Challenge # 71 January - February 2002
Israel's Economy in Trouble
The Wrong Horses
Assaf Adiv
THE GOVERNMENT of Ariel Sharon faces its worst crisis since its
establishment almost a year ago. December 31 has passed with no budget
for the fiscal year 2002. This failure points to the first major fissures
in the national-unity government. At a time of peak international support
for Sharon's policy toward the PA (Palestinian Authority), when US President
George W. Bush has given him full backing, Sharon finds himself immersed
in an economic crisis of unforeseen severity.
We may quickly indicate the depth of the crisis by a look at estimates
published by Israel's Central Bureau of Statistics on December 31, 2001.
After growing by 6.4 % in the year 2000 to $110 billion, Israel's gross
domestic product (GDP) actually shrunk by 0.5% in 2001, the only negative
year since 1953 (when growth was minus 1.4%). GDP per person fell by 2.9%.
Business output declined by 2.1% (compared with an 8.5% rise in the year
2000). This included a 10.5% drop in the high-tech and construction sectors.
Exports of goods and services fell by 13.1% (after growing by 23.9% in
2000). Unemployment rose to 9%.
As a result of all this decline, tax revenues in the autumn of 2001
fell so far short of projections that the government had to cancel its
original budget proposal for 2002 of 254 billion shekels (about $60 billion).
It has come up with a new one, 6.2 million shekels less.
In contrast with the narrow-based, short-lived governments of Benjamin
Netanyahu and Ehud Barak, Sharon is supported by 83 of the 120 Knesset
members. His is one of the broadest coalitions in Israel's history. Despite
this fact, and despite his forty ministers and assistant ministers, he
faces sharp opposition to the new, leaner budget proposal. He has until
March 31 to pass it: otherwise the government falls automatically. The
parties do not want to face new elections, so some sort of budget will
probably squeak through. Nevertheless, the difficulties facing the country
will sharpen. For one thing, until a new budget arrives, last year's remains
in effect, including expenditures that will increase the deficit.
The government approved the new cut on December 23. It cancelled a law
providing aid to the Negev, sliced payments to large families and other
social funds, cancelled proposed tuition reductions for students, and took
a number of other Draconian measures. The thrust was reduction of social
programs.
On the basis of these projected cuts, the Bank of Israel agreed to lower
the interest rate by 2%. Thus it harmonized monetary policy with the recent
reduction in US interest. All the Likud and Labor ministers supported the
budget cut unanimously, reflecting the existing consensus in the
Israeli establishment concerning economic priorities. This anti-welfare
consensus draws its authority, in the final analysis, from the views of
the IMF (International Monetary Fund).
At the root of Israel's economic crisis we find three events, here listed
by date:
1. March 2000. The fall of New York's NASDAQ index, representing high-tech
stocks, signified the end of euphoria for the new economics. Israel had
restructured its economy on the basis of the boom in high-tech. Suddenly
it found itself with less investment money and numerous companies whose
market value had plunged. High-tech, the motor of Israel's exports, had
stalled. (On the leading role of high-tech, see Challenge #66.)
2. September-October 2000. The outbreak of the Palestinian Intifada
after the failure of the talks at Camp David changed the whole atmosphere
in the Middle East. Tourists stopped coming. Projects for regional cooperation
dried up. All this wrought damage to Israel's image as a potential center
for economic development.
3. September 11, 2001. The terrorist attack on America, followed by
the war in Afghanistan, aggravated the global economic crisis. The Middle
East became a center of tension.
"A dramatic turn"
The revised budget proposal reflects a shift in direction, compared to
the budgetary expansion of the nineties. At its core is the cut in National
Insurance payments (such as provision for large families), amounting to
2.4 billion shekels. According to Moti Bassok (in Ha'aretz December 12),
this new budget signals "a dramatic turn in the economic and social policy
that governments have followed for more than two decades. In that period,
socially-oriented budgets steadily grew, above all welfare payments from
the National Insurance Institute (Bituach Leumi), at the expense of the
defense budget. Meanwhile, the national pie grew likewise. The present
government has decided to reverse this, freezing and lowering budget outlays."
