Jewish World Review Nov. 13, 1998 / 24 Mar-Cheshvan, 5759


Joel Bainerman



The economics
of "peace"


IT'S BEEN FIVE YEARS SINCE THE SIGNING OF THE OSLO ACCORDS in Washington. At the time, there was much hoopla about joint business ventures between the Israelis and Palestinians that, all hoped, would go far in bringing a stability to the region that would be more practical than ideological.

But a half-decade later, politics still plays a major role in keeping the two business communities apart: While Israel wanted to rush into such business relations, the Palestinians stalled. They believed that it would be in their best interest if foreign businessmen other than Israelis would be their partners.

Simply put: They were wrong.

Foreign businessmen have rejected outright business opportunities on the West Bank and Gaza. Whether it be the unstable political situation, the lack of a large local market, or the dearth of a western-style economic infrastructure, the fact is the only community of businessmen interested in joining forces with the Palestinians are the Israelis --- and even now that interest is waning in favor of the business opportunities that await Israeli industrialists in Jordan.

INDUSTRIAL PARKS: THE FIRST STEP
When Palestinians start looking for investors to help them build an industrial park or a new factory, the only people standing in line are their old enemies, the Israelis.

Israeli government officials are among the most fervent supporters of the plan to build industrial parks for the Palestinian Autonomy as an answer to crushing unemployment in Gaza and the West Bank. Yet, as Israel and the Palestinian Authority recently concluded negotiations on the basic framework for the parks, the key issue remains: Who will invest in an area that is politically volatile and has no clear sovereignty?

Ironically, it appears that Israeli investors, rather than Palestinian or foreign investors, are the most likely and, indeed, the most eager to invest. After months of debate, it is now agreed the parks will be at the border line on the Palestinian side. The borderline location -- rather than deeper within the autonomy area or even on the Israeli side -- was chosen because Israeli investors would not be willing to go further into the autonomous area.

Between attracting foreign investors or Israeli investors, many believe the Israelis are the far better bet, as they know the conditions in the region and can operate within the existing framework.

"It will be easier to bring in Israeli companies because they are used to us," says Suheil Gedeon, a banker and a member of the Palestinian business elite. "We have been living together for 30 years."

A recent study commissioned by the World Bank backs gives crediblity to that observation. Gershon Baskin of the Israel/Palestine Center for Research and Information conducted the survey, which polled 53 major potential investors.

"Of the three separate groups [we surveyed] -- Israelis, overseas Palestinians and the international companies -- those most anxious to make an investment, to make decisions quickly, and those that were most aware of the situation, were the Israeli companies," Baskin said.

"The Israeli companies, given the incentive package and guarantees presented to them, almost all said they are prepared to make an investment as soon as possible," he added.

The problematic side of Israeli investment may be, however, future Palestinian resentment of dependence on the Israeli economy and infrastructure, observes Baskin.

"Opponents," he believes, "might call it a new form of 'Israeli colonialism.'"

Why are Palestinian investors less enthusiastic? The World Bank survey also revealed that overseas Palestinian investors were worried about the involvement of the Palestinian Authority (PA): Put bluntly, the less the Arafat regime was involved, the more encouraged they would be to invest. In part to answer this concern, and partly to protect the investor from whoever the power may be -- PA, PLO or the Israel Civil Administration -- the World Bank is recommending the creation of a Palestinian Industrial Estate Authority, in effect an independent agency, to shield the investor from bureaucratic hassle and malfeasance.

While the Palestine Authority (PA) is eager for any investment in the autonomy, many observers claim the regime has been dragging its feet in building up the new economy. There is no comprehensive plan for development of the autonomy, nor a coherent trade policy. Most experts agree that these factors -- more than any others -- are what is keeping foreign businessmen away. The PA did not bother to erect any industrial laws, or incentive programs for investment. The tax system does not work and tax policy is unclear.

One of those experts, Dr. Gil Filer, knows the facts on the ground better than anyone. His consultancy firm, Info Prod, has been active in the area of joint ventures (JVs) between Israel and the Arabs since the peace process began. In fact, there are few other consulting firms that can point to such a successful track record in arranging such JVs between the two peoples.

