Divestment – The Untold Story

By David Blewett
National Director, the National Christian Leadership Conference for Israel

The National Christian Leadership Conference for Israel (NCLCI) is a coalition of Protestants, Catholics and other Christians who are pastors, priests, professors, writers, broadcasters and community leaders. The coalition exists to encourage and develop understanding and support for the people, land and state of Israel in the North American Christian community.

In July 2004, the 216^th General Assembly of the Presbyterian Church (USA) addressed several issues that dealt with the Middle East conflict, one of those issues has dominated public discussion for the past several months. In an attempt to move the Palestinian cause from words to action, the Presbyterian General Assembly voted 431 to 62 to direct the church’s committee on Mission Responsibility Through Investment to look into the possibility of selective divestment of church holdings in multinational corporations that do business in Israel. Use of the word “divestment” set off a fire storm of protest from a wide variety of Christians and Jews, including a large number of Presbyterian pastors, professors, and lay people in churches, colleges and seminaries throughout the country and in Israel.

At the October 2004 meeting of the NCLCI Executive Committee, Dave Blewett presented the following paper on divestment, which was unanimously approved by the NCLCI Executive Committee.

divestment – what is it? 
Simply put, divestment is when international groups remove financial support from select companies in order to promote certain behavior or policy. Over the past several years there have been many divestment actions against a wide range of issues, such as sweatshop labor, use of landmines, chemical and tobacco companies. But undoubtedly the best known example of divestment occurred in the 1970s and 1980s in response to the apartheid regime of South Africa. Some employees of groups that had investments insisted that their financial interests – retirement funds, mutual funds, investment institutions – sell their stocks (divest themselves) from companies that did business with South Africa.

It was a generally accepted assumption that as public knowledge grew about the injustices and horrors of apartheid, the public would react and exert such intense pressure on invested companies that eventually, for the sake of the company, its shareholders or owners would pull the company’s investments out of South Africa causing a massive destabilization of the country’s economy that would ultimately force the government to give in to the public demand and put an end to apartheid. Recent studies are indicating that there is more to the story.

divestment – the South Africa connection 
Divestment proponents compare Israel’s policy toward the Palestinians to South Africa’s control over its non-white majority population, an offensive and irresponsible comparison. Francis Boyle, the self-acknowledged founder of the divest from Israel campaign, stated his case this way:

Concerned citizens and governments all over the world must organize a comprehensive campaign of economic disinvestment and divestment from Israel along the same lines of what they did to the former criminal apartheid regime in South Africa. This original worldwide divestment/disinvestment campaign played a critical role in dismantling the criminal apartheid regime in South Africa.

A worldwide divestment/disinvestment campaign against Israel will play a critical role in dismantling its criminal apartheid regime against the Palestinian People (sic) living in occupied Palestine as well as in Israel itself.”[i]

Those who argue for divestment continually refer to Israel’s “apartheid” policy in order to arouse the same passionate hatred for Israel that was used against the white government of South Africa. South Africa’s Archbishop Desmond Tutu makes this link explicit when he says things like, Zionism has “very many parallels with racism,”[ii] or “Israel is like Hitler and apartheid.”[iii]

The difference between South Africa and Israel could hardly be more obvious. Apartheid was a repugnant practice that legally allowed one race to suppress all other racial classes of people. In Israel, there is no legal distinction between citizens, all Arabs and Jews are equal.

Arab and Jewish citizens of Israel have the same voting rights, including the right to organize political parties, the right to run for and the right to hold public office. Arabs currently hold 11 seats in the 120-seat Knesset; they have served, and are serving, throughout the government, including in some of the highest-level appointments in the Foreign Ministry and the Judiciary. As Alan Dershowitz pointed out in the Jerusalem Post, “Israel’s Supreme Court is the only court in the Middle East where an Arab can actually win a case against his government.”[iv]

Arabic is one of the official languages of Israel, Hebrew is the other. More than 300,000 Arab children regularly attend Israeli schools. At the time of Israel’s founding, there was just one Arab school in the country, today there are hundreds.

Under apartheid, black South Africans were not even considered citizens of the country in which they were the overwhelming majority. Laws dictated where they could live, work and travel. And, in South Africa, the government imprisoned, and often killed, those who protested its policies. By contrast, Israel allows and protects freedom of movement, assembly and speech for all people.

The international divestment campaign against South Africa was specifically directed at companies that were using the country’s apartheid racist laws to their advantage. In Israel no such laws exist; companies doing business in Israel must comply with the same standards of equal working rights that exist in the United States.

Divestment advocates bunch all Palestinians together, regardless of whether they are citizens of Israel or live in the Palestinian territories. They ignore the attitude of Israel’s Palestinian citizens toward their national home. When it looked as if a Palestinian state might actually become a reality in 2000, before Yasser Arafat rejected Israel’s offer, thousands of Israeli Arabs signed a petition to the government asking to remain citizens of Israel if a Palestinian state were to actually be created.[v]

The situation for Palestinians living in the Palestinian territories is quite different. Israel’s security requirements and a violent Palestinian insurrection in the territories have forced Israel to impose restrictions on Arab residents in the West Bank and Gaza Strip. Palestinians in the territories have typically rejected Israel’s right to exist; blacks never sought the destruction of South Africa, only the apartheid regime.

