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Mideast economies after the Israel-PLO handshake.

The Israel-Palestine Liberation Organization Declaration of Principles has created enthusiasm about the prospects for economic cooperation between Arabs and Israelis. Arab-Israeli economic cooperation is exciting because of its political benefits, not to mention its economic effects. Thus, proposals for economic cooperation should be judged primarily by their promotion of peace, rather than simply by their direct economic effect. In particular, economic cooperation can ease the Israeli sense of regional isolation and promote its acceptance by its neighbors. Furthermore, as each side reaps measurable economic benefits, future agreements may be more feasible in less politically sensitive areas than Palestinian sovereignty.

The strategy of achieving peace through incremental cooperation in areas of mutual advantage, such as trade, is problematic. The strategy itself has long been controversial among Arabs and continues to be rejected by many Arab radicals. For many years, the majority in the Palestine Liberation Organization (PLO) preferred to hold off on any form of cooperation, no matter how profitable, as a means to increase the pressure for a comprehensive political settlement. Today, Arab radicals complain that economic cooperation is Israel's latest strategy in its ongoing campaign to dominate the region. As Aqba Ali Saleh wrote in the leading Saudi daily Asharq al-Awsat, "The merging of technologically backward economies with a high-tech economy necessarily entails domination by the latter and restriction of the former's scope for development."(1)

Despite objections from such radicals, most in the region view economic cooperation as a step towards peace. Unfortunately, some also have the unrealistic expectation that Arab-Israeli economic cooperation is the key to a nation's prosperity. No one is more optimistic than Israeli Foreign Minister Shimon Peres, a longtime advocate of economic cooperation. As he argued, "There are only two alternatives [for the Levant]: Benelux or Yugoslavia." That is, prosperity and peace through cooperation or poverty and war.(2) In his latest book, written with Arye Naor, Peres outlines his vision of a Middle East common market.(3) Crown Prince Hasan of Jordan shares Peres' vision. At an important recent conference on the economic implications of Middle East peace, Hasan spoke of the long-term possibility of Palestinians, Jordanians and Israelis establishing "an arrangement similar to that which exists between Belgium, the Netherlands and Luxembourg." As Hasan has noted:

A free-trade zone across the Middle East would be the ultimate goal. Arrangements for a Middle East Free Trade Agreement -- a MEFTA along the lines of NAFTA [North American Free Trade Agreement] -- would allow the region to play a more creative role in the world economy ... Such a development would provide an impetus for a new relationship of hope in the Middle East.(4)

Peres' and Hasan's vision of the Middle East developing along lines similar to NAFTA is not realistic. The Middle East is just not in the same economic league as either NAFTA or the European Union (E.U.). The 1991 gross domestic product (GDP) of Israel and the Arab states was less than $500 billion, as compared to over $6,000 billion for NAFTA and the E.U. [Table 1]. The merchandise trade of Israel and the Arab states in 1992 was less than $300 billion, as compared to four times that amount within NAFTA and seven times as much within the E.U. The total GDP of the Arab League members is less than the GDP of Belgium and the Netherlands. Even if Israel were to develop as close relations with the Arab states as it now has with those two, the market opportunities would still be limited when compared to the greater possibilities in the larger E.U. market -- the natural market for Israeli, Jordanian, and Palestinian producers. While there are some excellent opportunities for profit from Arab-Israeli economic cooperation, the regional markets are just too small for such an endeavor to have much of a macroeconomic effect on the region.

Furthermore, the Middle East is a region in which states have not yet developed close economic relations with each other. Examples abound of political restrictions on economic ties between Arab states: Jordan has been effecfively shut out of the Saudi market in retaliation for King Hussein's stand on the Iraqi invasion of Kuwait; Libya and Egypt each has slammed shut its common border in response to one or another episode; and Syria cut off the flow of the oil pipeline from Iraq when the latter invaded Iran. For the most part, Arab states do not trade very much with each other. In 1992, for instance, Jordan had $54 million in trade flows with its neighbor Syria and $64 million with Egypt - 1.2 percent and 1.4 percent of its total trade, respectively.[5]

Even if governments were not to interfere with economic ties, consumer resistance based on traditional enmities could still jeopardize Israeli-Arab economic cooperation. Such resistance could continue for decades after a comprehensive peace treaty. Look at Greece and Turkey for example. They have been at peace for 70 years; their troops serve under common North Atlantic Treaty Organization (NATO) command. The two neighbors have economies that should be complementary, as Turkish textiles could be traded for Greek industrial goods. Yet their trade flow in 1992 was a paltry $250 million, less than 0.7 percent of either country's total trade flows.

Economic cooperation is not the central economic issue for Israel, Jordan, the West Bank and Gaza; rather, job creation is everyone's top economic priority. All three economies face the same fundamental problem: double-digit rates of unemployment combined with an exploding labor force looking for work locally. In Jordan, this explosion is due to returnees from Kuwait; in the West Bank and Gaza, to the fewer opportunities for employment in Israel; and in Israel, to immigrants from the former Soviet Union and Ethiopia. The real impetus for job creation is going to come from economic reform: easing government regulations, building new infrastructure, providing ready access to bank credit and enacting policies to promote exports to the larger European markets. In summary, the needed economic reforms themselves have little to do with cooperation; they depend much more on internal reforms in each area.


