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BREAD AND PEACE

Days after the signing of the interim agreement between Israel and the Palestine Liberation Organization, the gritty West Bank town of Ramallah looks like a liberated zone. Long-outlawed Palestinian flags fly from the lamp posts, and scrawled revolutionary slogans cake the imposing stone walls. The setting may not look auspicious for commerce, but in one building nestled on the rocky hillside, Daniel Issa, a local soft-drink magnate, is getting a headstart on nation-building.

Seated at an enormous rounded desk, Issa fields phone calls from Palestinians and Israelis alike. He's talking with Coca-Cola Co. and PepsiCo Inc. about bottling franchises for the territories. And he's establishing a vast industrial park he hopes will attract investors. Issa rubs shoulders with PLO heavyweights on the Palestinian Industrial Council, a kind of shadow ministry of industry. "I'm recommending to our leadership that we give a lot of incentives to multinational investors," he says.

Issa and other such entrepreneurial Palestinians are key actors in the bold experiment now under way in the Middle East. After the pomp in Washington and the euphoria felt around the world, a sense of the enormity of the task ahead is settling in. As Palestinian leaders prepare to assume real responsibilities in the long-disputed territories, they feel mounting pressure to move quickly.

For now, they're taking a decidedly free-market, pro-business approach. If they succeed, one of the world's most dangerous hot spots will be cooled off. The extremist Muslim movement that thrives on despair will lose its driving force. Already, oil prices have fallen sharply as the market reflects a decline in regional volatility (page 3521). The bitter political discussions that have prevailed in Jerusalem for decades are giving way to talk of free-trade zones encompassing not only the Palestinian areas and Israel but a substantial common market including Jordan, Lebanon, Egypt, and even hard-line Syria.

But cementing the long-dreamed-of peace will require new economic stability--and growth. While some 65% of the residents of the territories approve of the accord, a hard core of Muslim militants and fervent nationalists remain violently opposed. If there is economic development and stability, "people will work and not [flock to] fundamentalism," says Hasib Sabbagh, a Palestinian construction mogul based in Athens. Adds Hanna Siniora, now the head of the European Palestinian Chamber of Commerce: "If we don't succeed in this, all our other efforts will fail."

So whatever can be done to buy the peace seems worth the price. And fortunately, the price tag doesn't appear to be all that steep. The 2,300-square-mile territories encompass only a $3 billion economy. The $5.5 billion in foreign aid and private investment that the World Bank estimates will be needed over the next 10 years seems easy enough to raise (table).

Already, the French have hinted that they will fund an airport near Yassir Arafat's future headquarters in Jericho and a port in Gaza. The overseas Palestinian community can be counted on to kick in much of the $2.5 billion in private investment that the World Bank thinks the territory can absorb over the next decade. Although many people in the territories are poor and live in squalid conditions, there is money both there and abroad.

TOURIST ATTRACTIONS? One eager overseas Palestinian is Nablus-born, U.S.-trained Munib Masri, a former Phillips Petroleum Co. executive who runs a construction and manufacturing conglomerate based in Amman, Jordan. Like many Palestinian businessmen who have prospered abroad, he feels an obligation to help create a new nation. Even before the peace accord, he sent a team to scout business prospects from construction to tourism, and he hopes to set up a second headquarters for his group near Jerusalem. "The diaspora taught us a lot, and we owe it to Palestine," he says. "I would love to be the project manager personally to build a road or school or anything."

And Jaffa-born, Kuwait-based Abdul Muhsen Kattan, whose businesses range from real estate to investment banking, is discussing with other Palestinians the establishment of a holding company to identify projects for prospective Palestinian investors. The motive, Kattan says, is not mainly profit but "to go and help our people. There are many like me."

The people certainly need the help. After 25 years of Israeli occupation and five years of the violent Intifada, or uprising, the territories are decrepit. Telecommunications, the electrical grid, water, and sewage are all about five decades out of date. Experts figure unemployment is running as high as 35%. Upward of 300,000 Palestinian refugees from the 1967 war may now flood into the territories, further straining the job market and the housing stock.

Nor are political problems among the Palestininans and with the Israelis resolved. Israeli settlements will remain as flashpoints in both Gaza and the West Bank. At a recent panel discussion with Israeli and Palestinian academics, Khalil Shikaki, an adviser to the PLO on security matters, predicted that attacks on Israeli settlers by Gaza radicals were inevitable and could still torpedo the accord.

DELICATE TASK. Arafat's arrival on the scene could also make political waves. He is expected to bring his close associates and his bureaucracy from Tunis to the territories and could face a delicate task in appeasing local leaders who have developed followings of their own and considerable independence in recent years. Faisal Husseini, the top Palestinian leader in the territories, recently threatened to resign from the negotiating team over Arafat's secretive handling of the peace talks.

There is also some concern that Arafat will continue the lax management style that has apparently helped dissipate much of the PLO's multibillion-dollar fortune. One worry in particular is that he will favor the politically well-connected with choice business opportunities. But some close observers of Palestinian affairs think the PLO chief knows this is his last chance and will reform his ways.

