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
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
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
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
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
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
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
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
(a) Linking the electric grids of Egypt, Israel, Jordan, Lebanon
(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.