PROSPECTS FOR PARTNERSHIP IN ECONOMIC DEVELOPMENT:

ISRAEL, THE MIDDLE EAST AND NORTH AFRICAN COUNTRIES

Dr. Raphael Bar-El
Director, National and Economic Planning Authority
Ministry of Economy and Planning

November 1994

MANY SIMILARITIES BESIDES A WIDE DISPARITY

Israel is part of the wide geographical region which constitutes the North African and the Middle East countries. As a Jewish state, with a clear western orientation, and with a long history of conflict with its neighbors, it differs from many aspects from the other countries in the region.

However, a consideration of its basic features shows that there are strong similarities between Israel and the other countries in the region, which may be used as foundations for cooperation. The basic topological and climatological conditions in Israel are quite similar to those in many countries in this region. The problem of water scarcity and the need to deal with the development challenge of arid and semi-arid regions have always been a major concern of the Israeli economy as it has been for most Middle East and North African countries.

The state of the economy in Israel is in better conditions than that of the other countries in the Middle East and in North Africa: the GNP per capita in Israel approaches the level of about 13,000 US dollars, which is quite high in comparison with that of the countries in this region. However, Israel still stands in a situation of an industrializing country, if compared with the more developed countries of the western world, most of which show a GNP per capita about twice higher. Therefore, in terms of economic dynamics, the future challenges and development paths of Israel are more similar to those of the countries in this region than to those of developed countries. Israel faces development questions which are similar to those of many countries in the region: the need to develop rural regions, the need to provide employment for surplus labor force from agriculture, the problem of peripheral regions, the adaptation and absorption of new technologies, the development of industrial activities or the penetration into new world markets.

Finally, it is important to mention that beyond all differences in religion, cultural heritage and values, there is a basic similarity between the Israeli population and that of the other countries in the region. Most of Israeli Jewish population is either born in Middle East and North African countries, or second or third generation descendants of such Jews. In his first interview to the Israeli Television network last week, King Hassan of Morocco addressed to the Israeli population, and specifically to those from Moroccan origin, as his "sons" and as compatriots. In addition, almost a fifth of Israeli population are indigenous Arabs (within the pre-1967 war borders) . Although the Israeli society is generally considered as a westernized one, it has very deep roots in Middle Eastern and Mediterranean cultures, habits and mentalities.

FUTURE REGIONAL ECONOMIC GROWTH PROSPECTS

In global economic terms, the bloc of Middle East and North African countries, constitutes today about 2%; of the world product. According to estimations made on the basis on an extrapolation of data of the World Development Report (tables 1 and 26) regarding population growth and GNP per capita growth, in the next 25 years, this block (including Israel) will constitute 10% of the world economy. In relative terms, the importance of this region is therefore expected to be 5 times higher than it is now. This means that there will be a growing importance of the region as an economic entity, and of its role in the world economy.

Israel has experienced a quite rapid economic growth, and is expected to grow quite rapidly in the short and medium run as well as in the long run. In the last 30 years, the GNP has grown at an average annual rate of 5.9%, and the GNP per capita at an average annual rate of 2.9%. According to some preliminary evaluations, the GNP of Israel will reach about 60 billions US$ in 1994. This is a growth of 6.7% in comparison with 1993. This is an extremely high rate of growth, in OECD terms. The expected growth rates for 1994 as evaluated by the "Economist" are 3.7% for the United States, 2.8% for Great Britain, 3.5% for Canada, 1.7% for France, 1.3% for Germany, and 0.7% for Japan. It is closer to the expected rate of growth of rapidly developing economies in Asia: 7.8% for Thailand, 8.1% for Singapore, 7.5% for South Korea, 8.4% for Malaysia.

The forecast for the next 3 years as evaluated by a joint group of experts from the Ministry of Finance, the Bank of Israel and the Ministry of Economy and Planning ("National Budget for 1995-1997"), is that the expansionary trend will continue. GDP is expected to grow by about 4.9% a year, and the business sector is expected to grow by 5.8% a year. In terms of per capita income, this means a growth of 2.3%, which is a higher rate than in industrialized countries. International trade is expected to grow at a higher rate than the expected growth of total world trade: exports are expected to grow at an annual rate of about 8% and imports at about 6%.

