of the ISEPME, Dr. Leonard Hausman; and the Director of HIID, Dr. Dwight Perkins. The Steering Committee will meet three times per year to determine project priorities and to assess the accomplishments and requirements of project activities.

          Day-to-day responsibility for managing the project will fall to the Associate Director of ISEPME, Dr. Bishara Bahbah. An inaugural meeting of the Steering Committee and the Project Manager will be held in WBG as soon as funding approval has been received, in order to plan project activities for the first six months.

          Visits by senior economic consultants will be scheduled individually. They will confer with the committee of economic ministers on an agenda of issues designated in advance, through discussions held by the Project Manager with each of the ministers. PCG consultants will regularly be teamed with foreign consultants and will be available for continuing work on the particular issues during the dual consultancy. The PCG consultant will be able to keep the foreign consultant informed of developments and can recommend the timing of subsequent visits by that individual. Approximately six individual consultations will take place each year.

          Economic management capacity-building activities will also be scheduled during Steering Committee meetings. Activities already under way in the areas of tax computerization and collection, budget preparation, and economic planning will be continued and expanded. In addition to consulting visits, a senior economist will be assigned on a residential basis to the Ministry of Planning and International Cooperation to help establish the analytical capacities of the new planning unit.

          Additional areas of interest, such as strengthening statistical services, will be explored. The training of local staff will receive emphasis. HIID workshops will be utilized, and the HIID Training Office will arrange other short courses abroad as needed. The PCG will organize local training courses as needed. For example, courses from abroad, such as the budgeting or tax administration workshops, may be imported, translated and adapted to local needs.

          Severe fund shortages have led the PNA to adopt a strategy for expanding its technical capacities that relies heavily upon donor funding. Foreign assistance is used not just for external costs of consultants and training, but for local logistical costs and salary topping as well. Salary topping will be required to attract adequately trained economists for economic planning activities.

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