Elephant In The Room

We're currently in Southern Israel - having just visited Rehovot and now the Negev. As I've been on the bus for a while I've had time to reflect on the trip. Since arriving in Israel back in May, one topic that hasn't received a significant amount of attention (either from the speakers we've talked to, the companies we've visited, or on this blog itself) has been the issue of the business and economic conditions of both Israeli-Arabs and Palestinians. This is not to say that we haven't covered this issue generally, but this is an issue that (for a variety of reasons) hasn't always been the most comfortable or ready area of discussion.

"Some typical graffiti in the West Bank"
Photo by Stephen Kushner

To a large degree Israel's rapid economic progress of the past twenty years has been directed primarily towards Israel's Jewish communities. Oftentimes, Arabs (both Christian and Muslim) have been on the outside looking in (sometimes by choice and sometimes not) and even more so for the Palestinian populations of the West Bank and Gaza Strip (especially now that they are physically cut off from Israel by the Barrier Wall). This separation is clear when you drill down on the numbers. Income per capita among Arab-Israelis is one third that of the national average. For the Palestinian Territories, income per capita is one tenth that of Israel. It is not inconceivable to think that the future success of the peace process hinges on rapidly improving the economic conditions of these groups.

"A Palestinian woman in the city of Bethlehem"
Photo by Stephen Kushner

Regarding the Israeli-Arab population, Israel is looking to emulate the success of the government backed Yozma venture funds of the early 1990s. As such, they have launched the Al-Bawadir ("buds" in Arabic) fund in cooperation with Pitango Capital (see here). Al-Bawadir will invest approximately $50 million in Arab-Israeli ventures. The government provided $20 million, and Pitango general partners Nechemia Peres, Rami Kalish and Zeev Binman, along with various other private investors, provided the rest.  When we met with Chemi Peres last week (see here), this was an area he talked about as being the most critical component of Pitango's strategy going forward - and also an essential path to continued prosperity in Israel over the coming decades. Jerusalem Venture Partners and Viola Partners are also launching similar funds, which will begin investing in the next year.

In terms of the Palestinian population, Thomas Friedman of the New York Times recently discussed (here) the ongoing economic renaissance in the West Bank - which is paralleling the slow, but improving, economic improvements within the Israeli-Arab community - commenting that the changes ...

"initiated in the West Bank in the last few years under the leadership of Prime Minister Salam Fayyad, the former World Bank economist ... has unleashed a real Palestinian “revolution.” It is a revolution based on building Palestinian capacity and institutions not just resisting Israeli occupation, on the theory that if the Palestinians can build a real economy, a professional security force and an effective, transparent government bureaucracy it will eventually become impossible for Israel to deny the Palestinians a state in the West Bank and Arab neighborhoods of East Jerusalem."

One example that Friedman points to highlight the economic revival is the Palestine Exchange Board in Nablus, which was established in 1996 with 19 companies. It now has 41 with 8 more joining by the end of 2010. More to the point, this year the Al-Quds Index, which tracks this market has outperformed most other markets in the Arab world, as well as many markets in Europe and the United States. Hopefully - as I optimistically agree - this recent success - driven in no small part by the reforms of Salam Fayyad - offers positive signs for the rest of the Palestinian economy as a whole.

Over an over this summer, we've heard about the amazing "Start-Up Nation" that is Israel. Further, we've discussed and debated the characteristics that have enabled Israel to achieve its success. This prosperity and success though has been limited in its effect. The political and military conflicts are inextricably linked to economic conditions. For peace to ever succeed, it is in Israel's best interest if they look for ways to export their model to both their own Arab population, as well as to the Palestinian areas. Ultimately, the true success of the start-up nation may actually come in the next twenty years.

Obviously this issue raises many heated opinions on all sides - which I can't even hope (or have the ability) to address on this blog. That aside, I think from an economic standpoint there is a major question both sides need to address. For Israel, they must ask whether they have the desire and willingness to commit resources to improve the economic standing of the Arab populations (both in Israel and the occupied territories), even as they face resistance and hatred. For the Arabs and Palestinians, the question is, can they find positive purpose in a program of concerted economic growth and the building of a functioning economy and government, free of graft and corruption, rather than an existence centered on the negative (i.e. the destruction of Israel).

In both cases, I think the answer is yes. Perhaps I am naive or optimistic. Maybe, but I don't think so. There are at least groups like The Center for Jewish-Arab Economic Development, initiatives like Pitango Capital and Al-Badawir, and success stories like the Al-Quds Index. In the long run, I honestly believe that if Israel's economic success can be replicated (even partially), this will go a long way towards solving a lot of the regions problems.

Political Issues Ctd

Israeli politics are back in the news again - specifically in a way that is important to the United States. Since Barack Obama assumed the presidency in January last year, the Israel-US relationship has cooled considerably. After many false starts and canceled visits, Israel's Prime Minister, Benjamin Netanyahu, finally traveled back this week to Washington, D.C. for only his second meeting with his US counterpart, President Barack Obama. See below for a YouTube video of their Oval Office meeting from Britain's ITN News.

Hopefully the Obama and Netanyahu meeting will help begin to diffuse the rising level of animosity that has prevailed for much of the past year. Ultimately though, I'm certain it will take significantly longer for the average Israeli to begin to trust that President Obama has their (and Israel's) interests at heart. As the New York Time's reported yesterday:

Photographers clicked away in the Oval Office as Mr. Obama praised the prime minister as someone "willing to take risks for peace" and blamed the press for reports of discord. Mr. Netanyahu loosely quoted Mark Twain, saying, "Reports about the demise of the special relationship aren’t just premature; they’re just flat wrong."

As an American in Israel, the feeling among the Israelis I've met has been an adamant and clearly voiced dislike for our president. By all accounts, President Obama is persona non grata among most Israelis. Looking at the situation from my American perspective I definitely understand (though don't agree) with their assessment. As I've quickly come to find out, Israelis view our politics (and political leaders) only through the limited lens of how much we support (or don't support) their position regarding the Palestinian situation.

The perception (rightly or wrongly) is that President Obama is taking a more Pro-Palestinian stance than his predecessor George W. Bush. For Israelis that is unacceptable. It will be interesting to see how this issue (i.e. changing US-Israel relations) plays out over the coming months - especially as other more pressing regional issues (unrelated to Gaza, settlements in the West Bank, or the peace process generally) come to a head (e.g. Hezbollah and Lebanon, Iran's nuclear ambitions, American withdrawal from Iraq, etc.).