A Middle East Dividend Overlooked in the Primaries

To Americans deluged by news of primary elections, it may come as a surprise that historic change is going on elsewhere--including in places where peace and prosperity depend directly on U.S. leadership in the world.

“We are seeing the emergence of a common market of the Middle East,” says Benjamin Gaon, president of Koor Industries Ltd., once Israel’s largest defense contractor and now a diversified commercial company with operations in telecommunications and building materials--and a listing on the New York Stock Exchange.

Gaon is referring to budding contacts with Palestinian businesses in the West Bank and Gaza and with Jordan, Morocco, Tunisia and beyond. His vision soars on the business Israeli companies like Koor can now do with Indonesia, Malaysia, Vietnam and other Asian countries that avoided it through decades of Arab boycotts.

Peace attracts capital. U.S. investors poured $320 million into public offerings of Israeli companies last year, including $120 million for Koor. That’s in addition to a $252-million investment in Koor by Shamrock Holdings, the investment company of the Roy E. Disney family.

European and U.S. investors are putting money also in countries of the Arab Middle East along with Palestinian and Syrian families from around the world who are sending funds back home now that they see a chance for economic development. The stock exchange in Lebanon has reopened.

Capital has the potential for good. “The U.S. is a powerful actor encouraging all this because it sees economic development as deepening the peace process,” says Ian Lesser of Rand Corp., the Santa Monica-based research firm.

But a rush of money can also dislocate traditional economies, causing resentment. “Economic nationalism arises in poor countries as in advanced ones like the United States,” notes Graham Fuller, senior political scientist at Rand.

Amid such ambiguities, Koor Industries offers an instructive reflection of changing beliefs and economic realities in Israel and the world at large--as well as an interesting business story.

Koor was conceived in the Socialist vision that began a nation. It was founded in 1944 by the labor federation Histadrut, four years before the state of Israel was born. Initially a construction company and a state-owned source of employment, Koor became a supplier of military communications and electronic gear through Israel’s long period of conflict with its Arab neighbors.

But over time it went from heroic to bureaucratic. By the late 1980s, it was a bankrupt state company, with $300 million a year in losses--in an Israeli economy suffering 100% a year inflation.

It was in that period, with the Cold War ending, that the country recognized it had to reform its defense-heavy economy and the company had to reorganize. The Gulf War in 1991 only confirmed those decisions as it raised the U.S. role in the region to a new level. “From then on the Middle East has had only one sheriff,” says Gaon, a supermarket executive who was brought in to run Koor.

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In restructuring the company, Gaon did the customary things. He closed or sold 100 businesses, reduced employment 7% and cut pay for the remaining 20,000 employees. He got bankers to take common stock in lieu of debt repayments.

But his innovation was to take Koor from the protection of state ownership into world capital markets. He persuaded the labor federation last year to sell its 22.5% stake in Koor to Shamrock Holdings.

Shamrock, which invests on behalf of Roy Disney and others, exists in a world of abundant capital seeking returns on investment. Most of its investments are in the United States and it has partnerships with GE Capital and California state pension funds.

Why risk a quarter of a billion in Israel? “The returns--25%-30% a year--are larger than other opportunities in the U.S., because the risks are larger. But so are the prospects now that peace has opened the world to Israeli industry,” says Stanley Gold, president of Shamrock.

Koor can go into Vietnam with agricultural chemicals and know-how; into Indonesia with telecommunications networks. That doesn’t mean laying miles of cable. Today telecommunications means cellular or satellite setups that bring instant communications to an industrial area and make development possible.

“You don’t build a telecommunications network in Israel any more.” says Gaon. “It has already been built.” Indeed, the capital that now builds in Indonesia was earned by Israel’s earlier telephone networks.

What’s going on is multiplying improvement. The developing country gets the know-how that allows its people to move beyond subsistence agriculture. The developed countries get returns on their investments, which are then reinvested.

Perhaps the next place the world’s multiplying capital will alight is the Middle East, home of almost 300 million people in more than 20 countries, including Iran and Turkey.

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In all those countries, people have low incomes--one-half to one-sixth those of the advanced Israelis. Opportunities are sparse.

For the present, development won’t be as rapid as it has been in Asia. Koor is proceeding slowly, selling cement to Palestinian builders in the West Bank, forming joint ventures with Jordanian suppliers.

But four years after the Gulf War, there are visions of Iraq returning to the world economy, spurring expansion of the Jordanian port of Aqaba.

A Middle East where lions and lambs do business together has obvious meaning for Americans, with U.S. forces directly responsible for keeping peace in the oil-rich area.

Meanwhile, the new Israeli economy is growing at 7% a year. The vision of work and sharing that built the state--as symbolized by the now-fading kibbutz movement--remains. But the new vision of individual opportunity and world markets dominates.

It’s a more abundant world. But as Americans are learning in this year’s primary campaigns, even abundant economies have tensions that call for newer thinking.