FROM THE OFFICE OF PUBLIC AFFAIRS

I appreciate the opportunity to address this public forum, which includes so many dear friends and relatives. For thirty years the Van Leer Institute has been a center of scholarship, an active and thoughtful participant in Israeli civic life. Under the leadership of the distinguished Dr. Zelniker and my friend Dorothy Harmon, the Van Leer Forum has advanced the public dialogue, and has established relationships around the Mediterranean and elsewhere that enhances the larger work of the Institute.

I always look forward to coming back to Jerusalem. This is truly a city that has everything-beauty, history, energy, diversity. I can walk down streets that look and feel like a neighborhood in my home-town of Atlanta; turn a corner and find myself on a street that feels like one of the lost Jewish centers of Eastern Europe; then climb a hill and come to one of the finest Museums in the world. I have come to Israel countless times in the past 35 years. My wife and sons lived here and my daughter-in-law and grandson too for extended periods. I have relatives and some of my closest friends here. I have stayed in touch, formally and informally, with officials of all of your governments and with the very able people you send to represent you in Washington. Israel has, and always will be, an important feature of my family's life.

As an American, I am grateful there exists in the Middle East a flourishing democracy whose people enjoy all the rights my country gave the world in its Declaration of Independence. As a student of Jewish history, I know what it means -- after so many centuries of exile, deprivation and longing, and following the worst of all Jewish tragedies, the Holocaust -- for a people to have a land of their own, where they do not have to assimilate, do not have to face discrimination, do not have to live in fear that some day they will be forced to leave -- but instead can proudly claim citizenship in a country of their own. A great deal of blood has been shed to make this possible. A great deal of human understanding will be needed to preserve it.

Israel today is a strong, independent, secure and self-reliant state. It is a modern industrialized country positioned to participate fully in the global economy of the new Millennium. It is a nation that has absorbed since Independence a flow of immigrants half the size of its entire population, molding diverse backgrounds and cultures into a common language, culture and creed. Israelis are acutely aware of the unspeakable chapter in world history that led to its birth as a nation. There are those who may wish, as we enter the new Millennium, to put the events of the middle of the twentieth century behind them. But I know you will never forget. Abraham Lincoln said at Gettysburg,

It is for us the living to highly resolve that these noble dead shall not have died in vain." The State of Israel is an affirmation of that commitment.

I have been privileged to be able to represent my government in the effort to complete a task the world ignored for fifty years - obtaining some measure of justice for survivors of the Holocaust, and for their families. We have had success in many areas and are still engaged in negotiations on others. I must say that one of the most influential elements in this effort has been the presence of a sovereign power, the State of Israel, as moral heir to those who perished, whose presence at the negotiating table is a constant reminder of why we are there and a powerful force for justice.

My topic today is the economy of Israel and of the region. One of the things that constantly impresses me about your country is its capacity to seize new opportunities. Israel began fifty years ago as an agrarian nation that made the desert bloom. You are now a high tech, 95 billion-dollar, software-and-cell-phone economy, in which over twenty per cent of the people are already on the Internet. I can think of no other nation that won independence after World War II that has made greater strides in so short a time. So great has been your progress that Israel today is on the cusp of developed country status. Real GDP has increased from $2.5 billion in the 1960s to nearly $100 billion today. Your per capita GDP is ahead of three countries of the European Union. The value of your exports is now $20 billion and on a per capita basis, it is far higher than the United States. ($3650 vs. $2620) This is a phenomenal accomplishment.

Over the same period of time, the Israeli-U.S relationship has progressed enormously from its initial arms-length relationship. While President Truman's decision to recognize the new State was truly historic and courageous, it was his Administration also imposed an arms embargo on Israel, during the War of Independence. In the difficult days of the Suez Canal crisis in the 1950s, the Eisenhower Administration forced Israel, France and Britain to back off their plans. Compare that to the relationship we have today, which embodies the warmest embrace and the closest collaboration between the world's largest democracy and one of the smallest. The year before the Yom Kippur War, annual U.S. aid to Israel amounted to $249 million. Today it is $3 billion. Israel is the largest recipient of American foreign assistance. The economic relationship with the United States is also strong and growing. Since the Israel-U.S. Trade Agreement went into force, trade between our countries has increased more than three-fold. Last year it reached $15.6 billion.

