The Devil in Divestment

Divestment will hurt Palestinians as well as Israelis.

By Brad Hershbein

“The divesting numbers are going to be substantial for MIT and Harvard, but if there exists a cost for supporting human rights, I am fine with that.” So speaks Nancy Kanwisher, Harvard Professor of Brain and Cognitive Sciences. Echoing her sentiment are 129 members of the Harvard and MIT faculties and hundreds of students at both schools who have signed a divestment petition urging their school to pull out any funds in companies that do business with Israel. In response, many people opposed to the concept of divestment from Israel have created a counter-petition rejecting the calls to divest.

Of course, none of this debate is startlingly new. In recent weeks, Harvard's campus has been subjected to Larry Summers' pontifications equating an Israeli divestment drive with anti-Semitism and Alan Dershowitz's “debate” with Winthrop House Master Paul Hanson over the issue. While students and faculty alike have been quick to discuss and question the morality of American and Israeli policy-whether or not Harvard should divest-almost no one has mentioned the economic and socio-political effects divestment is likely to produce. But what kind of effect is the mass withdrawal of capital likely to have on Israel? While proponents will argue that this threat is the whole point of divestment-to force an entity to change its policies if it wants (or needs) a foreign supply of money-it is a crude argument that doesn't consider who ultimately bears the cost and for how long.

In reality, the effects of such a campaign could be economically devastating, and not just to the intended target. Professor Kanwisher is correct when she maintains that supporting human rights comes with a price tag; however, it is not the endowments of Harvard and MIT that are going to take the biggest hit. Advocates of divestment would do well to realize just how much damage their weapon is capable of dealing to the working people of the region and Palestine itself.

WHITE (CAPITAL) FLIGHT

Unfortunately, since the only successful target of divestment has been South Africa, scant empirical evidence of its economic fallout exists. In the mid 1980s, students at university campuses throughout the United States began to exert pressure on their school endowments to divest from companies that profited from South Africa's apartheid policies. In fact, they had begun to exert pressure a decade earlier, but their pleas initially fell largely on deaf ears. Indeed, even though about 155 universities adopted some form of divestment plan, only about 40 instituted total divestiture. Harvard, for example, despite having more than $500 million ($750 million in today's dollars) invested in companies doing business in South Africa, only divested from the few companies that refused to obey the Sullivan Code, which mandated equal employment opportunities in South Africa. Still, the public pressure on South Africa eventually caused scores of companies to remove some $12 billion invested in the country, ultimately leading to the end of apartheid in the region.

But at what cost to the people of South Africa? The World Bank keeps the data on such trends, and the figures are telling. During the end of the divestment period, 1987-1997, while overall GDP was slowly growing, the more important measure of GNP per capita fell at an average rate of 1.1 percent-the average South African was getting poorer. Furthermore, the growth rates of the capital-intensive industrial sector plummeted: general industry shrunk from 1.6 to 0.3 percent a year, and manufacturing from 2.0 to 0.4 percent a year. With a population growth rate remaining at a fairly high 2.6 percent, jobs were not being created fast enough for all the new entrants into the workforce; unemployment, already high at around 25 percent, increased further to 38 percent. While correlation does not necessarily imply causation, these figures taken with another showing that gross domestic investment (which includes all monies invested in the country) also fell at four percent annually throughout the 1980s-that would be the direct effect of divestment-do present a strong case that the foreign capital flight hindered South African growth. Indeed, international economists primarily blame South Africa's 1988-1993 recession, the longest in its history, on the political divestment movement.

Of course, I have focused on the costs of South African divestment to their economy, not because I believe they outweighed the long-term political benefits (I obviously do not), but because many proponents of divestment think that ousting apartheid was the ultimate purpose of the movement, and, that being accomplished, nothing further needs to be done. Since the regime change in 1994 following the end of apartheid, the conditions of the non-white majority of South Africa's citizens have improved little, with the white population still earning about half the income despite comprising only 12 percent of the population. While this trend of income inequality is beginning to change as foreign investment slowly returns to the country, it will not disappear until the African majority receives commensurate levels of education and skills training, and that may take billions and decades more.

