An Economy in Big Trouble

By John Haldane

How bad is the state of Israel's economy? A Senate Foreign Relations Committee staff report released last November stated the situation baldly: "The economic crisis gripping Israel today, if not swiftly and effectively addressed by the new unity Government, could pose as serious a threat to the security of Israel as any hostile neighbor in the region." The report continued: "U.S. aid can help alleviate the effects of reform measures on Israeli society but cannot substitute for the policy reforms that Israel must undertake if its economy is to return to a healthy and growing status."*

Israel has been living well beyond its means since the war with its Arab neighbors in 1973. Before that war, the Israeli economy was compared by some economists to that of Japan as a model of efficiency. Economic growth was averaging 10 percent a year, inflation was about half a percent a month and exports and transfers from abroad kept the balance of payments in equilibrium. Even though the population was increasing, more than enough jobs were being created to absorb the newcomers.

It was after the 1973 war that Israel's military expenditures soared from about 7 percent of GNP annually to about 30 percent today. While the $29.7 billion in American military and economic aid received since 1973 undoubtedly has been of significant assistance, the economy of Israel is too small to bear for long the burden of such heavy military spending, estimated to be at least $5.5 billion a year. One of the few persons in the Israeli parliament who has spoken out against recent defense spending levels is retired General Mattityahu Peled, a member of the Progressive List party, who stated in 1982 that "the military establishment has grown out of all proportion to our security needs."

As if the domestic economic situation weren't bad enough already, the Israeli leadership embarked on its ill-fated Lebanese adventure in 1982. This war has cost Israel an estimated $3.5 billion dollars, and this sum is growing by about $1 million with each day that Israeli forces remain in Lebanon.

The High Cost of Settlements

Another serious financial drain that cannot be ignored is that of the Israeli settlements in the occupied West Bank and the Gaza Strip, where the government has invested over $2.5 billion. Keeping the estimated 25,000 settlers in these areas costs the Israeli treasury several hundred million dollars annually.

How does the present leadership of a country smaller than the state of Maryland, with a foreign debt of $24 billion—the highest in the world on a per capita basis—propose to resolve this crisis? Since he became Prime Minister last September, Shimon Peres has cut $300 million from the government budget and implemented a three-month wage-price-tax freeze. However, his unity government still has not produced an overall plan to resolve the deep financial difficulties.

The Jerusalem Post has put it this way: "The national unity Government was expected to come up with a comprehensive program and audacious decisions to save the economy from collapse. What it has produced instead ... is neither comprehensive nor audacious. It is a reversal to the gradualist tactics and the attempts to muddle through that have characterized all of the governments that have preceded this one."

Meanwhile, soaring inflation has reached air annual rate of 1,260 percent, according to the Israeli government's Central Bureau of Statistics. This combination of raging inflation and a slowdown in cost-of-living pay raises cannot but deepen public despondency over the economic situation.

There is widespread agreement among Israeli and American economists that only an immediate austerity program can save Israel's economy. The basic items for serious and effective economic reform would include: An immediate $1.5 billion or more cut in the $23 billion budget; a wage-price-tax freeze that would break the inflationary spiral; and a formal linkage of the Israeli shekel to the American dollar. 'Many economists emphasize that Israel will have to lower its standard of living drastically, because the country simply can no longer afford to guarantee its citizens full employment, an elaborate welfare program, heavy industrial subsidies arid indexed growth in wages and savings. National priorities will have to be re-ordered, and the military budget cut back. But defense spending, according to the Senate report on the Israeli economy, "is not by any means the only important reason for Israel's economic problems."

Concomitant with economic reform and the setting of more realistic economic goals must be the acceptance of realistic political policies. Israel is too small and poor to be able to continue to prosper unless it can live at peace with its neighbors. The concept of territorial expansion as a guarantee of security has been found wanting and therefore needs to be publicly abandoned. Israel literally cannot afford, even with increased U.S. aid, to engage in military adventurism or to keep the occupied territories. Serious students of the Israeli economy agree that it lacks the capability to maintain military superiority over any potential combination of Arab forces.

"Guns and Butter" Policy Won't Work

The Israeli leadership has a serious problem: How to convince the Israeli man-on-the-street that austerity-induced hardships are in the best long-term interest of his country. The government's motto has been: Guns and Butter. This policy did not work in the U.S. during the Vietnam War and so cannot be expected to work in a small country such as Israel.

If Israel does not come to its economic senses soon, the ever-worsening crisis will cause an emigration of professional and skilled workers that will far surpass the exodus in 1966-67, when a recession and high unemployment caused thousands of Israelis to leave. And there probably will be a re-posting of the well-remembered Lod airport sign from those days: "Would the last one out please turn off the lights?"

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.

* A copy of the Senate report, "The Economic Crisis in Israel," by Michael Kraft and Gerald E. Connolly, can be obtained free of charge by writing to: Document Clerk, Committee on Foreign Relations, SD-423, Dirksen Senate Office Building, Washington, D.C. 20510.