TOURISM AND CONSTRUCTION WILL BENEFIT - 17-Jan-97

TOURISM AND CONSTRUCTION WILL BENEFIT

(Article by Sever Plocker, "Yediot Ahronot", Jan 17, 1997, Weekend Supp., pp.12-13)

THE SIGNED AGREEMENT REMOVES THE DANGER OF A RECESSION IN ISRAEL. PALESTINIAN WORKERS WILL RETURN TO WORK. SLOWLY, TRADE WITH ARAB COUNTRIES WILL GROW AND OTHER MUSLIM MARKETS WILL OPEN. THE CHINESE AND JAPANESE INVESTORS WILL RETURN. REGIONAL PROJECTS WILL GRADUALLY RESUME.

The first economic results of the Hebron Agreement were immediately seen in the sky: it began to rain. With this, hundreds of millions of shekels for compensating farmers were erased from the national budget, as was an increase in the fruits and vegetables CPI index. The coming of winter is not related to the Hebron Agreement? Perhaps not, but maybe it is. Maybe Netanyahu is playing his luck, both in the heavens and on earth. And what is so bad about politicians with luck?

The Hebron Agreement did not bring the rain, but even so is did do something very important for Israel's economy. It scattered the clouds hanging above the economy and cleared the sky, which had been very gloomy.

In recent months, I received agitated telephone calls from businesspeople, who asked for my discretion, from bankers who asked that I not reveal any hint of their names, from agents and local representatives of international companies. Everything was frozen, they whispered into the mouthpiece. In other words: the foreign investors were already not sitting on the fence, they had already packed their bags and were on their way out. Disaster is coming.

One businessman told about a giant South Korean industrial firm which sent letters to cancel its investments. A sales agent told about the panicked flight from Israel of the Omani trade representative. The manager of a noted international concern told me: executives at company headquarters are considering moving most of the firm's financial operations to Beirut. When I asked the callers for permission to use their names, their responses were all the same: Don't dare! What do you want to do, create panic? To mark the way out for others as well?

However, these were not false rumors. Within the business community and in government offices, extensive and reliable information was collected on the real intentions of certain foreign concerns to cut off the flow of their funds to Israel. Professional officials in the Finance, Foreign Affairs, and Industry and Trade Ministries knew full-well the dimensions of the damage done to Israel's standing in the Middle East by delays in the political process. At the same time, there were increased reports in the economic press in the United States and Western Europe about Israel's renewed isolation in the international business world.

Not everyone sang this tune. In an influential column of the British business daily "Financial Times," a short, though very hot, recommendation appeared on Israel's economy as a preferred investment target despite the politics. Israel's credit rating remained the same, despite the politics. The Israel Electric Corporation raised hundreds of millions of dollars on the American capital markets, and raised them rather inexpensively despite the politics. The Italian firm Generali made its purchase of the Migdal insurance company. In the United States, a new group of investors was formed whose members really want Bank Hapoalim, and are willing to pay more than $600 million for it. And the dry statistics continued to point to the expanded entry of foreign capital into Israel. And it is not from the Russian mafia.

The Tel Aviv Stock Exchange has even risen by 45% since the nadir that followed the elections, as if those in the know already knew that Netanyahu would continue to carry out the peace process. Whoever wanted to could have continued living in an atmosphere of business as usual.

However, it was not business as usual. Time was working against us. The signing of the Hebron Agreement and of the next phases of redeployment from the territories come at the next to last minute for the economy. Another rejection, another blow-up, another delay, could have caused the economy irreversible damage. Dr. Dov Frohman, CEO of Intel Israel told me explicitly and for the record: "A real halt in the political process would cause important investors to flee Israel." He knows: American-based Intel is building a new $1.6 billion dollar electronics factory in Kiryat Gat.

Dr. Oded Eran, Deputy Director-General of the Foreign Ministry, who holds in his hands all of the strands of joint economic and business cooperation between Israel and its neighbors, told me the following a week ago: "Since the end of the Middle East Economic Conference in Cairo, nothing has moved. There is no Middle East Bank, no business council, no tourism council, and all of the public joint ventures and agreements with the Gulf emirates have been cut. Everyone is waiting for the Hebron Agreement. That is the bottleneck, and only by saving it can the strangled ties be released."

