Developing Innovative Economic Tools
by Ian Bomberg, assistant, Middle East Progress. Original Commentary for Middle East Bulletin.
Achieving a lasting Israeli-Palestinian peace requires simultaneous work along multiple tracks. High-level negotiations; implementation and monitoring of Road Map obligations, including freezing settlement construction in the West Bank and dismantling terrorist networks and building Palestinian Authority security forces; and supporting efforts to strengthen Palestinian institutions and the economy must occur side by side. Without the political horizon of a two-state solution, day-to-day improvements are not sustainable and without tangible signs of improvement in people’s lives, closed-door negotiations will not have the time needed to make progress.
Several economic projects—a loan guarantee facility, political risk insurance and supply chain management efforts aimed at creating tangible economic growth in the West Bank and Gaza—help provide important economic steps that link up with the other tracks to move the peace process forward.
In July 2007, President Bush recognized the link between improving realities on the ground and a sustainable peace and endorsed the U.S. Overseas Private Investment Corporation’s partnership with the Middle East Investment Initiative (MEII) and the Palestine Investment Fund to help generate up to $228 million in lending to small and medium-sized Palestinian businesses.
Since President Bush gave his support to this and other Palestinian development projects, there have been both improvements and setbacks to the Palestinian economy. Quartet Special Envoy Tony Blair, U.S. General Keith Dayton and then Special Envoy for Middle East Regional Security General James Jones, worked together to implement programs that have strengthened areas in the West Bank. The northern West Bank city of Jenin, chosen as a first test of this strategy, has begun to experience the impact of developing multiple tracks simultaneously. Economic projects, led by Blair, were implemented at the same time that Palestinian forces, trained by Dayton, assumed security control in the city. Jenin has improved under this plan, with growing law and order combined with increased economic development that have given its inhabitants a greater stake in the peace process.
Even with these improvements, the lack of political progress between Israel and the Palestinians has allowed endemic problems to persist. Gaza’s economy remains in shambles with Israel’s continued blockade of the coastal strip and the impact of the recent conflict. In the West Bank, movement and access issues continue to restrict the transfer of goods into and throughout the territory thus hampering the growth of the economy. These challenges ultimately require political solutions, yet some new economic tools, such as the MEII loan facility, have the potential to improve the Palestinian economy as the political process unfolds.
MEII, managed in Ramallah by CHF International, has started providing the needed backing for banks to lend to properly qualified and vetted Palestinian businesses that would have been unable to secure financing otherwise, encouraging the growth of these businesses. Banks previously issued loans based on companies’ collateral, in part because so few businesses have actual title to property, given complicated land and title issues in the region. No matter if the business retained a strong cash-flow structure, if the company did not have enough assets, often exceeding significantly the value of the loan amount sought; it was not eligible to receive loans. The MEII loan facility has provided the needed backing to participating banks to issue loans based on companies’ cash-flow thus expanding the number of companies eligible to receive loans.
As of November 2008, the loan portfolio consisted of 46 loans averaging more than $166,000 with no arrears or defaults on any of the loans. One $50,000 loan helped a garment manufacturer purchase twenty-two high-end computerized sewing machines to replace outdated equipment. This, in turn, has allowed the manufacturer to compete with less-expensive Chinese imports by producing more competitive and varied goods. The manufacturer has hired 30 new employees and uses the machines to serve as a training center to upgrade and enhance the sewing skills of others workers. Similarly, a $300,000 loan is being used to finance the construction of a new 40-room hotel. Once completed, the family-owned hotel will employ 25 people and will help improve tourism infrastructure in the northern West Bank.
MEII’s Palestinian Political Risk Insurance (PPRI) project is another tool that can address the needs of the private sector. Once implemented, PPRI will provide specialized risk insurance coverage for Palestinian businesses; it is designed to help exporters and investors mitigate risks resulting from trade disruption and political violence. First announced by President Clinton in September 2005 and later developed through a Clinton Global Initiative steering committee, PPRI is developing a new risk mitigation product designed to meet movement and access challenges for Palestinian companies exporting goods across checkpoints and crossings while offering incentives for improved supply chain management security practices.
Even with proper financing and political risk insurance, movement and access issues will need to be addressed to ensure long-term, sustainable growth of the Palestinian economy. PPRI’s innovative approach increases incentives for Palestinian businesses to follow modern supply-chain management practices. These practices require compliance with certain criteria including, but not limited to, hiring trained security guards, applying additional checks on employees and utilizing GPS tracking on shipments. They incorporate standard procedures that would be good business practice in any environment, and would allow for tracking of shipments throughout the entire export process.
This program benefits Palestinian and Israeli economic and security needs simultaneously. Businesses that follow these practices, with oversight and checks from agreed upon private sector international actors, could gain greater movement and access privileges at crossings, thereby reducing the problems resulting from delays and closures. This will be possible because security concerns are being addressed, since the new procedures would allow for more effective monitoring of goods passing into Israel. Instead of grouping all commercial goods into the same category, Israeli security forces will be able to focus their time and efforts on the most high-risk targets.
The success of these three initiatives—loan guarantees, political risk insurance, and supply chain management—depends on the willingness and commitment of Israelis, Palestinians and the international community. In the case of the loan facility, there must be a renewed focus on building on the program’s successes and drawing lessons from it for other projects. In the case of political risk insurance and supply chain management, these programs, once implemented, will need support from all parties for financial backing, training on-the-ground partners and providing oversight management and technical expertise. Not only will new economic tools be important in the West Bank, they will be essential in the rebuilding of Gaza following the opening of the crossings.
At the end of the day, economic improvement alone cannot create peace. A lasting agreement will inevitably come down to the individual leaders’ willingness to go that last step. To make these difficult decisions, however, leaders will need public support. The international community, Israelis and Palestinians must renew efforts to improve realities on the ground and in so doing provide the needed space for leaders to make those decisions. While the recent appointment of former Senate Majority Leader George Mitchell as U.S. special envoy for Middle East peace is a positive sign that the United States is willing to take on a more active role in the peace process, his work must encompass efforts to improve people’s day-to-day lives in combination with keeping a watchful eye on negotiations and on the two sides’ implementation of their Road Map obligations.