A long term planning project for the Israeli economy until the year of 2020 evaluates a growth ability of the Israeli economy at an annual rate of 5.3% until the year 2020. Such a growth will lead the growth of GNP per capita to a level of about $30,000 US.

In summary, the long term expectations for the future are for a steady economic growth in Israel and for a growth of the relative share of the block of countries in North Africa and the Middle East. Expectations for the European and American countries and for African countries are for a slower rate of growth (and for higher rates in East and South Asia) . The probability of a changing economic reality to be faced by the countries of the region makes the collaboration between those countries imperative.

WHAT CAN ISRAEL CONTRIBUTE?

While Israel is not yet a member of the group of highly developed countries, it has already experienced a few development phases through which most developing countries are expected to go. We shall enumerate here a few main important fields in which Israel has accumulated some experience, which can be shared with other countries in the Middle East and North African countries. It is obvious that by no means the experience of a country can be copied to another country. However, sharing experiences may help a country to learn from the successes and failures of another one, and evaluate which kind of experiences can be copied, which should be adapted to the specific conditions, and which are irrelevant.

1. Agricultural development

For both ideological as well as economic reasons, the first steps of Israeli development had to be based on agriculture, as in almost any developing country. One of the most important characteristics of developing countries is a very high rate of employment in the agricultural sector. The process of economic development generally begins with the development of the agricultural sector, resulting in better productivity in this sector, and at a later stage in a transition of surplus labor force to the other economic sectors.

Agricultural development in Israel was achieved under very heavy limitations of the basic production factors of water and land. The Israeli experience has resulted in achievements in a few fields which could be considered by other countries, such as the following:

a. Irrigation technology:

The scarcity of water has led the Israeli agricultural sector to find best ways to use as efficiently as possible the limited supply. Consequently, irrigation technology has been very rapidly developed. Innovative developments included the design of new irrigation techniques (such as drip irrigation), and the production and improvement of irrigation equipment. Israeli innovations in those fields have been diffused to many other countries, and their adaptability to the conditions of the countries in this region could be analyzed.

b. Agricultural production technology:

The severe limitation of water and land have also led the agricultural sector to consider various agricultural production technologies, and in many cases, also the development of new agricultural products. Research and development in those fields has been very heavily promoted. Many important achievements have been reached in such fields such as the use of various sources of water and the development of new agricultural products or of varieties of existing products.

c. Rural organization for agricultural production:

A crucial problem in the development of the agriculture is the organization of production and of the various related supporting services. Many development efforts of agriculture have failed in various countries because of elements which were not directly related to the production process itself: marketing systems, production support or financing needs. Israel has built a few institutional devises which have helped the operational implementation of its agricultural development. These include for example:

– various types of organization of a village, such as a "moshav", a "kibbutz" or a "moshav shitufi." Each type of village is built on a different organizational principle, with a different level of cooperation between its members.

– regional organizations, for the cooperation between various villages, in fields such as marketing or buying inputs for agricultural production.

2. Integrated Regional Development and Planning

Israel, like many other countries is experiencing the gap between the rural or peripheral regions and the central regions, in terms of all parameters such as unemployment, level of income and living standards, migrations, and very heavy social tensions.

The Israeli approach to the solution of this problem, which has been adopted by many other countries, is one of integrated rural regional development planning. Helping the rural population and the peripheral towns to achieve a reasonable level of development has been achieved by acting in the various economic and social elements: allocation of economic resources, help in the provision of social services, building of infrastructures.

The main principle behind the Israeli approach has probably been the provision of equal opportunities, but letting the free enterprise act. The rural population received the necessary inputs in equal allocations, but the results depend on the free economic action of each farmer.

A strong emphasis has always been put on the allocation of basic human capital building measures, mainly in terms of a regional organization of education and health services.

Regional development is not only based on agriculture. It has in all cases also based on industrial activities. In the past few years, some of the villages have even been based exclusively on non-agricultural activities, including high-tech industries.

In the course of its economic development, Israel has developed an approach for regional development, and has implemented it in a few regions.

