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Investing in Palestine

I arrived Saturday afternoon in Port Moresby, the capital of Papua New Guinea, after a week on the West Bank and a 36-hour voyage that started in Ramallah, the West Bank city that serves as the administrative capital of the Palestinian National Authority, and involved eight time zones, five airports, four flights, three airlines, and two bags, which missed my connection in Sydney but arrived two days later on the Monday Air New Guinea flight. The only bright spot was when Emirates Airlines upgraded me to first class on the nine-hour Bangkok to Sydney segment, which entitled me to a private suite nearly as big as my first apartment in New York, plus as much 2000 Dom Perignon as I cared to drink.

I was in Palestine to help the Palestinian Investment Promotion Agency (PIPA) develop a new strategy and corresponding organizational structure.  I am not going to talk about “the Palestinian Question” here, I promise. It’s been making people crazy for at least 3,000 years (the Arabic word for Palestine is “Philistine”), and if people as smart as Tony Blair and George Mitchell can’t come up with anything intelligent to say about it I am not even going to try. It reminds me of the old question, beloved of preadolescent Catholic schoolboys:  “Sister, Sister, if God is all-powerful can he make a rock so heavy he can’t lift it?” We have our answer. With respect to Israel and Palestine, He has already done so.

It is refreshing, therefore, that the Palestinian Prime Minister, Salam Fayyad, first appointed in 2007 and reappointed in 2009, has adopted an entirely pragmatic approach to improving the lot of people in Palestine which, although it doesn’t ignore the wider political realities, concentrates on practical measures to develop the economy and create durable institutions. In his August 2009 working plan for the Palestinian National Authority, entitled “Palestine – Ending the Occupation, Establishing the State,” Prime Minister Fayyad sets out a two-year working plan to develop the infrastructure and institutions of a state, including separation of powers, a stock market, and a free market economy.

Regardless of the eventual outcome of the “peace process” – if that term has any meaning any more – Mr. Fayyad seems determined to avoid using the Israeli occupation as an excuse for failure. People have told me word has gone out that any form of violent protest will be suppressed ruthlessly by Palestine’s own security forces, so as to deprive Israel of any pretext for clamping down further on movement within the West Bank and between the West Bank and Israel, or on the limited freedom and autonomy the Palestinian Territories currently enjoy. In the near term, this promises to bring benefits for the Palestinian people in the form of increased investment and employment. In the longer run, demonstrating that Palestine can be a responsible and peaceful neighbor could soften Israel’s stance towards Palestinian statehood. This approach makes so much sense it’s hard to understand why it hasn’t been tried before.

There are some signs that this approach is already paying off. Ramallah and its environs are bustling with new construction. Some huge projects are underway, including a $700 million Qatari and Bahraini investment in a new planned city north of Ramallah, expected to house 40,000 people and to attract a further $800 million in investment over the next five years.  In keeping with traditions of the region, people tend to put their savings into real property, but other sectors are growing.  The Palestine Securities Exchange, with daily trading volume of around $2 million and a market capitalization of $2.4 billion, is tiny, but it has 39 listed companies including banks and insurance companies, real estate developers, IT companies, hotels, pharmaceuticals and medical device manufacturers, food and beverage companies, construction firms, and diverse manufacturers.

Ask most Americans or Europeans what they think of when they think of Palestine, and rock-throwing youth, Molotov cocktails, Israeli tanks and bulldozers, and suicide bombers are likely to top the list. These images have reflected the reality at certain times over the past 40 years or so, but it can be hard to credit them when you are sitting in a café eating a pizza and drinking a perfectly decent Palestinian Cabernet or a local Taybeh beer. Most women on the street wear the hijab head covering, but very few are fully veiled, and a sizeable minority goes uncovered. Ramallah is a pleasant city of tan stone buildings sprawled over numerous steep hills separated by steep ravines.  The roads are reasonably well maintained, though many are built at impossibly steep grades that would never be permitted in the U.S. There is poverty, but nothing like the African or South Asian variety. People go to work and go shopping and sit in cafes and restaurants in the evenings, and life seems remarkably normal.

The financial crisis has, perversely, helped Palestine. The Dubai financial crash has sent a lot of people home, some involuntarily but others attracted by increasing opportunities, a lower cost of living, and the chance to live close to family and friends.  One investment house manager told me he has recently lured back three people from Dubai, paying them about half what they were earning before, and he says there are plenty of others willing to take a big pay cut to return.

It may sound like a cliché, but Palestine’s greatest asset is its people, many of whom provide the management and technical skills that keep the Gulf economies going. Remittances, mainly from the Gulf, account for an estimated 15% of Palestinian GDP. Much of this goes to support a standard of living that the domestic Palestinian economy cannot sustain, but this could change, increasing the pool of capital available for productive investment. The wider Palestinian Diaspora, which includes 40% of Jordan’s population as well as large numbers of people who work in the West and carry American or Canadian passports, is a potential source of know-how and capital.

Palestine is probably not going to become the next emerging market star, a Middle Eastern tiger, any time soon. Absent a political solution to the wider Israel-Palestine question, Palestine cannot become a “normal” country. As long as the current state of hostility between the relatively peaceful and stable West Bank and the chaotic, Hamas-ruled Gaza strip persists, a true Palestinian state will remain elusive. But by concentrating on the quotidian instead of banging their heads against the big picture, the Palestinians may just achieve more than they did with 40-plus years of struggle.

If you’re now asking yourself “How can I invest in the coming Palestinian miracle?” it is possible. Shares in the Palestine Dedicated Fund, an open-ended mutual fund managed by Global Investment House of Kuwait, which invests in listed securities and IPOs in Palestine, is available to anyone with at least $50,000 to invest who doesn’t mind paying a front-end load of 2.0% (less for investments of more than $1 million), annual management fees of 1.5%, and 25% of any returns in excess of 25%. Not that there is much immediate risk of that; the fund’s current NAV of around $83 per share is down more than 30% from its May 2008 peak. You can buy shares from Global itself or from Lotus Investments in Ramallah.

Disclosure: none