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March 2002 • Vol 2, No. 3 •

Israel’s Economy Continues to Slide
The intifada threatens Israel’s economic existence

By Rod Holt

When an economist examines the Israeli economy, the 3.5 million Palestinians living in the Occupied Territories are not included. The Gaza Strip and the West Bank are “occupied;” that is, the land was taken by military force during a war, the victor maintains control by military force, and the Palestinians there live as conquered people. The territories of East Jerusalem and the Golan Heights, though seized by the military, are no longer “occupied,” as they have been annexed by Israel.

950,000 Palestinians of the Occupied Territories are over 16 and cannot find work but they are not counted as unemployed. Of the 600,000 who do have jobs, the majority work in Israel and stretch their earnings to feed families of 6 persons.

Living in the dominantly urban centers are 150,000 foreign nationals called migrant workers who hold work permits. Starting with the first intifada, migrant workers were recruited by Israeli businesses dependent on cheap labor to replace the Palestinians living in the Occupied Territories who could not get to their jobs because of Israeli “security checks.” Excluded from the economic statistics are an additional 180,000 illegal workers. As Israel anxiously watches their unemployment move past 10 percent, 50 percent of the migrant workers and 70 percent of the work force in the Occupied Territories are out of work.

Still, the capitalists look at the economy of Israel as though the Occupied Territories did not exist. For them, the Occupied Territories provide an unlimited supply of labor at the lowest possible cost and that is their only significant contribution. In the last decade what economy existed in the Occupied Territories has been systematically marginalized by Israel with military disruptions, widespread and serious harassment of workers, and with its total control of trade.

In contrast, the economic role of the United States is central. The U.S. covers the lion’s share of the military expenses, dispenses charitable loans and cash to cover the deficit spending, and is generally committed to rescuing Israel from any and all financial difficulties. But rescue today might be surprisingly difficult. The world economy is highly stressed at present and the Israeli workers may not wait patiently for the U.S. to arrange a blood transfusion.

2002 expected to be the worst year

Economists now recognize 2001 as the worst year for Israel since 1953, and 2002 is expected to be worse. The U.S. stock market collapse in early 2000 had forced investors to pull funds out of the Israeli economy to cover their losses in the U.S. This undercut expansion in the high-tech businesses and hurt those sectors such as the construction industry that are dependent upon speculative expansion. The anticipated deep recession then became a certainty with the Al Aqsa intifada that began in September, 2000.

The intifada had an immediate effect on tourism, the major source of foreign exchange outside of direct aid from the U.S. Tourists became scarce and hotels empty as news spread of the determined opposition from the Palestinians to the heightened aggression of the Israeli Defense Force. The government has been reluctant to give out all the numbers, fearing a snowball effect. Nevertheless, from released figures for the first 9 months of 2001, one may conclude that Israelis touring abroad spent $600 million more than tourists visiting Israel.

With the American tourist suffering a general malaise in the aftermath of the September 11 events, estimates of the tourism income for 2002 are running $1.5 billion below 2000.

Other economic sectors suffered accordingly. The Gross Domestic Product (GDP) shrank by 1/2 percent, contrasting with a projected increase of more than 4 percent. If one allows for the 2.5 percent increase in population, the per-capita product actually went down 3 percent. Growth of the productivity of labor dropped almost to zero, the worst fall in more than a generation. Exports fell 13 percent instead of increasing by 24 percent as in the previous year.

The balance of trade will be negative as usual but larger, likely exceeding $12 billion—a level that is impossible to cover with donations from foreign Jews and direct U.S. aid according to Ben-Gurion University economist Arye Arnon. He predicts that continuing social conflict, attendant military expenses, and the consequent outflow of capital will slowly reduce the per-capita income from its current level of $18,000 down to that of Turkey, around $10,000. 

