When Lack of Peace Becomes Too Costly

As an American CEO whose company is the controlling shareholder in Israel’s largest corporation--Koor Industries Ltd.--I applaud Prime Minister Benjamin Netanyahu’s historic handshake with Yasser Arafat on Wednesday. One key reason for this meeting reportedly was Netanyahu’s concern that Israel could face dire economic consequences unless there is progress in the peace process.

In Israel, Netanyahu’s economic program has been commanding almost as much attention as his approach to the peace process, as he has tried to reduce government spending, cut red tape that hampers free enterprise and speed up privatization. But the summit with Arafat, as well as a recent promising meeting of Israeli and Palestinian finance ministers, show that the prime minister has begun to realize that internal economic reforms won’t make Israel prosper if investor interest is dampened by a breakdown in talks with the Palestinian Authority.

When he first took office, Netanyahu seemed to believe, or hope, that his country’s economic health was not necessarily contingent on progress toward peace. During a visit with financial leaders on Wall Street shortly after his election, Netanyahu caused some consternation when asked if he could ensure “political stability” and a continued peace process. His response: A nation’s political stability and foreign relations should not affect international business decisions. After noting that the economies of nations like South Korea and Taiwan have thrived despite tensions with neighbors, he characterized political issues as a secondary factor in evaluating national economies.

That is clearly not the case. After decades of shunning Israel because of the now-irrelevant Arab boycott and a fear of regional instability, foreign capital has rushed in because of the peace process. In the last year, investments from abroad increased by 140%. Similarly, international businesses once loath to take advantage of Israel’s brainpower and technological capabilities have begun to do so. And foreign markets that were once tightly closed to Israeli goods have opened.

Because Israel is a small country, it needs to be an active exporter and trader if its economy is to grow. The peace process made that possible. Although the Israeli economy suffers from high inflation and has other problems, its GDP has been growing at a brisk 5.8% annually, the highest rate of the industrialized countries.

Netanyahu’s analogies to South Korea and Taiwan were misplaced. South Korea has a population of 48 million and Taiwan a population of 22 million, so they can sustain growth fueled mainly by domestic consumption. Israel, with 6 million people, cannot. Its prosperity depends on its place in the international economy.

On those occasions when the new Likud government has shown a determination to sustain the peace process, investors and the international business community have responded favorably. On the other hand, stagnation in the process has caused a stagnation in Israel’s capital markets.

Foreign investors have been unwilling to commit capital to the Israeli economy until it is clear what approach the government will take toward the Palestinians. Even more telling, Israeli investors and mutual funds have been withdrawing capital from industry by selling stocks and purchasing bonds and government paper until the uncertainty is resolved. That uncertainty undoubtedly contributed to a sharp decline in the Tel Aviv Stock Exchange since Netanyahu’s May election.

A policy of no movement (or worse yet, an unraveling of that process) would have the effect of starving Israeli industry of much-needed capital. If capital cannot be attracted from the private sector and foreign markets are closed, the Israeli government will find itself either subsidizing industry or allowing industry to become second-class.

It would be presumptuous of me, an American businessman, to suggest specific moves to sustain the peace process. I know that Netanyahu wants to find a way to enhance Israelis’ personal security and continue the peace process. Furthermore, as an American Jew who strongly supports Israel, I wouldn’t dream of suggesting that the interests of foreign investors should prompt Netanyahu to adopt policies that he feels will harm his country’s security.

Nevertheless, as the negotiating process continues, Netanyahu must not forget that Israel’s prosperity will be jeopardized if the prospects for peace become dimmer and the international business community is scared away. The recent handshake and renewal of negotiations between Israel and the Palestinian Authority show that Netanyahu understands this and is moving in the right direction.