Commentary: MRTI – Impressive Talk about Unlikely Investment

CHICAGO—A concise and informative presentation on the economics of Palestine graced the recent Presbyterian Committee on Mission Responsibility Through Investment (MRTI) meeting in Chicago, June 1. MRTI member Bill Saint, who delivered the briefing, is an elder from Western Presbyterian Church in Washington, D.C., and also a member of the Advisory Committee on Social Witness Policy.

“I have spent most of my adult life working on development issues in Third-World countries,” he began. Saint has only recently retired from development work with the World Bank, living and working extensively in Africa and Latin America. He claimed little prior familiarity with or expertise on Israel or the Palestinian Territories, but he had obviously done his homework. Saint knew what he needed to know and where to find it. The result was an excellent, if sobering, briefing on a difficult state of affairs for hard-pressed Palestinians.

A Fragmented Economy
The economy of Palestine is unusual, according to Saint, because it’s quite fragmented. In most economies, one tries first to sell to the local market, but even that is difficult in noncontiguous territories broken up and cut off even more by barriers and checkpoints made necessary by terrorist activities.

Saint provided some economic facts and figures:

• “The size of the economy is estimated at about $4 billion,” Saint noted. For comparison, he pointed out that “That is about one-tenth the income of Caterpillar Corporation.”
• About one-tenth of the Palestinian income is derived from remittances or earnings of Palestinians working in Israel. “And Israel has been gradually cutting back on work permits granted,” Saint added.
• Only 14 percent of the gross domestic product (GDP) comes from exports, which Saint called “a low figure” for most economies. The percentage is also declining.
• About 70 percent of Palestinian “national” income is spent on imports.
• Palestine receives about $1.1 billion annually in foreign assistance, largely from Muslim Middle East countries. This works out to roughly $300 per capita.
• “In 2006, the GDP or national income fell by 26 percent, which is a huge drop for any economy,” Saint explained. “It was largely because of the Israeli decision to hold the tax revenues that it was previously collecting and sharing.” (What Saint didn’t say was the reason for holding the revenues—the election of a terrorist organization, Hamas, to lead the Palestinian Authority, naturally causing Israeli reluctance to further fund terrorism directed at its people. Many other nations are also withholding funding as long as Hamas controls the Palestinian Authority.)

Depressing Factors
“The Palestinian economy cannot have sustained growth under the current conditions,” Saint made clear. He identified four main reasons.

1. It is not a competitive economy. Noncompetitive factors include such things as the cost structure, no access to modern technology, and the inability to enter into business partnerships with others.
2. A high level of risk is created by Israeli security measures. It is terribly difficult to do business with checkpoints and closures disrupting the flow of goods, both the input stream of materials for manufactured goods and output for local markets or for export outside the country.
3. The governance mechanism of the Palestinian Authority is very weak. Institutionally, the government does not have a lot of capacity. Saint elaborated that the flow of revenue to the government would normally go to civil service salaries, but with the flow cut off, jobs and the capacity of the government to fund its activities diminish.
4. “Because of all of all of this,” Saint concluded, “there is very little interest anywhere in investing. There is no source of capital to grow the country.”

The economic problems are not difficult to explain. “If you are going to produce something in Palestine, most of what you need has to be brought in from the outside,” detailed Saint. “That procedure adds to the cost. Therefore, Palestinians pay more for commodities.”

MRTI member Bill Saint (left) listens intently as Don Kuespert comments on the Palestinian economy.

Transportation is a big problem. You need to be able to ship your products. Gaza has both a port and an airport, but both remain closed for now by Israeli authorities. On top of that, the West Bank is landlocked and relies on Israel for transshipment to points where the products can be exported. Palestinians thus retain no control over access to a market for their products.

And then there are meager communication abilities. Only 6 percent of the population has access to the Internet, and bandwidth and speed are probably not very good, according to Saint. Only about 2 in 5 Palestinians have access to a phone.

Saint had more bad news: Many normal stimulants to a national economy are not available to the Palestinian Authority. A nation can, if necessary, devalue its currency to make its exports more competitive, but the Palestinians can’t do that, because their currency is linked directly to the Israeli shekel. The Palestinian government can’t use government spending to lift the economy out of a depression, as Roosevelt did for the United States. The revenue crisis means there is no revenue to spend. With unemployment at about 28 percent and rising, the government dare not raise taxes. Some governments, such as ours, can adjust the prime rate for lending, but with so little production and such meager demand for investments, tinkering with the prime rate would produce negligible effect, Saint explained.

According to a World Bank report upon which Saint based his briefing, “the last six years of escalated conflict in the West Bank and Gaza have left the Palestinian economy mired in an economic crisis.” With an unstable government violently fighting within itself and against its neighbor state, a precipitous drop-off in foreign aid, and severe restrictions on the movement of people and goods, Palestine’s economic prospects are dim.