If I have a single message for you today, it is that Israel needs to leave behind its days as a developing country and adopt the remaining structural reforms that will propel your growth and put you solidly into developed country status. My government makes its official recommendations on Israeli economic policy through the Joint Economic Development Group, which I chaired when I was at the State Department. In its latest joint communique, issued two weeks ago, the Group encouraged continued reduction in the size of government expenditures relative to GDP while increasing public investment in education and infrastructure, and thus making more resources available to stimulate growth through the private sector. They also called for deeper capital markets, with more competition and transparency, budgetary restraint and broadening the tax base. These policies are not unlike what America follows for itself.

Our experience in the Clinton Administration is that fiscal discipline pays off. It makes possible a "virtuous cycle" where interest rates can be reduced, which spurs private investment, which in turn spurs further economic growth, which increases available tax revenues, reducing what the government has to borrow, which can lower interest rates, starting the cycle over again.

But regardless of how well fiscal and monetary policy is managed, Israel will only reach the next stage of its economic development if it achieves genuine structural reform - privatization, deregulation, and competition policy in the financial sector, utilities, ports and transportation. This is demonstrated by the experience with Israel's own telecommunication sector. When Israel opened the international telecommunications market to competition in 1997, prices dropped by roughly 80 percent across the board, overnight. But because Israel's domestic telecom market has not been liberalized, it can cost more to call Eilat from Tel Aviv than to call New York City. The key point is that in the 21st century, those economies that are the most open and innovative, will generate the most investment in growth. One key lesson from the remarkable success of Israel's hi-tech boom is that this sector of the Israeli economy has free and open competition. This success demonstrates that open competition and reduced government involvement in the economy are necessary to the achievement to Israel's growth potential.

But Israel's economic growth-and its security-cannot be divorced from the Middle East as a whole. Your economic and political well being will be enhanced as the economies of your neighbors grow and as you are integrated into the Middle East. Other countries in the region, from Egypt and Jordan to Morocco and Tunisia to States in the Gulf, are implementing structural reforms, getting their fiscal houses in order, privatizing and deregulating. Here, the peace process can also be a key to the encouragement of greater trade between the rest of the Middle East and Israel.

For the past three and one-half years, I have devoted a substantial amount of time and energy - as I have during much of my professional life - to helping to build a more secure, prosperous, and stable Middle East. Advancing the peace process has occupied a central place in the agenda of every U.S. Administration over the past three decades I have worked in Washington. It has been a constant quest of President Clinton, from the historic handshake at the White House in 1993, through countless hours and days of personal negotiation and persuasion at Wye River Conference Center, to the meeting in Oslo this coming week. Throughout this process, the U.S. government continues to stress our unshakable commitment to Israel's security and well being.

Broadening and deepening Arab/Israeli peace would carry with it a number of important benefits - the end of Israel's isolation in the region, greater security for Israel and her neighbors and a more stable Middle East, and increased pressure on those states that still rely on violence and terror to change their course. From an economic perspective, progress toward a peace settlement would allow governments to redirect precious resources away from defense expenditures and into social spending and productive civilian investments. By reducing the amount of risk, it would generate significant foreign investment in Israel, as multinational companies build manufacturing plants to service the Middle East. It would increase direct investment in other nations of the region as well.

But just as economic progress to a great extent depends on peace, peace depends on substantive economic progress. The peoples of this region must have a direct stake-an equity interest if you will--in peace and the hope for a better future. The peace process is the cutting edge for providing an environment in which your economy and those of your neighbors can flourish and nourish and sustain peace. This is why we must all be concerned that the economic dimension, which dramatizes the benefits of peace to the elusive "man in the street," has been critically missing. Both Jordan and the Palestinians signed peace agreements with Israel but neither has yet seen much of an economic peace dividend. This undercuts support for the peace process. An impoverished neighbor is never going to be the kind of neighbor Israel deserves and desires. It is a top priority of the Clinton administration to reverse this negative dynamic by working on both tracks-the political and the economic - so that progress toward peace and prosperity can reinforce each other.

