Collapse of the Middle East peace process will sound the death knell for much-needed economic reform in Israel.

THE Jerusalem 3000 celebrations commemorating the 3,000th anniversary of the city’s foundation have not gone too well. So far at least.

First up, the US ambassador to Israel (Australian-born Martin Indyk) stayed away from the initial activities. Then the European Union announced a boycott, preventing EU member governments from sponsoring events.

Now tourism to Israel is down about 15 per cent following the recent terrorist bombings in Jerusalem and Tel Aviv and Israel’s “Grapes of Wrath” strike against Islamic Jihad operations in Lebanon.

Never mind. As Martin Gilbert points out in his Jerusalem in the Twentieth Century (1996), Jerusalem 3000 has already been celebrated. In 1952, no less. In any event there is always 1998 when Israel records its 50th anniversary. There will be much to celebrate. The 1990s have seen the emergence of Israel as a modern, internationally focused State. Israel’s modernisation has been accompanied by strong economic growth and some reform. For this the previous Labour administration of Yitzhak Rabin and Shimon Peres is entitled to take some credit.

But the newly elected Likud Prime Minister, Benjamin Netanyahu, is intent on going harder and faster. He recently told the US Congress he was intent on “turning Israel’s economy into a free market of goods and ideas”. Behind secure borders, of course.

The Israeli Prime Minister committed himself to “free enterprise, privatisation, open capital markets, an end to cartels, lower taxes, deregulation”. He promised that there would soon be a Hebrew word for deregulation.

That Israel has got by so far without a word for deregulation reflects the nation’s formation almost half a century ago as the embodiment of democratic socialism. Some economic reform has taken place in recent years to break down inefficient state monopolies. But much more needs to be done. It’s here that Mr Netanyahu’s rhetoric is likely to run up against the demands of his essentially conservative constituency. Right now the religious Right is demanding the closure of a major Jerusalem road on the Jewish sabbath (the shabbat). And the Transportation Minister, Yitzhak Levy, has announced that, when privatised, the national carrier El Al will not be able to fly on the shabbat.

Benjamin Netanyahu is a popularly, and directly, elected Prime Minister. But under Israeli’s complicated system of proportional representation, the Likud Government is dependent on minority parties for support – including the National Religious Party.

In a recent interview with the Jerusalem Post, the Finance Minister, Dan Meridor, acknowledged that Israel’s impressive economic growth of about 6 per cent had been due to “immigration, geo-politics and reform”.

On any analysis, Israel’s absorption of migrants has been stunningly successful. Then there is geo-politics. By this Meridor means the peace process initiated by Rabin and Peres which has improved Israel’s relations with its neighbours. He also has in mind Israel’s developing trade with North America and Europe, much of which occurred during the Arab boycott of recent memory.

The possible collapse of the peace process casts a shadow over the economy at the very time when further economic change is required. Israel’s inflation and interest rates are too high and there is substantial room for reform in the bloated and inefficient public sector.

This would be a hard enough task for a newly elected government. It’s all the more for the Likud, which has about a quarter of the seats in the Knesset.

If Netanyahu wants to deliver on his reform agenda as stated to the US Congress – including a wish to oversee a reduction in US aid, leading in time to Israel’s “total selfreliance” – he needs the peace process to continue. So far the signs are not good.

Neither Rabin nor Peres was in any sense a dove. It’s just that both came to see that the peace process was in Israel’s interests. At the moment the peace process is endangered on a number of fronts.

The Netanyahu Government appears to have put negotiations about the return of the Golan Heights to Syria on hold. Israel’s apparent reluctance to deal with Syria probably means that President Assad will continue to let Islamic Jihad engage Israeli forces in southern Lebanon.

Israel’s relations with Egypt and Jordan appear to remain cordial. But the situation in the West Bank and Gaza, under the control of Yasser Arafat’s Palestinian Authority, seems to be deteriorating.

President Arafat’s administrative style and authoritarianism leave much to be desired. They have been the subject of criticism by Israeli and Palestinian alike. Yet, from an Israeli perspective, the only alternative to Arafat seems to be the extremes of Hamas and Islamic Jihad. Nevertheless, the Netanyahu Government appears to be putting additional pressure on Arafat’s leadership by discussing more West Bank settlements.

Meanwhile, the grinding poverty of Gaza, and the administrative restrictions enforced by the Israelis, creates a breeding ground for Hamas and Islamic Jihad martyrs who are all too willing to become terrorists.

There are no easy solutions in the Middle East. That explains why Jerusalem has been fought over for centuries. However, the Likud Government might give economic reform a try – not just in Israel itself but also in the West Bank and Gaza. Israel’s security is obviously a matter of paramount importance. Yet this is not incompatible with reducing controls over people and goods in the West Bank and Gaza.

Even if these issues were resolved, this would still leave Jerusalem on the agenda. As Martin Gilbert has written, “the process of creating a democratic system, while the rights of Palestinian Arabs in Jerusalem are still curtailed, is a hard one”. Perhaps a start could be made in 1998.