TAX SOURCE. As for the Israelis, whatever powers over the Palestinians they are giving up, they still hold the fate of the territories in their hands. In the short term, many Palestinians say, it is crucial for the Israelis to reverse their policy of closing off the territories. That has shut thousands of Palestinians out of the Israeli construction and other industries, nearly one-third of the 350,000 workforce.

Indeed, for the Palestinian economy to succeed, Israel will have to relinquish much of its economic control. For years, Israel has run the territories as a captive market for its products, and it squeezes much more revenue out of the territories in taxes than it puts back. The territories are basically a free-trade zone for Israeli companies, but Palestinian vegetables and other products are banned from Israel. Exports from Israel to the territories approach $1 billion a year, while only $200 million in textiles, building materials, and other products go the other way. The Israelis also keep cheap Jordanian foodstuffs, household goods, and cement out of the territories. Now, Israel will be under pressure from the international community to change this, and such officials as Central Bank Governor Jacoab Frankel are urging such a course. But there is not yet a guarantee that the politicians and powerful lobbies will go along.

Even with all the pitfalls, much goodwill exists on both sides--particularly among the technocrats. Israeli economist Haim Ben Shahar, who chaired a 30-member government committee on autonomy, urges dropping barriers to Palestinian exports, including tomatoes, cucumbers, and other agricultural goods. He believes that in the long run, free trade with the Palestinian areas would be good for Israel. "The pie will increase on both sides," he says.

If the Israelis play their cards right, they could be big winners. With the Arab boycott fading, Palestinians could become Israel's bridgehead to the lucrative Persian Gulf markets. Some Israeli businessmen are already establishing close ties with their Palestinian counterparts. Benny Gaon, chief executive officer of Koor Industries Ltd., Israel's largest industrial concern, says he is close to forming a joint Israeli-Arab-Palestinian company that would invest in the territories. He plans to eventually list its stock in the U.S. "We started preparing a year ago," he says. "We knew we had to go into the Arab markets."

PROPERTY BOOM. Amid all the uncertainty, there is much reason for optimism. The Palestinians are an educated and energetic people. They have waited a long time for a crack at having their own state, and they are bound to open their wallets. If the Israelis pull their troops out of populated areas and the Intifada dies away, there could be at least a miniboom.

Already, choice homesites in Ramallah have tripled in price, to $180,000. In Gaza, a hellhole by any definition, a parcel of prime commercial property goes for as much as $1 million. If all goes well, the World Bank foresees economic growth exceeding 3% per year, raising the current $1,700 per capita annual income to above $2,300 in a decade. Economist Shahar predicts that growth could ultimately be as high as 10% to 12%.

But experts say that serious industrialization in the territories will proceed slowly. In the next year or so, economic growth is likely to come largely from a housing boom generated by political stability and an easing of tight Israeli zoning restrictions, particularly in the Gaza Strip. New government buildings in Jericho in the sultry Jordan Valley would also fuel construction. Another possible area of early growth could be tourism--the mainstay of the economy before 1967. Such revered cities as Bethlehem, Jerusalem, and Hebron, the site of the tomb of Abraham, have huge potential for attracting both Western and Muslim visitors.

Much of the industrial investment, as it trickles in, is likely to be closely tied to Israel, whose $60 billion economy is 20 times that of the territories. The Israelis are already trying to turn the territories, especially Gaza, into a kind of maquiladora area to take advantage of cheaper labor costs. The Israelis are encouraging the Gazans to shift from vegetables into the labor-intensive cut-flower industry for the European markets. Also, there are many Israeli-Palestinian partnerships in clothing and textiles.

Although they are still skittish about discussing their contacts, many Palestinians are now scrambling to cut deals with Israelis. While they find the prospect of being junior partners irritating, Palestinian economic thinkers say they are willing to accept such relationships as long as the Israelis are sincere about opening their markets to Palestinian goods. "We know we can't jump from the bottom to the top of the ladder," says Samir Abdullah, an economist and a member of the Palestinian negotiating team. "We just seek fairness and then want to let the law of comparative advantage play out."

Here and there, one can find investment just waiting to be made. Vahan T. Ohanessian takes a visitor through his family's $18 million Ohanessian (TAKO) Paper Industries plant in Ramallah. He proudly points to a huge disposable diaper machine that he designed himself and had built in the factory's workshop. Ohanessian says he has lost money since the Intifada began in 1988 because his workers are afraid to report for night shifts and miss day after day because of political strikes and funerals. Gesturing out at an empty yard, he says that just before the Intifada, he was poised to add capacity there that would have more than doubled the factory's present workforce of 120. Boasts Ohanessian: "If they leave us free, we can compete with anybody."Stanley Reed in Ramallah with Neal Sandler in Jerusalem, John Pearson in New York, and Owen Ullman in Washington


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