Economic Gulf Divides Israel and Neighbors

Few would consider this town deep in northern Galilee the ideal location for a utopian vision.

The rocky Lebanese border lies clearly within eyesight. Encircled within the horizon are a handful of villages whose diversity embodies the troubled ethnic history of this region: a Jewish village here, there a Druze, there a settlement of Arabs.

Yet this temperamental region is the kind of place that breeds idealists, and therefore it is not surprising that Stef Wertheimer chose it 16 years ago as the site of his first industrial park. Not your ordinary industrial park: On a groomed hilltop are not only rows of small-scale manufacturing facilities but an experimental school for employees’ children, a sculpture garden and two museums. Nearby lies a residential planned community, complete with its own cultural and sports facilities.

Wertheimer, one of Israel’s most successful self-made industrialists, decreed that rents would be cheap, the better to help incubate the tenants’ businesses. In return, however, the tenants would have to meet his rigorous standards--clean industries, devoted to making goods for export.

From his windowed office atop the headquarters of Iscar, the international machine tool company he founded nearly a half-century ago as a makeshift workshop in his family’s kitchen, Wertheimer gazes down upon what he calls his “capitalist kibbutz” and outlines an even more farsighted vision. He sees a network of industrial parks straddling the borders between Israel and its Arab neighbors, bricks-and-mortar incarnations of the dream of regional peace.

“Eventually there will be a factory on the Israeli side and a factory on the Arab side,” he says, “and a coffee shop, instead of barbed wire, between them.”

The vision of cross-border economic cooperation in the Middle East is as old as the quest for peace itself, and just as elusive: Of the five international industrial parks Wertheimer proposes, for instance, only one, serving Gaza, has received even pro forma approval from the two entities involved, Israel and the Palestinian Authority.

Internal trade even among the four Arab countries surrounding Israel is minuscule, amounting to less than 6% of all regional exports, thanks to multiple tariff barriers. Historically, Israel’s economy has been scarcely strong enough to support its own people, let alone export capital, ideas and commercial opportunity to its neighbors.

Now, however, that is changing. Thanks to a high-tech boom that has made it a world-class creator of companies and a magnet for venture capital from all over the world, Israel is joining the ranks of global economic powers. The country is once again considering whether its relative prosperity in the region can be a tool for peace--at a time when peace seems more than ever a precondition for economic growth.

“Whether your company will grow or not depends on your relations with [Silicon Valley],” says Uri Savir, a Knesset member who was Israel’s chief negotiator at the Israeli-Palestinian peace talks in Oslo. “Whether it exists or not depends on Gaza. Without peace this latest revolution will not sustain itself.”

Most Israeli entrepreneurs are well aware that the flow of foreign investment capital into their country began in earnest only in 1993--after the Oslo accords signaled a new regional commitment to peace.

Israel’s prosperity may also act as an obstacle to peace; the economic disparity between it and its neighbors remains a source of friction and an impediment to better relations.

“In the end the [Mideast] conflict is economic,” Wertheimer says. “The difference between us and our neighbors is too much. Peace will come the moment all those countries make $6,000 per capita.”

Even after the inconclusive outcome of the recent Israeli-Palestinian summit in Washington, most Israeli high-tech executives believe that the peace process, as one puts it, “is irreversible.”

The moment of economic equality is a long way off, however. The per-capita gross domestic product of Egypt, Jordan and Syria is between $1,100 and $1,400, according to Economic Models Ltd., a Tel Aviv consulting firm, while Israel’s is $16,100. The gulf will widen dramatically if Israeli economic growth accelerates, as is expected, over the next few years.

This phenomenon reflects inequalities within Israel itself, where the burst of wealth among entrepreneurs and the engineers they employ has only begun to trickle down into the economy at large. Israeli businessmen and social commentators are already expressing concern at the widening of Israel’s digital divide--the gap between the wealth and opportunity of those plugged into the technology economy and those left behind.

Many entrepreneurs have made multimillion-dollar scores from selling their companies to American buyers. Even novice engineers in Israel can command $80,000 or more per year, four times the country’s per-capita gross domestic product. But while Israeli technology companies are struggling to find and retain engineers--even offering to pay the government $50,000 for each visa for foreign engineers it approves--unemployment in the economy at large is hovering at about 9%.

“The social fabric here is very delicate,” says Eitan Raff, chairman of Bank Leumi, Israel’s second-largest bank. “If somebody’s making 4,000 shekels a month [approximately $1,000] and others are making millions, that becomes a social issue. Israel can’t afford to have 9% unemployment.”

The division of wealth cuts especially sharply here because of the country’s distinctive brand of socialist economic history.

“Israeli socialism did not come from Marx, but from the Bible,” argues former Prime Minister Shimon Peres, who was defeated in his bid last month for the largely ceremonial post of president. “It tells you not how to handle an economy, but human values. It tells us you cannot let the market decide on the conduct of your life.”

