The heat-humidity index was very high. Although the air conditioner was going full blast, none of the high-tech workers glued to their computer screens, most of them men and women in their twenties, objected to the offer of their team leader, who circulated among them with a carton full of ice cream cones.

That's how a summer work day looks in the offices of Exalt Technologies, a Palestinian firm located in the heart of Ramallah that employs 85 engineers. Exalt is a software development house working as a contractor for several large international c-orporations - including the giant Cisco Systems, their biggest client, which currently employees 18 of its people.

These employees are an organic team that works closely with Cisco's engineers, working out of the company's local headquarters in Netanya. Although most of the work done together is conducted via the Internet, it also includes trips to the headquarters for meetings - although obtaining entry permits into Israel can take some time.

"We talk only about business, about the work itself - we don't discuss politics," says Ibrahim, 23, a young engineer who has been working for the company for about a year, since graduating from Birzeit University in Ramallah.

Exalt was established in 1993, but only in recent years has it become involved in software development. Early on, it cooperated with the German firm Siemens on various hardware projects. In 2003, in light of the dot.com crisis in the international high-tech industry, the connection with Siemens was also severed. At the time the company stagnated, but thanks to the current, quiet security situation, it has grown once again: In 2011 it hired a record number of workers.

"In the second intifada almost everything was destroyed here," says Tareq Maayah, founder and CEO of Exalt. "Before 2000, the company had 47 employees, and by 2006, were only six. We had to rebuild everything. During the siege imposed on the city, the gun of an Israel Defense Forces tank was aimed at our building. They weren't looking for anything in particular here, but the tank aimed its gun around the entire area, so that sometimes it was aimed here. None of the workers were here, only the building's security guard, an elderly man, confronting the tank alone."

Maayah, an engineer, says that in addition to outsourcing contracts, he hopes to increase the independent activity of the firm. At present it is developing an application for social shopping via smart phones, for which a patent has already been registered in the United States, the target market. To date $250,000 has been invested in the initiative, and Exalt is looking for additional investors. Meanwhile most of the firm's revenue comes from outsourcing, and it can be reasonably assumed that the same will be true in the near future as well.

Maayah tries to make contact with Israeli firms on his visits west of the Green Line, but he says that it's hard to convince Israeli businessmen to visit Ramallah. "There's a crazy Israeli client who came here on a motorcycle. He has a French passport, so maybe he felt safer. There are several Israelis who come here regularly and have no problem with that, but many are definitely afraid." Maayah says that sometimes Israeli firms approach Exalt after hearing about it by word-of-mouth. "That's how we began working with HP, for example," he notes. "But there's a shortage of Israelis who are willing to see things with their own eyes, and to acknowledge that a high-tech firm here is not so different from a high-tech firm in Israel. It's true that sometimes there's bad news and that affects business, but in recent years the situation has been more or less stable, so that we can start building something here."

One Israeli woman who is not afraid to go to Ramallah is Zika Abzuk, the director of corporate responsibility for Cisco in the Middle East, Africa and Europe. At lunch at a busy restaurant in central Ramallah, she is approached by businessmen from the next table who are interested in Cisco's work in the city and want to find out about business opportunities. Her office in Netanya, she says, has become an address for Israeli high-tech people who want to know about the feasibility of investments in Palestinian Authority areas.

Abzuk, a mathematician by training, was previously a research and development manager for Cisco Systems Israel, but decided to switch to social action. In 2008 she initiated Cisco's investment activities in the West Bank, and received the full backing of company chairman and CEO John Chambers, who continues to support the project. Between 2008 and 2012, Cisco invested $15 million in Palestinian high tech, $4 million of that in two firms to which it outsourced projects. The other $11 million were transferred via two venture capital funds that invest in the West Bank: Sadara Ventures, which is managed jointly by Israeli Yadin Kaufmann and Palestinian Saed Nashef, and another, Palestinian fund.

According to data taken from the Palestinian Central Bureau of Statistics and presented by Cisco in a special report prepared for it, the IT sector in the West Bank grew from 0.8 percent of GDP in 2008 to 5 percent in 2010. According to the report, from 2008 to 2011, aside from Cisco, international companies and organizations, including the European Investment Bank, invested $78 million in Palestinian high-tech - a sum that constitutes about 1.6 percent of the Palestinian GDP of 2008.

