Desert boom.

• Author: Pollock, Robert
• Position: Israel's free-export processing zone

"TILL NOW THE WALLET COMES out--and the government takes half," declared Knesset member Raphael Eitan. He was explaining why despite a highly skilled labor force, excellent ports, and a prime location at the crossroads of Europe, Africa, and Asia, Israel's economy stagnates. Burdensome tax and regulatory policies have long made it a terrible place to do business. That is, until now. "Now" was June 20, the day the Knesset approved the creation of Israel's first free-export processing zone (FEPZ).

More than 100 companies have already expressed interest in locating in the zone, including clothing manufacturers Liz Claiborne, Phillip van Heusen, and London Fog, as well as chemical, trade, telecommunications, and pharmaceutical firms. That's because they will benefit from exemptions from tariffs, personal and corporate income taxes, and a whole host of regulations. And Israel is the only country in the world to have signed free-trade agreements with both the United States and the European Union, giving companies in the zone a competitive advantage abroad, too. In return for the hands-off treatment, Israel expects the zone to generate as many as 50,000 jobs within four years.

The FEPZ will likely cover about 500 acres located near Beersheba in the Negev desert. It will operate as a privately run, semi-autonomous laissez-faire state. In the coming months, Israel will award the rights to serve as concessionaire in the zone. The winning investors will purchase the land and be responsible for providing all infrastructure and services. In return, they will get to lease the land for a profit. This means roads, water, sewers, electricity, and telecommunications, as well as police and fire protection, will be privately provided--another bonus for potential tenants. Backers expect the zone to be able to offer the lowest telecommunications rates in the world. In an information economy that can mean huge savings.

The FEPZ is not unique as a concept. The first free zone started in Taiwan in the '60s. And depending on how you define them, there are now between 120 and 150 special free-market zones in 70 countries. But Israel's FEPZ is important because it may herald a coming wave of privately created, financed, and run free-market zones. It was not proposed by any politician nor planned by any government. It began as an offer from a group of Jewish-American venture capitalists that Israel quite literally couldn't afford to refuse.

ALTHOUGH IT MAY SEEM ODD...