Trade cooperation is blocked by the illiberal trading regimes common in the region. The Egyptian, Syrian and Israeli governments each have long traditions of paternalistic etatisme, rooted respectively in Nasserism, Ba'athism and Labor Zionism. Breaking free from the outdated statist models of the past would do more than any other step to make economic cooperation among private sector firms possible. Trade is not likely to grow as long as the state protects local firms against foreign competition.

As an example of how artificial barriers can restrict trade, consider the small volume of Egyptian-Israeli trade: $13.3 million in 1992, amounting to 0.04 percent of Israel's trade and 0.07 percent of Egypt's.(6) Much could be done to simplify trade procedures. Israelis justifiably protest the administrative barriers to exporting to Egypt, but Egyptians could also complain about the low share of Gaza's imports that come through Egypt or the impossibility of marketing cheap Egyptian agricultural produce in Israel.

The Arab-Israeli trade that does occur usually violates the rules of at least one of the governments. For example, Israeli rules have until recently firmly forbidden the import of Palestinian eggs except in a few special circumstances, yet West Bank producers provide about 120 million eggs a year for the 1.8 billion-egg Israeli market. The practical effect of the Israeli rules is to increase the income of Israeli middlemen who find ways to smuggle the eggs, while reducing the income of Palestinian farmers who do not receive the price they otherwise could for their produce. Every attempt to crack down on the smuggling ends up increasing the margins demanded by the smugglers, reducing the income of the Palestinian producers and raising the prices paid by Israeli consumers.

Israel is not the worst offender with regard to trade-inhibiting rules -- quite the contrary. The Arab League maintains several layers of boycott against Israel, observed by all its members except Egypt. The primary or direct boycott on Israeli products is enforced well enough that Israeli exports have to use subterfuge to find their way into Arab markets, reducing the trade volume to a trickle. The direct boycott boasts strong political support and is unlikely to end soon, except in Jordan. On the other hand, the secondary boycott on companies doing business with Israel, and the tertiary boycott, on companies doing business with companies on the boycott blacklist, are increasingly less enforced.(7)

The paradox of the boycott is that its primary victims are Palestinian businessmen who cannot ship their goods to Arab markets because they use inputs and equipment imported via Israeli ports. Ending the boycott of these Palestinian products could significantly increase Palestinian sales in the Arab world. On the other hand, dropping the boycott on Israeli-made products would not necessarily create great market opportunities for Israeli businessmen, since the regional market is small (Israel's Arab neighbors have a GDP less than Israel's) and Arab consumers may resist Israeli products even if there are no official barriers.

The official barriers to trade are being reduced in most of the Middle East. Many governments have announced plans to ease back the heavy hand of regulation and liberalize the economy. In recent years, Israel and Jordan in particular have issued bold statements about their commitment to structural reforms to open up their economies. Not surprisingly, each has proceeded at a slow pace, because they face challenges from domestic groups that benefit from existing regulations. Nevertheless, the small changes have begun to add up to a substantial difference. Over the last few years, Israel has eliminated nearly all quantitative restrictions on non-agricultural trade with the West Bank and Gaza and ended the de jure government-run export monopolies on agricultural goods. As a result, Palestinian textiles, shoes and agricultural implements, among other products, have taken a large share of the Israeli market.

The area in the Middle East with by far the freest trade is the West Bank and Gaza. The reason is not admiration for the teachings of David Ricardo, but the lack of a government to create and enforce restrictions. The Israeli occupation authorities made the West Bank and Gaza into an importers' dream: no duties and essentially no restrictions. Until 1991, Palestinian exports faced many barriers as part of the Israeli policy of discouraging Palestinian industry and agriculture, fostering Palestinian dependence on Israeli production. Those barriers to export have been largely eliminated since 1991 as part of Israel's reversal of policy to now encourage Palestinian output in order to reduce unemployment-induced unrest.(8) Ricardo would be proud of the West Bank and Gaza: They practice free trade even though they face extensive protectionism from their neighbors. Israel and Jordan use a wide array of trade restrictions, many of which come under the guise of security rules and quality standards but are in fact transparent protectionist devices (for example, insisting that each pencil made in the territories bear a label in Hebrew).

Since signing the Accord with the PLO, the Israelis have committed themselves to phasing in complete free trade with the Palestinians over five years. However, the remaining formal trade restrictions, which are on agricultural goods, will be phased out slowly to reduce the resistance from the beneficiaries of current restrictions (who may also be given transitional assistance, such as the buyout of chicken and egg farmers included in the 1994 Israeli budget).(9) The initial quotas for Palestinian products, agreed to in bilateral negotiations in Paris, are equal to the estimated existing illegal trade.(10) As important as the removal of formal trade barriers will be Israeli willingness to relax the disguised barriers, such as quality and labeling standards. The prospects for reducing disguised barriers are mixed, because of exaggerated Israeli fears about competition from West Bank and Gaza producers, who are too small to make much of a difference to overall Israeli sales and who are succeeding primarily in industries (such as simple textiles) that are already in decline due to competition from low-cost foreign producers.(11)

Because of these exaggerated worries about competition, Israeli liberalization of imports from the West Bank and Gaza is scheduled to be slow. Correspondingly, Palestinians are unlikely to perceive any dramatic change in their standard of living as a result of increased trade opportunities; they will instead see a slow, steady improvement. That is unfortunate, as a rapid increase in Palestinian incomes might have more of an effect on Palestinian public opinion. Any estimate of the effects of liberalization on the Palestinian economy must be speculative, given the poor data on Palestinian production and exports. But the situation inspires optimism: The Palestinians know the nearby Israeli market, a $63 billion economy which is 25 times the size of their own and is growing at a solid clip of 4 to 5 percent per annum. Many Palestinian businesses already compete well without any government protection or benefits. Palestinian producers have a substantial underutilized capacity that could be used to increase output, given ready access to the markets. My guess, and it is only that, is that a complete and immediate lifting of barriers to Palestinian trade could result in double-digit growth within a year, fueled by export growth on the order of $100 million to $150 million.

