WASHINGTON, DC – The October 7 terrorist attack by Hamas has rightly generated enormous sympathy for the people of Israel, especially given Jews’ history of persecution, culminating in the Holocaust. But the plight of civilians in Gaza since the attack is horrifying as well. Both sides need to support an immediate cessation of hostilities, followed by good-faith efforts to address the underlying issues.

That result will not be achieved by universities divesting from Israel – the main demand of student protests across the United States. Instead, divestment would significantly reduce endowment returns, which universities spend on financial aid and research activities. Equally important, divestment would undermine a university’s raison d’être: to seek truth. While staff and students can take political positions and demonstrate peacefully, universities should remain apolitical.

Rather than furthering their cause if they had persuaded universities to divest from Israel, student protesters undoubtedly would have caused harm to the institutions educating them. Universities enable discussion and debate about contentious issues, but doing so requires institutional neutrality. Siding with the protesters would have curtailed freedom of speech on campus.

Moreover, the financial cost would have been high. University endowments consist of myriad funds, often earmarked by donors for specific purposes, including scholarships, research funding, sports facilities, and many more. Endowment earnings also cover part of the cost of tuition at many colleges and universities, leading to a lower “sticker price.” Rice University, for example, did not charge tuition for decades, as its endowment revenues covered the full educational cost for each student. In 2022, four-year colleges and universities in the US allocated around 50% of their endowment income to financial aid. But once political criteria are introduced into investment decisions, prospective donors may be wary of future gifts.

In many ways, a decision to divest from Israel would be impractical for endowment managers, who are tasked with preserving the fund’s value and ensuring financial stability. There are often federal and state laws against boycotting countries friendly to the US. Moreover, managers tend to use stock indices like the MSCI All Country World Index and S&P 500 as investment benchmarks. The former has 0.25% of its equities in firms domiciled in Israel, and the latter none, which suggests that institutional portfolios have minimal exposure to Israeli companies.

An important reason why divestment would be costly, even where possible, is that endowments are increasingly allocating funds to external managers who commingle the assets of different clients. Universities would need to sell all their holdings in commingled funds in order to divest from the targeted stocks, and isolate those restricted components of the endowment that could not be sold. They would need to employ more managers to invest only in securities with no tainted activities, which would likely rule out multinationals – including tech companies – with branches in Israel.

Eliminating exposure to Israel would almost surely result in fewer resources for future students. Even if there were no losses on the sale of holdings, university endowments’ management costs would rise significantly, some of the world’s fastest-growing companies might be excluded from their portfolios, and donors might balk at further giving. And assuming a divesting university did have a large stake in a company with an Israeli connection, other shareholders would sell their shares in anticipation of a sell-off, thereby generating additional losses.

The US university system has long been the best in the world: American universities occupy 16 of the top 25 places in the latest Times Higher Education World University Rankings (only two Chinese universities made the cut). Ironically, that system is coming under attack at the same time that the US is increasingly seeking to shore up its competitive position, both economically and militarily. There is always room for improvement, but abandoning higher education’s commitment to open dialogue and inquiry would weaken an important national asset precisely at the moment when it should be supported.

Students who want to help end the Israel-Hamas war must recognize that divestment is not the way to do it. In fact, preserving and strengthening US universities can indirectly contribute to a lasting political solution to the Israeli-Palestinian conflict by educating young people and enabling them to achieve their goals. Public and private support for continued excellence and increased financial aid in higher education must therefore be at the top of the agenda. In this context, it makes no sense to weaken one of America’s sources of strength for the sake of a policy that cannot affect the war’s outcome.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University.

Copyright: Project Syndicate, 2024.