Encountering Peace: The Israeli economic breakout

Despite the global financial threats, the Israeli economy is still in the black and more healthy than the economies of Greece and Cyprus.

By GERSHON BASKIN
OECD 370 (photo credit: REUTERS)
OECD 370
(photo credit: REUTERS)
By all accounts, Israel is an economic success story.
Despite the global financial threats, the Israeli economy is still in the black and more healthy than the economies of Greece and Cyprus, its nearest European neighbors, and much more healthy than Spain and Ireland at the other end of Europe. Nonetheless, Israel’s new finance minister, the popular Yair Lapid, is faced with the reality of needing to close a budgetary deficit of more than $11 billion over the next year or two.
Lapid’s new party, Yesh Atid (“there is a future”), received unprecedented success in the January 2013 elections on the promise of removing the economic burdens on the middle class. This was a powerful message, especially following the middle class revolt that took place in Israel in the summer of 2011. However, Lapid is facing massive dilemmas regarding where and what to cut from the budget and how to raise additional funds to close the hole. One thing is sure: his electorate, the middle class, will be hurt.
About half of the hole will be filled by budget cuts, the other by new taxes. The large debt requires Israel to spend an enormous amount of money on interest payments, and that is a huge waste of money when there is not enough economic growth. That is Lapid’s main message: the next two years will be hard, but the crisis is enabling Israel to pass significant structural and bureaucratic reforms that will lessen the burden on the working man and woman.
Israel has had an impressive record of economic growth and compared with other OECD countries a relatively low level of unemployment (partly because Israel’s statistics don’t include the non-employed Arab women and ultra-Orthodox men who don’t really try to enter the workforce.) Lapid promises change in that area as well, focusing on reforms that will enable and encourage ultra- Orthodox men to get off dependency on the public coffers, out of the yeshivas studying religious texts all day long and into the work force. That will certainly benefit the economy of the country as well as the economy of those who have been doomed to live in poverty because of avoiding military service.
The economic choices facing the new government are not easy and election promises of no new taxes and helping the working man and woman are still quite vivid in the public’s memory. Any economist would agree that the main way out of this crisis is through economic growth and not budget cuts and new taxes.
But economic growth is almost impossible to achieve with the shrinking global markets that Israel does business with.
Israel is searching for new markets to expand into, such as China, and increased exports to China will certainly help. Israel’s hi-tech industries definitely lead the way, and new innovations developed in what is already dubbed “the start-up nation” will be the vanguard of economic development and growth. But even this amazing exploitation of Israel’s smart and entrepreneurial human resources does not have the ability to bring about the next Israeli economic breakout. The only thing that could is peace.
ISRAEL ALREADY experienced the economic wonders of peace in the early 1990s with the beginning of the peace process. Immediately after the Israeli-Palestinian Declaration of Principles (DOP) was signed in the beginning of the Oslo peace process in 1993, Israel experienced unprecedented economic growth. Foreign companies that had previously avoided doing business in Israel now entered the Israeli market.
In the early 1990s, foreign direct investment in Israel averaged $240 million annually, while in the last four years of the decade it averaged $2.4b., a 10-fold increase. Israel’s credit rating also improved markedly, with Standard & Poor’s and Moody’s rating Israel, respectively, as “high quality” and “strong payment capacity.” GDP per capita, that stood at around $11,000 in 1990, increased by more than 50% to reach $17,000 in 2000. By 2012 Israel’s GDP per capita had reached $22,860.
In 2012 Israel’s economy slowed to a growth rate of 2.8%, with a population growth rate of about 1.58%.
That is still positive economic growth, but far below Israel’s potential. In 1992 prior to the Oslo peace process Israel’s rate of growth was around 2.6%. A year later, after the Oslo peace process began, it reached 7.1%. When the peace process crashed and reached its lowest point in 2002, economic growth slowed to a negative rate of 0.7%. In the past few years it has been struggling at about 2%.
Twenty years after Oslo the world is more skeptical regarding Israeli-Arab peace and talk of a new peace process won’t bring about dramatic economic changes. However, a peace agreement with the Palestinians will open the entire Arab world to Israel and perhaps more importantly will bring the new wave of foreign investment into the country.
Israel’s tourism potential is far from being met, with only four million tourists arriving in the country in 2012. Nearby Antalya, Turkey, receives more than 10 million tourists a year, yet lacks Israel’s history and appeal to religious communities, Jews, Christians and Muslims.
Following a peace treaty with its Palestinian neighbors Israel’s economy could easily reach the same 7% that followed Oslo. At today’s GDP 7% growth would add more than $17b. to the GDP annually. That is what is called a “breakout.” That is what Israel needs to be able to provide the governmental services that the people of Israel desire and deserve in education, health care, public infrastructure, culture and more.
This is just another important reason why Israel should do everything possible to reach peace with its neighbors.
The writer is the co-chairman of IPCRI, the Israel Palestine Center for Research and Information, a columnist for The Jerusalem Post and the initiator and negotiator of the secret back channel for the release of Gilad Schalit.