Between Israel, the Palestinian territories and Jordan, the prospects for open borders and cooperation look good in the medium term, though the pace of the opening may be slow. The last several Israeli governments have been committed to opening up markets; the principle itself is not controversial in that often fractious country. The Jordanian government wants access to the Israeli-Palestinian customs union. The two sides are disputing the pace and method of liberalization, with Jordan wanting an initial quota of $300 million a year (up from a current $15 million) and rising thereafter, and Israel preferring a smaller quota and proportionate access to Jordan's market. The dispute sounds like that between many trading partners about how to liberalize trade, in which the issue at stake is dollars and cents and not deep

political principles. A few years ago in the Palestinian community, any proposal for economic cooperation with Israel was controversial. Now, the PLO and business communities recognize that the West Bank and Gaza will benefit from close links to the Israeli economy. In the Paris bilateral discussions, all agreed that there are to be no new barriers to the movement of goods (no customs checkpoints or border posts) between the Palestinian territories and Israel. The two sides are negotiating the fine points of the future customs union. The Israelis have agreed already to let the Palestinian side set the tariff rate on items of special interest to Palestinians (for example, the traditional Palestinian type of vegetable oil) in return for Israel retaining the right to set the tariff rate on all the other items. The Palestinians have accepted the continuing use of Israeli facilities, such as electricity generating plants and water systems, for part of their needs rather than having the unrealistic goal of creating a completely separate infrastructure. To be sure, the Palestinians want to create alternative sources of supply for industrial input and capital goods and outlets for their agricultural and industrial products so that they are not completely dependent on Israeli suppliers and purchasers, but that reflects good business sense rather than a desire for Palestinian show projects (like an electric generating plant, which would have to be small, and therefore, uneconomical, if it were to serve only the Palestinian market).


Capital flows to Israel and the Arab world come in two main categories: commercial investment and aid. Each can contribute to peace through its political impact, but the economic impact is not likely to be large beyond Palestinian territories.

Commercial investment offers limited short-term potential for cooperation despite many ideas for publicity-generating Israeli-Arab joint investments. The most prominent project being considered actively at the moment is a multibillion dollar project to pipe natural gas from Qatar to Israel. Discussions are progressing on the project despite Qatari skittishness about publicity.(12) Other examples include a canal from the Red Sea to the Dead Sea, diversion of water from the Nile or from southern Turkey to Israel, and a railroad from Damascus to Tel Aviv. Such projects will not cement the recent peace accord. They are almost sure to be accompanied by dispute-provoking cost overruns, which will strain relations between the partners. Besides, they take years to reach maturity, at which point opinions about the peace accord will have solidified; therefore, the projects themselves will not have much impact on how the peace accord is viewed. In addition, several proposed projects would have low economic rates of return.

Then there are the demonstration projects, typically to transfer Israeli technology to Arab nations. These projects may promote good will, as did the Israeli-supported agricultural research program in Nubariya, Egypt.(13) However, such transfers are often simply ignored by the recipient, for whom the project is typically arranged by the Israeli government, which is eager to demonstrate the advantages of Israeli technology.

More promising are joint investments by private businessmen from Israel and Arab countries, especially those aimed at conducting business with a third country (that is, a country other than Israel or an Arab one). An example would be a hypothetical joint Israeli-Moroccan investment in Egyptian agro-industry producing for the European market. These joint ventures bring together investors who have specific strengths to contribute, and who are less dependent on the good will of the host government since their markets lie elsewhere. These projects are the most likely to have a good economic rate of return, which also makes them the best candidates for long-term survival. Several such schemes have been already announced, with the Arab partners backpedaling in the face of adverse public reactions at home.

Similarly, various efforts are underway currently to promote joint investments with Jewish and ethnic Arab businessmen, including nationals of the United States and other industrial nations. For instance, former Congressman Melvin Levine of California and Arab-American activist James Zogby lead an investment-promotion group, the formation of which was encouraged by the U.S. Government.

In short, commercial investments can be a means to bring together Arab and Israeli businessmen, but the inevitable snags and delays in any new field -- always magnified by large projects -- means that the economic impact is likely to be limited, at least in the near-term.

Commerical investment, important as it may be in the future, has not been the main type of international capital flow in the Levant. Aid has been far more important. The Levant states receive truly astonishing amounts of economic aid, in addition to generous military assistance. In 1991 official development assistance from OECD and Arab countries to Israel was $354 per person; to Jordan, $247; to Egypt, $93; to Syria, $30.(14) The principal sources were the U.S. for Israel and Egypt, European states for Jordan, and Arab states for Syria. By comparison, the average for low income economies that year was $10 and for middle-income countries, $16.

