Israel's economy leaving Palestinians far behind

Headhunter Minna Felig once told corporate lawyers that Israeli firms hired one or two months out of the year. That was three years ago. Now, she is swamped with job openings all year long.

"Every law firm I work with is incredibly understaffed," she says. "I can't keep up with it. The workload has increased twofold."

This is just one sign of Israel's robust economic expansion. At a time when the Palestinian West Bank and Gaza are teetering on the brink of a collapse, Israeli growth - 6.6 percent GDP rise in the first quarter of 2006 - has returned to the torrid pace set before the outbreak of the Palestinian uprising.

It's also a recognition of a growing separation between the Israeli and Palestinian economies - and Israel's receding fear of attacks.

Tourists are filling up hotels. Private spending jumped 10.3 percent in the first three months of the year and the real estate market is heating up. Earlier this month, US investment guru Warren Buffet announced a $4 billion buyout of an Israeli metal tool cutting manufacturer, the biggest foreign investment in Israel.

A wave of suicide bombings that once scared off businessmen has been brought under control, and foreign investors are recognizing the long-term resilience of Israel's economy to the waves of conflict with the Palestinians. The trend seems to lend credence to a mantra of a former finance minister that Israel's high-tech, export-based economy is more sensitive to the US Nasdaq stock market than violence in the West Bank city of Nablus.

"The recession was not only because of the intifada [uprising]," says Uriel Lynn, president of the Israeli Chamber of Commerce. "The economy of Israel can grow and continue to grow in spite of the intifada, and in spite of security problems.''

Per-capita income - a measure of the standard of living - is 17 times higher in Israel than among its neighbors from the West Bank and Gaza Strip. That gap is forecast to widen as an economic boycott of the Hamas-led Palestinian Authority pushes up poverty levels and as foreign investment fuels Israeli prosperity.

Israeli sanctions, coupled with a halt in financial aid from the US and Europe, have left the Hamas-led government broke and unable to pay the salaries of 165,000 employees for the past two months.

Israel's cabinet decided Sunday it would release $11 million of the $55 million customs taxes it is withholding from the Palestinian Authority but only to purchase medicines and medical equipment to ease the humanitarian strain.

Experts say that the widening economic disparity could undermine the long-term prospect for peaceful relations between Israelis and Palestinians.

"It spells disaster. There's kind of a blind eye in Israel to the Palestinian economy,'' says Gershon Baskin, co-chair of the Israel-Palestinian Center for Research and Information in Jerusalem. "Israel has a sense that it doesn't matter what happens on the Palestinian side, Israel can do what it wants and continue to grow.''

To be sure, the outbreak of the Palestinian uprising in September 2000 and a campaign of suicide bombings plunged Israel's economy into a recession. Gross domestic product shrunk for two years and unemployment approached 11 percent, as tourists disappeared and Israelis stayed away from shopping malls. A spiraling budget deficit forced a painful government austerity program that cut social welfare benefits.

But as the violence has stabilized, the jobless rate has dropped below 9 percent, the economy is chugging through its third year of robust growth, and the Tel Aviv Stock Exchange has surged to record highs. Economic growth is expected to at least meet the 2005 mark of 4.7 percent.

Two weeks ago, Israel got a morale boost when Mr. Buffet announced that he would buy 80 percent of Iscar Ltd. "[Buffet] is a trendsetter for other investors in the world who are going to be asking themselves, do we have enough Israel in our portfolio?'' says Gil Bufman, chief economist at Israel's Bank Leumi Ltd.

In the decades after Israel occupied the West Bank and the Gaza Strip in the 1967 Six Day War, an economic symbiosis began to emerge as Israel exported consumer goods to the Palestinians and Arab construction and agricultural laborers flooded into Israel. The peace accords of the 1990s included a separate economic treaty - the Paris Protocol - establishing a customs union between Israel and the Palestinian Authority. But over the last decade, Israel has reduced its dependence on the Palestinian economy as technology exports surged and day laborers from Gaza and the West Bank were replaced by guest workers from primarily China, Thailand, and Romania.

Now the possibility of full economic disengagement looms. The completion of Israel's security barrier around the West Bank will allow it to end the customs union, says Mr. Baskin. Meanwhile, the two Israeli banks that clear transactions with Palestinian banks have announced they would no longer process Palestinian checks for fear of violating terrorism finance laws.

That is already having devastating consequences for Palestinian businesses as well as thousands of small- to medium-size Israeli businesses which have built up hundred of millions of dollars in sales with the West Bank and Gaza.

"We are getting a lot of calls,'' says Avraham Dishon, spokesman for Israel's association of independently owned businesses. "They are saying, 'What are we going to do? How are we going to get our money? We are stuck with checks.' ''

And yet the impasse between Israel and the Palestinian Authority isn't slowing outside investment, says Jackie Mukmel, the chief executive of Man Properties Ltd. The real estate brokerage has increased its staff by one-third in the last year to keep up with the investors looking for commercial properties in Israel.

"It's reminiscent of the late '90s when there was a wave of foreign investment to buy properties here,'' he says. "Investors are no longer taking into account the threats and declarations of the Palestinians.''