Israel’s continuing economic crisis was brought to attention on February 4, when some 50 Israeli business leaders in Tel Aviv called for a broad governing coalition, despite the landslide victory on January 28 of the right-wing Likud Party, led by prime minister Ariel Sharon. They say that consensus is essential to deal with the country’s worsening recession. Their view was summed up by Yitzhak Kaul, a member of Israel’s main business association, who told Israel’s public television channel: "A national unity government is vital to save the country’s economy, which risks collapsing," adding that "only a responsible national government can pull us out of the recession and push through the required reforms and change of priorities."
The argument that a government of national unity can deal with Israel’s economic problems is based essentially not on economic grounds but rather on political calculations. Sharon has so far failed to persuade Amram Mitzna, the leader of the rival Labour party, to join a national coalition. Mitza’s alternative is to form a coalition government with smaller far-right parties, which could set back Sharon’s efforts to get more aid from the US.
On January 5 an Israeli delegation arrived in Washington to try to secure an emergency aid package of US$12 billion. The delegation included a number of senior government officials, such as Dov Weisglass, the head of Sharon’s office, and the director-generals of Israel’s finance and defence ministries. Israel requested the aid package several months ago, and the delegation is part of an effort to push the request through. One third of the sum would offset the massive increase in military spending caused by Israel’s use of excessive force in its unavailing attempts to crush the intifada. This tranche of $4 billion would supplement some $2 billion the Jewish state already receives from Washington every year. The remaining $8 billion would be in the form of loan-guarantees. Washington, which already provides Israel with $3.2 billion in aid altogether every year, is said to be "looking into" the request. But even if Israel gets the additional aid, it is highly doubtful that it will make any immediate difference to the dire state of Israel’s economy.
The Palestinian intifada is the main reason for Israel’s economic recession, eroding investors’ confidence and affecting the tourism industry. The instability generated by the intifada has left its mark on several sectors of the Israeli economy: the international investment, tourism, agriculture, trade, heavey industry and real-estate sectors have all suffered huge losses. Official indicators published by the Israeli Central Bureau of Statistics and central bank indicate that the intifada has pushed the Israeli economy into its worst recession ever.
From the start of the intifada (September 2000) to September 2002, losses in returns are estimated at 50 percent in tourism, 35 percent in agriculture, and 45 percent in the real-estate sector. Per capita income fell by about 18 percent during the same period, from $17,500 in 2000 to 14,500 in 2002. Losses in the real-state sector reached almost $10 million a month.
Concurrently, Israel’s gross domestic product (GDP) has fallen for the past two years: by 1.0 percent in 2001 and by 0.9 percent in 2002. Economists predict that it will fall still further this year. The slowdown in economic activity is shown by a sharp drop in state tax revenues. Earlier this month the finance ministry reported that tax revenues totalled 11 billion shekels in January, which is a drop of 17 percent in real terms from last January. A ministry statement further said that in 2002 there was a real fall in tax revenues of 7 percent from 2001. The decrease in tax revenues was felt in many sectors. For instance, revenue from income and property taxes in January, totalling 5.7 billion shekels, showed a real fall of 18 percent from the same month last year; value-added taxes and customs duties in January totalled 4.9 billion shekels, a real fall of 17 percent. The decrease in tax-receipts has pushed the budget deficit to a record of more than $550 million in January. Consumer prices have surged, with annual inflation at more than 8 percent in 2002, forcing the Bank of Israel to raise interest-rates.
In November the central bank warned that Israel will face a third consecutive year of recession in 2003. The Bank of Israel predicted that Israel’s potential economic prospects for this year range from a contraction rate of 1 percent to a growth rate of 1.5 percent. But Israel’s economy needs to grow at the rate of more than 2 percent per annum to meet the demands made on it by normal population growth. Anything less than that will be recessionary growth.