According to Abzuk, during the first year of its project, Cisco invested $1 million of the designated budget in social objectives, but since then the cooperation has been entirely business-related: "When we started to work there, the economy had almost come to a halt and was based mainly on donations. The people we work with told us, 'We don't just want donations, we want you to do business with us.' They in effect asked us to help them to change their image from that of a conflict zone to a place open for business, attractive for outsourcing. We too, as a firm, wanted to develop a business model around this, in order to show other companies that it is possible to make business investments there, and that this wasn't just another social project."

Lower-cost employees

Cisco's vision really is impressive, and in 2010, Abzuk and her team even received the prestigious Award for Corporate Excellence from U.S. Secretary of State Hillary Clinton. (The ACE is an annual award that recognizes U.S.-owned businesses that exhibit good corporate citizenship, promote innovation and advance democratic principles around the world. )

But from a broader perspective, Cisco's localized success can be said to only attest to a larger failure. True, there are a few other international names in Ramallah, including HP, Microsoft and Intel, but they employ a very small number of engineers, and none of them have established or is about to establish an R&D center in the city. There are almost no well-known Israeli firms there, either, with the exception of Mellanox and LivePerson, both of which also employ a very small number of engineers.

Today the Palestinian high-tech industry is still in its infancy: There are 125 firms with 4,000-5,000 employees, and an overall turnover of about $6 million.

A few weeks ago, the World Bank published a report on the Palestinian economy, which it asserted is not strong enough for establishment of a state, remaining as it does overly dependent on foreign donations. About 2,000 young Palestinians graduate from West Bank universities each year with degrees that are relevant to work in high-tech, but only 30 percent of them find work in the field. The average monthly salary for an entry-level employee in the industry is $700 per month, but Israeli employers are still not storming the checkpoints on their way to the West Bank.

"The cost of a Palestinian engineer is between a quarter and a third of the cost of an Israeli engineer, so there's no question in terms of economic potential," says Eyal Waldman, CEO of Mellanox Technologies. His firm employs about 10 engineers at Asal Technologies in Ramallah, which does outsourcing for international and Israeli software firms.

This cooperation began about two years ago, after Waldman met the CEO of Asal at a professional conference. Clearly, based on its growth rate, Mellanox could employ far more engineers in Ramallah; indeed, Waldman says that the company plans to increase the number of employees there. "These are good workers," he says, "but they do require training. After a training period they become better workers. In terms of costs, it's worthwhile investing the time."

Senior executives in the Israeli high-tech industry who are familiar with what is being done in Ramallah claim, off-record, that relative to their peers in Israel, the Palestinians are not sufficiently skilled. Those same people point to the fact that four Israeli universities appear on the list of the world's top 20 universities in the field of computer sciences, whereas not a single Palestinian university is among the top 100.

"They simply aren't there yet," says one Israeli executive. "There's no labor force with technological capabilities in the West Bank, just as in Israel 20 years ago there was no mass of high-tech workers."

Hassan Kassem, chairman of the Palestinian Information Technology Association of Companies, thinks otherwise: "The level of our graduates is quite sufficient. I can't say that it's excellent or at the top, but relative to the region it's very good, especially at Birzeit University. It's a fact that even new graduates find work immediately."

The CEO of an Israeli firm that works with Palestinians in the West Bank says that disagreements of this type reflect cultural differences that lead to differing expectations. "There's no coordination between the expectation and what actually happens." he observes. "Western companies also had difficulty at the beginning with work in India or in Eastern Europe, and to this day there are problems there. That's why it's natural that there would be problems at first with the Palestinians too. I see how Israeli firms approach outsourcing when they are unaware of the differences in culture and mentality that cause communications gaps. Sometimes, if you don't transmit a super-precise document, problems are liable to crop up, but not everyone understands that."

The same CEO notes an additional obstacle to productive cooperation: "The Palestinian infrastructure is still problematic, the browsing speed is not high enough and it's impossible to develop a broad variety of products in the cellular field because of problems with 3G."

The problems with 3G (third-generation ) mobile-telephone technology stem, among other things, from the obstacles mounted by Israel, for security reasons, to the entry of appropriate equipment to the West Bank. For that reason, even if people possess smartphones, they can usually be used for surfing only with wireless (rather than 3G ) Internet. This makes it difficult, for example, to develop services based on identifying the location of the user.