Despite the heavy demands on aid budgets worldwide, in October 1993 the donor community pledged $2 billion in aid for the West Bank and Gaza and in December 1993 it pledged that 1994 commitments alone would reach $570 million.(15) If these funds were disbursed on a timely basis, the aid flow would triple from the 1992 level of $200 million from all sources (including tens of millions of dollars from non-governmental organizations).(16) However, the prospects for timely disbursement are at best mixed. The usual bilateral and multilateral institutions, such as the World Bank, are proceeding in the West Bank and Gaza on what is for them an accelerated basis. But that means a lag of about two years from project identification to the disbursement of funds. That accelerated pace can only be sustained if much of the tenuous Palestinian policy-making capability is diverted to dealing with the aid procedures.

If the principal aim of the aid is to lay a basis for sustainable development in the medium-term, then current procedures are appropriate. That seems to be motivating the donor agencies which are emphasizing efficiency and accountability, desirable goals that take time to achieve. If, on the other hand, the aim is to influence the public in favor of the peace accord now before opinions gel, then the most efficient procedure would be to disburse cash to the PLO, to reinforce its political credibility and have an immediate impact on Palestinian incomes. Cash payments would probably be money wasted economically and well-spent politically. Seamer Huleileh, a top official with the official PLO aid agency (the Palestinian Economic Council for Reconstruction and Development, or PECDAR), was doing more than pleading his organization's cause when he said the following:

We should be professional from a political point of view, not from an economic point of view. Money spent on salaries doesn't create development, but it creates survival, it creates momentum for peace and for the agreement. (17)

To date, the aid program is repeating the errors made in the former Soviet Union: large amounts are promised and small amounts are delivered. Unfulfilled expectations create popular bitterness and distrust of the West. In his analysis of the negative effects of the West's aid program, Jeffrey Sachs has created controversy by clinging to the illusion that the West could still meet Russian expectations for huge amounts of aid disbursed quickly.(18)

As is the aid program in the former Soviet Union, the aid for the West Bank and Gaza is primarily political. In the former case, the aid is meant to consolidate popular support for a pro-western and pro-market orientation; in the latter, it is meant to increase public support for peace with Israel. In other words, aid for the West Bank and Gaza is not aid for cooperation. Indeed, foreign donors face a paradox if they wish to finance both Palestinian development and economic cooperation. The more funding provided for Palestinian development, the more resources are available to develop autonomous Palestinian institutions which reduce the degree of cooperation necessary between the Israeli and Palestinian economies. The fact is that in some cases, autonomous Palestinian institutions -- operating on a smaller scale at higher cost than their Israeli counterparts -- may be a better way to promote peace between the two peoples. Consider, for instance, a Gaza port capable of handling most of the imports for the West Bank and Gaza. That would probably be less economical than making fuller use of Haifa and Ashdod, but it would reduce the quarrels over the disbursement of customs revenue and the application of restrictions on imports and exports. Furthermore, a Gaza port might be able to secure Jordanian business that would be less likely to go to an Israeli port. The point of this example is that there may be times when foreign donors justifiably decide to finance Palestinian development even though that development may be at the expense of economic cooperation with Israel and of economic rationality, especially in those few cases where a separate Palestinian facility may offer political advantages (such as reducing potential conflicts with Israelis over shared facilities) that outweigh these economic factors.

While the principal aim of aid is not to promote economic cooperation, aid could also play an important role in encouraging cooperation. Middle East economic cooperation is held back both by political suspicions and by cruel economics: How to distribute the costs and benefits? All too often, governments refuse to move on projects from which their country would profit because their neighbors would also benefit without paying. Each of the region's governments faces a serious deficit problem, and none is eager to borrow more from abroad unless the benefits accrue fully to its own citizens. It is difficult to find a technically or politically acceptable means to allocate the costs of a project such as a dam, which provides several countries with a variety of benefits (not all of them easily measured in dollars), such as reducing the risk of floods, generating electricity and providing water for irrigation. Financial disputes have been an irritant in joint international projects around the world, even when the countries concerned are on good terms; they are likely to be all the worse when the partners start out being suspicious of each other.

In order to avoid such disputes, an international financing facility could be created to fund (lower interest rates, longer maturity) projects that benefit several countries with softer terms than projects that benefit only one country. The facility could be administered by the World Bank. To make the facility attractive to borrowers, it would need grant contributions that it could combine with market-rate borrowing of its own.

A regional cooperation facility is better targeted and more realizable than a mooted Middle East Development Bank. Such an organization would face many problems, not the least of which would be Israeli participation. Despite the recent political advances, it would be difficult to secure Arab participation if Israel were a member, and it would be effectively impossible to secure U.S. participation if Israel were not a member. In addition, most of the states in the region, already heavily indebted, are not in a position to borrow at market interest rates. Furthermore, a Middle East Development Bank could easily be diverted from financing regional cooperation into financing ordinary development projects -- projects for which the states of the region already have ample sources of finance, given the limited amount of additional foreign debt they can afford.

In sum, aid could play a role in promoting Arab-Israeli economic and political cooperation and in increasing support for the peace process, especially by showing impoverished Palestinians that peace can bring prosperity. However, the potential for aid to play such a role is not as great if the emphasis is on economic rationality rather than on politics.