The Israeli exhibition at which demonstrators protested against in Amman proved the rift to everyone. It so worried the Netanyahu government that Finance Minister Dan Meridor went to the royal palace for a closed business meeting, in order to attempt to halt the slide in relations.

The main economic implications of the Hebron Agreement are similar, therefore, to the implications of a welcome rain in winter: preventing disaster, ending an unnatural situation. A return to the routine of an Israeli economy in a non-belligerent Middle East. Growing but inflationary; Investing but with a deficit.

And that means the following:

* An improvement in incoming tourism to Israel if there are no more attacks. Last year, we lost at least $1 billion from the collapse in tourism. This year also began badly, with the cancellation of reservations and conventions. Shmuel Tzurel, a senior Tourism Ministry official, ascribes a "dramatic effect" to the Hebron Agreement. Tour organizers, agents, hoteliers and airline companies expect a "tourism boom." A heavy stone has been lifted from the heart of the Israeli tourism industry.

* Quick growth in the scope of bilateral trade between Israel and Arab countries in North Africa and Muslim countries in Asia. Israel's extensive business ties with Morocco, Oman and Indonesia were suspended over the past six months. The suspension harmed exporters, importers and bankers. Following the Hebron Agreement, it can be expected that Malaysian, Bangladeshi and even Pakistani markets will open to Israeli goods. Trade with Egypt will increase. A rupture in economic relations with Turkey will be avoided. Perhaps an agreement for the import of natural gas will finally be signed. Israeli businesspeople will again be found in Oman and Qatar; the Omanis and Qataris will will again make courtesy calls on the directors of the large banks in Tel Aviv.

* The cancellation of the near-boycott which the Palestinian Authority has imposed on Israeli goods, and at the same time the end of the closure and the entry of Palestinian workers to Israel. Development of industrial parks near the border crossings will be accelerated.

* The construction industry is likely to be the second largest gainer from the agreement, after tourism: a greater demand for apartments, the implementation of major infrastructure projects and the return of qualified construction workers from the territories to their jobs in Israel.

* The Chinese and the Japanese will return, and will seek to enhance economic ties with Israel.

* The state budget will benefit: the political process will benefit privatization (if the government knows how and is willing), and will enable considerable increases in the defense budget as the IDF is demanding to be avoided. The danger of a recession will diminish.

* The chances of improving Israel's credit rating in international capital markets which means savings on interest rates will increase.

A different question is whether the signing of the Hebron Agreement "will impart new momentum to all economic activity in the region," as Dr. Yossi Vardi the high priest of cooperation plans and an ardent believer in the peace economy predicted.

The answer is complex. In the years which have passed since the Oslo Agreement, it has become clear that even in a very comfortable political atmosphere, Israel's integration in the Arab Middle East will be slow, confrontational and accompanied by heavy suspicion. The concept of a "New Middle East" expired six months after the first economic summit in Casablanca (which was held with exaggerated luxury in October 1994). Israel demonstrated a bit of its economic path there, but this was enough to frighten a considerable segment of of the Arab business community the same segments which are flourishing under monopolistic, protectionist, closed and distortion-fostering economic policies. It was not Israel's economic might which frightened them, but the strong winds of the market economy which are blowing from Israel's direction.

But the situation in the Arab countries is also changing rapidly. Egypt has begun a campaign of structural reforms, in the direction of a market economy. Jordan is continuing this campaign. Morocco is engaged in wholesale privatization and Lebanon is rebuilding its traditional capitalist economy. These trends Professor Michael Porter, from the Harvard University School of Business, told me this week are changing the face of the Arab environment and present a challenge to Israel.

Prof. Porter, one of the five biggest names in management worldwide, a consultant, lecturer and best-selling author, heads a joint project for outlining the appropriate competitive strategy in the Middle East. Israeli, Jordanian, Egyptian and Palestinian Authority businesspeople, academics and officials are taking part in the project.

Prof. Porter: "Israel will not always be able to rely solely on electronic exports to the U.S. and the purchase of expensive inputs from Western Europe, without integrating itself in its natural geographic surroundings. It is here, beyond the border, where your natural markets are found. They are within hand's reach, not in distant Massachusetts."