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The Economic Reality of Unilateral Declaration of Independence

For many of us in the Northeastern U.S., September is just another fall, with leaves in magnificent colors and kids going back to school. Yet, this coming September may be a different one. Those who follow Middle East politics hear about ‘The Black September’, a foreseen diplomatic Tsunami in the region following a Palestinian unilateral declaration in the United Nations. Other than it marking another milestone in the unsolvable conflict, why should we care? It’s the economy, stupid.

Let us be reminded of the political context. The last couple of weeks have experienced a wave of significant diplomatic speeches on both the Israeli and American fronts. Israeli Prime Minister, Benjamin Netanyahu, shared his vision regarding the future of the Middle East crisis and its solutions with U.S. President Obama and during a key speech to the U.S. Congress. Obama, on his end, in two key Middle East speeches presented his vision, encouraging the Israelis and Palestinians to negotiate bilaterally a peace agreement based on 1967 borders as a baseline.

Unfortunately, both parties, the Israelis and the Palestinians, have cherry picked the good and the bad in those speeches, leaving the parties of the matter in a diplomatic status quo of sorts instead of desirable bilateral negotiations. This has led to unilateral actions on both sides. The Palestinians are moving forward with the plan to declare a state unilaterally at the United Nations in September, while the Israelis are rejecting it fiercely in a global diplomatic response.

Unfortunately, any unilateral declaration will not change anything on the ground, and, if at all, will encourage the Palestinian Street to turn to violence as it follows meaningless U.N. resolutions with frustration. Arab neighbors, many of whom are still facing civil riots, may take advantage of these developments to divert global attention from ongoing local violence and governmental aggression. Iran might use it as an excuse to use its proxies in the region to exercise their powers. Clearly, a lot can be said on the unintended consequences of global diplomacy and nations’ race for self-determination, but not much has been said on the economic stakes in this diplomatic exercise.

The Israeli government has traditionally managed to differentiate between economics and politics. Being an economic miracle, the Israeli economy has continuously struggled with military and security challenges while running one of the most advanced economies in the world. A national-regional conflict, supported by economic sanctions driven by interventionist parties can have a significant impact on export-oriented companies in Israel, many of which are listed on the U.S. stock exchange and support Israel’s strong foreign presence in the North American capital markets.

On the Palestinian side, things are even more complicated. According to unofficial numbers there is about 4.5 billion dollar of trade annually between Israel and the Palestinian Authority. Although it does not sound like a lot in global terms, the Palestinians are heavily dependent on the Israeli economy. A direct conflict between the parties will destabilize the Palestinian economy and perhaps other linked economies in the region.

In fact, the current diplomatic tensions have a lot to do with the state of the Palestinian economy. Strong institutions and financial stability made the IMF announce two months ago that the Palestinian state is ready from a financial point of view. The complex tension between the relatively wealthy West Bank and poor Gaza Strip deserves its own separate discussion. Any conflict which will cause an irreversible harm to the Palestinian economy may undermine the economic fundamentals of the unilateral declaration in first place.

Recent studies showed that capital markets have not fully internalized the effects of the Arab Spring events. A September Tsunami may eventually lead to events that can both change this equation and which investors should follow closely in an already shaky macroeconomic environment.

Business people on the ground, on the other hand, seem to act ‘business as usual’. The promising Jerusalem Arbitration Center, a recently announced ICC arbitration center designed to foster business between Israelis and Palestinians who traditionally prefer to sell in cash, is just one of several ‘economic peace’ projects which believe in business in the region for the long-term.

Business people and economists have therefore the moral obligation to remind all of us that these potential events have unintended consequences. Diplomats and policy makers, on the other hand, should do their best to make sure that this coming September is a beginning of just another ordinary fall, with the right mix of apple picking and dropping temperatures.

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