"Israel defined a concept called 'dual use,'" explains Kassem. "The Israeli security forces don't allow the importing of equipment that could be used for intelligence purposes, although they know that there are certain firms that have no connection to security work. That has caused a big delay in economic development in the high-tech field, and we hope that this problem will be solved."

That is only one example of the fact that Palestinian high-tech does not exist in a vacuum, but rather within a complicated political situation. Although no physical obstacle can prevent software developments that are transmitted via the Internet, the political situation is not only expressed through physical roadblocks.

"People who work in the Palestinian high-tech industry have more political awareness than others," explains Yoav Stern, a business entrepreneur who until recently was the director of the business and environment department of the Peres Center for Peace.

"I remember initiatives that have been cancelled due to unfavorable reactions on the social networks, and then people maintained radio silence in order not to arouse an uproar. It's precisely the combination between the nature of the industry and the political situation that causes a problem. As opposed to other branches of the economy where things may be done in distant places and of which people are unaware, this is an 'exposed' industry - everyone sees what's happening on the Internet and on Facebook. This exposure constitutes a political barrier, because of the Palestinians' reluctance to work with Israel."

Economic peace

This situation arouses questions about the concept of economic peace - a phrase that was introduced into public discourse by Prime Minister Benjamin Netanyahu while he was still the opposition leader. Netanyahu believes that in a situation of security calm the Palestinians should be able to develop their economy in cooperation with Israel, something that in the long run could also lead to an improvement in relations between the two peoples and even perhaps to a peace agreement.

Koby Huberman, a businessman and one of the heads of the Israeli Peace Initiative (an organization of businesspeople, academics and former army officers interested in promoting a diplomatic solution to the Israeli-Palestinian conflict ), says that the low-key activity of Israeli high-tech firms in the territories is proof of the failure of this vision: "The fact that even now, in spite of everything, we are seeing the beginning of initiatives is encouraging, but the little that exists only proves that the potential is far from being exploited. The idea that economic cooperation would promote peace, without diplomatic progress, is being shattered against the rocks of reality. There is no question that when a decision is made regarding diplomatic and security arrangements, we will see a reduction in the level of suspicion and an increase in the level of business cooperation."

For her part, Abzuk admits that Palestinian suspicion exists, but prefers to see the glass half-full. "It's true, politics has really had an impact here. On the Palestinian side, there's less hope of reaching some kind of solution, which is why the political opposition has become harsher. But the initiatives start out small, things are conveyed via the grapevine, and the entire circle is growing slowly but surely. It's easier for large and well-known companies to take the first steps, but the others will come too."

Despite the criticism of the economic-peace paradigm, she believes that economics really can influence diplomatic processes: "It's clear that in the end, we'll have two states ... What we're doing today will make that possible in the end. The young people at Cisco Israel had never met a Palestinian. They were amazed when they met a Palestinian who spoke with them as an equal about professional issues, solved problems with them and wanted to excel exactly like them.

"The same is true of the Palestinians: Until then, they had encountered Israelis only as soldiers at the checkpoint. In this way we're trying to change the order of priorities, to show that the Palestinians are not so terrible. But if there's no horizon of hope for the Palestinians, this entire investment could fail. Ramallah looks like a really fun city now, but it's impossible to know whether that will continue."

The suspicion and hesitation exist on the Israeli side as well. Not only for political reasons, but for prosaic ones - such as how does one even get to the West Bank to visit the office of a Palestinian firm. At present the law does not permit Israelis to travel to Ramallah, which is situated in Area A (under full Palestinian control ), unless they have obtained a special permit.

"There's a problem with the fact that Israelis can't travel, work and visit there freely," says Yoram Yaacovi, general manager of Microsoft R&D Center, Israel, which employs 14 people at Asal. "I'm guessing that some are deterred for political reasons, but others are deterred by the fact that it's a place to which it's impossible to travel freely."

Microsoft began working on the West Bank in 2009, in cooperation with the U.S. Agency for International Development. Initially, five engineers were employed in a small R&D center in a technology incubator that operated under the aegis of the Palestinian government. In the past year it began cooperating with Asal Technologies.

"A firm like Microsoft is looking for serious people, and the people we employ could just as well have worked at the R&D center in Israel," says Yaacovi. "For us there's also an advantage because it's in the same time zone and the Asal employees can come to the offices in Herzliya Pituah on short notice, from one day to the next."