3. Transition from a protected economy to an open free market system:

As most economies in their first steps of development, Israel was first based on a highly protected economic system. Many of the economic structures were planned, local production was heavily protected against outside competition, capital markets were supervised. The transition from a state of underdeveloped economy to a state of a dynamic developing economy required a transition to a more open balanced free market system. The Israeli experience covers a few fields:

(1) Liberalization – exchange and customs policy:

The liberalization policy was launched in 1978. Exchange policy was based until then on a rigid foreign currency rate and was changed once in a while by drastic and generally very quantitatively significant devaluation decisions. The reform introduced then the idea of the "band", where the rate of exchange of foreign currency changed every day ("crawled"), within the limit of a "band" of values (to be transformed years later to the ‘diagonal") . This was followed a few years later by a drastic reform in taxes and customs policy, when the taxes on the importation of many electrical appliances were heavily reduced.

(2) Capital market:

The capital market reform of the last few years has mainly focused on the reduction of the level of government involvement in financial intermediation and of excessive regulations. Another aspect of the reform is the dismantling of the extensive foreign currency controls.

(3) Exchange rate – the "diagonal":

In December 1991, a diagonal exchange rate policy was introduced: the exchange rate is set to adjust gradually, according to a pre-announced schedule reflecting the Israeli inflationary gap, but allowed to fluctuate by 5% around this diagonal band. The slope of the band is periodically adjusted to the convergence of the Israeli inflation with that of its trading partners.

(4) Privatization:

In the mid-1980s, the Israel Government inaugurated a policy calling for active privatization of government corporations. Since then, privatization has been considered as one of the essential reforms required by the Israeli economy.

4. Transition from import substitution to export led policy and integration with world economy:

The policy of import substitution industrialization which was prevalent at the first steps of the Israeli economy was intended to protect local economic activities, provide employment opportunities and reduce the deficit in the balance of payments. However, such a policy supports inefficient economic activities and distorts rational economic behavior. The process of economic development required a transition to a more balanced policy, more oriented to foreign trade and to integration with the world economy.

Foreign trade is now a major component in the Israeli economy, since it amounts to 75%. of the GDP. Liberalization processes in foreign trade may therefore have very substantive implications.

Israel is the only country in the world that has free-trade agreements with the two biggest markets in the world: the European Community (since 1975), and the US (since 1985). Israel also signed an agreement with EFTA, effective since January 1993. An extremely important step taken in 1991 is the gradual plan of liberalization of "third country" imports, mostly from South-East Asia.

PROSPECTS FOR REGIONAL COOPERATION

The ongoing peace process in the Middle East has open new opportunities which can be beneficial to Israel as well as to every country in the region. Here are a few considerations in relation to the potential patterns of cooperation between Israel and Middle East and North African countries.

a. Pattern of economic cooperation: the "triangle approach":

The potential for economic cooperation between Israel and other countries in the Middle East and North Africa is not yet quite clear (research on this matter is still at its first stages). However, there is no doubt that such a cooperation can be beneficial to all countries, although the extent and nature of benefits may differ between countries.

As an example, in terms of pure economic considerations, the cooperation between Israel and the Palestinians can be beneficial to the Israelis, and much more to the Palestinians. The Palestinian new economy may present some interesting business options to Israeli entrepreneurs, but it small size can have only a marginal impact on the Israeli economy as a whole. On the other hand, the small size of the Palestinian economy excludes any possibility of a closed independent economy, and almost imposes the need for economic cooperation with the neighboring and other countries. Furthermore, the proximity of the Gaza Strip and the West Bank to the more developed infrastructures in Israel offers precious economies of scale to their economic development. Some of the advantages of such proximity may be: the access to higher income markets, the access to developed transportation facilities, the access to support of high technology services, the possibility of exchange of information with a wide range of industrial activities. However, there is a chance that such advantages will not fully be exploited. The huge gap between the size of the Israeli economy and that of the Gaza Strip and the West Bank has induced some fears of "colonialization" behavior. Such fears, together with a Palestinian tendency to show signs of economic independence may constrain economic cooperation important opportunities and lead to an inefficient pattern of economic growth. Although the presence of signs of economic cooperation between Israelis and Palestinians is already felt in the field, there may also exist some historical feelings of reluctance from such cooperation.