One particular area in which the hopes are high for benefits from cooperation is water. Water usage is a particular problem in the Middle East and North Africa, a region that uses 73 percent of this scarce resource while the world average is a mere 7 percent, according to a recent World Bank study.(19) Unfortunately, in many countries security of water supplies stirs emotions and political sensitivities that impede rational analysis. As a result, agreement on any regional water project may be hard to achieve. It would be unrealistic to count on water usage as the starting point for regional cooperation.

Nevertheless, it may be possible to get the region's governments to agree informally to accelerate announced plans for the use of market mechanisms for solving the water problem. Economists throughout the area have pointed out that the water shortage is hardly surprising: Consumers are charged a price far below the cost of production. That is a recipe for a shortage, no matter what the good concerned. Consumers -- which means primarily farmers, since agriculture absorbs 89 percent of the water used in the Middle East and North Africa -- have little incentive to adopt water-saving techniques. Farmers could preserve their income levels, while cutting water use by 50 percent or more, through a combination of changing the mix of crops grown and investing in water-saving technologies.

It is no exaggeration to say that the water problem is a price problem. Recognizing this, each country in the region has announced its intention to reform water pricing. But plans all too often succumb to political pressures from the beneficiaries of current (implicit) subsidies. It may be worthwhile to develop a joint declaration of water policy reform, which would recognize that reform in one country could improve the water supply for others.

Large-scale water projects, such as large dams, desalinization plants or canals, to take advantage of the difference in elevation between the Mediterranean and the Dead Sea, should be carefully evaluated to determine if the costs are justifiable. Using dams as an example, the international experience -- including the Aswan High Dam or many of the large dams in the United States -- has been one of inefficiency and low rates of return on capital invested. Perhaps given the emotions involved, it would be worthwhile spending $5 billion to flood the Levant with water from desalinization plants, the most expensive but politically most accessible source. That amount would pay for more than a sufficient number of dams and desalinization plants to meet water demand at the current subsidized prices, which encourage wasting water. But before paying such a high price for a largely irrational fear, let us start with smaller scale projects to see if they can improve public confidence about water supplies. A few reasonable proposals have been advanced for medium-sized ($500 million) multilateral projects, such as storing winter flood waters behind dams (much of the region's waterflow is lost during brief floods).(20)

One example of a medium-sized multilateral regional water project is the Unity Dam on the Yarmuk River. The dam has a long history: The United States offered to finance this project in the early 1970s because it would benefit several of the key actors including Syria, Jordan and potentially the Palestinian areas and Israel. Although a well-prepared project proposal exists, Jordan and Israel have yet to agree on terms for the project. Jordan may agree to concessions if the international community were to offer concessional financing in return for Jordan's agreeing to allow Israel and the Palestinian areas access to the project's benefits.

For both the medium-sized and the larger projects, the criteria for determining whether the costs are justifiable should be political as well as economic. The two categories of criteria, however, can lead to different results. Consider, for instance, the longstanding dream of generating electricity by capitalizing on the difference in elevation between the open sea and the Dead Sea (the potential to generate electricity being a function of the elevation from which the water falls). Such a project would make more sense politically if it fully involved the Jordanians rather than

holding them at the periphery -- implying preferential treatment to the "Red-Dead" route from the Red Sea over the "Med-Dead" route from the Mediterranean, despite the latter having lower costs.(21)


Compared to the high-profile water issue, the issue of ending Israel's isolation within international organizations is more mundane. There are numerous international institutions with regional affiliates or with administrative divisions along regional lines. Few classify Israel as a Middle Eastern nation; instead, Israel usually is categorized within the European group for administrative purposes. The reason is not one of bureaucratic convenience, but rather, politics. Specifically, it is the unwillingness of Arab states to consider Israel a legitimate Middle East state. Sometimes the distinction is not particularly important to the work of the organization, as is the case at the International Monetary Fund. But in organizations that concern themselves with issues that cross borders -- covering everything from allocating the radio spectrum to combatting infestations of pests -- Israel should be considered a Middle East state.

In addition, it should be possible for Israeli nationals to sit down with their Arab colleagues to discuss technical issues under the auspices of international organizations. That may require meetings in Egypt or outside the region, but there may also be other Arab countries prepared to issue visas for short visits to experts who are Israeli nationals traveling for international meetings. Certainly, it is inappropriate for multinationals to initiate new technical fora with the clear intention of excluding Israel.

An example of what not to do is the World Bank's sponsorship of the Initiative to Encourage Economic Research on the Middle East, which led to the founding of the Economic Research Forum for the Arab Countries, Iran and Turkey in June 1993. The material sent out by the new organization provided inadequate rationales for excluding Israel, claiming Israel had different economic problems from the rest of the region. The organization cannot even bring itself to say that Israeli scholars are welcome to participate; instead, it makes the ambiguous statement, "All those who can contribute to the goals of Forum would be free to participate."(22) World Bank Vice-President Caio Koch-Weser, in his address to the Forum's founding conference, had the gall to center his remarks on openness as the key defining characteristic of a research institution without once mentioning the word "Israel." The industrial nations and private foundations that funded the initiative, and now the Forum, should learn from this experience that they have to insist as a sine qua non on Israeli participation in Middle East organizations they support.


