Israel owes the US a great debt of gratitude for all the political and economic
aid it has received.
Since the state’s establishment, US aid, economic
and military, has amounted to some $105 billion. A goodly sum of money, even if
it amounts to less than half of Israel’s current GNP – $235b. At its peak in
1985, aid was $3.8b, representing a hefty 16 percent of Israel’s GDP at the
time. It played a significant role in the formation of the Israeli economy’s
structure, in a manner that still influences its economic development – and not
always for the better.
In 2007 Israel stopped receiving economic aid,
receiving only around $3b. a year in military assistance.
currently represents only 1% of Israel’s GDP, a burden Israel could conceivably
carry by itself. It may be important, however, to maintain such aid for other
strategic, political and institutional reasons, since it involves Israel more
intimately with many important American institutions, not least the US Congress
and America’s defense industry.
But there is room for improvement even in
the best relationships. As the great development economist Lord Peter Bauer
observed decades ago, foreign aid often creates serious problems for the
countries receiving it. This is also true for military aid.
enables recipient governments to free up for other purposes resources they would
otherwise have to allocate for defense. However, and this is the major problem
with all foreign aid, it is necessarily funneled through governments, and
governments naturally operate according to political rather than economic
Indeed, governments often operate in ways that are
detrimental to the economy. They create wasteful public sectors ostensibly
designed to enhance the welfare of their citizens, the so-called welfare state.
In reality, the plight of the poor often serves merely as an excuse; the real
purpose of enlarging the public sector is often the creation of interlocking
bureaucracies and tycoons that literally choke economic activity, while enabling
politicians to provide supporters with jobs and resources at the expense of
economic growth and the general good.
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Governments are often the largest
employer and purchaser in the economy. The sheer scale of their operations, and
their ever-growing thickets of regulation, tend to favor big business. This
helps build great concentrations of economic power in the private sector, huge
monopolies and cartels. They progressively come to dominate economic activity at
the expense of smaller businesses that cannot afford the burdens imposed by
Big business tends to exploit its economic clout not only to
suppress competition but also to amass political power that helps protect its
privileges. The bigger the government, the bigger the burden on small
businesses, which are the chief economic engines of innovation and
Lord Bauer’s warning is borne out by what foreign aid did to many
African and Muslim countries. The large flow of foreign aid funds through their
governments badly aggravated the inherent problems of their authoritarian
government rule. It increased an already overbearing concentration of economic
activity in the hands of a few institutions and tycoons with strong political
Indeed, in many of these countries, as is clearly the case in
Egypt, former government bureaucrats and top military men have become major
economic players, with all the abuse of power that this implies. In Egypt, the
army is in control of a full third of the economy, not the most efficient or
productive way to run a modern economy. The result is the exceedingly high rate
of Egyptian unemployment, reaching 30% especially among the young.
massive impoverishment that follows is a major cause of great political unrest
THESE ARE the bitter truths of political life. They are too
often ignored by observers who disregard economic processes in their analyses of
In the past such blindness to economic factors
was responsible for the failure of so many experts on the Soviet Union to
predict its “sudden” collapse.
Today it is responsible for the failure of
many to realize how weak the Iranian regime is economically, how dependent it is
on its current exports of oil to feed its 60 million citizens and how relatively
easily it can be brought to its knees by effectively hurting its oil imports,
without even touching its nuclear facilities.
Israel cannot be compared,
of course, to destitute African states, certainly not to an economically
dysfunctional Egypt. Israel is rightly considered a “startup nation.” It boasts
a vigorous, innovative hi-tech sector, and has weathered the post-2008 economic
troubles far better than most nations.
However, a closer examination of
the Israeli economy reveals some very deep problems. Despite arguably the best
human capital in the world – tiny Israel has more start-ups than all of Europe –
and despite over $300 billion invested from foreign sources, the Israeli economy
pays most of its skilled workers a pitiful $2,200 a month. This when prices of
most consumer goods and services in Israel are higher than in the
Millions of Israeli workers are struggling to make ends meet.
Economic concentration that curbs competition and efficiency is a major reason
for this predicament.
An April 2010 Bank of Israel study has confirmed
that excessive concentration in the Israeli economy poses a danger to its
stability and viability. It noted that “some 20 business-groups, nearly all of
family nature and structured in a pronounced pyramid form, continue to control a
large proportion of public firms [some 25% of publicly listed firms] and about
half of market share.” These same groups also receive most of the credit given
by banks to the business sector and 60% of the non-bank credit. They show, the
bank’s report warned, “higher levels of financial leverage – and therefore also
of risk,” than stand-alone companies.
Our two major banks and these
pyramid-style conglomerates have become “too big to fail.” The possibility of
their failure, which was tested in the past and may be tested again soon, is so
threatening to the total economy that they gain immunity for their
BUT WHAT does all this have to do with
foreign aid and with the economic interaction between the US and Israel? What
has sown the seeds of our extraordinary concentration of economic and political
power is no doubt Israel’s socialist past. But even after the demise of
socialism in the late Seventies, concentration still increased as a statist
ideology and practice continued to dominate economic life in Israel, and
extensive government intervention was justified not on socialist grounds but on
The initial dominance of the government, namely of
politics, over the economy was maintained after the creation of the state by the
government consuming over 80% of GNP and 90% of all savings. Most assets,
including banks, were held by government or by its political base, the Histadrut
Labor Federation. Foreign remittances and aid played a significant role in
making this possible.
Government still plays a major role in the economy
even now when its share in the GNP has shrunk to close to 50% (or perhaps a
little over) and even after most of the assets that belonged to government and
the Histadrut were sold, in a phony privatization process to cronies, to some
dozen families who bought these assets for very little with loans taken from
their allies in the bureaucracy, the managers of the nationalized
True, government no longer controls 90% of all credit, but credit
is still heavily misallocated to big business in Israel. It is a major factor in
the dysfunction of the Israeli economy and in its domination by inefficient and
rapacious conglomerates, banks and insurance companies that are mostly managed
by former high government bureaucrats with very questionable business skills and
ethics (witness the low rate of return on capital of these businesses and the
exceedingly high rate of non-performing banks loans. Also consider the very low
return Israeli pension funds receive on their immense, and as it turns out very
risky, investments in these conglomerates. As for ethics, witness their
managers’ rapacious behavior, the inflated salaries and bonuses they allocate
themselves for their poor business performance while exacting high monopoly
rents from the poorest strata in Israel).
The misallocation of credit to
big business is also a chief reason why the Negev and the Galilee, Israel’s
so-called periphery (a mere 160 kilometers from the center) is suffering from a
prolonged and severe credit crunch. The small and medium companies that are
based there cannot take off and develop.
The conglomerates also erect a
thicket of entry barriers that keep their would-be competitors out. They are
aided by protective tariffs and by government permitting them to control even
the shelf space in supermarkets.
Lack of competition, combined with
so-called “progressive” labor laws, has resulted in low efficiency that
translates to low per-capita productivity (about half that of the US). It also
translates into dismally low wages for Israeli workers, and causes inadequate
performance of our economy and increased social problems and tensions.
yes, it was our socialist and statist heritage that bred our distorted,
inefficient system. But foreign aid and remittances were serious
The struggle against political and economic concentration could
finally permit Israelis to overcome this destructive heritage. If they are to
successfully meet the many serious challenges facing them, Israelis must build a
more efficient and equitable economic system.
For this they can find
inspiration in the strong American free market tradition, a tradition that
America, too, is struggling to preserve.
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