A possible solution to such a short term constraint may be the adoption of a "triangle pattern" of economic cooperation. Such cooperation would involve three parties: an Arab country or the Palestinian Authority, Israel, and a third party from Europe or the U.S.. Business partnerships of this kind can help in easing the psychological constraint of a bilateral cooperation, and would benefit from the participation of the European partner in terms of investments or marketing facilities out of the Middle East. The Israeli partner would contribute the facilitating of support from Israel, and the Arab partner would contribute the knowledge of local conditions. There are already some signs for the beginnings of such a pattern of cooperation, such as the case of the Renaissance Fund, and the Salam 2000 project with the collaboration of Palestinians, Israelis, Spanish and Moroccans.

b. Joint regional projects:

Beyond the options of business partnerships on the basis of private investors, national projects of cooperations should be considered on a regional basis. Such regional cooperation may be based on the use of common natural resources (such as in the Dead Sea), and of common infrastructures (such as a port in Eilat-Aqaba) . Many ideas have already been raised, and a careful analysis should be done in order to evaluate the economic feasibility of such projects. Types of projects which can be considered may be projects related to the natural resources of the Dead Sea, a joint airport at Eilat and Aqaba, a joint maritime at Eilat and Aqaba, projects related to desalination of sea water, agricultural high-tech projects in the arid regions of the Negev and Sinai, a water canal between the Dead Sea and the Mediterranean or between the Dead Sea and the Red Sea.

All those projects need heavy investments which may be lucrative only in the long run. Most of them should therefore be leaded by the governments of the relevant countries rather than by private entrepreneurs, and the financial and professional participation of a third country may be required in many cases.

No such projects should be considered unless they show a sound economic feasibility. However, the benefits of such projects go much further the economic considerations: they may be considered as one of the important foundations of a new regional reality, one of long term peace and cooperation.

Joint regional projects may be bilateral, involving the cooperation of two countries, or multi-lateral, involving the cooperation between some or all the countries in the region of the Middle East and North Africa.

(1) Bilateral joint projects (the case of Jordan and Israel):

One most important track for such a cooperation is the general agreement reached by the delegations of Jordan and Israel to the Peace talks about the Jordan Rift Valley (JRV). In a paper which is being submitted now by the World Bank with the endorsement of the both Israel and Jordan, a few projects are submitted for evaluation. A distinction has been made between long term projects which still need a longer term feasibility study and "Fast-track" projects, which can be examined already now. Four groups of fast-track projects are suggested.

A first group includes projects related to the necessary steps for realizing border-opening potential. Here are included road links and border crossings, joint tourism promotion, trade and transport facilitation.

A second group relates to "seed" activities that prepare for further cooperative undertakings. In this group can be included R&D and training in various fields, exchanges of regional and urban master plans, water resources monitoring.

A third group refers to environment oriented projects, such the management of tourism activity increase (on the Red Sea shore and in the envisaged "Maritime Peace Park") and environmental profile and monitoring.

The forth and last group includes projects that provide economies of scale. Examples are connection of electric power, communication grids, coordination in airport management and development in Aqaba-Eilat.

In the track of the longer term development joint projects, the heavier one is by far the Red Sea – Dead Sea Canal. The feasibility of such a canal is still to be carefully analyzed, from various angles. A very important one is of course the economic viability, but other extremely important considerations are the environmental impacts (including those on ground water) and the treatment of seismic risks.

Other long term projects which can be considered are in the fields of agricultural development, conservation of nature and cultural heritage, human resource development, energy, telecommunications, new transport and trade links, tourism, industry and mineral resources.

(2) Multi-lateral joint projects:

Joint regional projects can go beyond the cooperation between two countries, and include a few countries in the region of the Middle East and North Africa. In a speech delivered by World Bank Vice President Mr. Caio Koch-Weser on the occasion of the 46th Annual Conference of the Middle East Institute ("Economic Reform and Regional Cooperation: A Development Agenda for the Middle East and North Africa,,), he makes a distinction between "software" and "hardware" projects.

"Software" projects are defined as those which involve institutional and procedural involvements, but not necessarily heavy investments in infrastructures. A few such projects which are suggested for consideration are:

* A regional Hydrological Data Network, to help improve the water resource planning and management in the region by providing reliable, consistent hydrological data on a timely basis.

* An Environmental Action Plan for the Gulf of Aqaba to help prepare a strategy which would respond effectively to the conservation needs of this unique marine ecosystem.

* A network of Centers of Excellence for Higher Education to promote collaboration on research topics of regional importance and improve the research capabilities of the participating institutions. Cooperation between Television Networks of the various countries could be used as an instrument for the support to the action of such Centers.

* An Air Carriers Cooperation project to improve service levels and reduce costs of air travel within the region by using the economies resulting from large scale operations.

