How Does Violent Conflict Affect Investment Location Decisions? Evidence from Israel during the Intifada

Time-series data from Israel are used to investigate the dynamics of the causal links between the intensity of the Israeli–Palestinian conflict and capital flight. A number of dimensions of the conflict are considered, including Israeli and Palestinian fatalities, the incidence of Green Line border closures and growth of Jewish settlements in the West Bank and Gaza. Capital flight is measured as (the growth of) the fraction of their physical capital wealth that Israelis hold overseas. The fraction of Israeli capital wealth held outside the country exhibits considerable variation over time; so do indicators of the intensity of the Palestinian–Israeli conflict, even before the upturn in violence in September 2000. Using quarterly time-series data, the article shows that there is a high correlation between the two, conditional on economic conditions. This correlation is a consequence of a causal link that runs in both directions: more violence leads to more capital flight, but more capital flight is also a predictor of higher future levels of violence. Both effects are evident in the data even before September 2000. Under certain assumptions about the properties of the economic time-series, it is possible to infer from these results the amount of income that Israel would gain as a result of a complete cessation of violence.