The Lavi Fighter: Lion or Lemon?

By John T. Haldane

The last six months have witnessed unusual strains on the United States-Israel relationship. Jonathan Jay Pollard, a civilian intelligence specialist working for the U.S. Navy, was arrested November 21, 1985, and arraigned in a federal district court on several counts of espionage against the United States as a paid agent for the government of Israel.

On May 29, 1986, a retired Israeli general and four other men appeared before a special magistrate in New York on charges they participated in schemes to smuggle $2.5 billion in American-made military aircraft, missiles and other weapons in direct violation of a strict U.S. ban on arms exports to Iran.

Then, in June of this year, Secretary of State Shultz and Defense Secretary Weinberger sent secret letters to the government of Israel expressing their strong concern at being "stonewalled" on skyrocketing costs of the U.S.-financed Lavi fighter. The Lavi (Hebrew for "lion") is a single-seat, single-engine, ground-attack aircraft designed to replace the Israeli Air Force's McDonnell Douglas F-4s, A-4 Skyhawks and the Israeli-made Kfir, all of which will become obsolete by the mid-1990s. The two Reagan Administration officials were upset because Israel has refused to provide the United States with cost estimates on the development and production of 300 Lavis, even though half the project costs are being directly financed by the United States. American defense experts are predicting another scandal, one that Israel will have difficulty in explaining.

Normally, military aircraft design and development is considered a specialized field that does not receive much attention in the non-technical American press. However, in the case of the Lavi fighter, the matter seems to have gotten so out of hand that a number of non-military publications are becoming interested. The conservative business magazine, Forbes, asked in an article in its June 30th issue: "Is the Lavi a boondoggle? The warplane is hyped as a way to free the Israeli air force from its dependency on foreign parts and suppliers. But 50-60 percent of the machine is made in the U.S. Even top Israeli officials admit that they could save millions per aircraft by buying an existing plane, such as General Dynamics' F-16."

In order to appreciate the unique nature of this deep dip into American taxpayers' pocketbooks, we must go back two years. In 1984, Israel was granted special permission by the United States to spend some of its foreign military sales (FMS) credits for the development of an Israeli-made jet fighter plane. Since U.S. law provides that foreign nations may only use their FMS credits to purchase American-made equipment in the U.S., Congress had to give exceptional approval for this Israeli production. It was the second such exception for Israel, which was permitted to use $100 million in FMS credits to produce the Merkava tank. No other country in the world has received such exceptions, before or since, because fostering military production overseas inevitably leads to the loss of American jobs in defense industries.

The reason for the stern Shultz and Weinberger letters was that the United States, which already has committed about $2 billion to the Lavi program, belatedly learned that the new aircraft will cost far more than the original Israeli government estimates. A Pentagon team, led by Deputy Undersecretary of Defense for Planning and Resources Dov Zakheim, failed to obtain any reliable data on the costs of the Lavi program during a June visit to Israel, nor would the Israelis provide any specifics for a spending lid on the Lavi project.

Upon Zakheim's return to Washington, Secretary Weinberger, who had opposed the project from the start, announced that "all of our people are unanimous that the costs will far exceed the Israeli estimates" which "are very, very much too low." His comments reinforced earlier statements by high American defense officials, as well as some Israeli Air Force officers, that the Lavi was consuming far too great a portion of the Israeli military budget.

The Israeli defense ministry, responsible for procurement of all military equipment, including tanks, submarines, artillery and naval vessels, as well as aircraft, also is worried that the Lavi program is eating up an inordinate percentage of its total procurement funds. In order to retain adequate funds for other vital military programs, the ministry recently placed an annual spending limit of $550 million on the Lavi. U.S. officials told the Defense News in June that if the Lavi's costs continue to rise, Israel will have to make a hard choice between the Lavi project and a separate program to build three new diesel-electric submarines and four missile boats.

Former Israeli Finance Minister Yitzhak Moda'i has made no secret of his skepticism about the Lavi project. He told reporters earlier this year that "The Lavi will not fly, the project will fall of its own accord." Defense spending already consumes more than 25 percent of Israel's GNP, and military imports account for more than 20 percent of total imports.

In addition to the unhappiness of the highest ranking members of the ministries of defense and finance, Minister Ezer Weizman, former chief of the Israeli Air Force, strongly opposes the Lavi program. Ironically, as defense minister in Menachem Begin's first Likud government, it was Weizman who secured initial cabinet approval for the first stages of the Lavi project. However, as he has pointed out, his version was to cost only $7 million, with a development cost of $750 million. These modest figures stand in stark contrast to the latest estimate, by the head of the Israeli Aircraft Industries (IAI), that development costs will reach $2.3 billion, with each plane costing at least $15 million. This latter figure is the one that Pentagon officials strongly contest, arguing that a more realistic price would be at least $22 million per plane. Zakheim's review pointed out that when servicing and all other costs are added the Lavi would actually cost Israel at least $20.6 billion, rather than the $14.7 billion estimated by the Israeli Ministry of Defense.

The extent of Washington concern may be judged by the fact that the General Accounting Office (GAO) has begun an investigation of the Lavi program. One of the starting points of this study will be the Pentagon estimate, based on known development and production costs of similar aircraft, that the Lavi will cost at least 50 percent more than the official Israeli estimate.