“In essence,” summarized Saint, “what this says is that Palestine has a hostage economy.”

Although the people are poor, they are relatively highly educated. Most children complete secondary school, and one-third go on to university, of which there are four within the Palestinian Territories. Family income is roughly $1,200 per capita a year, down about 20 percent in the last five years. Forty-five percent of the population lives below the one-dollar-per-day poverty line.

According to Saint, most firms are family-owned businesses. Businesses average about three employees, and 96 percent employ fewer than ten persons. Since 2000, firms have cut the number of employees in half, and three out of four are operating on lower capacity than in the past. Almost one out of five firms has closed since 2000.

One global indicator used by banks for assessing a country’s financial health is called “ease of doing business.” Out of 175 nations scored and then ranked for the ease of doing business, Palestine was number 127. Another indicator looks at bureaucratic red tape and inefficiency. It measures the number of days it takes on the average to start a business. For Palestine, it is 92 days, a little more than double the time it takes in the average Middle Eastern country.

In addition, other factors work against investment: A confusing legal structure, weak enforcement of business contracts, poor court protection for creditor rights, and a lack of clarity about land titles. Because of this, in the last couple of years, banks have been switching their credit lines into consumer loans, which they make to people on monthly salaries. As a result, there is a fairly high demand for investment funds, Saint noted.

What Can Presbyterians Do?
Saint didn’t have cheering words in summation. “The business environment is difficult and risky,” he warned. “The investment climate is bad. The problems are all political, not economic, and they’re not really that open to economic solution.”

“The result of this situation, I would propose, is that the Presbyterian Church is pretty unlikely to make a difference by focusing on economic activity, including positive investment. It may possibly make [church leaders] feel like they’re doing something, rather than nothing, but it’s not likely to make an impact on the Palestinian economy, and it may not even make any income for the church’s assets.”

In other words, if we press on toward investment for our sake, we may feel better. But it is not likely to help the Palestinians to any extent, and we could lose our shirt, due to the instability of the situation and very poor prospects for a return on investment.

Nevertheless, Saint was not satisfied with leaving MRTI in a depressed state. He had done some brainstorming and had arrived at five possible Presbyterian investment options to throw on the table:

1. Invest in the Palestinian stock market. “There is one,” he assured them, “a tiny stock market located in Nablus. It lists 27 possible firms, of which only seven are actively trading. So that’s seven possibilities.” An additional investment opportunity lies in Gaza, where the government has recently established with public capital an economic development company to provide investment for small firms.
2. Help capitalize a loan guarantee fund, in which our funds would help cover the risk to a bank for loans it would offer to businesses. “Two such funds already are functioning in Palestine,” Saint found, “and both are initiatives of foreign donors. So we could pick the best one and put some money into it.”
3. Get involved in micro credit. “Since most of the firms are so small, their credit needs are probably pretty modest,” Saint reasoned. “They also are the ones that most likely won’t come up with the collateral to get to the bank.” There are currently ten different programs offering micro credit.
4. Invest in the Islamic Development Bank. This bank is capitalized at about $2 trillion and operates very much like World Bank, according to Saint. The capital comes essentially from Middle-Eastern Islamic countries. In the last five years, it has made 11 loans to the Palestinian Authority, mainly for emergency assistance, such as housing reconstruction, getting hospitals operating, and new educational systems. “Surprisingly, every one of the projects is classified now as nonoperational,” Saint conceded. He wasn’t sure why, but wondered if it had something to do with deteriorating government capacity to implement these programs, or possible political reaction to the recent election of Hamas leadership.
5. Invest in Israel to benefit Palestinians. “If it is determined that the business environment in Palestine is just not conducive to any kind of investment,” Saint ventured, “then I wonder if there are niche investments that could be made within Israel itself for Arab or Christian Israeli Palestinians?”

“The logical conclusion,” Saint advised, “is that if we are going to do anything at all, we should work through a partner who is on the ground, someone we think is reasonable and doing what we want to accomplish.” It wouldn’t be a good idea just to drop some money and wish for the best. Any investment would require labor-intensive monitoring.

Toward the end of his briefing, Saint threw out a question about what money we’re talking about investing, when Presbyterians toss around the idea of investing in peaceful pursuits in Israel and Palestine. “What are we looking for?” he asked. “Do we intend to use our pension and foundation funds, or just grant money?”

“We don’t have any grant money!” was the reply he received from several other MRTI members, almost in chorus. In other words, the speculation about investment is basically a feel-good pipe dream anyway.

Presbyterians haven’t specified any funds actually to invest in Israel or the Palestinian Territories. That is the bottom line, since neither the Board of Pensions nor the Presbyterian Foundation is at all likely to cast aside fiduciary responsibility to venture out into high-risk, low-impact investments. At least, not while the officers and directors are stone cold sober!