Start-Up Palestine: How to Spark a West Bank Tech Boom

Yadin Kaufmann. Foreign Affairs. New York, Volume 96, Issue 4. July/August 2017.

For decades, Israeli and Palestinian politicians have pursued a political solution to the Arab-Israeli conflict, only to see their hopes dashed again and again. Today, the prospects for a comprehensive peace agreement remain dim. Policymakers must therefore start looking for other ways to improve the situation on the ground and preserve the possibility of a two-state solution.

Creating a viable Palestinian economy will be central to this effort. Should the Palestinian economy collapse, that failure would hurt Palestinians and their neighbors just as much as a failed political state would. And it would jeopardize their future as well, since no peace deal will succeed unless the Palestinian economy is able to stand on its own.

The idea of economic development as a precursor to peace is not new. But so far, efforts to boost growth have largely failed. Per capita GDF in the Palestinian territories is currently just $2,000, and a quarter of the labor force is unemployed. What growth the economy has achieved has come primarily from foreign aid and cash remittances from Palestinian workers abroad. And that aid-which in any case has done little to create good, high-paying jobs-has been declining since 2012.

As the economy has stagnated, a sense of despair has grown among many Palestinians. Such hopelessness, combined with the already volatile mixture of religious extremism, a large population of young people, and a stalled peace process, could prove extremely dangerous.

To break out of this trap, the Palestinians must look to private industry, not external aid agencies or the territories’ bloated public sector, to drive growth. More specifically, technology start-ups offer the best path forward. High-tech start-ups create well-paying jobs and support growth elsewhere in the economy while avoiding many of the roadblocks that prevent other Palestinian businesses from succeeding.

That said, the Palestinians cannot create a thriving technology ecosystem by themselves anytime soon. Israel and the United States will have to help. If entrepreneurs, engineers, and venture capitalists from all three places work together, they can generate prosperity and hope for millions of Palestinians-and perhaps improve the dimming prospects for peace.

Investment Opportunity

The West Bank has a small technology sector, but it is already changing the economy. As recently as five years ago, the territory had no venture-backed start-ups. Today, it boasts several local investment funds and accelerators, and multiple international funds have made initial investments in the territories. At least 15 start-ups have received some funding and are developing products and services aimed at foreign markets, primarily in the Gulf states. Thanks in part to these companies, the Palestinian technology sector now employs around 8,500 people, up from 5,000 in 2011. The sector now accounts for over six percent of Palestinian gdf and is growing at around ten percent each year.

Most Palestinian technology companies are relatively young, having been founded in the past five years. And that youth is an asset: although most start-ups fail, those that succeed go on to create more jobs than established firms and generate great wealth for their founders and key employees. In the Palestinian territories, each new job in the technology sector contributes $190,000 in economic output every year, compared with an average of $16,000 for jobs in other sectors. And technology jobs offer the highest wages: an average of $29,000 per year, compared with less than $6,000 for jobs in other parts of the economy. Thanks to those high wages, each technology employee helps create another three jobs-by eating out at local restaurants, buying goods in local stores, and purchasing new homes.

So far, however, the emerging Palestinian technology sector has not been able to create enough opportunities to turn the local economy around, or to stem the territories’ long-running brain drain. Every year, around 2,500 Palestinian students graduate with degrees in fields related to information technology. But since local technology jobs remain scarce, many of them must either leave their chosen profession or leave the territories. Both types of exoduses damage the economy.

This situation is all the more frustrating because a huge market awaits would-be Palestinian technology entrepreneurs. In recent years, Arabs in the Middle East have adopted new technologies faster than people anywhere else in the world. The number of Arabic-speaking Internet users has soared from an estimated five million in 2001 to more than 170 million today. The proportion of the population using smartphones in the countries of the Gulf Cooperation Council (GCC)- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates-is among the highest in the world. E-commerce is also growing quickly throughout the region. Frost & Sullivan, a consulting firm, has estimated that by 2018, it will reach $10 billion a year in the United Arab Emirates alone.

Yet Arabic-language Internet content has not kept pace; start-ups have only recently begun to supply the sorts of sites and services in Arabic that Western users have flocked to for years. Part of the problem is that Western technology companies don’t have a firm grasp of Arab cultural and purchasing norms; for example, few people in the Arab world use credit cards online. Western technology firms have generally avoided making investments in the region, preferring to focus on larger and more familiar markets closer to home or in Asia. Technology sectors have sprung up in recent years in several Arab countries, notably Dubai, Egypt, and Jordan, but they are still small.