Even before the State of Israel was established, Jewish leaders deliberately sought to avoid the situation that prevailed in South Africa. David Ben-Gurion addressed this concern in 1934 when he spoke to Musa Alami, a noted Palestinian nationalist:

We do not want to create a situation like that which exists in South Africa, where the whites are the owners and rulers, and the blacks are the workers. If we do not do all kinds of work, easy and hard, skilled and unskilled, if we become merely landlords, then this will not be our homeland.[vi]

divestment – does it work?
Those who are promoting the divest from Israel campaign would have us believe that the divestment campaign against South Africa was instrumental in ending apartheid there. In one sense they are right. There were those companies that chose, for a variety of reasons, to withdraw a total of $12 billion that had been invested in the country, a move that most economists cite as the main reason for South Africa’s 1988-1993 recession. However, the assumption that public pressure could force targeted companies to divest their holdings is not so clear. 

Proponents of divestment suggest that public pressure exerted on targeted companies lowered those companies’ stock prices, forced them to comply with the divestment activists’ demands and thereby disrupted the South African economy to the point that the government had no choice but to submit. In 1996, a study in the Quarterly Review of Economics and Finance considered that question and found that, contrary to the generally accepted assumption, “stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave.”[vii]

Another study, conducted in 1995 by Siew Hong Teoh, Ivo Welch and C. Paul Wazzan, came to the same conclusion:

“We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernable effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a “sideshow.”[viii]

Professors Matthew Haigh and James Hazelton, in a study published in the Journal of Business Ethics expressed their basic agreement with that conclusion: “In their current forms, both [shareholder advocacy and managed investments] lack the power to create significant corporate change. Shareholder advocacy has been largely unsuccessful to date.” And once more, for emphasis: “Fundamentally, however, addressing social problems by targeting individual firms, either by way of shareholder activism or [socially responsible investment] fund investment, is not likely to result in systemic changes.”[ix]

Another consequence of divestment, pointed out by Professors David Beaty and Orin Harari,[x] is that if divestment were to take place in Israel, it could be quite beneficial for local investors who would be able to capitalize on the “cache of grossly undervalued capital” that would flood the market if pressured companies decided to divest. Instead of eliminating businesses that are collaborating with the Israeli government, proponents of divestment would probably just cause targeted companies to sell their regional assets to local businesspeople at bargain prices, and the new owners would be free to continue making the same equipment as before, and for tremendous profits.

Divestment – who really pays the price?
There is, it seems to me, a rather significant question that those who support the idea of divestment from Israel are not asking – who really suffers from divestment? The South African experience teaches that divestment might help change policy, but it has a very poor record of actually improving the welfare of the people it intends to help. If proponents of the current Israeli divestment campaign really want to help Palestinians, they should consider the likely impact of divestment on an already struggling economy.

One must understand that the Israeli and Palestinian economies are highly intertwined. Before the current intifada both economies were booming, as the benefits of working together were finally being realized. Palestinians working in Israel supplied nearly a quarter of all the Palestinian labor income, the highest ratio of GNP/GDP differences for nations 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. In this movement of Israeli goods to the Palestinians and Palestinian labor to the Israelis, the territories enjoyed positive GDP growth rates in the late 1990s, unemploy-ment fell from about 26 percent to 12 percent and the Palestinian economy employed more Palestinians than Israel's. It is one of the tragedies of recent history that this brief period of peace did not last.

It is an unavoidable economic fact that the intifada, now in its fifth year, is wreaking havoc on the Israeli and the Palestinian welfare. According to Israel’s coordinator of activities for the territories, Major General Yaakov (Mendi) Or, “If the current situation continues, the gross domestic production of the PA will decline by about 25 percent of its normal rate.”[xi] The free movement of both Palestinian labor and Israeli goods across the borders is essential to the Palestinian economy and important to the Israeli economy. The Israeli economy has been suffering, not just from the drop in tourism, but also from the closure of access to one of its largest trading partners. The World Bank addressed this issue in a 2003 economic report:

Between 1968 and 2000, Palestinians in the West Bank and Gaza pursued a development strategy that featured the export of labor rather than goods. In June 2000, three months before the current Palestinian intifada began, 21 percent of all employed Palestinians worked in Israel, mainly in low-skilled construction and agricultural jobs. Net incomes from abroad provided more than 21 percent of Palestinian GNI, making it one of the most remittance-dependent economies in the world. This is why the loss of jobs in Israel in the past two years has had such a strong impact. Put another way, the intifada has demonstrated the vulnerability of a development strategy that relies so heavily on labor exports to Israel.[xii]

In other words, as the Israeli economy worsens, so does the Palestinian’s in a vicious downward cycle.

And so it is not at all clear how divestment of American funds from Israel, America being the source of Israel’s biggest investors, can help an already unstable region. If there are no jobs in Israel for Israelis, the prospects for Palestinians are even worse; Israelis certainly will not be able to employ Palestinians from the territories if they themselves are struggling financially. And don’t look to the Arab world for help – only three percent of Palestinian exports ever went to the Arab bloc.  

conclusion
All of this indicates that the divest from Israel campaign seems to have more to do with creating anti-Israel emotions and headlines than with practical economic advice. It seems to me that if advocates of divestment want to be taken serious they will need to present hard evidence that will demonstrate the effectiveness of divestment as a tool for direct political change that really helps the oppressed, or tailor their claims to recognize that divestment is nothing more than a symbolic immoral antisemitic gesture.

This whole issue of divestment has recently taken on a new and interesting twist as fourteen members of Congress wrote to Clifton Kirkpatrick, the Stated Clerk of the Presbyterian General Assembly and expressed their “terribly distressed” reactions to the church’s recent decision. Also, the Commerce Department is now investigating the divestment issue to see what makes it different from other attempts to support the Arab boycott of Israel and therefore illegal according to US law.