Room to Boom

Both Hong Kong and Israel are small countries with few natural resources; both have highly educated populations and conveniently located ports. Yet Hong Kong bustles while Israel stagnates, largely because Israel's tax and regulatory environment is far less hospitable to business. Recognizing this fact, the Israeli government may be ready to try a little bit of Hong Kong in the Middle East.

In January, Israeli Finance Minister Avraham Shohat announced that he had approved the creation of the country's first free export processing zone. The FEPZ would be an island of relative laissez-faire in a heavily controlled economy: no tariffs (except on exports to Israel proper), no taxes except for personal income tax (at least initially), no state-supported monopolies, no price controls, no onerous land-use regulations or licensing procedures.

If, as expected, the Israeli cabinet approves an FEPZ bill, the Knesset could vote on it this summer. "My guess is that Israel will have an FEPZ," says David Yerushalmi, CEO and chairman of Israel Export Corp., a group of 28 Jewish-American investors who hope to develop the zone. He estimates that the industrial park, which would occupy about 500 acres in the Negev or Galilee, could attract about $750 million in foreign investment and directly create some 20,000 jobs.

The FEPZ concept, promoted in Israel by the Institute for Advanced Strategic and Political Studies, has been around for years. It may seem odd that it took a Labor government, rather than the ostensibly more market-oriented Likud Party, to implement it. But Labor was elected with a mandate to revive economic growth, Yerushalmi says, and "they have to do something."

The key to moving ahead with an FEPZ was getting Shohat on board despite opposition from organized labor and bureaucrats in his own ministry. Yerushalmi convinced Shohat that, rather than subsidize foreign investment, the government should remove some of the obstacles that discourage companies from doing business in Israel. For example, government approval for a new business project can take up to two years. Under the FEPZ proposal, the zone's managers would have to act on applications within 30 days.

"We have a lot of interest from companies," Yerushalmi says. The zone would be designed to accommodate 50 to 75 businesses in fields such as biomedical products, telecommunications, data processing, computer software, and financial services.

If the first FEPZ is successful, there will probably be more, and Yerushalmi predicts that their example will encourage broader economic reform. "Privatization will take on a new meaning," he says. "Once they see what private industry does, they'll want to extend the benefits."