Bassok adds, "The Finance Ministry has been wanting such a reversal for
years, but the government and the Knesset always blocked it."
Israel has thus concluded a period of economic expansion, which enabled
it – amid a growing gap between rich and poor – to pay the poor off and
keep them quiet. Now, however, the government has committed itself to shrink
the entire pie. From this point on, every new aggravation in the global
economic crisis will carry further local cuts in its wake, trimming the
minimum on which many of the country's 6.5 million subsist.
The new economy: bursting of the bubble
The steep reduction in Israel's economic growth is a direct result
of the distortions accompanying its earlier ascent. While the high-tech
sector boomed in the nineties, traditional labor-intensive industries foundered
and people lost jobs. Yet the high-tech growth depended largely on speculative
investment. It was only a matter of time, therefore, till this new industrial
sector would shrivel to its true dimensions.
Meanwhile, the Bank of Israel kept the interest rate up, fearing inflation
(the trauma of the early eighties). The resulting slowdown expressed itself
in recession and unemployment. The Bank mistook sluggishness for stability,
believing this would attract investment. The strength of the shekel against
the dollar made for cheap imports, but the dollars earned by exporters
fetched fewer shekels. In this way, the Bank's policy proved poisonous
for the local economic infrastructure. Older industries (textiles, wood
and metals) could not compete with imports, partly because of the currency
rate, but also because protective tariffs were gone – a casualty of globalization.
High interest froze the economy. Inflation dropped nearly to zero, but
the price was widespread poverty and unemployment. Hardest hit were the
Arab workers, who are concentrated in labor-intensive industries such as
construction, agriculture and textiles. They found themselves in impossible
competition with the new slaves of globalization – imported workers from
the third world and Eastern Europe.
Before the NASDAQ plunge, US multinationals had spent enormous sums
in purchasing Israeli start-up companies. It looked as though the American
dream had crossed the seas. The dizzying success of these companies, however,
did not result in growth for the rest of the economy. The companies attracted
foreign currency as long as NASDAQ grew. When the bubble burst – when the
index dropped from 5000 points in March to below 2000 – the Israeli dream
burst too.
The government won't hurt the rich
In 1992, the Maastricht Convention of the European Union established
a principle for any country wanting to adopt the Euro as its currency:
the deficit should not exceed 3% of GDP. This limit has become a rule of
thumb in the era of globalization. Israel explicitly adopted it in that
same year, making it an integral part of its budgetary law. A government's
adherence to the limit has become a criterion for its stability. It also
marks Israel as a safe place to invest in. With the continuation of the
old budget, however, amid diminishing tax income, the deficit will likely
climb to 4%.
Behind the Maastricht limit lies the assumption that government spending
increases to the extent that the economy remains in the hands of politicians.
To prevent this (goes the theory) industry should be privatized. The labor
market should be kept flexible and accessible, dispensing with union organization.
You don't want to tax the rich lest they take their capital elsewhere.
All that remains – if you want to stick to the Maastricht limit – is to
cut social programs.
In the first phases of Israel's globalization, as mentioned above, the
rich got very much richer indeed, while the poor got poorer. As long as
the government had reserves, it passed some of these along to the lower
classes, mitigating their misery – essentially, buying them off. In the
nineties, according to the Finance Ministry, social expenditures rose significantly.
From 1994 to 2000, National Insurance payments increased by 50%. (Moti
Bassok, Ha'aretz December 26.)
On December 25, in an interview on the Second Radio Channel, Hadash
MK Tamar Gozansky claimed that easements to the rich and businesses in
recent years have eroded the government's tax revenues, increasing the
deficit by more than $8 billion. For example, the tax on company-employers,
which brought in almost $3 billion annually, exists no more. The tax that
employers used to have to pay, matching amounts paid by employees for health
insurance (more than $2 billion), likewise exists no more. Employer payments
to the National Insurance Institute have been cut by almost $1 billion.
A proposed tax on stock-market earnings, expected to bring in more than
$1 billion, has vanished. Instead of these measures, the government prefers
to eat the living flesh of people who can't buy stocks.
