Suddenly, What's Good For Business Is Good For Israel

Just a couple of years ago, Koor Industries Ltd. was a sad reflection of Israel's sorry economy. With debt of $1 billion, the cement-to-electronics conglomerate was on the edge of collapse. But like Israel's economy, Koor has undergone a remarkable turnaround recently. In late November, a slimmed-down Koor reported record quarterly profits. Things are going so well, says Benjamin D. Gaon, Koor's ebullient CEO, that a $94 million debt repayment to Israeli banks will likely be completed by yearend--instead of 2003.

Suddenly, Israel's volatile economy is riding high. Part of the credit goes to the five-month-old, Labor-dominated government of Prime Minister Yitzhak Rabin. Ironically, for years, the Labor Party symbolized heavy regulation, big unions, and the welfare state. But now, Labor leaders are pushing business-oriented programs, including corporate tax cuts and stepped-up privatization.

JOB CRUNCH. An unemployment rate of over 11% remains a tough problem, however. Hundreds of thousands of former Soviet Jews have flooded the labor market over the past several years. So far, Rabin has avoided quick-fix solutions, such as make-work schemes. "For the first time, we have a government whose task is a real economic turnaround," says Koor's Gaon.

To be sure, part of Labor's success has been luck. Like Bill Clinton in the U.S., Rabin inherited an economy that was already beginning to pick up speed. And now, it's expanding at a substantial 6.5%. Meanwhile, inflation, the economy's traditional Achilles' heel, is below 10%--its lowest level in 20 years.

Israel's economy was bolstered by the opening of peace talks with the Arab states in October, 1991. Multinationals that had shied away from Israel for fear of the Arab world's 45-year-old economic boycott are now knocking at the door. In recent months, such Japanese carmakers as Toyota Motor Corp. and Nissan Motor Co. have set up their first Israeli distributorships. Pepsi-Cola International, traditionally a major player in Arab countries, entered the Israeli market last April. Other newcomers include McDonald's Corp. and food giant CPC International Inc.

And thanks to the Bank of Israel's policy shift in late 1991 to gradually devalue the shekel, exports are up by almost 10% so far this year. That export boom will continue into 1993, industrialists say. "Exports are really starting to revive the whole economy," says Eitan Sheshinsky, an economist brought in to head Hevrat Haovdim, which administers the multibillion-dollar industrial and financial holdings of Israel's trade union federation, the Histadrut. The result: a big hike in corporate profits.

EAGER BUYERS. And in the high-tech sector, Israeli companies that have gone public in the U.S., such as Scitex, ECI Telecom, Lannet Data Communications, and Teledata Communications, are now among Wall Street's most stellar performers. Shares in Tadiran Ltd., Koor's $800 million electronics subsidiary, have doubled in value since they were floated last July on the New York Stock Exchange. Back home, the Tel Aviv Stock Exchange is up by over 70% this year (chart).

The stock market surge, in turn, makes privatization easier. In November, the Israeli government easily sold its $200 million stake in Israel Discount Bank Ltd., one of the country's largest. Next year, Jerusalem is looking at possible sell-offs of El Al and stakes in Bank Leumi and Bank Hapoalim, which together dominate Israeli finance.

Of course, setbacks could occur. Rabin's government is under increasing pressure to get some concrete results from the sputtering peace negotiations with the Palestinians and the Arab states. Jerusalem's recent offer to return parts of the Golan Heights to Syria both angered many Israelis and failed to win a peace deal from Syrian President Hafez al-Assad.

But economics will likely be the underpinning of any future peace agreement. Forming a regional market among Israel, Jordan, and the 1.8 million Palestinians of the occupied West Bank and Gaza Strip is essential for peace to last. "The first step toward Palestinian autonomy will be an economic step, and we want to be involved," says Koor's Gaon. His group is already studying potential Palestinian partners. With a little luck, Israel's current business boom could help out more than just Israel.

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