Although the tendency all over the world in recent years has been toward an increase in economic cooperation, this has not been the case regarding Israel and its neighbors. The most common type of cooperation between neighbors is border trade. There has been trade between Israel and the West Bank and Gaza (See Table 1), because economically they have been part of Israel for the past 25 years. In addition Egypt has sold Israel oil; but this was a condition of the peace treaty rather than a strictly commercial transaction. If one disregards these two examples, it can be seen that Israel's border trade has amounted to zero.
Countries in the same region are not identical; natural conditions are not the same and people are different. History has further widened the differences, including the economic ones. Comparative advantages can be defined between neighboring countries, particu¬larly when Israel is considered vis-a-vis the Arab countries. Even with passive governmental cooperation and nongovernmental obstacles, trade that takes advantage of the differences will flourish.
The main avenue of this form of cooperation is the division of tasks in the production process. The closer the distance, the less the shipping costs, and the narrower the division of the production process will be. Israel, the West Bank and Gaza provide an example of this. Such forms of cooperation are likely to develop between pairs of countries once the legal-political system enables them to develop.

Private Sector Cooperation

The motive for cooperation between members of the private sector is the traditional one, assumed to stimulate every economic activity: profits. Hence, once the private sector sees the opportunity of making profits it is liable to be the main channel of cooperation
This optimism with respect to the development of private sector cooperation is somewhat dampened by observing the current lack of trade and cooperation among the Arab countries themselves. Trade between the three Arab countries, Syria, Egypt and Jordan, was only about one percent of their total trade in 1989. There might be political reasons for this; but it should also be noted that the economies in these countries are highly centralized, and economic decisions are guided by political motives. Therefore the internal economic atmosphere must change if economic relations between the nations are to be strengthened. The introduction of more private elements into these economies, while removing the political constraints, will eventually lead internally to more efficient systems, and externally ¬on the regional level - to more cooperative systems.
Another explanation for the very low volume of trade among Middle Eastern countries is their level of development. Most of the world's trade takes place within or . between the industrialized countries. The developing countries, regardless of region, trade mainly with the industrialized nations. Thus, at the present stage of development, the Arab states also trade with industrialized countries. This will change as they proceed on the road of development. Progress will not be identical in all of them, which in itself is a reason to start trade. However another reason should be noted. Israel is generally included in the Middle East, although by most criteria it should be included in the category of industrialized countries.
The trade between the Middle East countries (including Israel) and the industrialized countries in 1989 indicates that 67.3 percent of Middle East exports can be substituted, at least partially, by imports from Israel (see also Tables 2 and 3.) This excludes military products, which Israel will clearly not supply its neighbors. Furthermore, given the constraints on natural resources in the region, such as water, the Middle East will have to increase its industrial base, thus moving very gradually toward the category of industrialized countries.
At the present time, Israel is outside the network of economic re¬lations in the Middle East. The main reason is the Arab boycott which dates back at least to 1948. Although the emphasis has usually been placed on the primary boycott - on products produced in Israel or which contain Israeli-¬made inputs (even if produced in the West Bank or Gaza) - the removal of the secondary and tertiary boycotts might be more important for establishing sound relations. The establishment of economic relations might be facilitated by the activities of foreign companies with branches in all Middle Eastern countries. Transactions between these branches, using the outputs and inputs produced in each country, might constitute a significant share of the trade.
Israeli-Egyptian relations after 1978 should not serve as an example of future relations between Israel and the Arab countries. In 1978 Egypt removed formal discrimination against Israeli products; but a large array of administrative procedures has been used to curtail trade, as the bureaucrats in Egypt remained hostile to Israel. Therefore, we do not actually know the consumers' attitudes toward Israeli-made products, although it is possible that Arab consumers will be inclined to resist Israeli the It is here that prices can make a difference. Proximity might result in lower prices and overcome ideological opposition.
In considering trade as the major avenue for cooperation, the special case of the West Bank and Gaza must be taken into account, because labor mobility and trade constitute a two-way street. In round numbers, over 120,000 Palestinians worked in Israel in 1987, generating an income of close to $1 billion, while the gross domestic product, GOP, of the territories was less than $2 billion. Hence, about one-third of the gross national product, GNP, was generated directly from Israel. Another one-sixth was generated indirectly by the production of goods that were exported to Israel. All in all, about half of the GNP is related to economic activities that are tied to Israel. Because of the Intifada and later the Gulf War, both GDP and GNP declined substantially (by 1992 they were about 25 percent lower than in 1987).
This means that the West Bank and Gaza were unable to find markets for their products and labor to replace the Israeli market. This situation is unlikely to change when peace comes, at least in the short run. It is sufficient to view the economies of the neighboring Arab countries, and observe their protectionist policies, to understand this argument. Therefore, within the region, cooperation including trade and employment will be strongest in the center - Israel/West Bank and Gaza - and will lessen as one
extends outward, with the possible exception of Saudi Arabia and the Gulf States, when it comes to trade.
While still in the framework of the private sector, another form of cooperation should be mentioned: that of joint ventures. Joint ventures could include marketing, pro¬duction and research and development, R&D. The cost of production differentials and technical know-how are grounds for joint ventures in production. Joint ventures in marketing are the result of economies of scale, economies of scope and reduction of risk. Joint ventures in R&D emerge for the purpose of sharing knowledge and risk. Regarding the Arab world, one can expect joint ventures mainly in production and marketing, where the two activities take place mainly in the Arab countries and in some countries, mainly marketing, outside the Middle East.
Cooperation in the tourism industry is a prerequisite for any attempt to increase the number of tourists to the region. More tourists can be attracted by minimizing their transaction costs when crossing from one country to another. The only way to achieve this is by cooperation to the extent of forming regional tourism service companies. The advantages are obvious, from economies of scale in marketing, all the way to providing the local services in the Middle East.

