Circumstances and Prospects for Economic Cooperation Between Israel and its Neighbors

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1 Circumstances and Prospects for Economic Cooperation Between Israel and its Neighbors Presented by: David Boas Netanyah College, June 29th, 2004 Presentation Structure Selected data Principal economic parameters in the region A possible format for economic cooperation Required pre-conditions for the realization of cooperation. Summary

2 General overview of the economies of Israel, Egypt, Jordan and the Palestinian Authority (PA) Israel Accelerated growth during the 90's propelled by the wave of immigration and the Peace Process. Negative per capita growth during accompanied by a recession and rampant unemployment. A dynamic, competitive and efficient business sector relative to the region. Israel (cont d) Inflation rate commensurate with the generally accepted levels in the Western World, along with capital market and foreign exchange reforms. A negative process in recent years of concentration, a wide gap in income and property distribution, and a decline in the level of competitiveness

3 Jordan A small country with inadequate supplies of water and other natural resources such as oil. Debt, poverty, and unemployment are fundamental problems. King ABDALLAH since assuming the throne in 1999 has undertaken some broad economic reforms in a long-term effort to improve living standards. In the past three years Jordan practiced careful monetary policy, and made significant headway with privatization Jordan (cont d) Liberalization of trade regime, a free trade accord with US (2000), and an association agreement with the EU (2001).. The Iraq war was an economic blow to Jordan which was dependent on Iraq for discounted oil. It remains unclear how Jordan will finance energy imports in the absence of such a deal. Other steps were taken like reduction of budget deficit and broader investment incentives to promote job-creating ventures.

4 Palestinian Authority (PA) GDP declined by about one-third between 1992 and 2002 since the Cairo Agreement of May 1994 The downturn was a result of violence and the imposition of closures in response to terror. This disrupted previously established labor and commodity market relationships between Israel and the PA The most serious negative social effect of this downturn was the emergence of high unemployment Palestinian Authority (PA) (cont d) In 1998, Israel implemented new policies to reduce the impact of closures on Palestinian goods and labor. These changes fueled an almost three-year-long economic recovery in the West Bank and Gaza Strip; real GDP grew by 5% in 1998 and 6% in Recovery was upended in the last quarter of 2000 with the outbreak of Intifada, triggering tight Israeli closures of Palestinian self-rule areas and a severe disruption of trade and labor movements.

5 Palestinian Authority (PA) (cont d) Since 2001 the military events within the PA areas resulted the destruction of infrastructure, and a sharp drop in GDP Another major loss has been the decline in income earned by Palestinian workers in Israel. International aid of $2 billion in to the Gaza Strip and West Bank have prevented the complete collapse of the economy. Egypt Egypt improved its macroeconomic performance throughout most of the last decade by following IMF advice on fiscal, monetary, and structural reform policies. As a result, Egypt managed to tame inflation, slash budget deficits, and attract more foreign investment. However, the pace of reform has slackened and excessive spending on national infrastructure has widened budget deficits again.

6 Egypt (cont d) Lower foreign exchange earnings since 1998 resulted in pressure on the Egyptian pound and periodic dollar shortages. Decline in tourism and Suez Canal tolls since Sep 11. Egypt has devalued the pound several times in the past year The gas export market is a major bright spot for future growth prospects. In the short term, regional tensions will continue to affect tourism and hold back prospects for economic expansion GDP in the Middle-East (In PPP terms) Country Amount Graph 1. Turkey $455.3 billion 2. Iran $374.6 billion 3. Saudi Arabia $235.6 billion 4. Egypt $232.5 billion 5. Israel $125.5 billion 6. Syria $57.6 billion 7. United Arab Emirates $48.9 billion 8. Kuwait $31.4 billion 9. Jordan $19.4 billion 10. Lebanon $18.6 billion

7 GDP in the Middle East (Nominal Terms) Country Description Amount 1. Turkey $489.7 billion ( Iran $458.3 billion ( Egypt $289.8 billion ( $268.9 billion (2002 Saudi Arabia 5. Israel $117.4 billion ( Syria $63.48 billion ( Iraq $58 billion ( United Arab Emirates 9. Kuwait 10. Jordan $53.97 billion (2002 $36.85 billion (2002 $22.63 billion (2002 Population in the Middle-East Country Description Amount 1. Egypt 2. Iran 3. Turkey 4. Iraq 5. Saudi Arabia 6. Yemen 7. Syria 8. Israel 9. Jordan 10. Lebanon 74,718,797 (July ,278,826 (July ,109,469 (July ,683,313 (July ,293,844 (includes 5,576,076 nonnationals (July 2003 ) 19,349,881 (July ,585,540 (July ,116,533 (July ,460,265 (July ,727,703 (July 2003