If Palestinian entrepreneurs can find a way to fill some of these gaps, they will transform their society. To understand the potential impact, look no further than next-door Israel. In the mid-1980s, the Israeli economy still reflected the country’s socialist origins. Per capita GDF was around $6,000 in today’s dollars. Growth was sluggish, inflation was rampant, and the country’s best-known export was oranges. Today, by contrast, Israel’s per capita GDF stands at $36,000. The country has refashioned itself into a global technology leader with a concentration of entrepreneurial activity and success second only to that of Silicon Valley. Spurred by its excellent schools and universities, military conscription, strong links to the United States, and several government programs to encourage investment in high-tech start-ups, Israel has truly become the “start-up nation” about which Dan Senor and Saul Singer first wrote in 2009.

To be sure, the Palestinian economy is currently even weaker than Israel’s was in the mid-1980s. The territories also lack several elements that contributed to Israel’s growth: a powerful military that funds technology research; an influx of engineers and scientists from the former Soviet Union in the early 1990s; and, of course, sovereignty. The occupation and the persistent threat of violence drive talented young people away from the West Bank and Gaza, prevent many Palestinians from adopting advanced technologies, make traveling to and within the territories more difficult, and discourage foreign investment. What’s more, the Palestinian educational and legal systems are in dire need of reform; schools generally focus on rote learning rather than critical thinking, and local laws do not allow Palestinian companies to use various legal and financial tools, such as issuing preferred shares for investors or stock options for employees, that technology companies elsewhere rely on.

Still, Palestinian society today shares many similarities with preboom Israel. Like Israel in the mid-1980s, the Palestinian territories have a small domestic market and few natural resources, so growth must come from a well-educated work force that can export to the wider world. Like Israel, the West Bank and Gaza boast a young and educated population, a sizable network of well-placed expatriates working in technology companies, and access to a vast potential foreign market. Israeli companies have traditionally targeted consumers in the United States; Palestinian start-ups could target the 390 million inhabitants of the Arab world. The technology revolution in Israel has generated vast export revenues, attracted billions of dollars in foreign investment, invigorated the Israeli economy, and improved Israel’s global standing. Repeating the formula has the potential to do the same for the Palestinian territories.

Growth led by technology start-ups would allow Palestinians to evade many of the constraints currently holding their economy back. Selling digital services to the Arab world would reduce the Palestinians’ extreme dependence on trade with Israel, which today accounts for around 82 percent of exports from the territories. Digital exports would also largely avoid Israeli security restrictions on shipments of physical goods. And political tensions would not have a significant impact on technology companies, since they generally don’t require large investments or government involvement. A few talented people with an idea and some seed capital can form a start-up quickly, and largely on their own.

Build It, and They Will Come

The idea that the technology sector could lead Palestinian development is not as fantastic as it might sound: several Palestinian start-ups have already developed products aimed at export markets and are growing fast, offering living proof of what others can hope to achieve.

So far, most Palestinian start-ups have taken models that have worked elsewhere, such as online hotel booking, and customized them to suit Middle Eastern markets. No Palestinian technology company has yet achieved the ultimate goal of technology firms: selling themselves to a larger corporation or going public by listing their shares on a stock exchange. But several are making rapid progress, and such “exits,” as they are known in the tech world, will come. When they do, they will provide a major boost to the entire sector. A few successes will encourage more talented young Palestinians to start businesses and tempt others who left for greener pastures abroad to return, bringing valuable experience back with them. Once investors see an investment in a Palestinian technology company turn a profit, more capital will flow into the region. The founders and employees of the first wave of start-ups will take the experience and networks they’ve built and start new ventures. Multinational companies will take notice and establish joint enterprises with Palestinian start-ups, invest in them, or even acquire them as a way to increase their market share in the Middle East. This is the way of technology ecosystems everywhere; the same virtuous cycle powered the development of Silicon Valley and the Israeli high-tech boom.

Start-Up Region

The Palestinian technology sector is unlikely to complete this cycle by itself anytime soon, however, and the region can’t afford to wait. The territories’ educational, legal, and regulatory systems need reform. Israeli restrictions on movement into and within the territories hamper business and restrict some foreigners, especially Israelis, from visiting. Worst of all, Palestinian entrepreneurs currently work in near isolation. No multinational technology company has an office in Ramallah, and foreign executives rarely visit. And to date, only a handful of experienced Palestinian expatriates have returned home. The typical Palestinian entrepreneur has never worked at a technology company and does not know many people who have. Finally, there are few experienced Palestinian technology investors who can make introductions and advise novice founders.

This is where Israel can help. Israel’s technology sector has benefited hugely from cooperation with the established technology and financial ecosystems in Silicon Valley, in the Route 128 area around Boston, and on Wall Street. Countless Israeli engineers studied in the United States, gained experience at leading U.S. companies, raised funding from U.S. sources, partnered with U.S. firms for development and marketing, sold their businesses to U.S.-based companies, or took them public on the Nasdaq.