Unemployment on an upward spiral

Meanwhile unemployment continues its upward spiral, which started with the Gulf War of 1991. David Brodet, director general of the Finance Ministry admits that over 10 percent are unemployed while 1.5 million Israeli citizens (about 25 percent) live below the poverty line. With the economy in a nose dive, the government is cutting the budget and bracing for a wave of red ink too.

The Bank of Israel does not seem to know what to do. In late December, just two months ago, its governor, David Klein, cut the interest rate by 2 percent, an act one expects to help in a recessionary period. Virtually overnight the dollar rose against the shekel as capitalists bought dollars for investment abroad where earnings would be greater. The Financial Times then reported February 18, 2002 that the bank might reverse itself and abruptly raise interest rates to dampen the fall of the shekel against the dollar. The bank has not yet done this, however.

With this uncertainty, the people and businesses of Israel are losing confidence in the management of the financial system by the capitalist state. And well they might; of 300,000 businesses in Israel, 30,000 went bankrupt in 2001 according to Hannan Sher writing in The Jerusalem Report, January 28, 2002

In an interview this January for Avi Temkin, Ben Basset, former director general of the Ministry of Finance, predicted zero growth for 2002. This will result in a serious shortfall in tax revenues and a consequent huge budget deficit. If the deficit were avoided by cutting the state budget this “would jeopardize economic stability and deter foreigners from investing in Israel.” Ben Basset says this because he and other Israelis know that the budget cuts will be made in social welfare categories where they can be least afforded. The drop of the shekel means serious inflation for Israel with the stagnant economy—the worst of all possible worlds.

It is interesting to note that the Israeli government’s budget accounts for half the Gross Domestic Product, and of that, approximately 20 percent goes to military expenditures (22 percent in 1996). This was 9.6 percent of the GDP, the highest in the world that averages less than 1/3 of that. Since the military spends its time and money repressing the Palestinian people, it seems obvious that ending the repression would allow the money to go to socially productive sectors of the economy, thus bringing both peace and prosperity at the same time. But few analysts or financial reporters for the bourgeois press have written of this.

Ha’aretz broke the ice with their editorial of February 20, 2002. The title was “Occupation or Prosperity.” After presenting the unemployment statistics and wringing their hands, they conclude:

The real remedy for the economic crisis will be found when Israel deals with the root causes of the conflict with the Palestinians. Only a determined effort to reach reconciliation between the two peoples, based on ending the occupation and the establishment of a Palestinian state beside the state of Israel, can result in peace and economic prosperity.

Ha’aretz hands out a version of the standard Israeli “solution” and there is the rub.

The path taken by the leaders of Israel is narrowing daily. The economic slump in the U.S. had a profound effect on Israel and that will continue. Israel can do almost nothing about its economic distress until America recovers. Israel also carries a terrible load with an enormous percentage of its productive capacity going to its military establishment. This makes it impossible to invest enough in its infrastructure, education, technological research, etc. to compete with the European Union, Japan and the U.S. whose military budgets are greatly lower when figured as a percentage of the GDP. Even with all its wasteful strutting as a super power, the U.S. has but half the military burden of Israel.

The Israeli rulers are thus faced with a contradiction. To remain useful to their imperialist masters they must shoulder the military burden. But that induces the dependency that cripples them in the eyes of the people. The vaunted Israeli leaders sit waiting like school children for instructions from their teacher. The outcome then is either their overthrow by the masses or their dismissal by the imperialists who must then find other, more effective agents.

The risks to the rulers of Israel trying to have their cake and eat it too are expressed in the popular Israeli daily, Yedioth Ahronoth, which displayed on its front page the words of its financial commentator Sever Ploker:

No surveys are needed: the public is expressing out loud its negative opinion of the government’s economic policy. Citizens and investors have realized that this budget is not authentic, is not correct, and is not credible.
The Israeli government is increasingly perceived as a confused, embroiled, spineless entity, lacking direction, lacking answers and lacking credibility.

And this is just the beginning of the crisis!





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