There is a widespread belief among Israelis that the peace process is irreversible and that we are moving toward binding peace agreements with our Arab neighbors. A system of guarantees based ,on buffer zones and demilitarized areas will initially be necessary to secure the agreement; but wide sectors of Israeli society and its business community think that economic cooperation between the former enemies is the best guarantee for the future. Only through the development of common economic interests and the free movement of goods and capital will it be possible to build a permanent and solid edifice of peace.
The Israeli business community seems ready to face the future with optimism, but without euphoria; without a patronizing attitude, but with a realistic approach to common needs and interests. We should not see the Middle Eastern market as virgin land waiting only for the Israeli "super-economy" to come and conquer it. The market, though geographically large, is still relatively small; regional trade is modest and must be developed and intensified if it is to sustain growing economies based on real economic cooperation. Right now the gross national product, GNP, of all the countries in the area is only some $500 billion - the size of Canada - which means that the European and North American markets will continue to be important for Israel. If the regional market is to become a serious destination for Israeli exports, there will have to be higher and more diversified levels of consumption, as well as the removal of protectionist and bureaucratic regulations.
The problem facing us is not, however, merely one of marketing or consumption capacity.
Essentially we face a political and cultural challenge. Decades of confrontation have created barriers of hostility and mistrust. These must now be removed in order to develop business strategies with our neighbors. The development of economic relations with the Arab countries will take time and will inevitably be accompanied by setbacks and frustrations. These stem not only from the objective difficulties inherent in the transition from confrontation to cooperation, but also from the different levels of expectation. For example, the Israelis would like to see an immediate end to the Arab boycott, whereas the Arabs foresee a far more gradual approach.
Israel may find more tangible and immediate compensation in the indirect benefits of peace. Even though military spending will not immediately decline, trade may expand and investment increase, as a result of increased security and stability and the erosion of the Arab boycott. At present Israel attracts foreign investments of only some $200 million annually (less than half of one percent of its GNP). A capital inflow of three percent of the GNP would more than match current economic assistance from the United States.
Future decisions about economic cooperation can only be the result of independent sovereign decisions of the parties concerned. At the present time, the Palestinian economy is almost totally dependent on Israel; but in the context of a settlement it may be in the interest of -both parties to create a common economic area. If the flow of Palestinian manpower to Israel is to be stopped, it must be done gradually, as economic development in the Palestinian area is achieved. In order to stimulate such development, the Palestinians will want to have lower rates of income tax and value added tax, VAT, than the Israelis; but Israel will strive to have the differences as narrow as possible to prevent unfair competition. The Palestinians might negotiate free trade agreements with both the Israelis and the Jordanians, leading to a customs union between the three economies.
For Israel the challenge is to move to a phase of growth, based on joint Israeli Palestinian ven¬tures, designed to create economic growth that can absorb the Palestinian labor now working in Israel, and Palestinians returning from their diaspora. This can only be achieved by large-scale industrialization, focused ini¬tially on agriculture, construction, and infrastructure.
The Israeli business community is ready for open-minded coope¬ration with Palestinian business¬men, both in the stage of developing basic industries, and in the subsequent move toward an export-oriented economy. KOOR has recently taken an initiative, agreeing to be a minority partner in joint ventures with Palestinian, European and other Arab partners. Such ventures will invest in the Palestinian economy in food industries, telecommunications, tourism, transportation, cement and construction. A detailed proposal is currently being studied by a Spanish bank, a Moroccan company, and Palestinian en¬trepreneurs.* The Spanish and
Moroccan governments are opti¬mistic about the project. We in KOOR believe that we might establish the foundations of a highly interesting Mediterranean economic - and maybe political - triangle that is worth developing further. KOOR also stands ready to transfer some of its plants to the Palestinian autonomy on a strictly business and profit basis. Some Israeli industries, which are based on Palestinian labor, will have either to scale down their operation, or move to the Palestinian area. This is the only way that our economies can develop business opportunities in a way that is complementary. Many other projects can be explored if the political will exists.
The clear Palestinian intention to restructure their economic relations with Israel on a more equitable basis does not have to mean disengagement. There are wide possibilities of rationa¬lization or complementarity. Nor is it inevitable that the larger Israeli economy will dominate the smaller Palestinian one. The current Israeli domination is a result of the political situation. If the association is free and equal, the smaller economies benefit as much as the larger ones from trade and cooperation. In the European Community, for example, the Benelux countries have benefitted more than Germany or Britain. In conditions of peace, the pattern could be repeated with the Palestinians and the Israelis.
So far our contacts with Palestinian entrepreneurs regard¬ing joint business ventures have been most gratifying and interesting. At KOOR, we are receiving dozens of approaches from Palestinians and others throughout the Arab world. Our approach is that we want to move to a phase that goes beyond buying and selling to the establishment of strategic economic ventures with Arab partners. We think we have achieved that already with one Arab country, and we are proceeding with similar ventures in other Arab countries, the names of which would be premature to disclose at this time.
However we are interested to know whether the Palestinians have taken a political decision to facilitate strategic economic cooperation with Israel. As far as we know, they have not. The Palestinians, currently in the throes of transition toward the responsibilities of statehood, are in a state of understandable confusion and disorientation. They need time to look around and define their priorities. Israeli euphoria looks frightening to them. They don't want military colonialism to be replaced by economic neocolo¬nialism. It is this political constraint that is now the major obstacle to economic cooperation.
We have an obligation to respect Palestinian sensibilities and work to convey a clear message that the phase of political and economic domination has come to an end; we are ready for cooperation based on dignity and mutual respect. It is not for us to define their priorities; but when they themselves define them indepen¬dently, we will be ready to cooperate by investing money, know-how and energy - always on a minority basis. We are convinced that this is the best way to serve our respective economies and, what is more important the interests of peace.
We in the Middle East cannot rely on the West, which is already overburdened with the former Soviet Union and Eastern Europe. Our future lies in our capacity to devise mechanisms of economic cooperation that will attract investment on a strictly profit¬-oriented basis. In today's world it is imperative that we join the modern trend of regional cooperation, if we are to win the future.

(Extracts from a speech made at the Jerusalem Business Conference, November '93.)