November 22, 2001
It is a total mystery how and when Israel will get out of this economic fix.
On top of being in a military state of emergency for over a year, Israel is now in an "economic state of emergency" as well, Prime Minister Ariel Sharon announced last week. He was about the last person in the country to say the words out loud.
The arrival of Israel's economic crisis was something like the NASDAQ crash of last year -- everybody knew it was coming, they just didn't know when. The scales began falling from Israelis' eyes last week when the economic growth figures for the third quarter of the year came in -- 2.8 percent in the red, the second straight quarter of economic contraction. Bad, bad news.
It's no mystery what's caused the recession. The NASDAQ crash hobbled Israel's high-tech sector, the turbo jet of the economy. Then the intifada came along and devastated the tourism industry, at the same time burdening the State with the cost of fighting a new, mass-scale guerrilla war. The intifada, combined with the burgeoning world economic slump, chased foreign investment away. All this comes against the background of a construction industry that's been in the doldrums now for five years. The economy was hit so hard in so many places, that the ripple effect has touched virtually everyone in the country. Then came Sept. 11, and there was nothing much left to do except wait for the bleak statistics to confirm the consensus expectations. In a country where the prime minister and the political echelon get blamed for the weather, it's no surprise that Israelis are blaming the bad economy on Sharon. A poll in Yediot Aharonot last weekend found 73 percent of the public gave the prime minister a failing grade on economic performance.
The problem is that emerging from this recession is probably out of the hands of the prime minister and the rest of the government. It wasn't government economic policy that crashed the NASDAQ, or started the intifada, or chased away tourists and foreign investors. These are objective conditions that drained the Israeli economy of billions upon billions of dollars; government policy, be it liberal or conservative, can't replace it.
And while it is no mystery how Israel got into this fix, it is a total mystery how and when Israel will get out of it. The upshot is that lean times are coming. People are going to have to learn to make do with less. But nobody -- not government, not business, not labor, and certainly not a special interest like the ultra-Orthodox community -- is ready for that. Start with the government. Cutting public services and benefits alienates voters, so for Finance Minister Silvan Shalom, who has his eye on the prime ministership, it's business as usual.
He's drawn up a budget for next year based on the notion that the government will have greatly increased tax revenues, which will come as a result of a 4 percent economic growth. Nobody believes Israel's economy will grow by anything close to that figure, but cutting back expectations would mean cutting back spending, which Shalom is loath to do. So, while government leaders may talk of an economic emergency, they're spending as if the country's on easy street.
As for labor, social security workers have been striking for weeks, joined by university professors, and now the firefighters. Public sector strikes are as Israeli as falafel, and no economic state of emergency is going to change that. With unemployment rising and government aid about to decrease, social solidarity is being battered, which is a mighty dangerous thing when terror threatens everyone and the army is fully engaged. Yet manufacturers aren't willing to hold off on firings; in fact they want a tax cut and a promise that the minimum wage will not go up.
"Industry is the engine of the economy. The country depends on the taxes that industry pays," said Oded Tyrah, head of Israel's Manufacturers Association, arguing the industrialists' demands. He seemed to forget that regular working people pay most of the taxes, and that businesspeople are not a higher order of being who deserve financial breaks when everyone else is hurting.
But probably the greatest anomaly of this military and economic state of emergency is that the sector of the Israeli population that, by and large, neither works nor serves in the army -- the ultra-Orthodox -- continues to demand more welfare. They threaten to bolt Sharon's government if they do not win passage of a bill that would sharply increase government aid to families with five or more children -- a law tailored for ultra-Orthodox needs.
The good news is that Israel is fundamentally a middle-class society; a deep recession will hurt, but will not drive the country into poverty. The restaurants and theaters remain full, one out of every five Israelis still travels abroad each year. Even while three-quarters of Israelis rated Sharon's economic management poor, two-thirds rated their own personal economic situation as good. The bottom third, however, stand to get considerably poorer in the near future. This will put a severe social strain on the country; advocates in the poor towns of the Negev and Galilee warn of an "intifada" of the unemployed. If that happens, maybe then Israeli decision-makers will understand the meaning of an economic state of emergency.