Backed by a group of well-placed Israeli investors and ten years of academic research on the Arab economies surrounding Israel, Filer understands where the compatibility is between what Israel can offer on the one hand, and what the Arab economies need, on the other.

Yet when he started out seeking JVs in the West Bank and Gaza, he quickly learned what other observers of the scene hadn't: That the Palestinians never wanted to (and still does not want to) do business with Israelis.

The view of Gideon Suihill quoted above is not the norm. Most Palestinian businesspeople have simply boycotted doing business with Israelis.

Ironically, since Oslo began, the Arab boycott based out of the Arab League in Damascus has been eroded away. Not that Arab countries still don't boycott Israel --- however the negative effect it has on the Israeli economy is minute compared to what it was just half a decade ago.

The bottom line, according to Filer, is that the Palestinians may be the big losers,

"After the Oslo accords were signed there was a big wave if enthusiasm on behalf of the Israeli business community to initiate JVs with the Palestinians," says Filer. "However they soon discovered that the potential for JVs are limited for number of reasons --- one of them being the reluctance of the Palestinian Authority to register Israeli companies in West Bank.

"Today less than two dozen Israeli companies are registered to do business in the autonomous areas."

Filer points out that many Israeli companies realized when the Palestinian Authority (PA) legalized a monopoly for such staples of creating an infrastructure as cement and gasoline -- whereby the PA was the sole, exclusive importer -- that this was going to be the future trend; that the threat of nationalization loomed over every potential deal.

PALESTINIANS LOSS-- JORDAN'S GAIN
Boycott or no boycott, the Israeli business community is finding greener pastures elsewhere, namely, to the east in the Kingdom of Jordan. The Israelis are no longer interested in courting the Palestinians, but instead, have found willing partners in Jordan to do business.

Compared to trying to do business in the West Bank and Gaza, Jordan is a godsend. It is politically stable, has a reasonable business infrastructure, and, most importantly, there is a genuine desire to initiate economic relations with Israelis.

"Around l994-l995 after they had become discouraged with the reception they were getting in the West Bank and Gaza, Israeli businessmen turned their focus towards Jordan," says Filer. "Here they found cheaper labor and land costs, a much better infrastructure, and most importantly, a willingness amongst some Jordanian policymakers to welcome Israelis."

Although the figures are difficult to verify due to the reluctance of both the Jordanian and Israeli governments to publicize them, Filer estimates that there are currently is about $40 million worth of Israeli investment in Jordan which has all tolled, created about 2500 jobs.

"Considering Jordan's huge unemployment problem, this is no small number," he claims.

More important, Jordan is picking up important skills from their Israeli partners. For instance, the Israeli textile company Delta is producing clothes in Jordan for export to England's Marks and Spencer retail chain with the Israelis supplying the needed manufacturing, marketing and exporting experience.

"Trade between Israel and Jordan is about $30 million," Filer reveals.

After 15 years of peace with Egypt, the figure is only three times as much (excluding oil). More importantly, hundreds of Jordanian companies are engaged with hundreds of Israeli companies. There are about 40 JVs with 10 of those in the range of more than a $2 million investment. The industries include textiles, food, steel, concrete, alkaline batteries, and lighting.

One recently established JV is the $2.5 million Kaniel food packaging company located in Irbid, Jordan. The new factory has begun to manufacture in bulk and is under common ownership of Kaniel Israel and Jordanian holding companies. Kaniel states that the plant will market its products to countries with which Israeli companies cannot trade directly. It expects the plant's turnover to be $10 million in its first year. In addition to Kaniel's $2.5 million cash investment, it has also loaned an additional $3.5 million to the venture.

In another deal, the Israeli company Jordeal, which develops natural cosmetic and dermatological products from the muds and minerals of the Dead Sea, partnered with a Jordanian company which mines the minerals from the Jordanian side of the Dead Sea. Jordeal found it was easier to work this way than to purchase its raw materials from the Israeli government, which held a monopoly on all rights to mine minerals at the Dead Sea.

The company, which was established just two years ago, is already exporting its line of cosmetics, shampoos, and hand creams to markets in the US, Europe and the Far East.

"In our situation, the Jordanian component is key to our success and a critical part of our overall plan to dominate this market overseas," says the general manager of the Israeli firm.

