Investors See Hope in the Middle East

Two years after the terrible events of Sept. 11, violence has reached new levels of pain and futility in Israel and the Palestinian territories, and the killing goes on in liberated Iraq. As the death and destruction continue, some 100 million young people throughout the Middle East have little or no gainful work, their meager prospects making them potential legions of terrorism and hate.

But across that troubled landscape, if you take the time to listen, the economic world quietly is telling a more hopeful story than the political world. Economic development, incredibly, is possible amid political despair.

If you look “below the radar screen,” in the words of one U.S. financial manager, investors’ interest in the region is evident. Despite the bleakness in so many parts of the region, new business ventures and the development of essential projects for water and other infrastructure are proceeding.

There is a strong desire for economic development in the West Bank and Gaza, in Jordan and in Egypt. At the Amman Stock Exchange in Jordan, the stock prices of local companies have been pushed toward peaks last seen in 1994, when there was greater political optimism across the Middle East.

Egypt’s large economy, about $100 billion in gross domestic product, is still growing at a good clip, shrugging off the slowing of tourism and foreign investment of the last two years. In Israel, where the economy has been in recession because of the global technology downturn plus the terror of suicide bombings, a surge of foreign investment is imminent.

And the Palestinian territories? There, you would think, the political despondency would be such that the economy wouldn’t have a chance. But, in many ways, the signs are encouraging, even promising.

This year, the Palestine Investment Fund was organized by Salam Fayyad, the finance minister of the Palestinian Authority, which rules the West Bank and Gaza. This new fund is putting to sound use $600 million raised from the Palestinian people, money that used to be poured into accounts that served mostly as a slush fund for Chairman Yasser Arafat.

Fayyad’s ability to make sound investments -- without political interference -- is backed by the United States, the United Nations, the European Union and Russia, all of whom reckoned it was time the territories’ 3.5 million Palestinians saw some benefits.

Now, Standard & Poor’s attests to the soundness of the fund’s investments in dozens of local companies. The fund’s management is being assisted by the Democracy Council, a Los Angeles nongovernmental organization staffed by former PriceWaterhouseCoopers investment managers.

The Democracy Council has big ideas for the Palestinian territories. Its president, James Prince, hopes to organize a border company for Gaza that can perform freight and security services for 500 trucks a day that cross the Israeli line. “We’re looking for a firm like DHL or Federal Express to operate such a company,” Prince says.

The Democracy Council’s plans also call for privatizing the West Bank electricity company; it boasts a modern power plant built by the U.S. firm Enron before it fell into bankruptcy proceedings two years ago.

Arabs living far from their homeland are showing increased interest. “I get calls every day from Arab investors inquiring about prospects in the region,” Prince says.

Jordan, whose King Abdullah II visits President Bush and Congress this week, signed a free trade agreement with the United States two years ago and has seen results. Jordanian textile and apparel production has risen, thanks to local firms such as Jordan Worsted Mills Inc. and to investments by Israeli firms such as Delta Galil Industries Ltd.

The prospect is that Jordan will be able to upgrade its industry with orders for electronics assembly work from Israel and other countries.

Of course, it’s Israel, with companies that are technological leaders in pharmaceuticals and information technology, that has a modern economy unlike any other in the Middle East. The country’s longtime trade and investment ties are with the industrial world of the United States, Europe and Asia.

Even as the death toll mounts, Israel is still viewed as a place to put capital: Right now, as much as $900 million from U.S. pension funds and institutional investors is being amassed by Markstone Capital of Los Angeles and other U.S. firms for investment there.

And Israel itself is looking in new directions, forging economic ties with Jordan and Egypt. In fact, the Palestinian Authority and the Israeli government are cooperating -- very smoothly -- on a water treatment project aided by Santa Monica’s Milken Institute.

The Middle East, stretching from Iran to Morocco, has always had enormous potential: It has 8% of the world’s population but only 2% of its economic output. Sadly, that potential has never been realized. But it could so easily be, and Iraq -- if it survives the postwar transition led by the United States -- is viewed by many as the great laboratory for economic development in that part of the world.

For a change, Arab scholars are thinking about the possibilities of spurring the regional economy. In “Arab Economic Integration,” a new book published by the Egyptian Center for Economic Studies, economist Ahmed Galal and others outline the benefits that would come to their societies if the countries of the Middle East followed the cooperative example of the European Union.

At this time of war and destruction, a lot of doubt is expressed about the Middle East and its people, and about how the Islamic religion may be incompatible with democracy, or even with economic expansion.

But, in fact, Noah Feldman, a scholar of Islam, says in his new book “After Jihad” that it is likely that this very period of turmoil will produce Islamic democracy in many countries, and the jobs and development that would bring.

“Skepticism is appropriate,” Feldman concedes. “But so is creativity.”

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James Flanigan can be reached at jim.flanigan@latimes.com.