ISRAEL'S efforts to establish itself as the business capital of the Middle East have been dealt a serious psychological blow by the Arab League's decision to row back on developing economic and cultural ties with Jerusalem.
Although the Cairo resolution passed on Monday is non-binding, and requires ratification by individual Arab states, it does indicate the outrage provoked by the Har Homa housing project in East Jerusalem.
The significance of the move is not just that large trade and infrastructure projects planned for the region - such as an airport in the Eilat-Aqaba area serving tourist needs in Israel, Jordan and some of the Gulf states - will be interrupted. The loss of tourist income will indeed be critical to all parties, but what will really hurt Israel and the economic ambitions of Mr Benjamin Netanyahu's government are the ripples this will send worldwide.
Israel has reaped enormous benefit from the peace process, mainly in the form of improved business relations with countries, many in the Far East, which had historically shunned the Jewish state because of concern about an Arab boycott and the security of investments.
The Madrid process and the Oslo accords changed all that. There has been a massive inflow of new foreign investment into Israel, not just from its two most powerful traditional trading partners (the United States and Britain) but from dozens of other countries.
These inward flows, which reached 53.2 billion last year, have enabled Israel to remake itself as Silicon Valley east, using its high-tech skills as bait to capture the world's largest technology groups, including Intel, Digital Equipment and Kyocera of Japan.
The focus on high-paying, high-value technology jobs has also enabled Israeli companies to transfer lesser-value textile manufacturing to Jordan and Palestine, where wage levels are a fraction of those in Israel. In Israel, per-capita income has now reached levels comparable with those in the largest
10 industrial economies.
But all this economic change has been based on confidence: a trust in the Israeli administration to keep the peace process rolling forward and a belief that economic policymakers would ensure the right environment for overseas investors and broader trade links within the region.
These are connections which the Netanyahu administration has found it difficult to make. While the finance minister, Mr Dan Meridor, has travelled extensively in the region seeking to build trade and commercial relationships with neighbours, much of the rest of the government has put the Likud political agenda ahead of longer-term financial and economic objectives.
One of the great hawks in the cabinet, the communications minister, Mrs Livnat Limor, is in charge of a radical privatisation programme designed to reverse Israel's traditions of centrist government and create a more liberalised and deregulated one.
But there is an intellectual conflict in her approach. It is impossible to be a hawk on security issues and at the same time attract the foreign investment required to privatise great sections of the economy, from telecoms to electricity and chemicals.
Moreover, as long as the current unrest on the West Bank persists, companies like Daimler-Benz, which has considered moving its Middle East regional headquarters to Israel, will keep those plans on hold.