Spreading the Wealth

This article from the Associated Press caught my eye earlier this week. The semi-official Palestine Investment Fund is teaming up with Abraaj Capital of Dubai to start a $50 million private equity fund specifically devoted to investing in the Palestinian economy. $50 million is a little more than 1% of Palestine's GDP...so the potential impact is huge.

I think it's a positive move. I have long puzzled over why the Gulf, with all its oil wealth sloshing around with nowhere to go, doesn't put more of that money where it's mouth is. These states are vehement supporters of the Palestinian national cause. None of them recognize Israel and Saudi Arabia especially is considered a key player in brokering any final deal with Israel.

But for all their bluster, I wonder that these governments don't devote more of their state-controlled oil wealth toward strengthening the Palestinian economy in preparation for its ultimate independence. Salam Fayyad, Palestine's prime minister, has embraced this strategy, setting a two-year time horizon for developing an economy that can survive on its own. Israel certainly hasn't made this easy for the Palestinians: there are still ample roadblocks to economic growth, not the least of which was Israel's devastating attacks on Gaza at the beginning of 2009. But in the case of the West Bank, at least, the economy has recently flourished. While the rest of the world languished in recession through 2009, the West Bank's economy grew at 5.5%. As long as the peace with Israel remains intact, growth in the territory is likely to continue, setting Palestine on a course toward economic viability and (possibly) statehood.

This strikes me as an arena where the Gulf states can have a real impact, especially while political negotiations are deadlocked. The governments in the region have huge wealth to deploy through their sovereign wealth funds. They can't invest it all (or even most of it) in their own economies because of the risk that this would spur inflation, crippling other industries that they are trying to establish. So they have to deploy this capital abroad. Although they have mostly tended to look to the West, especially Europe, for investment prospects, the funds should consider sourcing deals closer to home.

Moreover, for these sovereign wealth funds, a little can go a long way. $50 million may be a big drop in the bucket of the Palestinian economy -- but it is minuscule compared to the holdings of these funds, some of which manage hundreds of billions of dollars.

It is somewhat ironic that the Gulf investment institution behind this new private equity fund is Abraaj Capital, which hails from oil-poor and debt-ridden Dubai. Perhaps, though, its move will strike an example for some of the other funds in the region.

People often talk about the Middle East as a poor and backwards region. It certainly is not the latter and only parts of it are the former. With so much wealth collecting in the Gulf, the managers of these assets should consider how they can use their economic power to effect positive change in their less well-endowed neighbors. Investing in Palestine's economy is an obvious first step.