The peace process must deliver economic benefits now, particularly to core constituencies in Jordan, the West Bank and Gaza. Since the 1993 Declaration of Principles, per capita incomes in the West Bank and Gaza have declined by over 20%--hardly the basis to sustain popular support for the process. An economic recovery which may lead to a projected 4 per cent growth in 1999, due mainly to more Palestinian workers in Israel and more public hiring. There is little private investment. Nor has Jordan experienced the economic benefits it expected from peace. Its trade with Israel and with the West Bank/Gaza has been tiny-one percent of its exports and 4 per cent of its imports -despite their proximity and the long borders they share. Jordan is looking to the West Bank/ Gaza and to Israel as major destinations for its goods. But the West Bank/Gaza is virtually a captive market for Israel, which is responsible for 86% of their trade. If you exclude the diamond trade, West Bank/Gaza is Israel's second biggest export market-but its exports to Israel are minimal.

Some will say the answer lies in those countries producing better goods or marketing them better. Israeli consumers, in order to advance the peace process, should not have to pay higher prices to purchase inferior products that are not even labeled in Hebrew. But that is not the whole answer. One major reason your neighbors' goods cost more is the expensive "back-to-back" transportation system, whereby goods must be off-loaded at the border and transferred to another truck on the other side of the border.

By the same token, my Government has invested substantial resources in the Gaza Industrial Estate, but lack of investor confidence continues to hamper its expansion. The high cost associated with the back-to-back trucking system and Qarni crossing fees complicate investing in the GIE, although the absence of commercial legislation and other problems in the Palestinian sector have also contributed to this problem. When I was Under Secretary of State, I maintained a dialogue with the Israeli government. For example, I proposed the creation of an expanded list of business people who posed no risk, for whom travel between the West Bank and Gaza should be made easier; and another list of workers with good security records who would have the privilege of working even in times of closure; and expediting the flow of imports and exports to and from the territories. Much progress has been made here due to the action of the Israeli government. Clearly, Israel has an obligation to protect its citizens from terrorist attacks. The challenge is to balance this near term security need with your long-term security interests in reducing poverty in the West Bank and Gaza.

In that connection, the opening of the Safe Passage between Gaza and the West Bank is a very constructive step. It promises new horizons and real improvement in trade and job opportunities for Palestinians.

Israel and the West Bank/Gaza must remain open to each other for trade and investment. Over the long run, we should continue to seek ways to promote more interaction for Israeli, Palestinian and Jordanian economies.

While I was U.S. Ambassador to the European Union, I witnessed the complicated experience of European countries with foreign guest workers. Foreign workers in Israel now make up a significant percentage of your workforce. Many of them are here illegally. Reduction of these numbers will have a double benefit. It will reduce social problems in the future while at the same time creating more room for Palestinian workers, who remain at half the level than they were in the late 1980s. The ability of Palestinians to work in Israel will remain crucial for the viability of the Palestinian economy until it becomes more self-sufficient.

Donor countries have provided hundreds of millions of assistance to the Palestinian Authority. The Clinton Administration is now seeking from the Congress $400 million for the Palestinians in the Wye Supplemental. The Israeli government is making progress in facilitating the free flow of goods, services and people. Now, it is time for the Palestinians to take increased responsibility for their economic future. They must develop more open, accountable and transparent institutions, create a modern legal infrastructure and consolidate all budget accounts under their Ministry of Finance. Thus, my government was particularly pleased to hear the commitment made by Chairman Arafat in Tokyo where he warmly welcomed the IMF proposal to establish a Ministerial Committee to develop a fully integrated economic framework with IMF support. This effort is a unique and important opportunity to achieve these goals.

These policy aims are absolutely critical to build trust and confidence with the Palestinian people and with foreign investors. This, in turn, would promote a more dynamic, vibrant private sector-led growth that can generate the job opportunities which the Palestinian people seek and deserve.

