• Business

A National Economy Without the Nation

11 minute read
Stacy Perman / Ramallah

This city’s historic landscape of rolling hills and groves of knotty olive trees is undergoing something of a transformation. Multistory villas fronted by ornamental porticos and columns are rising on Ramallah’s hilltops along with glass and marble office buildings. There are newly paved roads. The city’s first five-star hotel, a Mövenpick, is opening this month.

Across the West Bank, similar scenes are unfolding. Building cranes pierce the sky. Outside Nablus, new car dealerships sell everything from BMWs to Hyundais. Inside the ancient city, the first movie house to open in 20 years, Cinema City, is hugely popular. Last year the Hirbawi Home Center, a five-story shopping mall selling luxury items like plasma TVs, opened just outside Jenin.

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Consumer goods are only part of the story. Industries from finance to housing to a high-tech sector are developing too. Such activity marks a fundamental political-economic shift among the ruling Palestinian Authority (PA) apparatchiks and the Palestinian business community, upending former PA President Yasser Arafat’s long-entrenched policy of nation first, institution-building later. The current leadership believes that creating a sustainable economy is essential to creating an independent Palestine. “We need to work on the economic front,” says World Bank veteran Mohammad Mustafa, CEO of the Palestine Investment Fund (PIF), a quasi-governmental financial institution. “It is part and parcel of the overall struggle toward statehood.”

Indeed, the IMF has reported that the Palestinian economy is on track to grow 8% in 2010. Israeli and Palestinian negotiators may equivocate over peace, but an economy is breaking out in the West Bank. Under Prime Minister Salam Fayyad, an American-educated economist and former Finance Minister, the PA has spearheaded an ambitious strategy to move away from subsisting on foreign-donor aid and toward attracting foreign direct investment to spur private-sector growth.

(See pictures: “Israeli Settlements: Palestinian Labor.”)

Just as important, Fayyad has vastly improved security, sweeping the streets of rogue militants, which has eased the movement of people and goods. Israel has responded by dismantling numerous checkpoints that also inhibited commerce. There’s also an effort to streamline the legal system — a quilt of Ottoman, Jordanian, Israeli and British mandate laws. It has all served to boost confidence in Fayyadism, as the host of initiatives in play is commonly referred to.

Mahmoud Ahmad al-Takruri, regional manager of the Housing Bank for Trade and Finance in Ramallah, says that one of the positive indicators in evidence is the lending climate. “The situation is more stable nowadays, and banks have more of an appetite to make loans,” he says — meaning, specifically, loans to the small and medium-size enterprises (SMEs) that are the backbone of the Palestinian economy. They make up roughly 95% of enterprises, 84% of the private sector and 55% of the GDP.

Feeding the Entrepreneurs
Mazen Shkukani’s oxygen gym on the fifth floor of a Ramallah office center is state of the art: it boasts the latest equipment, classes in spinning, kickboxing and Pilates, a sauna and even a smoothie bar. “We do very good business,” Shkukani says proudly. “We are a very famous gym. We have customers that come all the way from Jerusalem and other villages.” Oxygen is the third of five businesses Shkukani owns that were made possible by a series of loans he was able to obtain.

Born in Kuwait to a Palestinian family, Shkukani returned in 1987 to Ramallah, where he opened a children’s boutique and later worked for his family’s car-rental business. In 2004, a volatile year, the part-time bodybuilder saw an opportunity to import American-made nutritional supplements. Making use of his family’s business reputation and connections, Shkukani, along with a partner, secured a loan of $200,000 to launch his Sportline supplements line. A few years later, having closed out his initial loans, Shkukani opened Oxygen Gym with two partners. Each put in $143,000 and took out a $400,000 small-business loan. It was Shkukani’s largest to date.

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Last year, Shkukani obtained three more loans totaling $500,000 to expand his supplements business and to launch a snack-food distributorship, selling items like imported potato chips. More recently he opened Liberty, a used-car dealership. “Loans are for responsible people,” he says. “We help the economy for our country by making a successful business. This is how it is around the world.”

Emblematic of the current commitment to entrepreneurialism, the PIF, along with Abraaj Capital, a Dubai-based private-equity firm, announced a $50 million fund that will focus on SMEs. “We believe that the PIF investment program can have a huge transformative effect on the economy,” says Mustafa. “Moreover, the SME fund is great because the benefits exceed the funding to include the know-how that comes with it from the fund management.” The PIF plans to invest $500,000 to $7.5 million in companies with less than $50 million in revenue or fewer than 250 employees or both.

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It’s an acceleration for the PIF, which for five years has very quietly partnered with the Middle East Investment Initiative (MEII), a Washington-based nonprofit formed specifically to stimulate the region’s fragile economies. MEII has been fueling ventures in the West Bank with a loan-guarantee program in excess of $200 million. The process of vetting the loans is heavily monitored not only for a business’s viability but to ensure that the money is not going to finance terrorist groups, money laundering or weapons purchases. In the past 21â„2 years, MEII has approved more than 322 loan applications totaling more than $63 million in guarantees. While the average loan is about $120,000, the largest, one of $16 million, went to the first competitive cell-phone system in the West Bank.

This being the Middle East, there is always a wrinkle. Because of enduring distrust of the U.S. and cynicism regarding aid, the process is managed so that applicants have no idea their loans are being supported by a third party — namely an American organization.

