Dousing the flames of recession: Israel's
economy is in its third year of slowdown

By the time, elderly Israeli farmers Ezra and Carmela Kaddouri decided to take their own lives, last month, they had reached the end of their tether. Sunk in $200,000 worth of debts, their vehicles – essential for their livelihood – had just been confiscated. Their double suicide brought to four the number of flower-growers to kill themselves in Israel in recent months.

The Kaddouris’ story of desperation is increasingly common in Israel, where living standards have plummeted in the past three years as the economic boom generated by the Oslo accords has evaporated into the worst economic crisis in the country’s history.

Israel's military closure and gradual economic strangulation of the occupied Palestinian territories have not had the desired effect of isolating the Israeli economy. The closure of the territories has hit Israel's construction industry, 30 percent of whose labour is made up of Palestinians.

The uncertainty of the low-intensity conflict and low prospects of peace have also damaged Israel's tech-based economy. Telecommunications, computer and agro-technology industries have been badly knocked by the global economic downturn.

The Israeli economy has felt
the effects of the
intifada

“The Israeli economy is much more sensitive to global changes. Because it's a high-tech economy, it has been much more affected by the international situation," says Gal Luft, founder of the Institute for the Analysis of Global Security, a Washington-based pressure-group seeking alternative energy sources to oil.

The security situation has mainly led to a lack of tourism but I wouldn’t overestimate its effect. Most of the problem comes from the decline in the international hi-tech markets.”

At the same time, poverty is increasing at an alarming rate. Last year 26.9 percent, or 530,000 Israeli children, officially fell below the poverty line and the figure is expected to rise to 605,000 for 2002. Israel’s Palestinian citizens – the poorest and most discriminated against – are the hardest hit.

The 2003 budget slashes benefits for the unemployed, pensioners and single-parent families and includes measures aimed at deporting 50,000 immigrant workers from Romania, China and the Philippines, who work in the construction, nursing and personal care industries for less than the minimum wage. Taken together, these provisions are aimed at forcing Israeli workers into low-wage jobs.

Alarm bells went off in earnest early this year when the Israeli government revealed that its budget gap reached $500 million in February, following a 2.67 billion shekel deficit in January.

Under Sharon the outlook for
t
he Israeli economy looks grim

Likewise, tax revenues plummeted last February by nine percent compared to the previous month, Israeli radio said. Benyamin Netanyahu, the new Israeli minister of finance, described the situation as “very serious” even as Israeli Prime Minister Ariel Sharon flew to London to try to prevent Fitch, the ratings agency, from downgrading Israel’s credit. Such a step would threaten Israel’s ability to finance its debt.

Since the beginning of the intifada, foreign investment has fallen by two thirds and revenues from tourism have halved, undermining Israel’s currency, the shekel. Inflation is now at 8 percent. Unemployment has risen to 12 percent and the Central Bureau of Statistics has forecast a 2.9 percent fall in per capita gross domestic product.

Military spending soars

Fuelling the budget gap is a sharp fall in revenue stemming from the economic slowdown and a rise in military spending related to Israel's attempt to suppress the Palestinian uprising since September 2000.

Israel’s exuberant military spending in its war against the Palestinian insurrection has hardly helped the economy either. The cost of the war, running at two billion dollars annually has led to the expansion of its army reserves by 400 per cent, the intensification of its intelligence operations and the costly construction of the ‘security fence’.

Israel's budget has been racing to keep up
with military expenditures 

With defence spending for the first two months of 2003 already exceeding earlier provisions by $300 million, Israel’s defence burden has increased from 8.4 percent of its gross domestic product (GDP) to 10.2 percent – over three times more than the United States.

But however dire the economic situation Israel is wading through, the Ministry of Finance’s website still bursts with good news. On its main page, the ministry furnishes impressive statistics that boast a high growth rate and low inflation.

The site states that "inflation was successfully contained, in line with Western norms, and came to zero percent." The gross domestic product, it says, “was US$17,500, higher than Spain, New Zealand, Portugal and Greece. The ministry also notes an impressive GDP per capita spurt of 3.4 percent.

Unfortunately, all these figures date from 2000, the last year of normal economic activity in Israel before the intifada began in September of that year. Even the rosy statistics and spin, however, cannot totally obscure the full damage caused to the country’s economy.

The site’s relentless optimism takes in an upbeat assessment of the effect the current Intifada is having on Israel’s economy. The intifada, referred to as the “geopolitical situation” or "security events", is credited with slicing one percent off Israel's GDP.

Regional turmoil

Baghdad’s fall, the renewed tension between Washington and Damascus, and the possibility of military action against Lebanon’s Hizbullah, have all added to the instability. Although the possible elimination of another bastion of Baathist anti-Zionism – Syria – could be good news for Tel Aviv, analysts doubt that Israel’s beleaguered economy will benefit from the continued regional instability.

“I would say that if for some reason the war is expanded for a long time with Syria and Lebanon and new confrontations materialise, it (regional instability) will have an effect on the economy,” says Aryeh Arnon, the director of Ben Gurion University’s Israel Centre.

“But the investors have already taken into account that we’re in a bloody conflict. The economy is already in bad enough shape and the fact that we are in an era of confrontation rather than peace is already in the investors’ calculations.”

Other analysts believe that however tense the regional situation, Israel’s economy is detached enough from its hinterland - the West Bank and Gaza excluded - to not have to worry.

“Middle East countries have never been big markets for Israeli goods and services. The Middle East has not been a big market for Israeli goods and services. The entire potential of Middle East trade with Israel is equivalent to one midsize European country,” Luft says.

Arnon agrees: "Israel is linked to the international economy more than the regional one. Trade relations with the Arab world are at a very low level so there is no decline or impact on trade from war.

“Events in the region will not have much of an impact; most of the impact is connected to our own confrontation with the Palestinians. The regional crises do not affect the Israeli economy as much as the global ones."

The reason for this, Arnon argues, is because the Israeli economy “is linked to the international economy more than the regional one. Trade relations with the Arab world are at a very low level so there is no decline or impact on trade from war.”

All analysts agree that until there is peace with the Palestinians, the economic situation is unlikely to improve.

“Indirectly, the main thing that needs to be taken care of is the Palestinian-Israeli problem because it is taking a toll on the economy,” says Luft. “The war in itself will not improve the situation dramatically."