LOU DOBBS: Joining me now from our studios in Washington, D.C., to talk about the prospects for peace in the Middle East and the Israeli economy -- Zalman Shoval. He is the Israeli Ambassador to the United States, member of the Israeli negotiating team, and Ambassador, it's good to have you with us tonight.

ZALMAN SHOVAL, Israeli Ambassador to the United States: Hello.

LOU DOBBS: Let me begin by asking you for an assessment of how the talks have gone over the past two days, particularly, today, and what you assess as the prospects?

AMBASSADOR SHOVAL: Well, I think the prospects are not bad. Today was a slow day, but this whole process is going to take a long time. One must accept that and understand that, but my personal belief is that peace, at least between us and the Jordanian/Palestinians, is irreversible even if it will take a long time.

LOU DOBBS: Well, that's encouraging. Notwithstanding, the Palestinians today have asked that the Israelis negotiate with them bilaterally, without the Jordanians. Can they be accommodated in your judgment?

AMB. SHOVAL: Well, they want to change the rules a little bit. They want to have some symbols. But, I think by the end of the day they will understand that they stand most to gain by this process -- most to lose if it doesn't really get off. And, I hope they'll be more realistic than they were today. There are some signs -- some encouraging signs.

LOU DOBBS: Well, that is good news. Let's turn to the economy -- this week we're examining the special relationship -- the economic aspects of it -- between the United States and your country. We're looking at an economy that is, by any definition, in trouble -- 20 percent inflation, 11 percent unemployment -- it's rising. The leadership has been very slow to move ahead with reform that most economists, at least, say is urgently needed. Why is that?

AMB. SHOVAL: Well, Israel, of course, is a country which had to look after its society, after its immigrants -- we're talking about the 40- year long process. But, let me correct you about the impression -- first of all, inflation is less than 20 percent. It's probably going to be around 17.6 percent which is still very high, of course, but we are making, I think, improvements. And the important thing is that Israel is beginning to cope with its economic problems, and I think that with the influx of immigration and with further investments, which we expect, by the end of this century Israel should probably be one of the economic miracles -- the new Hong Kong or the new Singapore.

LOU DOBBS: You said making progress with the influx of Soviet Jews to Israel. In point of fact, your office of trade -- your ministry of trade has suggested to us that you'll need a GNP growth of 13 percent alone to accommodate that influx that you projected. That's really not achievable, is it?

AMB. SHOVAL: Well, we had 8.1 percent growth even this year, in spite of the Gulf War, and we are projecting for 8.5 percent next year. I think that will continue to grow. I can't offer an opinion about the 13 percent, but I would like to remind you that for many, many years Israel did have an average growth of about 10 percent annually, which I think the United States never achieved.

LOU DOBBS: Well, we're talking about an economy really less than 1 percent the size of the United States. That's hardly comparable.

AMB. SHOVAL: That's right, that's right.

LOU DOBBS: The issue of the government -- 50% of the GNP taken up in the public sector, a welfare state by any definition. Do you think -- and I know you've spoken to this issue, do you think that there is any likelihood that the Israeli government will change from its current structure, where it has devoted so much of its GNP to the public sector?

AMB. SHOVAL: Well, it must and it will. There's a committee now on privatization headed by the prime minister itself, but we shouldn't forget one thing -- only about 18 percent of the productive economy is indirectly or directly controlled by the government. We have a very large public sector because of our huge defense expenditure, which is still very, very high. Hopefully, with peace, we'll be able to reduce that over the years.

LOU DOBBS: You said earlier, Ambassador, that the Palestinians have the most to gain and to lose. I wonder if I could quibble with you. Does not Israel have even more to lose because Israel has so much more than the Palestinians?

AMB. SHOVAL: Well, look, we may have a lot to lose because we, after all, we want peace and we have been fighting for peace for so many years. But, we have coped with that situation for all these years, in spite of the wars -- in spite of five wars which the Arabs launched on Israel. We have established, I would say, quite respectable economy. Our exports are growing, we have a high standard of living -- a reasonably high standard of living, and we haven't coped too badly with that. Now, if peace really comes -- if the Arab boycott stops, which is, of course, an illegal act, we hope we will make even greater strides. But with regard to the Palestinians, they want to have some sort of self government. We are willing to give it to them. I mean, they never had it before -- they didn't have it under Jordanian occupation, they didn't have it under Egyptian occupation. They have a lot to gain.

LOU DOBBS: I'm sorry, we're running out of time here. I want to ask you -- Most of the friends of Israel, certainly, the United States government, views the Shamir government's policy on settlements in the West Bank, Gaza, as intransigence. Is there any hope for movement on that issues?

AMB. SHOVAL: Well, may I correct one thing which I think you had on the program yesterday? Only 1.2 percent of immigrants -- all of the immigrants who arrived in Israel, are actually settled across the 'green line' -- in the territories. That means, less than 5,000 people -- not tens of thousands or hundreds of thousands. The settlement issue is a political issue -- that's one of the things that we're going to negotiate about in the future. It has nothing to do with the economy, and it has nothing to do, I think, with the growth of Israel's economy, which is centered on Israel inside the former 'green lines.'

LOU DOBBS: Peace in the region and new order in the region -- you think an absolute, essential condition for prosperity for Israel, as well as its neighbors.

AMB. SHOVAL: It's not an absolutely essential condition, but it is a very important condition, and I believe that that combination of that synthesis of Israel's human resources -- Israel has one of the highest concentrations of technological, scientific trained manpower in the world, plus investments, plus peace in the area, will bring prosperity not just to Israel, but also to the whole Middle East and, perhaps, to parts of the Third World.

LOU DOBBS: Well, Mr. Ambassador, we thank you for being with us, and we wish you as well as those with whom you're negotiating, great success in achieving that stability for the future.

AMB. SHOVAL: Thank you very much. Thank you.