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The IT Plan
Behind glass on the third floor of the Burj office tower, 30 people are pressed into a small conference room. They are attending a seminar on open sourcing conducted by a representative from Intel and sponsored by the Palestinian Information Technology Association, better known as PITA. On the same floor, six start-ups share space as part of the Palestine Information and Communications Technology Incubator, or PICTI. There, Emad Ahmad, a filmmaker from Rafah, Gaza, is developing a program to digitize film archives. Emad Ammouri, who earned a master’s in computer science from Texas A&M University and later worked at IBM and Timex, is creating an Internet toolbox to make, as he says, “microchip-embedded systems more friendly.” Ammouri has also begun teaching innovation courses to high school students and launched an innovation camp for fifth-graders. “We can do it,” he says. “Why can’t a Palestinian company innovate for the world?”

With 4,000 engineering graduates each year and a trickle of returning expats, many are looking at tech as a potential economic engine. According to a recent study, the Palestinian IT sector grew from roughly $130 million in 2008 to $231 million in 2009. Significantly, because tech is not dependent on physical movement, it is somewhat insulated from checkpoints, closures and political unrest.

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After earning degrees from the New Jersey Institute of Technology, Ala Aladdin returned to the West Bank in 1996 and started a company, Bailasan (which means flower in Arabic), a Web-development and graphic-design firm. In 1999, Aladdin helped found PITA with a group of 24 companies to lobby for the fledgling sector. Today there are more than 100 companies in PITA, and one of its major accomplishments has been to bring the world’s biggest tech companies to the region. “It was important to transfer know-how and build infrastructure,” says Aladdin. Representatives from companies like Microsoft began to arrive, cautiously, offering workshops. Eventually, those workshops expanded into weeklong conferences. But tech leaders wanted more than seminars; they wanted real investment.

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Two years ago, their lobbying paid off. Cisco, the $40 billion U.S. networks company, gave a $10 million grant for seed-funding tech start-ups in the West Bank and Gaza. Initially part of Cisco’s corporate-social-responsibility initiative, the investment turned out so well, the company is converting it from a CSR investment into businesses. Cisco plans to work with Palestinian IT companies to bolster their ability to handle large outsourcing contracts from the U.S. and other countries. Recently Microsoft, HP and others have begun investing too.

The West Bank’s IT sector is also attracting pure venture capital. One fund that has come calling is the aptly named Middle East Venture Capital Fund. The fund, which has a reported $50 million target and some heavy-hitting backers, was started by a pair of high-tech veterans — Yadin Kaufmann, an Israeli, and Saed Nashef, a Palestinian.

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Kaufmann went to Princeton and earned a law degree from Harvard before emigrating in 1985 to Israel, where he clerked for the Supreme Court. At the cusp of the country’s high-tech revolution, Kaufmann joined Athena, Israel’s first venture fund. Surveying the Palestinian high-tech landscape, Kaufmann says, “I saw how Israel’s venture business impacted economic development. I started to think about doing something else to help in the region.” Kaufmann decided to launch a fund to invest in Palestinian high tech, but he needed a partner on the other side.

That would be Nashef. Born in Jerusalem, Nashef studied computer science in the U.S. and spent 19 years there, including a six-year stint at Microsoft. In 2006 he returned to Jerusalem and decided to take a year off with his family. That visit stretched into four years and counting. “I saw the beginnings of a technology and telecommunications sector,” he says. “I wanted to build something to contribute.” His tech consulting firm, Equiom, had been outsourcing software engineering to China, India and Ukraine, and Nashef says he thought, “Why not give a piece of that business to Palestinians?” He started with a three-person team in Hebron. The trio eventually replaced a five-person team from India. The math was basic: “They were higher quality and lower salaries.” That led Nashef to make it a permanent move and establish his Ramallah-based spin-off of Equiom, called Nena. “We’re not advancing an economic or political peace agenda,” says Kaufmann. “We are leveraging real opportunities.” Says Nashef: “At the end of the day, we are creating high-value jobs. We are giving people hope.”

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The Limits of Development
While there are promising signs of growth, economic development is no substitute for a political solution. The borders, airspace, water rights and communications are still under Israeli control; so is 60% of the West Bank. “We are not waiting for a political solution to move forward with economic development,” says one Palestinian banking specialist. “But the impact of these efforts is diluted when there is no parallel political movement. It is like a bird flying with one wing.”

The fragile state of affairs is not just contingent on Israel. There is a sharp divide between the Fatah government, led by Mahmoud Abbas and Fayyad, that rules the West Bank and the fiercely Islamist Hamas, which took control in Gaza in 2007. And Carnegie scholar Nathan J. Brown noted in a recent report that economic development has actually impeded some democratic and human-rights reforms. While Fayyadism is roundly praised among many Palestinians and in the U.S. and Europe — and even Israeli Prime Minister Benjamin Netanyahu has expressed his support — its progress stands on a very shaky footing. Says Said Abu Hijleh, managing director of DAI Palestine, a consulting firm: “There are still limits to how far you can go. I wouldn’t call this an emerging economy but a promising economy.” As tenuous as the current state-building is, it rests on the creation of institutions critical to any sustainable economy. And that just might be the start of a genuine Palestinian revolution.

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