Overseas Investors in Israel Await the Fate of Peace Process

The photographs in Benjamin Gaon’s 15th-floor office overlooking the Mediterranean are a reminder that peace has been sweet for Israel’s business community.

The president of Koor Industries, the country’s largest industrial conglomerate, is pictured with Yasser Arafat, leader of the Palestinian territories, where Gaon does $120 million a year in cement, steel and telecommunications business.

Nearby is a signed photograph of Jordan’s King Hussein, in whose country Gaon is building a food manufacturing plant. And there is a picture of Yitzhak Rabin, Israel’s assassinated prime minister, with whom Gaon traveled to Japan in the wake of Israeli peace agreements with the Palestinians and Jordan to bid for more trade and investment.

The question is whether Gaon will have any new pictures of success to add to his collection in the next four years under the administration of Prime Minister Benjamin Netanyahu, whose hard-line policy statements have caused concern about the future of the Middle East peacemaking.

“The peace process signaled to the world that there is no uncertainty in Israel, that they can rely on a good return on investment,” Gaon said in an interview. “I don’t think there’s a setback yet. Maybe there is a kind of wait-and-see [attitude] . . . . The threat is that by saying, ‘Let’s wait,’ they will pick somewhere else.”

Gaon’s worries have been echoed by Yaakov Frankel, the governor of the Bank of Israel, who told the daily newspaper Maariv that “it is crowded on the fence these days,” and warned the Netanyahu government to quickly ensure that foreign investors land on the right side.

At stake is Israel’s economic boom--6% annual growth--and its dream of becoming a kind of Middle Eastern Singapore, the headquarters for multinational companies investing in a much-desired regional common market.

“The whole strategy,” said Israel Bank spokesman Ohad Bar-Efrat, “is for the Israeli economy to become an integral part of the world, to participate in world economic organizations.”

The strategy has been working. Foreign investment in Israel has nearly tripled since 1993, when Rabin signed his first peace accord with the Palestinians on the White House lawn. About 75 Israeli companies have made it onto the New York Stock Exchange. And exports have grown by 31%, a good chunk of that to India, China and other countries that would not trade with Israel while the Arab economic boycott was in full force.

The growth in exports created jobs that helped Israel absorb hundreds of thousands of Russian immigrants into the economy and still bring down unemployment, from 11% in 1990 to 6% now. Inflation also dropped to 8% last year, although it is creeping back up to about 14%.

In fact, business was so good under the Labor government of Rabin and his successor, Shimon Peres, that Gaon and many other prominent business leaders openly endorsed Peres in the May 29 election.

When it suddenly became clear that Netanyahu would win by a razor-thin margin, Gaon rushed to calm stockholders with a letter saying he expected that Netanyahu would “keep the peace train on track.” Similarly, Dan Propper, president of the Manufacturers’ Assn. of Israel, got on the telephone to reassure investors. His own food company, Osem, had just plowed $7.5 million into a company in Egypt to produce bakery goods.

Nonetheless, instead of going full guns, some Israeli and foreign investors are holding back for clear signs that Netanyahu will sustain the good relationship Israel has with Egypt and Jordan and continue to move forward in negotiations with the Palestinians and Syria. Most important, they want to be sure that the relative peace and stability Israel has enjoyed in recent years will continue.

“I have heard of some companies that were on the edge of signing [investment] agreements that have said, ‘Let’s wait and see,’ ” said Dan Catarivas, the Finance Ministry’s deputy director general for international affairs. “A couple of contracts have been put on hold. An Israeli company that was going to issue stocks on the London market decided to postpone for six months. But it’s not a major trend.”

Additionally, a meeting of Middle Eastern tourism organizations, including Israel’s, that was supposed to be held in Tunis, Tunisia, on June 24 was postponed until September at the request of Arab members wanting to see what happens to the normalization of relations with Israel.

The Middle East-Mediterranean Travel and Tourism Assn. was formed after the Middle East-North Africa economic summit in Amman, Jordan, last year and was considered a further sign of Israel’s acceptance as an economic partner in the region. Tourism in Israel has nearly doubled under the peace process to become a $3-billion-a-year industry.

Although some potential new markets for Israel may be on hold--Malaysia apparently has shelved its interest in opening a trade office in Israel--Catarivas and others remain optimistic that most of the doors that opened in the 1990s will remain open, barring a major political or military confrontation with the Arab world.

Their optimism was reinforced in late June. While the president of Tunisia attended the summit of Arab leaders in Cairo to protest Netanyahu’s apparent backtracking from the key premise of trading land for peace, a delegation of Tunisian business people visited Israel in search of business opportunities.

“Kuwaiti businessmen came just after the election. . . . Our offices in Oman and Qatar have not closed. . . . China and India are not going to end their relationship,” Catarivas said. “Some companies are here not because of the peace process, but because Israel is a strong economy. They’re here to stay.”

With its highly educated work force and per-capita income of $13,500 per year--about 16 times its neighbors’--Israel remains attractive to investors. On the purely economic front, Netanyahu has sent several messages to the national and international business communities that he means to make the economy even stronger by continuing the country’s economic liberalization.

He named the business community’s favorite candidate, Likud Party moderate Dan Meridor, as finance minister, and left the respected Yaakov Frankel as governor of the Bank of Israel. Netanyahu, a graduate of MIT in business administration, promised to privatize more than a score of state-owned companies and to cut the federal budget by about $1.6 billion--despite heavy pressure from his religious and immigrant party coalition partners for more spending. This is well and good, say business leaders, but they want to see movement on the peace front as well.

“If Bibi Netanyahu proceeds with the peace process, he will have the full support of the business community,” said Gaon, using the prime minister’s popular nickname. Noting that Netanyahu is to see President Clinton next Tuesday, Gaon added, “By the time he comes back, he should make some decisions.”

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Going to Israel

Foreign investment in Israel has climbed nearly sevenfold in the 1990s, but uncertainty over the peace process and the election of hard-liner Benjamin Netanyahu as prime minister have prompted some investors to take a wait-and-see approach.

Foreign investment, in millions:

1995--$2.03

Source: Bank of Israel