The Palestinian Economy. Theoretical and Practical Challenges

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Zagha
1. Introduction
The local government in the West Bank and Gaza has its origins in the middle of the last
century (UNDP-PAPP 2003). The design of the legal framework and administrative
systems were based not on local needs but mainly on the requirements of the Ottoman
Empire, British Mandate, Jordanian era in the West Bank, Egyptian military rules in Gaza
Strip, and Israeli occupation all of which were concerned more with security than with
developmental aspirations of its constituency. Local government laws were therefore
designed mainly to maintain the central control and to provide the minimum of the public
goods at the local level. Meaningful decentralisation in the sense of a democratic
representation in local governance was not a policy objective until the Palestinian
Authority (hereafter the PA) was established (Al-Araj 1998). The local government units,
the Ministry of Local Government and the donor community show a growing interest on
issues related to fiscal and administrative decentralisation. Many workshops have been
organised in recent years to discuss different aspects of fiscal decentralisation, but to our
knowledge none in-depth studies have been conducted.
In an earlier joint paper Fjeldstad and Zagha (2002) discussed the factors
explaining the tax system in the PA. In this respect, it was found that the limited
trustworthiness in the PA was closely linked to citizens’ perceptions of the capacity of
the PA to make credible commitments about the use of tax revenues and foreign aid, as
well as its procedures for designing and implementing fiscal policy non-arbitrarily.
Moreover, the study found that extensive and increasing corruption contributed to
undermine popular confidence in the PA as a credible force in the struggle against the
Israeli occupation. These findings have implicitly implications for policies to devolve
fiscal and administrative powers. Local authorities are the branch of the government
which is ‘closest’ to the citizens. Hence, it is perceived that the strengthening of local
authorities represents an important building block in the peace process, as well as in the
Palestinian state formation process. Political and administrative reforms are still
underway in the PA (ARD 2000a, 2000b; C3 Management and Economic Consulting,
Adam Smith Institute and Center for Continuing Education at Birzeit University:
Project on Public Administration and Civil Service Reform 2003-2006). An important
challenge facing these reforms is related to the resourcing of local authorities, including
the establishment of credible and transparent intergovernmental fiscal relations. Sabri
and Jaber (2006), pointed out that “(t)he relations between local governments and
ministry of finance are the most significant issue in the Palestinian local authorities,