EIGHT MILES AND FALLING FAST

The lesson to be learned from South Africa is that divestment can be effective in changing policy, but it has a poor track record in actually improving the economic welfare of the very people it is trying to help. If we make the assumption that proponents of the current Israeli divestment drive are motivated by a wish to improve the lot of the Palestinians, then their technique becomes pragmatically questionable. If, on the other hand, they are motivated by a desire to punish Israel for mistreating the Palestinians, then their technique is morally questionable because it seeks to harm one group rather than help another. This latter interpretation is what Summers meant when he bluntly called the divestiture movement anti-Semitic.

Of course, a direct comparison between the economies of South Africa and the Palestinian Territories is no more accurate and acceptable than a comparison between the treatment of blacks in South Africa and that of Palestinians in Israel. The Palestinian population, while poor and often living in Third World conditions, is better educated and in better health than South Africa's non-white population, so there exists an infrastructure for employment and economic growth. The fact that there has been little of either is often used as an argument that Israeli policies must be to blame. Instead, while such policies certainly play into the equation, blame could also be placed on the Territories' lack of geographic cohesion and size. But one must also understand that the Palestinian and Israeli economies are inexorably intertwined. Before the current intifada, Palestinians working in Israel supplied a full quarter of all Palestinians' labor income, the highest ratio of GNP/GDP differences for nations of their size in the world. Eighty percent of Palestinian imports come from Israel, and 95 percent of Palestinian exports go to Israel-another ratio that is highest in the world. The Territories enjoyed positive GDP growth rates in the late 1990s, and unemployment fell from about 26 percent to 12 percent. Of course, this has all changed within the past two years.

It is unavoidable economic fact that the intifada and reactionary Israeli policy have hurt Palestinian welfare. The free migration of both Palestinian labor and goods across the two borders is essential to the Palestinian economy and important to the Israeli economy. Yes, although it's hardly as newsworthy as the latest suicide bombing or tank invasion, the Israeli economy is suffering not just from a precipitous drop in tourism, but also from closure of trade with one of its largest trading partners. And, as the Israeli economy worsens, so does that of the Palestinians in a vicious cycle.

Thus it becomes unclear how divestment from Israel by American sources, which constitute Israel's biggest investors, can do much help to an already unstable region. The threat of divestment, if carried out successfully, would compel companies to pull out of Israel, which would hurt investment, growth, and income there, which would in turn further hinder investment, growth, and income in the Palestinian Territories. Even if Israel succumbed to the economic pressure and changed its Palestinian policies (which it might do after the next democratic election, anyway), the capital flight would likely have set domestic industries back about a decade, and Israel would probably have to crawl out of a depression similar to the one that South Africa just recently escaped. Of course, during all this time, the Palestinians will hardly be having a renaissance. If there aren't jobs in Israel for Israelis, the prospects for Palestinians would be laughable, and Israelis certainly won't be buying Palestinian goods when the value of the shekel goes down the toilet. Nor will the Arab world for that matter: only three percent of Palestinian exports go to the relatively closed (excepting oil) Arab bloc.

A NEW HOPE

For divestment to be a credible threat, its proponents must be willing to go through with it. But doing so will almost certainly hurt the Palestinians. Advocating divestment in the face of this evidence is akin to using a grenade in a hostage situation. Yes, you might take out the bad guy, but the weapon is indiscriminate, and you are bound to kill those whom you're trying to protect.

So what's an idealistic yet determined liberal to do? What policy can convince Israel to change without hurting the average Palestinian or Israeli citizen? Well, if one is primarily concerned about the plight of the Palestinians, there might be a positive approach available. In fact, possibly the best way for the international community to improve Palestinian welfare is to assist in the development of the private sector. Essentially, instead of calling for divestment from Israel, proponents should be advocating for investment in the West Bank and Gaza. And by investment I do not mean foreign aid (which is controversial due to terrorism links in some circles), but actual investment: purchasing Palestinian bonds, improving trade networks, and establishing foreign company presence. These reforms would create jobs and a market for Palestinian goods and services while giving a (responsible) Palestinian government the resources to refine the infrastructure required for economic growth.

In the end, it comes down to a question of swords versus plowshares. Obviously, no one will benefit if the governments are not wholly committed to improving conditions for their citizens. But, when given the choice between an option in which neither party is guaranteed to gain and one in which both are guaranteed to lose, I think the choice is pretty clear.

Questions? Comments? Please contact perspy@hcs.harvard.edu