Israel can play the same role for aspiring Palestinian entrepreneurs today. The country is home to outposts of 300 of the world’s leading multinational corporations, including such giants as Amazon, Apple, Facebook, Google, and Microsoft, most of which have already acquired Israeli companies. The Israeli R & D operations of Cisco, Microsoft, and others have begun to work with Palestinian developers; many others will find natural partners across the Green Line.

Hundreds of Israeli entrepreneurs have already completed the journey from idea to exit and thus can provide contacts and mentoring. Some of them operate in the same sectors as Palestinian entrepreneurs, such as e-commerce, Internet services, and gaming, and so can help them access and understand international markets. Israeli venture capitalists, some of whom represent the leading Silicon Valley funds, can provide funding and support.

Best of all, cooperating to build Palestinian start-ups is in Israeli’s self-interest. Unlike the political negotiations between the Israeli and Palestinian governments, business dealings are not zero-sum. Israeli technology companies are largely shut out of the huge Middle Eastern market, as a result of cultural, legal, and political barriers. Partnering with Palestinian companies-whose employees speak Arabic, understand Arab cultures, and in some cases have worked in Gulf countries- could change all of that.

Experienced Israeli entrepreneurs could also employ Palestinians directly. Israel’s booming technology sector has created an extremely competitive market for talent, making educated West Bank developers attractive to Israeli employers. These _ employers also understand the benefits of creating jobs for those nearby rather than bringing in workers from, say, India or eastern Europe at a similar cost. Again, a few bold firms have already shown the way. In 2012, for example, Zvi Schreiber, a British Israeli serial entrepreneur, founded Freightos, an online freight marketplace aimed at simplifying the logistics of the global shipping market. The company has raised venture capital fundi ng from several international investors, including Sadara Ventures, a firm I co-founded. Most recently, in early 2017, Freightos raised $25 million from a group of funders led by GE Ventures. Schreiber decided to build his R & D team in Ramallah and recruited a Palestinian engineer, Fareed Qaddoura, who had spent years in senior positions at Amazon in Seattle, to be the company’s chief technology officer. Today, Qaddoura manages a team of several dozen engineers in Ramallah and Jerusalem for the fast-growing company.

Such companies reveal the potential for cross-border cooperation. Although Israeli and Palestinian entrepreneurs have vastly different life experiences, they face many of the same challenges, and they know that they have a stake in each other’s future. Entrepreneurs everywhere tend to shun ideology in favor of pragmatism. And many Israeli entrepreneurs understand that Palestinian economic development will reduce political tension-and thus is in their country’s interest as well as their own.

Over the past three years, the Palestinian Internship Program, which I started in 2014, has brought several dozen recent Palestinian university graduates in engineering and finance to Israel for three-month internships at multinational and Israeli companies. The program helps interns gain valuable skills and contacts, while also benefiting their host companies and changing Israeli attitudes. The signs of the shift aren’t hard to find. A decade ago, when I first started working with Palestinians in the technology sector, friends and colleagues typically thought I was crazy. “What could you possibly be looking for in Ramallah?” they asked. Today, many Israelis get it. Once they hear about the technology story unfolding in the Palestinian territories, they see the hope such programs represent. People no longer ask what’s wrong with me. Instead, they ask, “How can I help?”

Foundation for Peace

Economic growth will not solve the Israeli-Palestinian conflict on its own; only a political solution can address Palestinians’ aspirations and Israelis’ concerns about security. But a solid economic footing and business partnerships across the border would help politicians reach a deal and ensure that a future Palestinian state endures.

Palestinian economic development, especially if it comes in part from working with Israelis, would also isolate violent extremists and strengthen those Palestinian factions that favor a two-state solution. Indeed, it would create important lobbying groups for a political settlement on both sides of the Green Line. The experiences of Northern Ireland and South Africa show that lobbying by businesspeople can help bring peace. The same could work for the Israelis and the Palestinians.

Bilateral business relationships can undo the damaging mythpromoted by partisans on both sides-that there is “no partner for peace.” Many Israelis currently blame the Palestinians for responding to the 2005 Israeli withdrawal from Gaza by attacking Israel with rockets rather than by building their own economy. Were the Palestinians to focus on entrepreneurship today, that might begin to change Israelis’ minds. Those Israelis who help Palestinian technology businesses will also help change attitudes on the other side, among a people who have come to see Israelis as only soldiers and settlers.

Of course, changing such attitudes will not be easy. Many Palestinians believe that until the Israeli occupation of the West Bank ends and a Palestinian state is established, Palestinians must refrain from doing anything that treats the status quo as normal. This position has deterred many Palestinian businesspeople from openly cooperating with Israelis.

