Except for the late Prime Minister Yitzhak Rabin’s term in office, Israeli politicians of the last generation have been consistently behind the times and have not dealt appropriately with the issues facing the country. The results have been predictable.
In October 1973, Israel may have been well-prepared for the Six-Day War. In 1973-1985, as a result of the trauma of the Yom Kippur War, Israel increased its defense spending to an average of 25% of GDP, while its potential enemies lowered their spending to less than 10% of GDP. Israel therefore damaged its infrastructure and economy, which would not begin to recover for another decade.
In the Lebanese war, Israel used political concepts that were more appropriate for the Middle Ages or early 20th century Lebanon, in its attempt to create a Jewish-Christian alliance against the Muslims there. Additional anachronistic political theses surfaced in the 1980s, and are being repeated now: Jordan will be a Palestinian state, while the Palestinians will be absorbed there or in other Arab countries. It is a pleasant dream, but totally lacks any basis in reality.
Prime Minister Ariel Sharon issued an optimistic statement last week, saying, “We have found the way to handle terrorism; now I will focus on solving social and economic problems.” During the current intifada, however, Israel is utilizing tools, in the political, military, and economic spheres, that may be suitable for some other reality, but are certainly inappropriate for the current situation.
The political and military realities
The government is still thinking in pre-intifada military, economic and political terms, leading to the illusion that it has found a way to handle terrorism. When the Palestinian Authority (PA) controlled its own territory, it usually upheld the principles of its agreements, while the violent forces were limited and illegal.
From a military standpoint, Israel’s leadership is assuming that if it effectively wipes out the “engineers” – the terrorist leaders and other initiators of terrorism – it will substantially reduce the Palestinians’ capability to carry out terror and thereby preserve the security of Israeli civilians. This thesis led to many tactical achievements (the targeted killings), but strategically was a total failure.
We are much less physically secure than we were a year ago, for one simple reason. There currently exists in the territories a loose confederation of hundreds of official and unofficial militias consisting of 80,000 armed men. Each one of these militias is perfectly capable of crossing the non-existent border and shooting Israeli civilians. The level of attacks is fairly low only because Palestinians prefer to employ limited, ongoing violence, in order to preserve a politically fluid situation.
The attempt to defeat the PA economically and force it into a political compromise is also destined to fail. The PA is managing to function economically with the help of limited aid from Arab countries, and humanitarian aid from Europe and the UN. Israel also allows it to benefit from electricity and communications services and supplies of fuel, water, food, and medicine, as well as the movement of 50,000-60,000 (mostly illegal) workers. Under these conditions, I see no chance of breaking the PA economically.
Politically, Israel assumes that heavy military and political pressure on Arafat, including international pressure, will lead him to confront the Hamas, Tanzim, and other militias militarily. This assumption, which was accurate during the pre-intifada situation, no longer applies.
Arafat will only be able and willing to battle the militias when he can show his people an impressive, real political achievement. At the moment, he is making partial, tactical cease-fire agreements with the various militias, but these are always shattered by Israel’s targeted killings.
Arafat is aware that if he returns to talks today, without any real political achievement, he will be unable to defeat the militias. The Palestinian public will be against him. His political achievements vis-a-vis the Sharon government will be non-existent, even in comparison with what Ehud Barak offered him (91% of the territory and Jewish settlement blocs in the territories, with the Jordan Valley leased to Israel).
Examining all these criteria shows that the PA is currently nowhere near implementing a real cease-fire, while Israel has no effective answer to this situation.
In these conditions, Israel’s alternatives are:
- The dovish alternative, involving a return to diplomatic negotiations without a full cease-fire. The targeted killings and sieges will be halted, Jewish settlement activity will be totally frozen, and Israel will commit itself to further territorial withdrawals. This alternative assumes that the next stage will be either a return to the Taba understandings or an interim accord, with an extensive withdrawal from Gaza and the West Bank.
- The hawkish alternative. This alternative is divided into two possibilities. The first is to occupy the entire West Bank and return to full military, civilian, and political control over it, with all of the attendant consequences. The second is a military siege, by constructing a separation line along the border, concentrating the Jewish population into settlement blocs, and continuing the violent confrontation, thereby at least increasing the security of Israeli citizens.
- In my opinion, the status quo led by Sharon and Peres is the worst of all the alternatives, since it leads to an economic crisis on both sides, injury to defenseless civilians on both sides, and tactical Israeli successes through the use of thousands of Palestinian who cooperate with Israel, while economic and psychological suffering create thousands of potential suicide bombers able to attack us virtually at will.
The economic situation – the intifada years
In the second part of Sharon’s above-mentioned statement, he emphasized he would now focus on social and economic problems. In my opinion, Sharon’s words reflect a misreading of the intifada.
Only one economic issue will confront Israel in the next two years: keeping its budget and economy stable. Means and resources for handling other issues will be negligible, or even negative.
The budget forecast for 2002 predicts 1-2% growth and a budget deficit that will reach 4.5% of GDP, even without a tax revenues crisis. Both Keynesians and monetarists would agree the deficit should not be increased beyond that in an economy open to foreign investment, at a time when investments from abroad are falling from $11 billion in 2000 to a projected $3-4 billion in 2002.
Under these conditions, Sharon cannot do much in the social and economic field except cut the budget. Furthermore, the government coalition, rife with pressure groups, will not allow him to maneuver on budgetary matters. The government will, of course, focus its efforts on achieving an unrealistic package deal, the purpose of which is understood by no one, and ad hoc solutions to individual problems (wages disputes, enterprises in distress, etc.). These will have a marginal effect, if any, on the general economy.
At the level of existing demand, under the harsh, uncertain conditions in an open economy subject to war and border closures, there will be only one economic goal: preserving economic stability until the war is over. Unfortunately, little more can be done.
Macroeconomic stability
A political-military decision by Israel and the Palestinians to continue the violent confrontation for an extended period without returning to negotiations has created a stark reality – a long-term neglect of civilian security and an economic slump, which even the best prime minister and minister of finance would be unable to handle.
A reform in political and military policy to make them conform to reality is a necessary condition for economic change. Without such a reform, it is best to preserve macroeconomic stability until the storm passes, while accepting economic stagnation, gradually increasing unemployment, and a loss of national hope.
The author participated in the talks with Jordan and the Palestinians in 1993-99, and was Ministry of Finance Budget Director.
Published by Israel's Business Arena on December 5, 2001