To end on an upbeat note, let me offer an example of an industry with good prospects for growth through regional cooperation.(23) Tourism offers promising opportunities for demonstrating the material reward from Arab-Israeli peace. Much of the reward will come automatically, as a more peaceful environment encourages more visitors and stimulates private sector investment in tourism facilities. Israeli Foreign Minister Shimon Peres decried that "the region has not fulfilled its potential for tourism," and pointed out that "the root of the problem is violence."(24) Tourism is extraordinarily sensitive to the state of personal security, real and perceived. Should there be a wave of publicity about attacks on individuals, for either political or plain criminal motivations, tourism drops rapidly, as it did in Egypt from 1993 to 1994. Tourism is also sensitive to the state of national security, meaning not only war and peace but also the international perception of how a country fits into the international scene. Tourists -- vacationers and business travelers -- would rather visit a country with a government which promotes peace and upholdes justice. On both the personal and national security fronts, Israel suffered image problems in the 1980s, between the war in Lebanon from 1982 to 1983 and the intifada from 1987 on. In contrast, Egypt benefitted from Camp David and the subsequent blossoming relationship with the West.

One factor that makes tourism a promising area for inter-governmental cooperation is that Israel and its neighbors are on a more equal par regarding tourism than in almost any other economic field. In many areas in which functional cooperation has been proposed, Israel is the giant that, no matter how well-intentioned, has the potential to overwhelm its neighbors. But in the tourism industry, this is not the case. In 1991, Israel (including East Jerusalem) had 28,515 hotel rooms, while Egypt had 53,959; Jordan and Syria combined had 21,693.(25) Indeed, it is striking to realize that Amman has more hotel rooms than West Jerusalem, and that there are more hotel rooms on Nile River cruise boats than in Tel Aviv and West Jerusalem combined.(26) Compared to the 18-to-1 ratio of GDP between Israel and Jordan, the 4-to-1 ratio of hotel rooms is psychologically less troubling to the Jordanian side. Similarly, Egypt has a 2-to-1 ratio of GDP with Israel but almost a 2-to-1 advantage over Israel in tourism.

Tourism cooperation has the potential to create additional tourism for each country, rather than divert the existing flow of tourists from one country to another. The Middle East offers good prospects for "regional tourism," or visits to sites in a variety of countries in a region. Officials and members of the business community interviewed in the region agree that American Jews and Europeans are poor targets for such regional tourism: The former are mostly interested in visiting Israel, and the latter are more disposed to spend their vacations in one spot rather than visiting numerous places (hence the importance in the European market of package trips to one tour resort). That leaves Japanese and North American non-Jewish vacationers as the best targets for such regional tourism. To increase regional tourism from North America and the western Pacific will require marketing the region as a whole. An American or Japanese considering a vacation may not realize the geographical proximity of the key historic sites in the Levant and how easy it is to see the Pyramids, the Holy Land, the Jewish state, Roman ruins and the exotic Arab markets -- all in two weeks. Until now, there has been little government encouragement for such regional marketing. Though a fair amount of regional marketing is done by private travel agents for combination Israel-Egypt trips, these efforts have not had the coordination (e.g., a single marketing theme and slogan) that could be achieved through a government-sponsored campaign. In November 1993, the Egyptian, Israeli and Turkish tourism ministers signed an accord creating the East Mediterranean Tourism Authority.(27) Even if other governments believe it is inappropriate to join such an organization now, hopefully they can be induced to participate in the proposed marketing campaign.

Tourism cooperation offers several advantages from the perspective of aid donors. First of all, the tourism industry may be the best prospect for Palestinian economic development, at least in the short run. The tourism industry in the Levant is already so large relative to the Palestinian economy that if the West Bank (or, less plausibly, Gaza) were to capture even a small share in tourism growth, the impact could be quite significant. If the Palestinian areas received revenues equal to 5 percent of the 1992 Levant and Turkish tourism receipts (for example, about $400 million), that would be equal to 16 percent of the GNP of the West Bank and Gaza. Indeed, a number of observers -- Palestinian and non-Palestinian alike -- see tourism as one of the best prospects for the growth of the West Bank economy. Some of the Palestinian businessmen and officials interviewed feel there will be large-scale Muslim religious tourism to Jerusalem, perhaps in the hundreds of thousands per year. These tourists are seen as the mainstay of the Palestinian tourism industry, because they would prefer to stay in Palestinian hotels and some could be attracted to other religious sites in Bethlehem and Hebron. Palestinians also expect to gain considerable revenue from Gulf Arabs by exploiting the West Bank's cool summer weather and relaxed social atmosphere, transforming the area into a Gulf tourism destination as it was before 1967. Also, Gulf Arabs who are reluctant to overnight in Tel Aviv may feel more comfortable staying in the West Bank and making day trips to the beach and stores, or evening trips to nightclubs and the like.

A second advantage of tourism cooperation is that it offers a highly visible infrastructure project of the sort politicians love. That project is the development of a multinational airport at the head of the Gulf of Aqaba, where Israel and Jordan each have fewer than 20 miles of shore surrounded by Egypt on the one side and Saudi Arabia on the other. Israel is considering building a new airport -- which seems like an extravagance given that there are already four airports within a 20-mile radius.