The GAO team would be wise to read a recent Congressional Research Service study of the 1976 Arms Export Control Act, which governs the use of FMS credits. One of that study's conclusions was that "Exception may be considered appropriate when defense items are needed badly by a foreign country and are not available in the United States, or when an alternative production source of U.S. defense equipment is needed." Neither of these provisions apply to the Lavi fighter project.

The Israeli Government has based its planning for the Lavi on the assumption that U.S. military assistance will continue at its present annual level of $1.8 billion. However, given the Gramm-Rudman-Hollings budget control law, Congress may cut back Israeli military aid for next year. U.S. Undersecretary of State Allen Wallis said on June 18 in Jerusalem that the $1.5 billion in U.S. emergency aid, which had been granted on a "one-time" basis to Israel during 1985 and 1986, would no longer be available. He added that Israel could expect U.S. aid to drop by another $250 million next year because of the overall cuts in the U.S. federal budget required under Gramm-Rudman. All told, Wallis advised, Israel could end up receiving $1 billion less in 1987 than the approximately $3.75 billion it is getting this year.

Some American defense experts believe that even if Congress manages, in an election year, to get around the Gramm-Rudman provisions, the real financial crunch for Israel will come when the Lavi enters production after 1988. Even if American aid continued at the present rate, they believe the project would fall at least $1 billion short annually. Either way, it appears that Israel, and the U.S. taxpayer, have a real lemon on their hands.

American manufacturers of similar fighter aircraft are concerned about Israel's production plans after the agreed-upon 300 planes have been delivered to the Israeli Air Force. The usual procedure in Western countries is to parlay the sale of new aircraft to one's own air force into further sales abroad. But U.S. aid is being given only to enable Israel to provide its own aircraft needs. If the U.S. stands firm, as American manufacturers believe it should, Israel will be unable to recoup a portion of the planning, development and production costs by selling the Lavi in the international market. Nevertheless, there are reports that Israeli officials are describing the Lavi as a direct competitor to the American F-16 in the world aircraft export market. Aviation Week & Space Technology reports "U.S. officials are upset by press reports that Israel would like to export the Lavi as a means of supporting the program. 'We were told categorically the Lavi was not being developed for export,' a White House official said. 'Now they want to export to the U.S. and third countries'."

Israeli stubbornness regarding the Lavi project reflects a simple economic fact of life: the program has become a critical part of the Israeli technological infrastructure. Israeli Aviation Industries is now Israel's largest employer and has assigned an estimated 4,000 employees to the Lavi. Another 1,000 Israelis work on Lavi-related systems for other firms. These totals will increase as production of the 300 planes begins in 1990, at the rate of 24 planes a year.

If the Lavi program were to be shut down and 5,000 Israeli technicians were to lose their jobs, it would be a devastating blow to Israel's economy. Hundreds of badly needed Israeli engineers already have left for better paying jobs abroad, since many who remain in Israel earn only about $2,000 monthly and must pay income taxes that can climb to 75 percent of their salaries.

Israel, the size of Massachusetts and with a population of only four million, already had a surplus of emigrants over immigrants in 1985. The "brain drain" of scientists, engineers and technicians which would result from the cessation of the Lavi project could strike a death blow to Israeli high-technology industrial efforts. Israel desperately needs to retain all the educated people it has, and should find and train thousands more if it is to compete in export markets with the United States, Japan and Western Europe.

Israel's Minister of Absorption said at a recent news conference that he expected 1986 immigrants into Israel to total only about 9,000. Most of the newcomers are unskilled workers. He did not estimate emigration for 1986, but the number of Israelis who left Israel in 1985 was up 47 percent from the 10,400 who emigrated from Israel in 1984. The majority of those leaving Israel are skilled technicians moving on to greener pastures. A tiny country such as Israel cannot hope to compete with highly industrialized nations in world markets if it continues to lose its best and brightest.

If other sectors of the Israeli economy were prospering, the seeming impracticality of the Lavi project would not be so alarming. Some of Israel's biggest firms, however, are on the brink of bankruptcy. Zim, the national shipping line, recently announced debts of over $450 million. Solel Boneh, the nation's largest construction firm, has revealed debts of $500 million. The Clalit health insurance fund, a Histadrut trade union subsidiary, has debts of about $525 million. Worst of all, EIscint, one of the leading hi-tech firms, disclosed debts of $180 million, more than $40 million more than company assets. It is clear that Israel is keeping its head above water only because of the huge annual handouts from the United States.

So what can be done to rescue Israel from the consequences of an unrealistic attempt to produce a state-of-the-art military aircraft far beyond its financial means? One story going around Washington is that the Reagan Administration may provide Israel with several alternatives to the Lavi project to preserve jobs. A likely proposal is Israeli-American co-production of the F-16 or F-18, with some assembly in Israel. In this way, some of the parts and sub-assemblies from the Lavi, compatible with American planes, can be utilized. Another idea is to buy more Israeli military equipment for the American armed forces. Another "gimmick" which would be popular with Congress is to involve Israel in the Strategic Defense Initiative (SDI), or "Star Wars" program. Not surprisingly, Israel has accepted President Reagan's invitation to participate in the SDI. The thought of earning millions of dollars from SDI subcontracts or through joint enterprises with U.S. corporations undoubtedly warmed the heart of the Israeli Minister of Finance.

Some combination of alternative projects will probably divert American money from the losing Lavi project into more glamorous-sounding "Star Wars" research and development. Congressional supporters of Israel can then take credit for funding Israel's economic survival, and only the American taxpayer will continue to be the loser.

John T. 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.