Why won't the government touch the rich? Well, for one thing, you don't
bite the hand that feeds you: the rich fund all the major Zionist political
parties. A second reason is the one that the government always gives: we
mustn't touch old Moneybags or he'll send his capital elsewhere. Better
that the poor should tighten their belts: if the country goes bust, they'll
be worse off.
A return to Oslo will not help
Given the dovetailing of two dead ends, political and economic,
prominent leftists blame the economic crisis on the freezing of the peace
process. A return to talks, they say, and the signing of a permanent settlement,
will easily set the economy back on its feet. This analysis, however, fails
to comprehend the regional and global circumstances, which do not provide
the minimal conditions for a stable political accord. As consequences of
globalization, these circumstances also prevent economic recovery.
The Oslo Accords were intended as the cornerstone of a new order in
the Middle East. They were the hinge on which the relations between Israel
and the Arab states were to turn, under the aegis of American hegemony.
The new order was supposed to compensate the Arab peoples for the surrender
of their national ambitions: instead, they were to get economic prosperity.
They got no prosperity. Foreign investment flowed into Israel, while
the Arab states remained dry. The Israeli economy flourished in the nineties
as never before. The Arab street languished. Egypt, Jordan and Saudi Arabia
had staked their chips on the American connection, providing the political
backing for Arafat's tentative agreements with Israel. But the drastic
decline in living standards brought their peoples to a nadir of frustration
and disappointment. Faced with rising instability at home, these regimes
sought to divert their subjects and win their support by cranking up anti-Israel
propaganda.
Militant Islam developed in all three. No leftist opposition arose to
offer the youth an alternative. In response to the regimes' corruption
and impotence, hundreds of thousands of jobless university graduates found
answers in the Koran, which gave them hope of an otherworldly kind, as
well as an outlet for frustration.
In Egypt misery is massive. There is no more hope that America and globalization
will save its poor. After the collapse of Argentina, Egyptians no longer
believe that the IMF will pull them out of their crisis. Argentina has
a lot more oil than Egypt. If the IMF would let it fall, how will it behave
toward a land whose per capita GDP is $1300?
The dour regional atmosphere undermines the possibility that Arafat,
or any other Palestinian leader, will be able to make concessions. At best,
there may be a cease-fire, a time-out pending the next explosion. That
won't save economies. There will be no stability, and no significant economic
growth, until a basic change occurs in the principles by which the global
economy works.
In writing about Israel, however, we omitted one consideration. Israel
is not like other nations. Not only must it worry, as all lands do, about
an exodus of capital. It also has to worry about a massive exodus of people!
Life for most Israelis is hard. They have to think twice about walking
down the street or getting on a bus or entering a mall. They have to send
their children to the army. Those "welfare" payments, mentioned earlier,
aren't just aspirin to soothe the pain of socio-economic gaps. They are
bribes to keep the Jewish population from fleeing the country.
The government's new budget proposal reduces the bribes. It includes
not a single article requiring the rich to help bear the burden. Thus the
government cuts the branch that Israel, for all its five decades and more,
has been sitting on.
When the total burden is placed on the weak, national solidarity breaks.
The question is: how much will Israel's poor be willing to take, and what
about the middle class – how much pain will it tolerate before it packs
and leaves?
The case of Argentina is not identical. Yet the force of the uprising
there is commensurable with the years of governmental indifference. Argentina's
middle class did not object to the dictates of the IMF, including linkage
of the peso to the dollar and wildcat privatization. Instead, this class
followed the political leaders like sheep to the slaughter, allowing them
to grind down the working class.
So in Israel, in October 2000, thousands of Arab jobless poured into
the streets, and the police killed thirteen in cold blood. Israeli society
hasn't fathomed the lesson. The eruption expressed not only feelings of
insult on the national level, but also the feelings of a social class in
whose faces the doors to the future have shut. The events of October may
herald similar eruptions, because the economy has no mechanism for recovery,
and more cuts will be forced on the poor. Next time, perhaps, it won't
be only Arabs on the streets, but impoverished Jewish workers too.
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