The Swiss experience with France and Germany over the dual-administered airports in Geneva and Basel would be use useful to consider in this case. The ideal would be one airport with three exits at the terminal; one through a door marked "Egypt," one through a door marked "Israel," and one through a door marked "Jordan." Special, fenced-off roads would then bring travelers from those doors to the country concerned. The payoffs could be large: Economically, only one airport would be needed instead of three, while politically, the day-to-day administration of a joint facility would create professional ties that could undermine mutual suspicions. The international community could sweeten the pot by offering to finance on concessional terms an Israeli payment to Jordan or Egypt to cover Israeli use of the existing runway. Jordan or Egypt might find the offer tempting, because the money would be a windfall (the runways already exist). Jordan probably has the greater incentive to cooperate since, like Israel, it has a narrow coast line that makes it difficult economically to support a level of tourism that in turn would sustain an airport where flights could arrive directly from Europe (as distinct from the existing airports that mostly serve short-distance hops from the region's main national airports). Egypt has a long coast in the Sinai that it can develop on its own, quite possibly sustaining its own long-distance airport.

A third advantage of cooperation in tourism is the potential to relax the hair triggers on the borders. The best zones for tourism development are precisely some of the border areas which have been largely empty to date. Consider the case of the Sinai peninsula, which Egypt has targeted as one of the principal regions, if not the main region, for its tourism development in the next decade. During the entire period from the British occupation of the 1880s through 1967, Sinai was isolated from the rest of Egypt. A special permit was needed to visit the region. The area was empty except for the military presence; it was a battlefield waiting to be used.


A word of caution is in order about whether economic cooperation in fact contributes to peace. Consider the history of the most extensive case of Arab-Israeli economic cooperation, namely, the Palestinians working in Israel. The employment of 140,000 Palestinian commuters inside Israel knit together the two economies and did more than any other development to bring individuals from the two communities into person-to-person contact. The need to communicate on the job was a major reason to learn the other community's language; the daily contact taught much about the other's customs and habits. However, close contact engendered by economic cooperation has not been effective in overcoming the deep animosity between the communities and it may even have contributed to this animosity. Relations between the Jewish and Palestinian communities seriously deteriorated by the early 1990s, with individual Palestinians attacking Jews at random and visa versa. The 1993 closure of the occupied territories, designed to forestall such attacks, was popular among Israelis. The attacks and the closure made Israeli withdrawal from Gaza and much of the West Bank more acceptable to the Israeli public. This fact should be considered carefully by all those who expect economic cooperation to bring peace to the region.

The most important economic contributor to Middle East peace may not be cooperation but West Bank and Gaza development. The New York Times caught the mood in the region in its headline, "Economic Ties Are Regarded as Key to Israeli-PLO Pact."(28) The peace accord has the best chances for securing the approval of skeptical Palestinian public opinion if it can deliver higher incomes -- especially if incomes increase quickly before public attitudes gel. Raising Palestinian incomes by a noticeable margin should be a relatively simple task, given that the West Bank/Gaza GNP is less than $3 billion. The best options are cash aid to the PLO and immediate Israeli trade liberalization. However, neither is likely to happen. The international donors are emphasizing efficiency, accountability and coordination, which take time to achieve. The Israeli government is swayed by lobbying from those domestic groups that would be hurt if restrictions were lifted quickly. Current donor and Israeli policies are laying the foundation for sustainable rapid growth in the medium-term if peace flowers, but the donor and Israeli economic policies are doing little to help peace take root. Indeed, grandiose public investment proposals and high-profile aid promises to the Palestinians may be politically counterproductive by creating unrealistic expectations that, when dashed, could feed a public backlash against the accords.

Unrealistic expectations are a grave danger to the real but qualified potential for economic cooperation between Israel and Arab countries. Grand hopes for the future should not be allowed to get in the way of practical plans for the present. Nor should grand projects be allowed to absorb so much of the available financing that there is not enough for small-scale projects with a potentially larger social impact, such as the creation of and investment in labor-intensive industries for unemployed Palestinians. Realism suggests that we concentrate on what can be obtained now, even if that requires us to take imperfect steps; what matters most is the appearance of progress. The priority should be on the immediate disbursement of aid, without the comprehensive prepartory studies and careful accounting that aid economists prefer. If governments can increase regional confidence in cooperation as the wave of the future, then the private sector will find more ways to cooperate (and more resources) than the governments could ever provide.

Politics, not economics, will be both the main goal and the main determinant of economic cooperation. The principal barrier to cooperation is not technical matters that can be resolved through careful examination, but rather political will. Therefore, the effort spent on studies is on the whole a waste, because it delays timely agreement on small steps that create the climate of confidence vital for getting cooperation off the drawing boards and into action. We must first address political concerns about the consequences of cooperation. That may well mean proceeding first with some projects that have rather marginal economic effects. For instance, it may be desirable to finance a host of projects creating Palestinian institutions (like an electricity company) that are marginally profitable and for which it would have made more sense to cooperate with Israel, because assuaging Palestinian nationalism with such symbols may be more important than achieving economies of scale.

On a more positive note, the political taboos against Arab-Israeli economic cooperation have been broken. Broad consensus exists among Palestinian leaders for open borders with Israel, while Israelis are prepared to see the PLO assume some of the attributes of a government in regulating the West Bank and Gazan economy. Business leaders from several Arab countries are willing to visit Israel and explore joint business ventures. Israel is becoming increasingly accepted as part of the Middle East scene; its neighbors are treating it less as a pariah country. However little or much economic cooperation may contribute to prosperity, its political impact is exciting.

