Despite Peace Woes, Arabs and Israelis Link Up in Business

Almost unnoticed amid the crowd of Mideast officials and financiers, two men exchanged heartfelt greetings and embraced, cheek to cheek.

Considering they come from opposite sides of this region's political divide - Israel and the Persian Gulf state of Oman - their meeting at the third annual Mideast economic conference here is instructive.

"These are Omanis making business with Israelis," said Oded Eran, Israel's deputy director for economic affairs, after conferring with the turbaned Omani.

"The major problem is psychological. All of us are living in a region full of strife, mistrust, and skepticism. Now we must build a different environment, which accepts cross-border projects with mutual benefits," he says.

Despite the current Mideast peace impasse that includes the still-unresolved issue of Israeli withdrawal from the town of Hebron - as well as Palestinian calls to isolate and pressure Israel, and the high-profile arrest on spying charges of an Israeli manager in Cairo on the eve of the conference - interested investors and officials are following a parallel track of their own.

Their aim is to integrate long-protected economies across the Mideast and North Africa - including Israel - and put economic "facts on the ground" that are likely to underpin an eventual political peace.

But problems abound, and almost every economic move is seen through the filter of the stalled peace process. Still, this week's meeting is the third since Israel, the Palestinians, and Arab states launched the peace process. Despite predictions of doomsayers, this conference attracted an unprecedented number of global business leaders, economists, and officials.

The US delegation alone included two cabinet secretaries and 260 businessmen, 100 more than at last year's summit in Amman, Jordan. US officials say their presence indicates long-term optimism.

"When businessmen give their time, it is their most important resource and indicates hope," says Leonard Hausman of Harvard University's John F. Kennedy School of Government.

But he also voiced caution. "It's the primaries, not the election," he says. "The election will come when people see before their eyes a peace process that is on track."

Topping the list for financiers and economists alike is improving the investment climate. Though Egypt is undertaking an ambitious reform program, other countries such as Jordan, Israel, and the Persian Gulf states are not doing enough, they say.

Economists point to the need for deregulation, clear commerce codes, better laws on intellectual property, and lower tariffs.

Privatization and competition will also be key to attract investors. Instead of inspiring hope, economic indicators show the work to be done. These are the figures that worry investors, but - if improved - could turn disparate economies into a lucrative, integrated market:

*Intraregional trade accounts for an average of just 7 percent of each country's imports and exports in Middle East and North Africa (MENA) nations, compared with 60 percent for the European Union. Part of the problem is trade barriers and the fact that Israel's Western-oriented economy has little appetite for non-oil Arab exports.

*International Monetary Fund figures for the past decade show per capita growth for MENA countries has declined, even as it rose some 40 percent in developed countries.

Slow growth can be "traced to poor economic policies," says Stanley Fischer, an IMF deputy managing director. He notes a "palpable feeling of change in the air" but adds that lasting reform requires "reorienting the role of government."

*Exports from MENA countries have fallen 5 percent in 1990-95, while growing 20 percent for developing countries and 10 percent for industrial nations.

Nemat Shafik, the World Bank manager for the MENA private sector, says that non-oil exports for this region of 250 million people were comparable in value to Finland, with a population of just 6 million. MENA exports average $100 per person, while in Southeast Asia they are $3,000.

*MENA nations' reinvestment in their own economies averaged 20 percent, well below the developed nations' average of 25 percent and the Asian figure of 30 percent.

*Integrating Israel's large economy with poorer neighbors presents special challenges. "It is difficult when you have a $90-billion Israeli economy, next to a $2-billion Palestinian one," says Judith Barnett, an acting deputy US assistant secretary of state. "They started at 100 miles per hour, and have slowed up."

Observers point to a "readjustment" under way vis--vis working with Israel. Arabs must "be ready to engage deeply with Israel," says Joel Peters of London's Royal Institute of International Affairs.

Jordan and Israel recently signed a "door-to-door" deal, which permits goods to be carried on the same truck between them. Before, goods had to be transferred to Israeli trucks and if the cargo were continuing to Egypt, transferred again.

*A big obstacle is the deteriorating Palestinian economy in the West Bank and Gaza. Here more than 300 days of closure - keeping Palestinian workers out of Israel - by the Israelis since September 1993 have taken their toll, cutting output to one-third its previous level.

Still, changes are under way. Egyptian President Hosni Mubarak's speech at the conference, for example, is believed to have been vetted first by Egyptian business leaders - an unheard of concession.

US Secretary of State Warren Christopher said: "For too long, this region has been held back by the ravages of conflict and war - and by the inefficiencies of statist and protectionist economic policies.... To compete effectively, this region must not only make peace, it must reform."