Another example of a "joint venture" is "Abraham's Odyssey," an Israeli-Jordanian cinematic co-production which took three years to produce. The movie was filmed by a Jordanian camera crew, in Israel, Jordan, Syria, Turkey, Egypt, Saudi Arabia and Iraq, as well as in the Palestinian Authority, and produced in three languages, Hebrew, Arabic and English. The film documents Abraham's odyssey to the Land of Canaan was born.

THE VIEW FROM JORDAN
The Jordanians, however, aren't nearly as proud of the current track record as Filer and the rest of the Israeli business community is.

Addressing a conference in Amman of US and European academics and politicians in August 1997, Crown Prince Hassan of Jordan said that peace with Israel had so far failed to open up trade with the Jewish state or with the Palestinian territories that are still largely under Israeli control.

"Trade between Jordan and Israel is barely $20 million per annum, which is an infinitesimal amount compared to Israel's trade with the world," he said. "The trade between Jordan and the Palestinian territories is even worse than that of 1984, when the West Bank and Gaza were totally under Israeli control.

Jordan, which hoped for a new era of regional prosperity when it made peace with Israel in 1994, has instead seen its economy grind to a halt as its economic growth rate has declined to almost zero since 1996. Jordanian businessmen frequently complain that Israel has obstructed Jordanian exports to the Palestinians, mainly through its tight restrictions over border traffic.

"Jordanian citizens would certainly have been the first to doubt the dividends of a working peace if they are expected to invest what little saving they have in projects dependent on accessibility to the Israeli or Palestinian markets," Prince Hassan said.

The problem, however, is not what Israel is or isn't doing, but the poor level of relations between Jordan and the West Bank and Gaza.

Even after the Jordanian-Israeli peace treaty, Palestinian businessmen can still export products to Jordan only in quantities equivalent to the amount of raw material imported from the Hashemite Kingdom. "What makes it worse," notes one Palestinian industrialist, "is that Jordan has an open market and the competition with cheap products imported from East Asia is difficult."

Jordan and the Palestinians are drafting an economic accord, but the process is slow and painful. Recent discussions got stuck because of Jordan's insistence on fiscal control of the Palestinians. They object to the establishment of a Palestinian central bank and demand that the Palestinians use the Jordanian dinar as the only legal currency.

Jordanian and Palestinians businessmen want to set up a joint commercial services firm to boost trade between them. Hamdi Tabaa, chairman of the Jordanian Businessmen's Association, said that a memorandum was presented to their governments in late September outlining suggestions for increased commercial activities. Tabaa said the memorandum was drafted by a council of Jordanian and Palestinian businessmen.

"The meeting determined that our trade ties do not meet our aspirations because of the obstacles placed by Israel in order to monopolize trade with the Palestinians," he said. "In l995, Jordan and the Palestinians agreed to trade at least $300 million a year, but the actual exchange was established at not more than $30 million. The Palestinians import from Israel $2.2 billion annually.

ISRAEL'S ECONOMIC RELATIONS
WITH OTHER ARAB COUNTRIES

It is Israel's lopsided economic relationships with its immediate neighbors which may impede future joint venture activities. For instance, Israel exports about $14 billion worth of products compared compared to $68 million for Jordan, $15 million for Syria, $53 million for Lebanon and $399 million in Egypt. While Israel is able to cover 71 percent of her import debt with export earnings, Lebanese and Jordanian export revenues cover less than a quarter of their respective imports.

Many Arab economists claim that if the markets of the Middle East are opened up, the Israelis will have the upper hand in the market for high-technology development making the Arab economies subservient to Israel's.

"The solution for Jordanian industry, if peace happens and the Arab boycott is canceled, is for the Jordanians to protect their market from an invasion of Israeli products," says Dr. Fahad Fanak, an influential Jordanian economist.

Fahad also adds that the perceived danger of an Israeli invasion is "exaggerated -- Israeli industry is not of such high quality. At the same time we should not underestimate it."

The deputy director of research at the Central Bank of Jordan, Dr. Hamad Ahfnan Al Kasaseiba, says Jordan must guard against Israel's expected use of Palestinian middlemen as a covert channel for entry into the Jordanian economy.

"Jordan has only two choices, to freeze its economic situation with the territories for five years, or to create an economic relationship with the West Bank, which can provide a basis for cooperation."