(1.) As translated and printed in Mideast Mirror, 16 September 1993, p. 16. (2.) Interview quoted in World Monitor, 5, no. 12 (December 1992) p. 21. (3.) Shimon Peres with Arye Naor, The New Middle East (New York: Henry Holt and Company, 1993) pp. 95 and 99. (4.) Speech of Crown Prince Hasan at the Middle East Economic Digest conference on "The Economics of Middle East Peace," printed in Foreign Broadcast Information Service -- Near East and South Asia, 13 January 1994, pp. 25-26. (5.) International Monetary Fund, Direction of Trade Statistics Yearbook 1993, p. 233. The same source is used for the trade of Greece and Turkey, below. (6.) International Monetary Fund, pp. 243-44. (7.) Indeed, Arab League Secretary General Esmat Abdel Meguid put the phasing out of these boycotts on the agenda of the League's March 1994 meeting, though no decision was taken. Kimberly Dozier, "Arab League to Consider Easing Boycott of Israel," Washington Post, 22 January 1994, p. A13. (8.) The new policy, based on a report by Israeli economist Ezra Sadan, is discussed by Salah Abd al-Shafi, director of the Economic Development Group in Gaza, in an interview in Middle East Report, 186 (January-February 1994) pp. 11-13. (9.) Interview with Finance Minister Schohat, Yediot Ahranot, 24 December 1993. (10.) Interviews with Israeli and Palestinian officials, December 1993. (11.) As a Wall Street Journal headline put it, "Israeli Businesses Fear That Autonomy In Territories Means More Competition" (Amy Marcus, Wall Street Journal, 24 June 1993, p. A8). (12.) Clyde Haberman, "Israel Seeks Deal with Qatar on Gas," New York Times, 29 October 1993, p. A10 and personal interviews in January and February 1994 with Israeli and Qatari officials. (13.) Chris Hedges, "Bananas Become Fruit of Egypt-Israel Friendship," New York Times, 18 December 1993, p. A4. (14.) World Bank, World Development Report 1993 (New York: Oxford University Press, 1993) pp. 276-7. (15.) Mideast Monitor, 17 December 1993, p. 12. (16.) Stanley Fischer and Thomas Schelling, Securing Peace in the Middle East: Project on Economic Transition (Cambridge, MA: Institute for Social and Economic Policy in the Middle East of John F. Kennedy School of Government, Harvard University, 1993) pp. 108-111. Other sources list more aid from non-governmental organizations than shown by Fisher and Schelling. (17.) Interview in Mideast Reports 186 (January-February 1994) p. 8. (18.) Jeffrey Sachs, "Betrayal: How Clinton Failed Russia," The New Republic, 31 January 1994, pp 14-18, and Jagdish Bhagwati, "Shock Treatments," The New Republic, 28 March 1994, pp 39-43. (19.) World Bank, World Development Report 1992 (New York: Oxford University Press, 1992) p. 197. The percentage of water in the Middle East allocated to agriculture is from the same source. The data refer to developing countries, which in the World Bank's definition excludes Israel and some of the Gulf Cooperation Council states. The percentages of water used and of water allocated to agriculture would have been higher had all states in the region been included. (20.) The comparative cost of diverting winter flood waters to the Sea of Galilee compared to various dam projects is analyzed in Haim Ben-Shahr, Gideon Fishelson and Seev Hirsch, Economic Cooperation and Middle East Peace (London: Weidenfeld and Nicholson, 1989) pp. 48-81, and Elisha Kally, "The Potential for Cooperation in Water Projects in the Middle East at Peace," in Gideon Fishelson, ed., Economic Cooperation in the Middle East (21.) This is a matter of some controversy. See Elisha Kelly water and peace: water resources and the Arab-Israeli Peace Process (New York: Praeger Books, 1993) pp 84-94. (22.) Letter dated 29 June 1993 from the coordinating committee of the economic research Forum for the Arab Countries, Iran and Turkey. (23.) This section draws heavily on the author's article, "The Prospects for Tourism Cooperation in the Levant," Policy Focus (The Washington Institute for Near East Policy, 1994), which was in turn based on interviews with tourism business people and Ministers of Tourism in Israel, West Bank, Jordan and Egypt in December 1993 and January 1994. (24.) Peres and Naor, p. 150. (25.) World Tourism Organization, Compendium of Tourism Statistics, 13th edition (Madrid: World Tourism Organization, 1993) pp. 50, 79, 83 and 151. (26.) Israel Ministry of Tourism, Tourism and Hotel Services Statistics Quarterly, 21, no. 2 (August 1993) p. 45; Egyptian Hotel Association, Egyptian Hotel Guide 1993-94 (Cairo: Egyptian Hotel Association, 1993) pp. 11148; Jordan Ministry of Tourism, data provided January 1994. (27.) Alistair Lyon, "Egypt, Israel, Turkey Link Up to Promote Tourism," Reuter, 5 December 1993, and Moredechai Benari, "Eastern Mediterranean Tourism Association," Israel Ministry of Tourism International Relations Division, unpublished paper, December 1993. (28.) As Clyde Haberman and Chris Hedges stated, writing from Jerusalem, "Economists and business leaders here [Jerusalem] caution that the key for success for the new deal struck by Israel and the Palestine Liberation Organization lies in rapid economic progress in the Gaza Strip and the West Bank," in "Economic Ties Are Regarded As Key to Israeli-PLO Pact," New York
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Title Annotation:Contemporary Issues in World Trade
Author:Clawson, Patrick
Publication:Journal of International Affairs
Date:Jun 22, 1994
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