Israel’s Prosperity Will Benefit Peace, Neighbors

Israel’s economy is about to surge forward once again, and because of that there is hope that the peace process in the Middle East will translate into economic development for the region.

In Israel, the newly elected government of Prime Minister Ehud Barak believes the economy can return to the 6%-a- year growth that it enjoyed in the early ‘90s, a bounce back from the 2% and less of recent years.

And this time, rising prosperity in Israel’s advanced economy is likely to spur development of the much poorer Palestinian, Egyptian and Jordanian economies around it.

That hasn’t happened before. Enmity and distrust between Arab nations and Israel has discouraged economic cooperation, of course. Also, Israel’s technology-driven economy--with annual output per person that is 11 to 12 times that of Egypt, Jordan and the Palestinian areas--has little in common with those of its neighbors.

But now cooperation appears to be on the rise, and that’s a good sign. Because Israel’s own development holds many lessons for its neighbors--and because rising living standards may in and of themselves finally foster peace in the Middle East.

Construction has begun for a joint Israeli-Jordanian airport project on the Red Sea and for an Israeli-Palestinian industrial park in the Gaza Strip. A cross-border industrial plant--similar to maquiladora arrangements between the U.S. and Mexico--is under construction at Bet Shan on the Jordan River.

U.S. industry is getting involved. Commerce Secretary Bill Daley recently led a delegation of U.S. companies and institutions to the region.

One company on Daley’s tour, Enron International, the Houston-based energy company, signed an agreement in June to build a power plant in Gaza in partnership with the Palestine Electric Co. and Palestinian investors.

Cedars-Sinai Medical Center of Los Angeles has opened a tele-medicine center in Tel Aviv, from which patient information such as electrocardiogram and CT scan data can be transmitted by computer and video to Los Angeles and consultations and diagnoses made long-distance.

The Santa Monica-based Milken Institute is devising new ways for Israel and its neighbors to finance infrastructure development, including water projects in which Palm Desert-based U.S. Filter, a subsidiary of France’s Vivendi, is involved.

In Egypt, Gov. Gray Davis this week will visit a 100,000 acre Saudi-backed irrigation and agricultural project that is being operated by Sun World International, the Bakersfield-based subsidiary of Cadiz Land of Santa Monica.

All that activity is occurring against a backdrop of Israel’s emergence as one of the liveliest high-tech economies on earth. Hundreds of entrepreneurial companies have sprung up in Israel. Almost 100 of them trade on U.S. stock exchanges and Nasdaq, including Check Point Software Technologies, a network systems company, and Galileo Technology, a supplier of semiconductor devices.

But Israel has not always had such an advanced economy--it had to create it out of political and economic changes that are still evolving. The country was created less than three generations ago as a frankly socialist state with large segments of its industry controlled by a labor federation.

Because of its needs for heavy defense spending, Israel had a government-dominated economy until 1985, “when inflation hit 450%,” recalls current Finance Minister Avraham Shohat. That’s when Israel began to change. Banks were privatized, and government industries sold to private investors.

Israel always had skilled people, because it spent 12% of its national budget on education even as defense commanded 15%. Then, with the addition of skilled immigrants from Russia in the early 1990s, Israel’s economy took off, sending exports to Europe, Asia and the United States.

But problems nearer to home continued. The West Bank and Gaza swelled with Palestinians who had been expelled from Kuwait after the Gulf War. Terrorism rose, and Israel cut Palestinians off from jobs in its territory. “We had more than 150,000 Palestinians working in Israel and the number dropped to 50,000,” says Shohat. They were replaced in construction and other jobs by contract workers from China and Thailand.

Now, says Shohat, Israel wants the Palestinians to have such jobs again. He is aware that 50% of the Palestinians and the population of Jordan are under 16. A powder keg is threatening if those young people can’t find work. “It is better for us if living standards can rise for the Palestinians,” he says.

Shohat, 63, a civil engineer who also served as finance minister in the early ‘90s administration of since-slain Prime Minister Yitzhak Rabin, knows that progress on peace helps the Israeli economy.

After the Oslo accords between Israel and the Palestinians were signed in 1993, international companies increased investment in Israel. But the peace process went into cold storage after Rabin’s 1995 assassination and the election of the opposition party that followed.

Now, with the a new Israeli government improving relations with its neighbors, investment is flowing again. Shohat points to a new $1.6-billion microprocessor fabrication plant opened by Intel, which has long had a major presence in Israel.

There is no doubt of the opportunities in Israel, says economist Glenn Yago of the Milken Institute. He is helping Tel Aviv float revenue bonds on the 64 parking garages it owns so the city can get cash for other municipal purposes. Mayor Stephen Goldsmith of Indianapolis is counseling both Israeli and Palestinian communities on water conservation. He explains how his pioneering privatization of water treatment facilities in Indianapolis conserved water and lowered costs.

But peace and modern finance can have even more dramatic effects among the mostly poor Arab nations. For they too have been held back by the burdens of war and wasteful expenditure. The brutal fact is that the 200 million or so people of the Middle East constitute 3% of the world’s population but their countries account for roughly 9% of the world’s military expenditures.

And the people of the Arab Middle East have the potential for far more advanced economic lives. Egypt and Palestine traditionally have provided the physicians, accountants and managers for the oil-rich sheikdoms of the Persian Gulf.

With peace and international investment, the potential of those people could finally be encouraged.

That’s the promise that Enron, Merck & Co., Lucent Technologies, Cedars-Sinai and other firms that accompanied Daley to the Middle East see ahead. May others come to share the view.

James Flanigan can be reached by e-mail at [email protected].

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A Region in Need

Gross domestic product and GDP per capita in U.S. dollars for major Mideast nations. Iraq is excluded because reliable statistics are not available:

*--*

GDP fiscal year 1999, GDP per Country in billions capita Israel $98.2 $16,100 Saudi 137.3 6,687 Arabia Palestinian 4.2* 1,499* areas Egypt 91.9 1,438 Jordan 7.8 1,297 Syria 18.0** 1,133** Iran 49.5** 744**

*--*

*Figures are for fiscal 1997, the most recent available.

** Currency translated to dollars at market, not official, rates.

Sources: WEFA Middle East & Africa Service, Milken Institute.