Israel: Three Steps Back

Mideast turmoil is roiling economies near and far

It was just another little-noticed casualty of the collapsed Middle East peace process. Crown Prince Hassan, the bookish brother of Jordan's King Hussein, had invited academics and government officials from Israel and the Arab world to the ancient city of Petra, deep in the Jordanian desert, for a two-day retreat in early October. But after the worst Israeli-Palestinian bloodshed in years, the normally moderate Jordanians canceled the meeting. Ironically, Hassan had called the Petra get-together "Fears of Peace."

Fear has overtaken hope in the Middle East with frightening speed. President Bill Clinton's hastily called Washington summit Oct. 1-2 seems to have succeeded, at least for now, in heading off an explosive collision between Israeli Prime Minister Benjamin Netanyahu and Palestinian leader Yassir Arafat. But it will take more than that to get Arabs and Israelis seriously back on the peacemaking track. After a day and a half of discussions among the leaders, a cordial meal, and all-night marathon talks by aides, all that emerged was a reiteration of the positions that have polarized the two sides for months. And a promise to continue talking.

That doesn't bode well for the next round of negotiations set for Oct. 6 in Erez, on the Israeli-Gaza border. While Clinton tried to put a positive spin on the outcome, claiming Netanyahu and Arafat reached a higher level of understanding, he conceded: "The problems are still there. The differences are still there." Netanyahu and Arafat, adds Richard W. Murphy, a senior fellow at the Council on Foreign Relations, "are worlds apart."

A new confrontation between Israel and the Palestinians would almost surely be bloodier than the four days of conflict in late September that left 73 dead and hundreds wounded. Another outburst, Israeli intelligence officials warn, would ignite already rocky relations with Syria and possibly provoke other Arab countries to take sides against Israel. An unnerved Israel would find it difficult not to reoccupy the West Bank and Gaza. "We now have a monumental crisis of confidence between Arab leaderships and Israel," says Emmanuel Sivan, an Israeli expert on the Arab world.

Even if Israel and the Palestinians return to the negotiating table, the discordant climate will make it more difficult for the U.S. to pursue broader policy objectives in the Middle East--from keeping together an already frayed coalition against Saddam Hussein to ensuring that Persian Gulf oil flows at moderate prices (table). And it will make numerous businesses pause before pumping money into the region.

SAUDI FLAK. In a worrying sign that the Arab-Israeli turbulence could trip up the world economy once again, Saudi Arabia's King Fahd took the highly unusual step of assailing Israeli policies after a regular weekly Cabinet meeting in Riyadh on Sept. 30. Such tension--and the tightest oil supplies since the Iraqi invasion of Kuwait almost six years ago--have pushed crude prices up by more than a third over levels of just a year ago.

The ruptured peace process already stands to inflict a dauntingly high economic cost on Israel, the Palestinians, and Jordan. And without peace dividends in the form of high growth, new jobs, and investment in regional projects, such as the $500 million natural gas pipeline linking Israel and Egypt, there's little chance of cementing political achievements. Says Stuart E. Eizenstat, U.S. Under Secretary for International Trade: "Trade and investment are the essential foundations to undergird the peace process. We can't have one without the other."

Israel could feel the pain quickly. It has attracted close to $4 billion in foreign investment since the beginning of 1995. And the end of the decades-long Arab boycott against Israeli products has allowed the Jewish state to penetrate new export markets. "For the last five years, we've been successfully selling Israel as a good place to do business in, that we're no longer a liability," says Benjamin Gaon, CEO of Tel Aviv-based conglomerate Koor Industries. "Now, people are asking political questions."

The first economic casualty of Netanyahu's tough line has been Israeli capital markets. Since his victory on May 29, the once-buoyant Tel Aviv Stock Exchange has lost more than 13% of its value, with a 6% drop alone since violence erupted Sept. 25. Declining markets could spell trouble for Netanyahu's plans to privatize huge swaths of the Israeli economy quickly, from telecommunications company Bezeq to state-owned banks. "Without stability and confidence, it's going to be very difficult for Bibi to do the things he wants to do," says Jerusalem-based venture capitalist Marc Belzberg, a Netanyahu supporter. The Israeli government has already sidelined a $200 million syndicated loan because of investor resistance.

The Arab business community is also nervous. Neighboring Jordan has seen little in the way of tangible benefits from peace. Big regional projects such as an Israeli-Jordanian highway connecting the southern tourist towns of Eilat and Aqaba and a "peace airport" near Aqaba are in limbo. Indeed, Jordanians who until recently were considering deals with Israeli companies are now backing off. Jad Makdah, managing director of Amman-based Jordan Clothing Co., had been negotiating some joint ventures. Not anymore. "This is too sensitive now," says Makdah. "Cooperation won't work in this climate."

TRADE WOES. Similar rumblings are also coming out of Egypt, which still plans to host a major regional economic development conference Nov. 12-14. "I never thought the peace process would deteriorate as quickly as it has," says Mahmoud al-Gammal, general manager of Cairo-based Icat, a company that imports irrigation equipment from Israel. Al-Gammal says that he's cutting purchases of Israeli equipment by more than half this year because of the political chill.

It might not be too late to reverse such sentiments. Palestinians say that confidence-building measures, such as ending the economic sanctions of the West Bank and Gaza, would go far to ease the bitterness that has poisoned relations. "Two or three kind words from the Israelis would win our hearts," says Fahmi Nashashibi, owner of Jerusalem's Pilgrims Palace Hotel and a member of one of the city's most prominent Arab families.

UNLIKELY SHIFT. The Administration is pushing that line, too. "We believe substantive progress can be made in a short period of time," Assistant Secretary of State for Near Eastern Affairs Robert H. Pelletreau Jr. told a meeting of U.S. company executives Sept. 30. "And I'm not whitewashing the events of last week."

But that would imply a complete recasting of the hard-line, nationalist outlook of Netanyahu's government. Don't count on it, say many Israelis. Even before the recent flareup of violence, Israel's leading Hebrew-language daily, Ma'ariv, criticized Netanyahu in an editorial for pursuing a narrow vision and endangering Israel's long-term security. "The man is clearly learning," the paper said. "But can Israel afford the learning experience?" The price could be very high--and not just for Israel.

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