Great hopes for IT

Asal's offices are very reminiscent of the headquarters of a high-tech firm in Israel, with a stylish conference room and colorful chairs in the dining room. The company's founder and CEO, Murad Tahboub, is a salesman through and through. It is hard not to identify the political motive of his activity: As far as he's concerned, the company he heads is another brick in the construction of the "state in the making." His company employs about 120 people, some 15 percent of whom, he says, are Palestinians who have returned from overseas: "They're willing to make the financial sacrifice and to come back. I offer them challenging work, because I really can't compete with the salaries offered abroad."

In his fifth-story office, from which one can see Jerusalem to the south, Tahboub expresses optimism about the future of Palestinian high tech. He believes that in the next three years the R&D center of a large international corporation will be established on the West Bank.

"The IT sector has progressed greatly in recent years, but that's not enough. There's no reason why this sector shouldn't provide 20 percent of our GDP. We have no natural resources, we have no sovereignty over the borders, that's why IT has to be the major stimulus of the economy. Our great barrier is marketing. On channels such as Fox News or CNN, they don't discuss us in the context of technology, but in totally different contexts.

"Because of the occupation," Tahboub continues, "we have minimum interaction with the international market, and we have a large gap here that we have to overcome. It's impossible to separate the political situation from the business environment. To my regret, we don't have a strong government that can invest in R&D. Under the circumstances, we are trying to do more things on our own: to develop ties with the international community, to put on a 'road show' in the United States, Europe and the Arab world. I'm pleased that when we meet with large firms abroad we receive good feedback from them."

Additional encouragement for the industry comes from Palestinian engineers, such as those mentioned by Tahboub, who have returned in recent years to PA areas for patriotic reasons, after acquiring experience in IT firms in the United States and Europe. Tahboub says that "there are people in the company who worked for eight years at Motorola, 11 years at Oracle, in Italy and other places, and they saw it as an opportunity to return here, to work and to build manufacturing capability here."

One of Asal's returning residents is Sharif Abdeen, the firm's director of sales and marketing. Abdeen, a native of East Jerusalem, went to England at the age of 19 to study and returned 13 years later. He says that at the beginning of his career, he tried to find work at Israeli high-tech firms but wasn't hired even though he has a blue ID card with which he can travel to work at the high-tech complex at Har Hotzvim in Jerusalem or to the business complexes in the Tel Aviv area.

What made Abdeen return? He says that in England he met his wife, also a Palestinian from East Jerusalem, and the two wanted to return to their families back home. During the two years since their return, he has had to become accustomed to the fact that instead of a pleasant trip in an air-conditioned train from Kent to London, the way home from work is liable to take from an hour and a half to two hours, because of delays at the Qalandiyah checkpoint, which separates his place of work in Ramallah from his nearby home in the Beit Hanina neighborhood in northeast Jerusalem.

Abdeen: "My nationalist motivation definitely helps me to put up with all the problems and harassment. I want to help the young Palestinians to improve the quality of life of the community here. That's one of the reasons why I came back. I also see my work here as a kind of mission."

Abdeen says that his friends in England were shocked when he left, and admits that, "sometimes I think that it was simply a crazy thing to do. I'm a young man who's trying to start a family, and to buy a new apartment, and in Beit Hanina, with all the restrictions the Israelis place on construction, it's far more difficult than in England. But this is the place where I grew up and my family is here, and that's why I'm here. And besides, it's a wonderful place. I love the West Bank, and when I travel to work meetings in Tel Aviv and Herzliya I also enjoy myself - there are excellent beaches there."

Hani Abu-Ghazaleh, Asal Technology's project manager, returned two years ago after an eight-year stay in the United States, where he worked at Intel's plant in Arizona. "When I came back, I underwent culture shock. It took me time to get used to the work environment and to the environment in general. But it's still high-tech, and there are benefits [here] too. The work hours are flexible, and the firm is trying to pamper employees and provide them with what they need. We go on trips occasionally. A month ago, for example, the firm paid for a trip to Israel. After all that, though, it's clear that I won't get the salary or the conditions I had abroad. That doesn't bother me. My dream is to live here and not to worry about anything else, political or non-political, simply to live, like any other person in the world."