Why A Peace Dividend Could Look Tempting To Tel Aviv

The Israelis are casting it off as another propaganda ploy. But the surprise proposal of key Arab states to end their 43-year-old economic boycott in return for a freeze on Jewish settlements in the occupied West Bank and Gaza Strip could trigger a badly needed influx of investment in Israel. And if the Arab gesture is genuine, it couldn't have come at a better time for the Jewish state, which is barely coping with the massive influx of Soviet emigres.

Already, the conciliatory murmurings from Israel's Prime Minister Yitzhak Shamir about sitting down with Arab leaders at the peace table are boosting the country's financial outlook: The news sent shares on the Tel Aviv Stock Exchange soaring 4.5% from July 18 to July 23. "That's a signal of where things are going," says Avinoam M. Tocatly, chairman of Tel Aviv-based Aryeh Insurance Co.

DISCOURAGING. That may be just the beginning. If the boycott is removed, Israel would suddenly become an attractive spot for investment. Although the country has one of the world's most highly trained--and inexpensive--work forces, few large international corporations have operations there for fear of blacklisting by the Arab world. "The perception that the Arabs might boycott is enough to discourage companies," says Bank of Israel Governor Michel Bruno. Net foreign direct investment last year amounted to barely $200 million.

Big U. S. companies have stayed away in droves. A few exceptions: Intel, National Semiconductor, and Digital Equipment have important design facilities in Israel, where a potent high-tech, military-industrial complex has spawned thousands of top engineers. "But where is GM?" asks Kenneth J. Bialkin, an attorney who does Israeli-related work at New York law firm Skadden, Arps, Slate, Meagher & Flom. "Beyond a few high-tech companies, there's no one." And very few big European companies do business with Israel, even though France and Britain have antiboycott legislation, as does the U. S.

Now, says Bruno, "knowing that the Arabs themselves have lifted the boycott will be a green light for these firms." The results could be dramatic. Prior to this, the Japanese giants avoided Israel. But recently, teams from Japan's powerful Ministry of International Trade & Industry have been in Israel to look at investment opportunities, especially in high tech, while Japan Airlines Co. and El Al are negotiating a deal for direct flights between Japan and Israel.

A MAGNET? The European Community is offering Tel Aviv the potentially lucrative status of associate membership in the EC--if Israel shows political flexibility. That would guarantee tariff-free entry into the European market for Israeli products. With the Arab promise to remove the boycott, Israel could even become a regional magnet for investment.

Israel is going to need every investment dollar it can get. Even with a Middle East peace, Israeli government officials say there will be no reduction in multibillion-dollar defense outlays. Settling and providing jobs for the estimated 1 million Soviet emigres expected to arrive by 1996 is likely to cost up to $50 billion over the next five years, according to the Bank of Israel. With unemployment already close to 12% and inflation at 20%, fueling economic growth won't be easy.

But after four decades of hostile relations with the Arab nations, Israel is not quick to believe in Arab sincerity on this or any other issue. Even though it's under mounting pressure to sign off on the U. S. plan for an international peace conference, the Shamir government is still very uncomfortable with the idea of trading territory for political or economic gain. The boycott offer, says Israeli Defense Minister Moshe Arens, "is more like a maneuver than a sincere offer." But as peace talks break out--if not peace itself--big companies are busy rethinking what Israel may have to offer.

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