- As a small economy, Israel depends on its capacity to export goods and conduct trade with other nations, but most of its industry concentrates on the domestic market.
- Planned population distribution to fill out the outlying areas has created regional pockets of socio-economic distress in the Negev, Jerusalem and the Galilee.
- Constant shifts in economic laws and regulations and massive amounts of red tape render the economy unattractive to DFI.
- Unilateral foreign transfers and credit from abroad may be expected to shrink in the future.
- Deficit budget financing would revive the scourge of hyper-inflation.
- Economic stagnation leads to unemployment and a "brain drain" phenomenon.
- No consensus exists for restructuring the economy by means of slashing transfer payments.
- A powerful centralized trade union and monopolistic economic structure are deeply entrenched, enjoying the complicity of the main political parties.
This paper proposes the establishment of Free Export Processing Zones (FEPZs) in Israel. FEPZs are export-led industrial parks which function as free-trade enclaves. Such enclaves create an environment conducive to competitive economic activity by freeing entrepreneurs from changing regulations and bureaucratic interference, enabling them to make efficient use of Israel's comparative economic advantages. The establishment of Free Export Processing Zones is expected to attract massive direct foreign investment (DFI), which will serve as an engine for economic growth.
The rationale for establishing FEPZs requires a brief description of the main impediments to economic growth in Israel.
The establishment of FEPZs containing competitive export industries in the Negev, Jerusalem and the Galilee is an economically viable, socially desirable and politically feasible solution to the foregoing obstacles to growth.
Free trade can best be introduced into Israel's economy by means of industrial enclaves; the alternative, exposing the whole nation to foreign competition in one fell swoop, would exact too high a price in social, political, and economic terms.
The successful experience of other countries in achieving economic growth through FEPZs demonstrates that their implementation can be accomplished within the existing socio-economic structure and vested interests. In other countries, FEPZs created employment, generated foreign exchange earnings and attracted DFI, despite other restrictive domestic policies. The FEPZ achievements gradually percolated through the economy, reinforcing competitive and liberalizing tendencies.
Priority must be given to attracting DFI. The FEPZ system removes the obstacles to DFI, which is then able to generate non-inflationary economic growth, improve the balance of payments and create jobs in a competitive export-oriented industry. DFI brings capital, know-how and markets with it, making DFI a low-cost and low-risk means of development. When combined with Israel's comparative advantages, DFI will enable Israel to compete in foreign markets.
In 1989, Knesset Member Amir Peretz introduced a prototype bill to establish FEPZs in Israel. Far from perfect, the bill was a first attempt to outline some of the key elements of an FEPZ: tax exemptions, freedom from currency controls, no customs barriers, along with the removal of other impediments to profitable DFI. The bill needs improvement to protect the rights of investors from potential changes in government policy and, in particular, to secure protection from the predations of Israel's national labor monopoly. In a nutshell, the bill envisages that the government will grant a "Concessionaire" the authority to construct, manage and market the FEPZ, on a for-profit basis, to investors and entrepreneurs. The FEPZ will attempt to create genuine free-market, free-trade institutions on Israeli soil that foster prospects for massive export growth along the lines of the success stories of Hong Kong, Singapore, Taiwan, and Korea.
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