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The Peace Dividend For Israel And Jordan


International Business

THE PEACE DIVIDEND FOR ISRAEL AND JORDAN

Umayyah Toukan, the head of Amman's small but bustling stock exchange, was wary of talking to his Israeli counterpart at a financial conference in London last April. After all, the 46-year-long state of war between Israel and Jordan had put a chill on most contacts. "We both presented papers at the podium, and that was about it," recalls Toukan.

All that has changed now. Just minutes after watching Jordan's King Hus-

sein and Israeli Prime Minister Yitzhak Rabin end their state of war in Washington on July 25, Toukan says he wants to forge links between the Amman and Tel Aviv exchanges. "We're optimistic," says Toukan. The stock exchange chief has already seen one other important payoff. Waves of buying in mid-July by investors anticipating a peace bonanza for Jordanian companies finally turned Amman's 10-month-old bear market around.

The bullishness could be contagious. The Hussein-Rabin pact could be just what it takes to give the Middle East peace process irresistible momentum. With Jordan on board, Syria, the last major holdout to cutting a deal with Israel, has few cards left to play. The sweeping political changes could set the stage for a reversal of economic mis-fortunes in the long-troubled eastern Mediterranean region. One believer is Stanley Fischer, chairman of Massachusetts Institute of Technology's economics department. "There is bound to be an expansion of trade," he says. "Trade is good; peace is good; and investment is good, and all those things are going to happen."

It looks as if there will be a quick economic payoff for Jordan and Israel, which already have a list of proposed projects (table). That's why this deal could prove to be so different from Israel's two previous peace agreements with Arab neighbors. The hostile Arab reaction to the 1979 Camp David accords caused Egypt to settle into a kind of cold peace with Israel, with very little two-way trade. The economic dividends from the new agreement with the Palestine Liberation Organization are also likely to be slow to emerge because of lingering hostility between the two sides and the moribund state of the Gaza and West Bank economies.

Jordan could use a quick lift. King Hussein and his 4.1 million constituents paid a heavy price for keeping his links to Iraq's Saddam Hussein during the gulf war. The Persian Gulf states angrily cut off their aid, forcing Jordan to reschedule its $7.3 billion in foreign debt in 1992.

To help entice Hussein to the negotiating table, the Clinton Administration has been dangling promises of debt forgiveness since last winter. Now, Clinton is asking Congress to forgive all of Jordan's $702 million direct debt with the U.S. The U.S. is also offering the Hashemite kingdom military aid and its good offices in interceding with other foreign debtors. For an economy whose gross domestic product totals little more than $4 billion, these moves could provide a dose of economic adrenaline.

MAJOR PROJECT. Jordan should also benefit from a rapid increase in tourism. The Washington Declaration calls for opening new border crossings between the ports of Eilat and Aqaba and in the Galilee region, as well as first-time-ever electricity and phone links. This will make it easier for Holy Land tourists to visit such Jordanian attractions as the ruined desert city of Petra and the Grand Canyon-like Wadi Rum, where Lawrence of Arabia was filmed. Already, Tel Aviv-based Galilee Tours is planning trips to Jordan for Israeli citizens who also hold non-Israeli passports. In Amman, prominent tour operator Tawfiq Kawar predicts that the number of foreign tourists visiting Jordan will rise by "at least" 25% in the coming months.

Jordanian executives are already involved in a huge tourist project: a $1 billion plan to build hotels, amusement parks, and health spas along the Israeli-Jordanian border at the barren northern end of the Dead Sea. The project is led by Africa Israel Investment Ltd., a Tel Aviv-based real estate developer. Other possible investors: Holiday Inns Inc. and South African tycoon Sol Kerzner, developer of Las Vegas-like Sun City. Africa Israel CEO Shlomo Grofman says investors "sense that the Middle East is finally starting to change, and they want to be in on it."

The terms of trade between the two countries will probably be hashed out in negotiations in early August. Jordan, with substantially lower labor costs than either Israel or the Palestinian territories, is pushing for access to Israeli markets. Some Israeli companies are worried by the prospect of uncontrolled imports of cheap Jordanian cement, wood products, and textiles.

But in many ways Israel's economy stands to gain the most from peace. King Hussein's move to withdraw from the half-century-long Arab economic boycott of Israel is the latest and biggest breach of the sanctions. The Israel Chamber of Commerce estimates that the boycott has cost the country some $40 billion in lost trading opportunities since the creation of that state in 1948.

The erosion of the boycott is already leading to a major increase in Israeli investments by companies that once shied away for fear of being placed on the Arab boycott list. U.S. hospital supply giant Baxter International Inc., which was hit with $6.5 million in U.S. government fines last year for complying with the boycott, is now investing in Israeli venture-capital groups.

Companies from Asia and Europe--areas highly dependent on Arab oil--have been the most reluctant to do business in Israel. Now, though, Germany's Volkswagen is negotiating with Israel Chemicals to build a magnesium plant at the Dead Sea. Top executives from Daimler Benz have been discussing train and highway projects linking Israel and its Arab neighbors. And all of Japan's major carmakers have now opened up offices in Israel.

Many Israeli companies consider the opening to Jordan a prelude to entering the gulf region's rich markets. Although they won't have the importance of Europe or North America for Israel, some Israeli companies stand to benefit handsomely. Israeli expertise in desert agriculture and medical technology is tailor-made for the area.

One Israeli company that's already carving out a market for itself in the gulf is Herzeliya's Paradime Geophysical Ltd., a geological software firm. To help find customers in the Arab world's oil patch, Paradime last January set up a Cairo office manned by a Lebanese Muslim. In early June, it hit pay dirt: a sale to Saudi Arabia, the world's biggest oil producer. The sale, says Paradime CEO Eldad Weiss, "should open up the entire gulf market for us."

Many Israeli executives are saying that trade with Jordan will probably avoid some of the misunderstandings that have delayed Israeli-Palestinian ventures. "The Jordanians do not have the same hang-ups about dealing with us," says CEO Benjamin Gaon of Israeli giant Koor Industries Ltd. Koor has set up a $100 million joint-venture company called Salaam 2000 with Palestinian, Spanish, and Moroccan investors--but the new company still hasn't launched a single project.

ATTITUDE SHIFT. Gaon also says that the breakthrough agreements with Jordan are already changing Palestinian attitudes. Indeed, the Palestinian Authority's economics czar, Abu Ala'a, recently reversed the PLO's previous policy of discouraging business ventures with Israelis. And U.S. Administration officials say that even Syrian hard-liners in Damascus are also being swayed by the economic carrots of peace. As an added enticement, House Majority Leader Richard A. Gephardt (D-Mo.) and 42 other representatives have written President Clinton urging that the U.S.-Israel free-trade agreement be expanded to include any Arab countries that reach peace accords with Israel.

No one is arguing that there will never again be violence in the Mideast. Some low-level conflict, including terrorism, is inevitable. But the era of the entire Arab world confronting Israel is history--just like the cold war. The region's mainstream leaders want to bury past hostilities so as to give their countries a shot at prosperity.

THE ECONOMIC PAYOFF FROM THE WASHINGTON AGREEMENT

-- Jordan is likely to get $700 million in debt relief from the U.S., along with new military aid

-- Better communication by opening telephone lines, airspace, border crossings, and deep-water ports

-- Possible joint infra-structure projects such as a Dead Sea-Red Sea canal for electricity and desalinization

-- Tourist joint ventures, including $1 billion Dead Sea development. Number of visitors expected to jump

DATA: BUSINESS WEEKJohn Rossant in Rome, Neal Sandler in Jerusalem, Amy Borrus in Washington, and Stanley Reed in New York


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