8 Labor force in the Middle-East Country Description Amount 1. Turkey 2. Iran 3. Egypt 4. Saudi Arabia 23.8 million (about 1.2 million Turks work abroad (2001 3rd quarter)) 21 million (shortage of skilled labor (1998)) 20.6 million ( million (35% of the population in the age group is nonnational) 5. Iraq 6.5 million ( Syria 5.2 million ( Israel 2.5 million ( United Arab Emirates 1.6 million (2000 (73.9% of the population in the age group is nonnational (July 2002 (2000 ) 9. Lebanon 1.5 million (in addition, there are as many as 1 million foreign workers (2001 ) 10. Jordan 1.36 million (2002) Birth rate in the Middle-east Country Description Amount 1. Yemen 2. Gaza Strip births/1,000 population ( births/1,000 population ( Oman births/1,000 population ( Saudi Arabia 37.2 births/1,000 population ( West Bank 6. Iraq 7. Syria 8. Egypt 9. Jordan 10. Kuwait 11. Lebanon 12. Bahrain births/1,000 population ( births/1,000 population ( births/1,000 population ( births/1,000 population ( births/1,000 population ( births/1,000 population ( births/1,000 population ( births/1,000 population (2003

9 The four main factors influencing the region Oil Terrorism Violence Cultural and economic gaps Oil Oil retains a considerable influence over the world economy. The most recent rise in prices stems, inter alia, from factors related to the region. Nearly two thirds of the industry is located in the Middle East. Reserves related to output (R/P) are amongst the highest in the world.

10 Terrorism According to Tom Friedman's theory, we are in the midst of a new kind of a world-war. According to Prof. Harari's theory, the terror is not specifically related to the US and Israel. Terrorism is presently at a cross roads and could either flourish or wither away. Terrorism is propelled by enormous amounts of money. Violence The severe wave of violence during the last four-years, has suffocated any will to normalization. The violence wave has extracted a heavy economic toll from Israel and, mostly, from the PA. Terrorism and the responses to it, have torpedoed the Paris Agreements, as well as the joint trade and industry parks between Israel and the PA. Terrorism and military violence are extracting a high social price from both parties.

11 Cultural and Economic gaps Enormous gaps in living standards, average wages, birth rates, life expectancy, science and medicine, as well as GDP structure. Economic polarization between the rich and the poor in Arab countries. Cultural gap: scientific publications, consumption of books, theater, etc. Civil rights: In most of the Arab world, women have rights that were granted in the Western world about 150 years ago. The Pre-conditions for Cooperation between Israel and its main neighbors Leadership, daring and tenacity by both parties to attain economic cooperation. External assistance to commence the process, especially from the US and the European Union. The withering of terrorism and demonstration of support from the Arab community for the cooperation process.

12 The Pre-conditions (Cont..d) Exploiting the relative strengths of both parties: Israel's strong buying power, Low-cost labor offered by Israel's neighbors, Israeli know-how and experience in agriculture, construction, infrastructure and advanced industry, Integration of tourism packages, Low-cost products from the Arab countries, mainly for traditional products. Patient and gradual execution of the process. The Format for Cooperation Between Israel and its Neighbors The initial phase Israeli assistance to Egypt and Jordan in the area of agriculture and irrigation. Extensive Israeli assistance to the rehabilitation of infrastructures at the PA, in the format of a Marshall Plan. The second phase Importing Arab laborers to Israel. Promoting mutual export transactions amongst the various countries.

13 The Format for Cooperation (Cont d) The third phase Mutual ties in the field of tourism Joint projects, mainly with the PA, in the development of water resources and power plants. Joint activity in capital and banking markets. Israeli assistance in the fields of high-tech. Cultural cooperation: Museums, literature, exhibitions, theater, music, etc. Summary Both parties are in need of political and cultural normalization far beyond the willingness of the parties' leaders. Israel will get a side-benefit from the normalization the rehabilitation of its relationship with the Israeli Arab minority. The cooperation will be implemented if the pre-conditions will be realized, especially external assistance, mainly from the US and the EU.

14 Summary (Cont d) Enormous growth prospects due to great potential and to the economic gaps. The economic cooperation will serve also as a corridor for cultural cooperation that will bring, in its wake, other various types of cooperation ventures, such as political and social. This process will expand in the course of time but it will also encounter difficulties and efforts to dismantle it. If the process is successful, the region will again become one of the world's leading centers for culture and business as it was several centuries ago.