Kasaseiba also recommends that Jordan seek a free-trade agreement -- or economic union -- with Iraq, to counter the "Israeli threat" as close economic ties already exist between Amman and Baghdad. Jordanian exports to Iraq currently account for 55 percent of Jordan's total export revenue -- as compared to 38 percent in 1980. Jordanian imports from Iraq, meanwhile, increased from 1.5 percent of total imports in 1980 to 26.3 percent of the total in 1990 -- when the UN imposed Gulf War-related economic sanctions.

But the most upbeat assessment is offered by Dr. Ismail Zazloul, director of research at the Jordanian Central Bank. Among the positive benefits of peace that Zazloul foresees are a correction of the negative trade balance between Jordan and the West Bank as transport over the border eases:

"From 1968 until 1990, cumulative trade from Jordan to the West Bank amounted to $150 million, while from the West Bank to Jordan it was $1.46 billion," he notes. "A boom in Palestinian purchases of building materials like cement, paint, ceramics, electrical cables, furnishings and fuel from Jordan -- which would prove cheaper than their Israeli alternatives. An increase in Akaba Port activity, as the Red Sea port becomes a major channel for imports by the new Palestinian self-government."

Zazloul recommends the creation of a free-trade zone in the Jordan Valley, "in order to promote the flow of services to the self-governing area." He believes that as the political situation stabilizes, there will be a greater flow of international and Arab capital into Jordan as he Palestinians who until now have invested abroad would return to Jordan and the self-ruled areas. He also sees an increase in Jordanian hard-currency reserves as investors convert dollars into dinars to fund new West Bank development.

Zazloul warns, however, that Israel will try to keep the Palestinian economy shekel-dependent, while the creation of a Palestinian currency could harm the dinar's stability. He also sees a greater flow of Jordanian services to Palestinians in fields like tourism, insurance, transportation, health and education. He notes that the West Bank "lacks a strong insurance market" necessary for any major investment and Jordanian insurance companies can fill the vacuum.

Normalization of commercial relations with Israel could give Jordan access to Haifa Port as well as the planned Gaza deep-water outlet. This use of land and port exits would reduce expenses for exports to Europe," he notes. Jordanian overland access to Africa, via Gaza, would also make Jordan a more important trade crossroad.

On the down side, however, Zazloul sees rapid West Bank growth as a potential stimulant to Jordanian inflation. And Palestinian investment in wholly Palestinian banks or institutions in the West Bank, could drain capital from the East Bank. Zazloul sees few high value-added Jordanian goods and services that might be attractive to Israelis. He thus shares the prevailing fear of an Israeli "invasion" of the Jordanian market via the new Palestinian entity. "It will be very difficult to distinguish between purely Palestinian products and Israeli products, or products produced by both sides."

"Israel will remain the main supplier of high technology in the area, competing with Europe and Japan," he predicts gloomily, "and it will exploit this advantage to prevent high-technology transfers to the Arab world."

Filer believes that ultimately, there is a great potential for economic relations between Israel and the Jordanians- if only the Jordanians would concentrate on business and leave regional politics aside.

"Arab fears of Israel economically dominating them are unfounded and based on nothing but propaganda," says Jonathan Levy, one of Israel's leading business and high tech writers. "Israel's economy is increasingly oriented towards the West, particularly the US. Few markets for Israeli high tech goods exist in the Arab world. While some low-tech Israeli companies may find the regional markets attractive, the majority of Israeli industry will ignore the Arab world for lack of prosperity there.

The fact of the matter is that the Palestinians and the Jordanians need the Israelis far more than the Israelis need them. Yet anyone who can read a Jordanian or Palestinian newspaper can see just how little interest there is in Israel amongst most of the Palestinian business community and a big chunk of Jordanian industry. While Filer has made some significant breakthroughs, the overall picture remains bleak until the Jordanians and the Palestinians come to the realization that Israel's economic expertise can help them, not hurt them.


JWR contributor Joel Bainerman writes on Israeli economic issues from Zichron Yaacov, Israel. He can be reached by clicking here.


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10/29/98: Israel: Hot Market Targeted For Foreign Acquisitions

©1998, Joel Bainerman