Economics of David and Goliath

By Frank Collins

The successful confrontations by impoverished Third World peoples against the forces of developed nations possessing everything in terms of money, weapons, and supplies have been one of the strategic surprises to the West since World War II. The Palestinian uprising in the occupied territories is proving to be one more such case.

The uprising has continued now for one year and, while the final outcome is not in sight, it has succeeded in creating a new Palestinian society, self-reliant and filled with national pride. The uprising appears to be capable of continuing indefinitely in spite of the fact that, while the uprising has reduced the economic resources of both parties to the conflict, it has cut into those of the Palestinians far more than those of the Israelis.

West Bank Development Blocked by Israel

The gross national product (GNP) of the occupied territories is unnaturally small because their economic development has been blocked by the Israelis ever since their conquest in 1967. In 1985, the latest year for which complete figures are readily available, the GNP of the occupied territories was only $1 billion ($750 per capita), $1.4 billion if the wages of Palestinian residents working in Israel and abroad are included, compared to the Israelis' $21 billion ($5,100 per capita). The disparity is made more glaring by the lavish American economic and military support of Israel.

However, the Israeli economy is itself in deep trouble. The illusion of solvency is made possible only by the scale of American funding which last year was almost one-sixth of the amount of the total Israeli GNP, one-quarter if private aid is included. Even this is proving to be insufficient to maintain the economy in a stable condition. Thus the Palestinian uprising comes at a bad time for the Israelis, and the Israeli decision to attempt to put down the uprising by force instead of ending it by negotiated concessions is adding to the already intolerable economic strains.

The Basic Economy Has Turned Sour

The position of the Israeli consumer at the moment is fairly good, as shown by relatively low unemployment and by last year's almost unprecedented volume of purchases of expensive imported consumer goods. There are, however, numerous indications that the basic economy has turned sour. Among other adverse developments, the government is unable to maintain minimal expenditures for domestic services.

Adding to this distress, the economy has recently received some major shocks. The most serious of these is the crumbling of the huge Koor industrial empire. Koor, owned by Histadrut, the general confederation of Israeli trade unions, generates 10 percent of the GNP and employs 27,000 workers. The net worth of its subsidiaries may be over $5 billion, but all of these 400 companies are reported to be in the red. Last year Koor lost more than $250 million and losses are continuing in the current year.

The depth of its current cash crisis is illustrated by Koor's inability to come up with $20 million on an overdue loan from Bankers Trust of New York. Fearing that Koor's assets would otherwise be taken over by local Israeli banks, Bankers Trust is now demanding the liquidation of the whole Koor enterprise. Faced with the imminent demise of Koor, the Israeli government and commercial banks will almost certainly have to provide the money required to take the company out of immediate jeopardy. The Israeli government says it will insist on a drastic cost-cutting restructuring of the Koor owned companies, a program that will involve the firing of thousands of workers.

Many other companies show large losses this year compared to last. It is seldom mentioned that the economic fallout from the Palestinian uprising may have something to do with this.

In addition to this year's losses by private companies, the kibbutzim and their industrial enterprises are also reporting large losses. The moshavim (development towns) also have debts of $2 billion, well beyond their ability to repay. In addition to all of this, Israel's physical infrastructure has been neglected over the years. Many towns and villages lack essential services, including even sewage systems.

The health services, schools, and universities have had their budgets cut to the bone, and employee strikes are proliferating. At the same time, however, the Israeli government continues to pour subsidies into Jewish settlements in the occupied territories. Annual costs of this program alone are said to be more than $470 million.

Bank Scandal Shakes Israel

Business losses are not the end of the story. In 1983, Israel was shaken by a bank scandal of mammoth proportions. Managers of the commercial banks had been artificially supporting the prices of their own shares, pouring bank funds into the Tel Aviv stock market to do so. This unethical practice proved unsustainable in the face of an October 1983 stock market sell-off in anticipation of a shekel devaluation.

Bank shareholders were rescued by the government, which agreed to redeem all outstanding shares under an "arrangement" that will ultimately lead to an increased government indebtedness of $7 billion, plus the interest that must be paid year by year on the debt. The bank shares "arrangement" will raise the national debt, already the highest in the world on a per capita basis, from $29 billion to $36 billion.

Having failed to subdue the civil disobedience by guns, clubs, poisonous gas, and prisons, the Israelis have retaliated with economic repression.

An installment of $3.6 billion on the bank share redemptions fell due on Oct. 30, 1988. The redemption is being covered internally, without recourse to foreign borrowing, by the sale of Israeli government bonds denominated in shekels and bearing interest at the rate of inflation (15 percent so far this year) plus approximately 4 percent. The earnings of the bank shares could of course cover the interest payments, but this appears to be very unlikely under present circumstances.

In short, Israel today is the scene of unrelieved economic distress in spite of the high level of American aid. Israeli politicos tend to shrug off the economic crisis on the assumption that Uncle Sam will always pay. This is a commonly shared Israeli attitude. Virtually all Israelis are perfectly sure that American generosity will continue as long as Israelis need it.