My government is also cooperating with yours and Jordan's on a number of constructive projects. The most successful so far is the Qualifying Industrial Zone at Prince Hassan Industrial Park, where a number of Israeli -Jordanian joint ventures have produced thousands of jobs. Four other Qualifying Industrial Zones have been designated. My government fully supports them. We are also working with your governments to promote joint development of the Jordan Rift Valley. Continued progress on development of the Valley will come as projects are identified that benefit both countries, as the necessary high-level clearances are obtained, and as those commitments can be translated into action at the working level.

Looking more broadly, the economies of the Middle East are united by common strengths and common problems. Many of the nations invest a large percentage of their budget in the military. For the region as a whole, military spending levels represent three times the average of all developing countries. Environmental degradation, especially the declining quality of groundwater, affects nearly every country. On the other hand, the region has tremendous potential for economic growth in such unexploited sectors as tourism and high-value added seasonal agricultural products. An improved security environment and a less protectionist European market are the keys to unlocking these possibilities.

As an economic unit, the Middle East as a whole is inward looking and mostly closed--both to the rest of the world and among the nations themselves. Globalization is coming late to the Middle East. The region risks being left behind-or left out altogether-from the rest of the world in technology and information advances, and in financial integration. Due principally to high tariff and non-tariff barriers-and to a far lesser extent the Arab-Israeli conflict-only about 7% of all trade in the Middle East is between countries within the region. This compares to a level of 20% for the Americas, 30% for the Asians, and 60% for Europe. In terms of direct foreign investment, the region absorbs less than 1% of worldwide flows. It makes no sense that it should be easier for Israel to do business with Britain than with Jordan. Or that it is easier for Jordan to do business with Tokyo than with the West Bank.

There are similar problems in North Africa, an area of promise for increased Israeli economic relations and trade. Currently, the border between Morocco and Algeria is closed to trade due to political differences over the Western Sahara. This affects not only Morocco's ability to trade with Algeria, but also with Tunisia and countries further east. There are virtually no lateral east-west trade linkages in North Africa, only north-south linkages with Europe. Thus investors interested in selling consumer products in North Africa are better off locating their plants in Europe, from which they can reach all the key North African markets, rather than in North Africa, where they could only reach domestic markets.

We have made progress on this problem in North Africa. Last summer, I helped negotiate, on behalf of the United States, an agreement with the governments of Morocco, Tunisia and Algeria establishing a new U.S.-North African Partnership. It will be based principally on enhanced ties with private sector investors, who will be much more interested in any given North African country if it can be seen as a platform to the region as a whole.

For regional barriers to be reduced in the Middle East over the long run, regional institutions will eventually need to be formed to cement policies and broaden the scope of regional cooperation. These institutions need to be inclusive in their membership, created and managed by regional actors, and draw most of their financial resources from within the region.

Regional approaches are also being tried to cope with the severe, region-wide shortage of water. The Middle East is in the midst of the worst drought in 60 years, and faces a freshwater deficit greater than 50 per cent of projected needs twenty years from now. Next January, an historic water conference will take place in Jordan. For the first time ever, leaders from the region will meet to work out regional planning and sharing of resources to try to provide vast new supplies of fresh water from the sea.

The dream of desalination has been around as long as I can remember, but over the past l1 years, breakthroughs in technology have cut the cost in half and brought them within the realm of the possible.

These are some of the problems and opportunities I see, here in Israel and across the region. My Government wants to work with yours and with the other countries of the Middle East to help build economies that meet the challenges of the twenty-first century. This means economies that are market-oriented, outward looking, based on a strong, vibrant private sectors and that have the resilience to generate jobs and prosperity for their peoples.

We must press forward with this task now. We simply cannot afford to wait for the final resolution of the conflict between Israel and its neighbors to launch our work. Israel has fulfilled its Biblical responsibilities as the place for the ingathering of the exiles. You can now reach out the hand of economic cooperation, which I believe will increasingly be grasped as the peace process proceeds.

Thank you and shalom.