But those who believe in a two-state solution should strongly support cooperation. Palestinian-led boycotts of Israeli goods and services have not had a significant economic impact on Israel-but they have helped condemn the Palestinian economy to slow growth. Some Palestinians still fear that those Israelis promoting economic cooperation with Israel are hoping to buy them off by trading prosperity for their acquiescence in the continued Israeli occupation of the West Bank. Yet Palestinians need not waive their political demands in order to work with Israeli technology companies and investors. On the contrary, increased business interaction will make Israelis more sympathetic to Palestinian aspirations, since they will be hearing about them directly from their business partners.

Although many Palestinians might prefer to find other partners to build their emerging technology sector, only the Israelis can provide the necessary knowledge and assistance in the near term. Distance, fear, and ignorance combine to ensure that there is little appetite among technology entrepreneurs outside the region for engaging deeply in the Arab Middle East. Few people are even aware that a Palestinian technology ecosystem is beginning to emerge. Silicon Valley is far away, and its investors and entrepreneurs are busy with what they see as larger opportunities. Europe, although closer, has struggled to develop its own start-up culture.

Some Israeli businesspeople may worry that, whatever its potential, cooperation with Palestinians remains too risky given the ever-present threat of violence. In the technology sector, however, this concern is mitigated by the fact that colleagues can communicate remotely and share their work without having to move physical products. Israelis themselves have addressed similar concerns from international partners in recent years by noting proudly that during periods of conflict, Israeli start-ups continued to deliver their products on schedule, even as missiles rained down on Israel.

America’s Role

Although most of the responsibility for developing the Palestinian economy lies with those who live in the region, the United States can and should play a crucial role, both by working directly with Palestinian technology firms and by acting as a bridge to Israel. U.S. companies should collaborate with local partners to develop, customize, and market products and services in the Middle East. U.S.-based multinationals should consider opening R & D centers in Ramallah. American firms should help Palestinian companies market their products abroad. And American engineers, financiers, and executives should offer mentorship to Palestinian entrepreneurs and their employees to fill the gaps in their international networks and experience.

Washington should also do its part, by drawing on a successful program it launched four decades ago: the Israel-U.S. Binational Industrial Research and Development Foundation, or bird, to which Israel and the United States each contributed $55 million in 1977. Bird introduces Israeli start-ups aiming to develop a new product or service to large U.S. companies and then provides grants equal to 50 percent of the development costs, with the remainder coming from venture capital funds and other sources in the private sector. The program has been a runaway success. It has poured millions of dollars into Israeli start-ups, enabled U.S. companies to provide valuable know-how to fledgling Israeli ventures, and supported projects that have generated billions of dollars in revenues.

The U.S. government should replicate bird’s success by establishing a similar foundation to provide matching funds for new business ventures that include a Palestinian company and an Israeli or U.S. company. U.S. technology companies could participate through the R & D centers that many of them have already established in Israel.

This model would be both cheap and easy to implement. Given the low cost of labor in the West Bank, $50 million would suffice to sustain the program for several years. The United States could provide part of this sum by redirecting some of the over $200 million in annual bilateral assistance it currently provides to the West Bank and Gaza. Since this would not involve increasing the foreign aid budget and the approach has proved so effective in Israel, the Trump administration should consider it a cheap way to fulfill Trump’s promise, made at a press conference in May with Mahmoud Abbas, President of the Palestinian Authority, to work to “unlock the potential of the Palestinian people through new economic opportunities.” The U.S. government could also ask GCC countries to contribute, especially as many of the products built by the resulting ventures will flow into Middle Eastern markets. Support from the GCC would be crucial, as it would make participating in joint ventures with Israeli companies more publicly acceptable for Palestinian firms.

Neither the Palestinian Authority (which lacks the resources) nor the Israeli government (whose involvement would complicate matters politically) is likely to provide financing. But getting the Palestinian Authority to officially bless the program would increase the likelihood that Palestinian entrepreneurs and other Arab entrepreneurs and governments will accept the idea. To facilitate collaboration, the United States should ask Israel to loosen restrictions on Israeli, Palestinian, and foreign technology workers wishing to cross the border-and remind Jerusalem of all the ways that doing so would be in its interests.

Over the past two decades, U.S. and Israeli politicians have come up with various ideas designed to boost the Palestinian economy, from building industrial parks to creating the $4 billion investment program announced by U.S. Secretary of State John Kerry in 2013. Yet all these plans have failed; they proved too complex or too expensive to work. Supporting technology start-ups, by contrast, would cost little and could start tomorrow. The risks would be low and the payoff enormous: should the Palestinians, helped by Israel and the United States, succeed in building a technology ecosystem that powers Palestinian economic growth, they will reduce their reliance on foreign aid, improve the lives of millions of people, and help lay the groundwork for lasting peace.