Unemployment reached 10.5 percent of the workforce last year. Even this and other figures fail to show the depth of the unemployment crisis. Unproductive jobs account for a significant proportion of new employment opportunities. For instance, increasing security uncertainty has created a rush to recruit security guards, who can be seen in most shops, theatres, resorts, cafes, pubs and restaurants, where they check bags and search customers.
The fear of bombings is keeping many Israelis away from city centres, shopping malls and entertainment sites. Entrepreneurs and foreign investors have also become increasingly reluctant to start any new economic activity. Foreign investment fell by $4.2 billion last year, to $2.6 billion, according to the Bank of Israel. Many businesses are also being disrupted by workers being pulled away to spend time in the Israeli army reserve.
The intifada is placing heavy strains on Israel’s military spending. The defence ministry’s budget has increased to 50 million shekels, which is a hefty 11 percent of the Israeli gross domestic product. During last year, the ministry of finance had to extract 2 billion shekels from the budgets of various governmental ministries in order to cover the growing expenses of Israel’s attempts to crush the Palestinian intifada.
No sector has been hit harder than tourism. The once-thriving Israeli tourism industry has virtually collapsed, with a loss of 50 percent of activity, and $3 billion. Around 60 thousand workers in the sector have lost their jobs since September 2000. Decline of activity in the tourism sector has resulted in the closure of dozens of hotels and other establishments. The desperation of the industry took a bizarre twist last summer, when the Israeli Hoteliers Association sued the Palestinian Authority for losses caused by the intifada.
In September 2001 Major-General Uzi Dayan, then head of Israel’s national security council, told the Knesset foreign and defence committee that the intifada is costing Israel about $3 billion a year. He added that "improving security" (a euphemism for crushing the intifada completely) is the only way to revive the economy and meet welfare requirements.
Even before the intifada began, the Israeli economy was suffering from a number of stresses that imposed distortions. One stems from the increasing number of full-time Jewish religious students, who are subsidised by the state and who are also exempt from military service. Another distortion is caused by the large tax incentives given to settlers living in the illegal settlements in the West Bank and Ghazzah Strip. In times of prosperity the economy could absorb the costs of these distortions with no great difficulty, but in times of crisis they are a heavy burden.
The worldwide economic downturn has compounded Israel’s economic woes, especially in the banking and financial sector, where the effects of the global recession, exacerbated by the consequences of the attacks in the US in September 2001, are being felt most severely. The bursting of the hi-tech bubble has also dried up funding for Israel’s once-thriving hi-tech sector.
Israel’s current economic crisis is leading to a decline in material living standards and an increase in poverty rates. According to figures released by the Israeli National Insurance Company, the number of Israelis living below the poverty line is now 1.5 million. On December 23, 2001, the government passed a new financial package to reduce public spending; its main thrust was a reduction in spending on social programmes. The package cancelled a law providing aid to the Negev, slashing payments to large families and other social funds, and rescinding tuition-fee reductions for students.
In an attempt to pull the economy out of the doldrums, the government is formulating an austerity plan that aims to "drastically reduce public sector spending," according to Ohad Marani, director-general of the finance ministry. But that bodes ill for the country’s social peace, as it will entail the dismissal of tens of thousands of civil servants and 10-percent cuts in salaries of public-sector employees, raising the prospect of internal political instability. Disputes over last year’s budget and concerns about the government’s handling of the economy were responsible for the collapse of Sharon’s first coalition government, and set off a fall in the value of the shekel last year.
An American bailout remains Sharon’s only hope of dealing with the slide in Israel’s economic fortunes. But the intifada might well erode all efforts to prime a small economy like Israel’s, strongly connected to overseas markets by exports and investments, and fatally dependent on them, as it is. His failure to deal with the situation would further endanger not only the viability of the Israeli government, but also that of the Zionist enterprise as a whole. The hold that Zionism exerts on many Israelis stems not from its ideological appeal but from economic privileges granted to them by the state. Faced with the effects of massive economic losses and the erosion of a sense of personal safety and wellbeing, Israelis could soon be emigrating from Palestine at an unprecedented rate.