* An East Mediterranean Tourism Association to promote tourism activities in the region.

* A Trade Facilitation project aimed at institutional and procedural improvements to promote unimpeded flow of goods and passengers within the region.

"Hardware" projects are defined as those which require significant investments in infrastructures. Some of the promising ones are:

* Reconstruction of the Eastern Mediterranean Coastal Highway linking Europe with North Africa trough Turkey, Syria, Lebanon, Israel and Egypt.

* Interconnection of the National Power Grids in the region in order to benefit from significant differences in local demand patterns and cost of electricity generation.

* Installation of oil and natural gas pipeline systems.

c. Economic interactions:

Joint economic projects are born out of carefully examined formal decisions. The economic implications of a situation of peace go much further even with no formal decisions taken at the governments level. The peace process will inevitably create a new reality which will change all the prevailing economic "rules of the game". Before taking any additional decision beyond the mere decision of making peace, an improvement of the economic situation of all countries involved may be expected as a result of the diminution of security risks which may stimulate higher investments from abroad and more tourist attraction or as a result from lower government expenses on security.

Economic interactions for the benefit of all parties involved may be stimulated by achieving agreements for cooperation between countries. The formation of a regional block of North African and Middle East countries may be still too premature, but partial agreements could be reached in a few fields, such as the mobility of workers between countries, the opening of markets by reducing customs and by relieving administrative restrictions, the permission of capital flows.

Quoting from the speech delivered by World Bank Vice President Mr. Caio Koch-Weser, cooperation in trades enlarges the market and allows gains from economies of scale and from technology transfers. He finds that trade between countries of the Middle East and North Africa has been a mere 60%. of the total exports from the region. Although the comparison might not be appropriate, it is worth indication that for the European Community, internal trade is 60%. of total exports, ten times as high as in the Middle East and North Africa region. Similarly, labor mobility improves the allocation of resources between countries with abundant labor and those with abundant capital. Capital flows – bilateral loans and foreign direct investment can serve the same purpose. Finally, some infrastructural and environmental projects can only be implemented in a regional context.

Such measures may in a few cases have a negative implication. For example, a regional interaction resulting from the full or partial opening of borders between Israel and the Arab countries may imply an economic shock to some of its sectors, which are now protected by the existing barriers: many some agricultural products and labor-intensive manufacturing. Regional economic interaction will therefore mean a very substantial change in the economic structure of Israeli economy, specially in the peripheral regions of the Galilee and the Negev. The adaptation of those regions to the new situation may be quite painful and economically costly.

However, in most cases, such agreements are expected to bring many benefits to the countries in the region. To mention just a few:

– Bigger markets, which may allow the economic justification for some industries which need larger scales.

– A better economic integration, by a bigger ability of complementarity between economic activities in different countries.

– A wider supply of labor force, with a larger variety of skills.

d. Technical cooperation:

Israel has achieved an extensive experience of technical cooperation with Latin American, African and Asian countries, as well as with more industrialized countries. Technical cooperation focuses basically on exchange of information and of production practices between different countries. The contribution of Israel may be in the following fields:

– Agricultural technology.
– Agricultural practices in arid and semi-arid regions.
– The organization of rural development.
– Industrial high technology development.

CONCLUSION

The benefits of the peace process in the Middle East may go much beyond the creation of a better security and of a friendly atmosphere in the region. The conditions prevailing in the Middle East and in North African countries are such that there are very considerable prospects for a fruitful economic cooperation between Israel and those countries. Achieving peace in the Middle East will mean the liberation of this region from a very heavy and detrimental bottleneck. The economic development of Israel and of the other countries in the Middle East and in North Africa have followed different paths, and those paths have really never met. On the other hand, the basic structural historical features of Israel are quite similar to those of the other countries in this region, in terms of topology, climatology, cultural sources, geographical location. Such conditions of, on one hand, similarity in basic conditions and of, on the other hand, divergence in patterns of development, constitute a very fertile ground for economic cooperation.

Israel has a lot to gain from a process of economic cooperation with all the countries in the Middle East and North Africa, which will open to it the access to bigger markets, and to wider business opportunities. In parallel, all the countries in this region have much to gain from the economic cooperation with Israel by sharing its experience in agricultural development, in regional organization and in technological industrial development, by using its preestablished commercial relationships with many industrialized countries, by exporting local products and intermediate products.