Public Sector Cooperation

In free economies cooperation channeled through the public sector would not be an important factor. However the Middle East is an exception, at least in the case of Egypt, Syria and Iraq, because of their political-economic systems. In these countries the public sector attempts to carry out the tasks that the private sector performs elsewhere. Thus, part of what was said above about potential gains from cooperation between the private sectors in different countries, is in this instance relevant to the public sector.
Another role for the public sector in regional cooperation is participation in regional projects, a few of which are the following:
(a) A natural gas pipeline from Egypt to Israel.
(b) Oil pipelines from the Gulf to Gaza.
(c) Fertilizer plants.

Infrastructure projects are the ones suited to the public sector, and one might suggest the following water projects:

(1) The River Yarmouk water storage project.
(2) The River Litani water project.
(3) A canal or pipeline from the Nile to Northern Sinai, Gaza and Israel.
(4) The West Ghor Canal: a water supply canal on the west of the River Jordan.
(5) A cloud seeding project.
(6) A joint electricity generating¬ water desalination plant on the Israel-Egypt border.
(7) The Turkey-Israel-West Bank-¬Gaza-Jordan-Syria water convey¬ance system.

The various projects that come under the category of energy are:

(a) Linking the electric grids of Egypt, Israel, Jordan, Lebanon and Syria.
(b) A joint Israel-Lebanon hydroelectric plant.
(c) A Red Sea-Dead Sea canal, a by-product of which could be hy¬droelectric and water desalination plants.

Transportation plans can include projects to improve the region's road, rail, aviation, and sea transportation, such as a railroad from Egypt through Israel to Lebanon, Syria, Turkey and Europe, or a highway from Iraq or the Gulf, through Jordan to an Israeli port on the Mediterranean. Such a highway could be constructed parallel to the Gulf-Gaza oil pipeline.
Another example of trans¬portation cooperation is an inter¬national airport, serving both Aqaba and Eilat, and a "Red Sea Riviera and Free Tourist Zone," which could be established along the gulf. Such a project is likely to require the removal of the commercial port of Eilat. Aqaba port could then be adapted to serve Israel as well as Jordan, or a joint port known as the Canal Port, could be constructed along the Israel-Jordan border. This port could serve the two countries and others in the Middle East. Land transportation facilities could be developed such as the Gulf-Gaza highway and the Israeli railroad to Eilat, which could be extended to Egypt and Lebanon.


Economic cooperation in the Middle East is expected to fulfill two linked roles. First, it will strengthen the foundations of peace and safeguard it from external and internal events that might lead to war. Second, it will help the Middle Eastern economies to attain sustainable economic growth. Given the current levels of population growth, and the GNP per capita of the Middle Eastern countries that do not possess oil, these countries are likely to be caught in the vicious cycle of poverty. On its own, cooperation between the economies will not be sufficient to enable them to prosper. Cooperation must go hand in hand with the restructuring of each country's internal economy, the adoption of liberal economic policies, and the removal of bureaucratic obstacles to economic entrepreneurship. All these, together with the economic cooperation, which would emerge naturally, are the prerequisites for the low GNP economies to start the long process of approaching the GNP of the developed countries.
Within this framework, regional infrastructure projects carried out either by private chartered companies, or by the newly formed regional institutions, can be the catalysts for cooperation, and the assurance that the countries in the region and in the world place Middle East Peace at the top of their scale of priorities.