By Peres’ reckoning, that places a special burden on the haves to help lift the have-nots.

“Would we be better off not having the [technology] boom?” asks Gideon Tolkowsky, a leading Israeli venture capitalist. “Decidedly not. But no doubt there is a widening socioeconomic gap that needs to be addressed.”

Even if high-tech can close the gap in Israel’s domestic economy, no one is sure that the industry can play the same role regionally.

For one thing, because Israeli high-tech companies are oriented toward research and development rather than manufacturing, they generate demand for limited numbers of highly trained workers rather than large-scale employment.

Most such companies, moreover, are preoccupied with developing their growing markets in the United States and Europe rather than embarking on joint regional projects that are almost certain to be fraught with bureaucratic difficulties.

Israeli entrepreneurs “are living more in the north of California than the west of Jordan,” says Omar Salah, a Jordanian entrepreneur who has managed to start several joint ventures with Israeli and overseas partners but still finds resistance to cross-border cooperation on both sides.

Additionally, the skills of Arab engineers are not always up to the standards set in Israel and the industrialized world. In part this is the result of a vicious circle: There are few opportunities for even trained engineers to exercise their skills, which consequently are in peril of simply withering away.

“The educational system in Jordan produces 3,000 engineers a year,” Salah says, “but there aren’t enough companies to utilize their skills. So they end up working in sales rather than building their creativity.”

Then there are the political and cultural obstacles.

No one would minimize the depth of mutual suspicion that still afflicts Israel and Arab nations--including Jordan, which signed a peace agreement in 1994, and Egypt, which reached the Camp David accord with Israel in 1978.

“It is a leap of faith [for Israelis] to do business in the Arab world,” Salah says. “People are still skeptical here in Jordan. A lot haven’t buried the hatchet.” He pauses to reflect. “Not that I’m oblivious to the past: The city of Herzeliya [the center of high-tech commercial development outside Tel Aviv] was owned by my grandfather, who lost it all in 1948.”

Relations with other Arab entities are obviously more difficult. And previous efforts to make economic development a component of Mideast peace agreements have foundered for a variety of reasons--some cultural, some political. There are few significant multilateral development projects in the region, and with the possible exception of Jordan, the passage of people, capital and goods across the borders between Israel and its Arab neighbors is hampered by numerous physical and bureaucratic obstacles.

But many participants still believe the effort is worthwhile.

“Economic development is a very important tool in changing the mind-set of people,” says Yossi Vardi, an entrepreneur and former Israeli government official who has participated in economic negotiations with Syria, Egypt and Jordan.

Even if few of the proposals made during those talks have borne fruit, he argues, the prospect of economic progress is inviting. “It’s like when you go to buy a house that is not yet built,” Vardi says. “The architect tries to project what it will look like when it is built.”

It is also true that many Israeli businesses have already succeeded with ventures in the Arab world, demonstrating that cooperation between Arab and Jew is no chimera.

Among the most notable is Delta Galil Ltd., a Tel Aviv textile firm that has taken advantage of the proximity of a large Arab work force to employ 5,000 workers at plants in Egypt and Jordan--more than work in its Israeli factories--to manufacture garments for Donna Karan, Calvin Klein and other apparel companies.

“Today we move goods and people easily across the border,” says Dov Lautman, Delta’s chairman. “We’re within commuting distance of both Egypt and Jordan, and there are good technical human resources there. So our company decided it would be our strategy to build there instead of moving our factories to Eastern Europe.”

Indeed, thanks in part to the policies of its farsighted leader, King Abdullah II, who took power last year, Jordan is emerging as the most progressive economic story in the Arab Middle East. Among other things, the country has brought its intellectual property and contract laws more into accord with international standards and offered financial incentives for foreign investors.

“Abdullah is making a revolutionary change to the way business is done in Jordan,” says Calanit Dovere, an American venture capitalist investing in the country. Perhaps more than any other Arab ruler, Abdullah understands that technology makes national borders irrelevant while increasing opportunities for all.

“The Jordanians ‘get’ technology,” Dovere says. “But the question is whether they’re going to be able to move forward.”

And certainly many in the Middle East are convinced that technology itself and the changes it has wrought in the world economy may do much to erase the importance of national boundaries.

“The most important factor in our lives is no longer real estate,” Peres says. “The most important factor is speed. Now, after thousands of years of learning to cultivate land, we have to invest in learning how to cultivate the person.”

Israel’s Technology Boom

Today’s story and the complete series are available at https://www.latimes.com/israeltech.

Previous stories by Times staff writer Michael A. Hiltzik cover:

* The transformation of the Israeli economy.

* A profile of two leading tech titans.

* How the army acts as a high-tech boot camp.