The Economic Case for Peace in the Middle East

A venture capitalist on how both Israel and the Palestinians can benefit from making peace.

Yadin Kaufmann
Yadin Kaufmann
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Soldier near Hebron.
Soldier near Hebron.Credit: AP
Yadin Kaufmann
Yadin Kaufmann

Issues of morality, historical rights, and defense have long dominated the discourse regarding the importance of resolving the Palestinian-Israeli conflict. While these have a rightful place in the debate, the time has come – as a result of domestic developments in both societies - to make the economic case for peace. Continuation of the status quo is likely to result in worsening conditions for all involved. In recent months, some 300 leading Israeli and Palestinian businesspeople launched an initiative called “Breaking the Impasse” to encourage the political leaders on both sides to urgently negotiate a two-state solution to end the conflict.

From the Israeli perspective, the economic burden of building, maintaining and defending settlements and an ongoing military presence in parts of the West Bank has become increasingly difficult to bear in the face of an $11 billion budget deficit and impending sharp spending cuts. As a recent poll affirmed, a majority of Israelis favor cutting budget allocations to the settlements, rather than reducing spending on defense, social welfare, and education.

To be sure, substantial one-time costs will be incurred to relocate those settlers who fall outside the redrawn borders, and cuts in defense and settlement spending will be gradual, as the durability of peace is tested. Real regional threats – Syria, Iran, Sinai – will remain. But a peace agreement with the Palestinians, and the resulting improved regional environment, will enable Israel to reduce the current allocation of 7% of GDP to defense spending (2nd highest in the world after Saudi Arabia) in favor of social and economic development programs and education.

Ending the Palestinian conflict will offer increased opportunities for Israeli companies. The 350 million Arab consumers in the Middle East and North Africa are the world’s fastest-growing Internet and mobile markets, but currently are essentially off-limits to Israeli exporters. Whether selling directly or partnering with the Palestinian technology community, Israeli startups stand to gain important new outlets. Even larger and more remote Islamic markets – Indonesia and Malaysia, among others – are potential customers as well, especially if a peace agreement is backed by the 57 Islamic nations behind the recently reaffirmed Arab Peace Initiative.

Peace will usher in a new age for Israel’s tourism sector, as the perception of security threats, and of terror, diminishes. Notwithstanding its unmatched menu of religious and historical sites, entertainment opportunities, beaches and hotels, Israel today attracts fewer visitors than Albania or Iran. In addition to increased tourism from the West, a peace agreement will open the door to visitors from Islamic countries.

Finally, peace with the Palestinians will put an end to talk of economic sanctions against Israeli businesses from European Union members and others, and the improved atmosphere will help the Israeli government stem and reverse the “brain drain” that has seen many talented and sorely-needed academics, scientists, and engineers depart for the United States and Europe.

From the Palestinian perspective, peace with Israel will not only fulfill national political aspirations and restore dignity, but will have economic benefits that have become increasingly urgent and necessary.

Restrictions on economic activity and on movement of people and goods – while reduced in recent years as the security situation has improved — continue to impose significant costs on intra-Palestinian commerce and on exports.

Palestine today suffers from high unemployment – some 25% in the West Bank, and higher in Gaza. GDP growth has slowed, and the economy continues to be overly dependent on promises of foreign aid, many of which habitually fail to materialize.

Foreign investment is severely limited by the uncertainties and perceived risks of the status quo; with peace, it would help fuel development of the Palestinian industrial, agricultural, technology, tourism, and construction sectors. The plan announced last May by U.S. Secretary of State John Kerry to invest $4 billion in economic development activity in Palestine is a sign of things to come. And Israeli companies could provide employment to tens of thousands more Palestinian workers.

Palestinian firms could be natural partners for Israeli companies – and others – looking to export to the larger Arab markets, notably Saudi Arabia, Egypt and Iraq. The nascent Palestinian technology sector would find an experienced and willing partner in next-door Israel, with its highly developed technology industry. Israeli venture capital firms could provide much-needed financing, support, and know-how to export-oriented Palestinian entrepreneurs.

Increased economic opportunity in Palestine will encourage some of the many talented expatriates who left home, to return from the Gulf, the United States and Europe, to participate in building the economy of the new state.

Neither side will sacrifice its national and political aspirations and security requirements for the sake of economic well-being. The issues separating Israel and Palestine – security, borders, settlements, refugees, recognition and the status of Jerusalem – will need to be resolved, of course. But unlike those “zero-sum” matters, business can introduce a “win-win” element that can change the calculus of peace-making. Economic growth for one side is good for the other. Given peace, there’s no cap on the economic upside that Israelis and Palestinians can pursue, independently and together.

Business considerations may have more resonance on both sides today, given the challenging economic climate facing both populations. Alongside the ample moral reasons for ending the conflict, increased attention to the “peace dividend” that both parties stand to gain, should encourage Israeli and Palestinian leaders to make the difficult compromises necessary for peace.

Yadin Kaufmann, an Israeli venture capitalist, established the first venture fund investing in Palestine and is a member of the “Breaking the Impasse” initiative.



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