Israel Reaps Benefits From Asian Trade As Arab Boycott Frays

THE Israeli economy, reaping the benefit of Middle East peace, is moving to strengthen its position as the economic powerhouse of the region.

''The main benefit from the peace moves so far is not that Israelis can cross the border to Jordan,'' says Economics and Planning Director-General Alon Liel. ''It is the growth of Asian exports markets. These economies were completely closed to Israeli products. Now we have a growing share of the Asian market.''

Asian nations once shunned Israel for fear of offending the oil-producing Arab states. Today, they are rapidly growing trade partners.

The combination of the unraveling of the Arab boycott imposed on countries trading with Israel, progress on Middle East peace, and a quickening transition from a social- to market-oriented economy, is producing robust growth for Israel.

The Jewish state's gross domestic product (GDP) now exceeds the combined economic output of goods and services of Egypt, Jordan, Syria, and the Palestinian territories.

In 1994, exports to new Asian markets increased by 20 percent in US dollar terms. Israeli exports to India alone grew by 64 percent to $323 million last year -- more than exports to all of South America.

The jump in trade with Asia follows the establishment of diplomatic ties with the region. The number of countries with which Israel has diplomatic relations has jumped from about 70 to 154 in the past four years.

Israel's GDP grew by 6.8 percent in 1994 and prices about 14.5 percent. Economists here expect 4.7 percent growth and 10 percent inflation this year.

Over the past five years, the Israeli economy has grown at a hefty average rate of 5.8 percent a year. Exports are up 41 percent while imports have risen by 71 percent during the same period creating a current account deficit in 1994 of $3 billion. That's double the deficit in 1993.

Although foreign investment is limited, some of its new Asian partners are knocking at Israel's door. Global net capital inflows reached $589 million during 1994.

''Countries like South Korea and Japan -- who wouldn't have considered Israel a few years ago -- are now looking seriously at investment and joint ventures,'' said David Rosenberg, research director for Pacific-Mediterranean Capital Markets, an Israeli investment company.

Large United States companies, such as Digital Equipment Corporation and IBM Corporation, and the German electronic giant Siemens are also in the process of gaining a foothold in the Israeli market.

Today's scenario is a far cry from the 445 percent inflation of a decade ago and the average growth rate then of around 2.5 percent. Economists give partial credit for the revival of the Israeli economy to its ongoing transition from a semi-socialist to a free-market economy.

In the first quarter of 1995, the Israeli government collected $530 million from the privatization of companies and banks. So far, government sales have brought in $3.4 billion since privatization began in 1986. Yossi Nitzani, the outgoing head of the Government Companies Authority, the agency in charge of coordinating privatization, says that the sale of four more companies, four banks, and the Israel Oil Refineries could bring in an additional $5.8 billion.

Further evidence of Israel's march to a market economy came when Israeli Finance Minister Avraham Shohat responded to the Bank of Israel's 1.5 percent cut in interest rates on March 19 with a $400 million reduction in the state budget and a 5 percent drop in income tax rates. Among areas hit by cutbacks: state support for the ailing Kibbutz movement and government mortgage assistance.

Ha'aretz, Israel's most authoritative daily newspaper, noted that Prime Minister Yitzhak Rabin, in motivating the tax and budget cuts, delivered a speech to the Cabinet which could have been written by Milton Friedman, a famed US economist noted for his free enterprise enthusiam.

Although Israel's peace accords with Jordan, the Palestine Liberation Organization, and Egypt have failed to produce many direct economic dividends, joint contracts are having indirect spin-offs.

There is limited scope for two-way trade between Israel and its neighbors, some observers say. After 16 years of peace with Egypt, the largest of Israel's neighboring economies, two-way trade is one-seventh the size of Israel's $300 million in annual trade with Turkey.

''Peace accords are not enough for a trade relationship,'' Mr. Rosenberg says. ''There are real suspicions in Egypt and other Arab states that Israel will dominate the region economically as it does politically and militarily,'' he says.

But, with the Arab boycott unraveling, Israeli officials and businessmen are looking to the Gulf States of Tunisia and Morocco as markets for expanding trade.