"Peace Starts Here" is the slogan adopted by the United Nations Relief and Works Agency (UNRWA) to promote its work in the Palestinian territories. But why does peace "start here"? Why not 60 years ago when UNRWA began its work with Palestinian refugees? Or 60 years in the future, when we will still be debating the same problems if the aid models do not change.

The timing of Chris Gunness's recent article about the UN agency's work was unfortunate, coinciding with strikes by UNRWA employees, which have paralysed essential services in the West Bank's 18 refugee camps. The laudable initiatives Gunness mentioned – health centres, schools, food for hardship cases – ground to a halt without his agency's patronage.

That's not sustainable development; it's a permanent life-support system. Neither is it sustainable for UNRWA, which had been forced to slash its services because of budget deficits even before the strikes began.

Palestine is one of the world's largest beneficiaries of foreign aid, receiving over $3bn (£1.9bn) annually (not including the budget of UNRWA itself). Yet a quarter of the West Bank population remains food-insecure and half of all Palestinians live below the poverty line.

If relief work is failing, economic development is even more worrying. Prime minister Salam Fayyad told the Annual Capital Forum that Palestine's GDP grew 9% in the past year, but as a former IMF representative he should know that the gains are hollow. In 2009, over 60% of Palestine's gross national income, and almost 100% of government expenditure, came from aid.

The Palestinian Authority, which receives over $2bn annually, is answerable not to Palestinians, but to its donors. The aid-management structure in Palestine is innately political. At the top level, the ad hoc liaison committee, members include the United States and Israel. The impact of foreign interests can be clearly seen in PA budgets that allocate 10 times more money to security – suppressing resistance to the occupation – than to agriculture, which could be the backbone of the Palestinian economy.

Industries with export potential, agriculture and construction have shrunk to half their 1999 output. Building for future independence has been subordinated to short-term crisis management.

The 2006 elections showed how vulnerable Palestine's economy and development efforts are to foreign interests. Following Hamas's election victory, emergency and development aid were drastically reduced – making a clear statement that foreign aid is contingent on foreign control. Joseph DeVoir, author of Tracking External Donor Funding, has compiled an extensive study linking aid figures with political changes in the territories. In his words, "when realpolitik shifts, development takes a back seat".

Attempts to make aid work for the population have had little success. Ninety-one countries, including the US, signed up to the 2005 Paris Principles on aid effectiveness, which stipulated: "Developing countries must lead their own development policies." Although the declaration showed widespread acknowledgement of aid's failure to empower Palestinians, it has not been the catalyst for change that was hoped for.

Individual NGOs have attempted to assert their independence from donors. Many reject USAID funding due to its political demands, which preclude assistance for projects that could benefit people with affiliations to undesirable political groups. The Dalia Association has introduced a "Village Decides" scheme, focused on institution building, which empowers local communities to invest funding as they see fit, without conditions.

This commitment to reform is not generally reflective of Palestine's NGO sector, which has become a byword for corruption, incompetence and meaningless job creation. Thousands of NGOs have sprung up, promoting everything from family planning to liberal arts education, bloating the aid industry without delivering long-term benefits.

Naseef Mu'allem, director-general of the Palestinian Centre for Peace and Democracy, revealed that "JICA – the Japanese government aid mission – invested $5m last year, but practically what they spent is $600,000. The rest is given as salaries, accommodation, hotels, retreatment and transportation for the foreign employees here but not for the Palestinians". Without donors thoroughly checking on their investments, this kind of private profiteering has become normal.

Palestinian perceptions of foreign NGOs are revealing. Bir Zeit University's 2008 survey found just 35% of the West Bank population feel they contribute to the development of Palestinian society; 78% said they played some role in reducing human suffering and 55% felt they contribute to reinforcing the Israeli occupation.

According to DeVoir, the combination of these results seems to reveal a perception that NGOs "do not achieve political goals; they facilitate occupation by making it bearable". Certainly NGOs and international agencies have financial motives for sustaining the occupation, without which they could not obtain the funding to combat its effects.

The foreign money flooding into NGOs has entrenched class divisions in Palestinian society. Employment opportunities within them are typically limited to the educated elite class, narrowed further by routine nepotism. In Ramallah, the difference is most apparent with glitzy nightclubs on the doorsteps of refugee camps – the preserve of foreigners and rich Palestinians who live too comfortably to identify with the struggle for independence. Their money has already immunised them against the worst effects of occupation, working in jobs that allow them to cross borders and checkpoints, lessening their incentive to fight the status quo.

So why are the major donors happy to keep pouring money into a black hole? What have the US and Europe bought for their tens of billions since 1994? Stability, which could just as easily be called stagnation. Their money is compensation for half a century of political failure.

Last week Hillary Clinton had her picture taken donating an additional $150m to the Palestinian Authority, her first photo opportunity in the region since chairing the failed peace talks. The current systems of aid will never deliver peace, or development, while they serve interests that run counter to Palestinian independence.