Where Have All our Shekels Gone?

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Responsible economic leadership is severely restrictive. It imposes many limitations on decision-makers and requires them to carefully consider the consequences of their actions and to plan accordingly. Economic responsibility is supposed to prevent the spending of a major share of the entire national budget on the Napoleonic military ambitions of any individual leader or faction. Moreover, a built-in democratic mechanism é the vote – is supposed to ensure that governments do not disregard their voters’ economic well-being. There are, however, ways to avoid the grueling financial demands of economic government. Our leadership in Israel has truly refined the art of Avoiding Fiscal Responsibility by cultivating skills mastered by all our leaders during their uniformly heroic military careers, namely diversion tactics. The instruction manual (secretly awarded to all senior government officials with high security clearance) converts these tactics into political terms in the following manner: “Focus on and exploit national fear, whip up frenzy by issuing continuous and ominous warnings of imminent attacks, obfuscate reality and concentrate national attention to an immediate threat of extinction. Rely on the fact that economic numbers and accounts are boring and largely incomprehensible. If the voters are sufficiently terrified and anxious about their prospects for survival, they will back you all the way to national bankruptcy. If these tactics are properly implemented, any opposition to military spending is perceived as unpatriotic and the military leadership is secured for the time required to rewrite history.”

Following several years of robust performance, Israel’s economic growth in 2002 is expected to reach its lowest level since the 1970’s. Government debt is now expected to reach 98% of GDP (Argentina, here we come!) and the government deficit to exceed 6% (while the Maastricht Agreement limits state budget deficits to a maximum of 3%). But the current economic crisis was not created overnight. Operation Defensive Shield, launched in March 2002, was not solely responsible for the bleak economy and gloomy prognosis é although it certainly did not help matters. The Bank of Israel’s most recent report (October 2001 to March 2002, BOI website) attributes much of the presently visible deterioration to the military effort, to the recruitment of tens of thousands of reserves soldiers, to the consequent decline in domestic output and demand, to the effect of escalating uncertainty on investment, to the evident decline in revenues from tourism and to the ever-increasing demands on the budget. However, the downward spiral actually started well before the current Unavoidable War. Indicators of decline are fully visible in the official numbers for the year 2001: Tourism é down 50.1%; Immigration é down 27.8%; Housing Starts é down 31.3%; Industrial Firms’ Output é down 15%; Commercial Firms’ Sales é down 24%; Exports é down 11%. Politicians competing for domestic popularity and international approval, use these numbers to impress upon us the damage inflicted upon us by the Intifidah é of which we are entirely innocent victims.

However it is significant to note that Israel’s high growth in the early 1990’s (Madrid? Oslo? The prospect of Peace?) actually came to a halt after 1996, just as the rest of the world boomed. The economic contraction here began during the Netanyahu government when military expenditures started to climb back up to the 20% of GDP level, from the much more economically comfortable and profitable level of 10%, which is where they were when peace seemed almost attainable. It is no accident that Israel’s highest growth period coincided with mounting optimism for peace and lower military spending. Now that the prospect for peace has faded, current damages include a significant decline in direct foreign investment in Israel, withdrawals of portfolio investments, and the loss of billions of dollars in the paper value of Israeli hi tech companies listed on foreign exchanges. Beyond the immeasurable detrimental impact of pessimism on investment and growth, the costs of war have to be paid by an Israeli public who face higher taxes, higher interest rates and inflation, and rising unemployment.

On the whole, we can divide the costs of war into three broad categories: outright expenses, declines or losses in real earnings and loss of economic opportunities. While we may be able to calculate most of the first and some of the second, the third category is immeasurable and significantly more expensive. It includes all the investments that went elsewhere, all the jobs that could have been, all the potential regional developments that so excited the capital markets and enticed all the global hi-tech companies when peace was looming. It includes all the tax monies that should have gone into improving the National Health Service, the education system, the infrastructure and the creation of new jobs. It includes the product and creativity of all the soldiers standing guard at the numerous and perpetually expanding roadblocks (“makhsomim”); all the hours that could have been used for growth rather than house demolitions, eviction of civilians and destruction of crops.

And now, with the economy so precariously poised for a plummet, responsible decision-making is vital. Perhaps that is why the government has just decided to build a 75 km fence along a border Israel has consistently refused to define, including 11 km around Jerusalem. This fence is supposed to secure and protect us from future acts of terror. If that were true its creation would indeed be urgent. Conservative estimates for the construction of the fence and its electronic mechanisms are $1 million per km., an insignificant expense if this could prevent the escalating violence. It is certainly much less costly than the recurring incursions into the occupied territories and the prospect of re-conquering the entire area. But this investment presents a glaring contradiction to the much higher cost that we have been paying since 1967 that has been and continues to undermine the effectiveness of any protective physical barrier we may choose to erect. It is the insidious cost of the settlements. Just last week, a budget of 100 million shekels was approved by the finance committee for a variety of programs intended for the settlements: 10 million shekels for the construction of 20 housing units, 3 million shekels for the development of infrastructure for one settlement and the remainder for a variety of mostly educational programs. These are costs intended to house new settlers who will augment the anger and add more fuel to the already blazing rage. Over the years that Israel was officially committed to not expanding the settlements, 200,000 Jewish Israelis were very comfortably housed in the occupied territories. They were given generous tax reductions and multiple financial incentives. Roads were built for them and then rebuilt to provide more security from the incomprehensible surge in the number of terrorist attacks. Water, electricity and all other infrastructure facilities were provided for them, in unabashed defiance to their long deprived and occupied neighbors who had no such luxuries as running water or sewage.

The real cost of the settlements to our economy are prohibitive, although incalculable. Just with the numbers provided above one could extrapolate that they have cost us billions in lost opportunities and in misdirected expenditures. This does not even begin to approach the costs of anguish and grief and fear that have accumulated over the years of on-going conflict. The most horrendous thought of all is not only that our leadership has no way out of this accelerating descent into third world (or worse) status, it actively encourages it. Why else would it continue to speak of peace and provoke war, promise security and encourage violence, pay for a fence and continue to build outside it?

Daphna Levit teaches courses on the capital markets of Asia in the Ben-Gurion University Business School.

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