The Jerusalem controversy: What it means for the region’s economies

U.S. President Donald Trump’s announcement last week to recognize Jerusalem as Israel’s capital and move the U.S. embassy to that city drew strong negative reactions from world leaders who saw it as hurting the peace process in the troubled region. Jerusalem is seen as sacred to Islam, Judaism and Christianity, and Palestinians have for years wanted the city to be the capital of their future state. In the week gone by, fears of a strong Palestinian uprising seemed overstated, and protests were largely muted.

At the same time, Trump’s move is unlikely to bring any serious consequences for the region’s economies or U.S. trade, even as the Middle Eastern states need to diversify their fortunes beyond oil. That is because outside of oil and gas, the Arab states have little trade or technology transfers with the rest of the world, according to experts. Ironically, Trump’s move could propel many Palestinians to abandon their dreams of a two-state solution and integrate into the Israeli economy, they said.

Wharton professor emeritus of business economics and public policy Howard Pack, Wharton finance professor Bulent Gultekin, and Camille Pecastaing, senior associate professor of Middle East Studies at the Johns Hopkins School of Advanced International Studies, shared their insights on the likely outcomes during a recent appearance on the Knowledge@Wharton show, on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

“Singapore has a population of less than 4 million, and yet it exports more manufactured goods in a year than all of the Arab countries put together, which is an astounding factoid,” said Pack. In contrast, the Middle Eastern countries have a combined population approaching a billion people, but they don’t produce much beyond primary commodities, he noted.

Lower oil prices have hurt the economies of countries like Saudi Arabia, and newer technologies in renewables or energy efficiency will put further pressure on them, said Gultekin. “The one-commodity countries will face difficulties as oil prices go down.” Pecastaing said some Palestinians feel less confident of a two-state solution and believe they would be better off with a single-state solution. “[Trump’s] move goes in that direction and [toward] absorbing Palestinians into the Israeli economy.”