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Divestment not the answer
by Matt Gillum

[This article was written by Matt Gillum, a Trinity senior at Duke University. It appeared in the Duke Chronicle on October 6, 2004, and could be viewed originally at the following link.]

In a recent guest column on these pages, Fayyad Sbaihat, the national spokesperson for the Palestine Solidarity Movement, claimed that critics have avoided discussing what he sees as the principal aim of his movement—persuading universities and other institutions to sell their shares in companies "that provide the Israeli army with weaponry that are used to kill innocent civilians and violate the basic livelihood of others." He is correct. To date, no one in our community has publicly evaluated the probable effectiveness of this sort of sale. He makes three main factual claims on the subject.

  1. "Critics shy away from debating divestment for the lack of a rationale by those who oppose it. In reality divestment is the way out for Palestinians and Israelis and has proven successful in South Africa, India, and other countries."
  2. "Divestment is potentially the most effective non-violent tactic that would prepare the atmosphere for peaceful resolution, where the outcome is not dictated by military might."
  3. Divestment will end "the apartheid-like regime against the Palestinians."

Sbaihat seems to suggest that the divestment movement in South Africa was instrumental in ending apartheid there, presumably by lowering the stock prices of targeted companies which led them to withdraw and thereby disrupted the economy and encouraged the government to capitulate. In 1996, a study in the Quarterly Review of Economics and Finance examined exactly this question, and it found that—contrary to intuition—firms that remained in South Africa did better in terms of stock price than firms that listened to social activists and left, lending support to the idea that divestment may provoke the opposite of its intended effect (Lytle and Joy 1996). Another study in The Journal of Business came to the following conclusion:

"We find no support for the common perception—and often vehement rhetoric in the financial media—that the anti-apartheid shareholder and legislative boycotts affected the financial sector adversely: The announcement of legislative or shareholder pressure had no discernible effect on the valuation of banks and corporations with South African operations or on the South African financial markets" (Teoh, Welch, Wazzan 1999).

In an article titled "Financial Markets: A Tool for Social Responsibility?" in the Journal of Business Ethics, Matthew Haig and James Hazelton agree: "Fundamentally, however, addressing social problems by targeting individual firms, either by way of shareholder activism or SRI (socially responsible investment) fund investment, is not likely to result in systemic changes" (Haig and Hazelton 2004).

Another demonstrable consequence of divestment about which Sbaihat probably would not be too pleased is the fact that divestment, were it to happen in Israel, would be 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 leave (Beaty and Harari 1987). Instead of eliminating the businesses that are collaborating with the Israeli government to bad ends, champions of divestment would very probably just cause these companies to sell their regional assets to resident entrepreneurs at bargain prices, and these new owners would likely continue making the same equipment for tremendous profits.

If proponents of divestment had taken the time to do research into the details of their movement, they would probably arrived at the same conclusion as Keaempfer, Lehman and Lowenberg, who published a paper in International Organization titled "Divestment, investment sanctions, and disinvestment: an evaluation of anti-apartheid policy instruments" that argued that in order to prevent local investors from taking advantage of divestment, it would be more effective to limit new investment than coerce corporations into selling their holdings (Keaempfer, Lehman and Lowenberg 1987). But, as is obvious by now, PSM intellectuals have not spent much time doing research.

In fact, to the best of my knowledge and effort, no scholarly work exists suggesting how divestment was "successful" in South Africa or how divestment is "your peaceful way to put an end to the suffering of both peoples" or how—based on experience in other countries—divestment will end the "apartheid-like regime against the Palestinians."

What we are faced with now is the prospect of a conference on our campus that advances a principal tool of political activism that may be entirely ineffective. If this is true, then we are wasting our time thinking about the PSM as a practical movement because even if it succeeds in convincing universities and mutual funds to divest their shares from certain companies, this will have a negligible effect on Israel's government and economy, and may even have salutary consequences. If the PSM hopes to be taken seriously, it must present evidence demonstrating the effectiveness of divestment as a tool for direct political change, or tailor its claims in such a way that recognizes divestment as a symbolic, or dubiously moral, gesture only. Otherwise, by the grandiose words of its spokesperson, it has condemned itself to irrelevance.

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