Gramm-Rudman Act May Finally Reach US Aid to Israel

Within the American political establishment, however, there is growing recognition that Israel cannot forever be the outstanding exception to the budget limitations imposed by the Gramm-Rudman act. Thus the present level of grants is likely to be the upper limit of the appropriations for aid to Israel. Politically it may become extremely difficult for the US Congress to increase appropriations by the large amounts necessary to rescue Israel from its economic emergency. The erosion of public sympathy for Israel on account of the cruelties being practiced against the Palestinians is a factor that may make the raising of additional aid doubly difficult. Few Americans will contest the slogan, "Not one more US dollar for killing Palestinians."

There are alternative routes to obtain the money to meet the Israeli deficits without accounting for it under the US government budget. One step that has already been taken toward extra-budgetary funding is the refinancing of part of the Israeli national debt at lower rates of interest. Thus far, the Israelis have been able to refinance $4.8 billion of their military debt. This will yield a savings of $290 million per year according to the arithmetic of the Jerusalem Post.

The article "Israeli Debt for Sale on Wall Street" by Donald Neff in the October issue of the Washington Report on Middle East Affairs explains how it was done. The bonds required for this transaction were guaranteed by the US government and sold to private investors. As the bonds were as safe as US Treasury bills, they sold quickly at one percentage point over the Treasury rate.

Legislation authorizing this US commitment was buried in the 1987-1988 appropriations act, PL 100-202. The transaction, the biggest of its kind on Wall Street, received minimal publicity in the US, although it was well covered in Israel. It is possible that this same device could be used also to reduce the interest rates on much of the remaining high-interest Israeli debt, and so stave off the day of reckoning.

Palestinian Economy Crumbling Under Israeli Rule

The Palestinian situation is worse than the dismal picture of Israel's finances. The 1947-1948 war left Israel in possession of most of the highly productive areas of the former British mandate. From the early days of occupation, the Israelis carried out a policy of blocking economic development of the territories. They have even refused to grant licenses for projects sponsored by US voluntary organizations. The intent was to limit employment for Palestinians within the territories, forcing them to accept jobs at low wages in Israel.

While Israeli products have been encouraged to compete in the occupied territories, Palestinian goods have been shut out of Israel lest they compete successfully against Israeli goods. This has led to an adverse balance of Palestinian trade with Israel of more than $120 million annually before the intifadah. This has been offset by the wages of the more than 100,000 Palestinians who had been commuting to daily jobs across the green line and benefiting the Israeli economy.

The uprising has completely disrupted past economic relationships with Israel to the general disadvantage of the Palestinians. No figures are yet available for the economic losses to the Palestinian economy. A rough guess might be that the already woefully inadequate Palestinian GNP may be down as much as one-third.

Israel today is the scene of unrelieved economic distress in spite of the high level of American aid.

King Hussein's renunciation of the Jordanian claim to authority over the West Bank was followed by an almost total cutoff of Jordanian funding for services, such as the schools, that had been co-administered with the Israelis. This meant the 21,000 civil servants in the West Bank were effectively dismissed, costing the Palestinian economy $45 million on a yearly basis in addition to the loss of their services.

The Israelis refused to make funds available for salaries and other expenses formerly underwritten by Jordan and have also taken all possible measures to insure that the PLO is not able to step in to supply the funds formerly provided by Jordan.

From the beginning, the uprising has been based on civil disobedience, the stone-throwing demonstrations being only part of this campaign. However, all forms of the civil disobedience to date have had negative impacts on the Palestinian economy, from the demonstrations, the merchant strikes, the street actions against transport of Palestinian workers to jobs in Israel to the selective boycotts of Israeli goods.

Having failed to subdue the civil disobedience by guns, clubs, poisonous tear gas, and prisons, the Israelis have retaliated with economic repression. The measures include the arbitrary levying of higher taxes against which there is no mechanism of appeal, the destruction of property, and the confiscation of identity cards on unproven charges of non-payment.

Under such adverse conditions, can the uprising continue? The surprising answer is that the actions of the Israelis are forcing the uprising to continue and are likely to crown it with success.

There has not been a single move by the Israelis toward concessions or reconciliation. The reliance on force alone to end the uprising is, in effect, a call for unconditional surrender. After the brutalities committed by the Israelis in their attempts to put down the intifadah, the Palestinians justifiably fear that life under unconditional surrender would be far worse than life under the uprising.

Israeli collective punishments have unified the Palestinians as nothing else could. Instead of singling out individuals for individual acts of resistance, groups are punished for offenses committed by unidentified individuals. These arbitrary punishments are being perceived as punishments for the crime of being a Palestinian. What better way is there to unify all of the diverse Palestinian factions?

Even against such Palestinian unity, the Israeli economic squeeze could be effective if the intifadah required extensive outside funding. However, civil disobedience comes cheap. Stones are everywhere, and no one is being paid for civil disobedience. The exact contrary is the case for the Israeli occupation forces.

Finally, whether the Israelis see it or not, it is almost inevitable that the American establishment will one day conclude that any intangible benefits of all-out support of Israel are far-outweighed by the increasingly visible losses.

Frank Collins is an American free-lance journalist who divides his time between Jerusalem and Washington, DC, The help of Dr. Mohamed Rabie, director of the Center for Research and Publication, in the preparation of this article is gratefully acknowledged.