Will peace processing undermine Israel’s economy, again?

Politics, especially related to security and the putative peace process, have always dominated Israeli public life. They became, inevitably, an end in themselves, consuming immense energies and resources. As a result, Israel neglected its many economic and social problems, with negative repercussions on security and peace as well.

The present political turmoil in Israel over the reshuffling of Sharon’s coalition is a good example. It seems that for the sake of an uncertain disengagement plan – a unilateral withdrawal, really – Sharon is going to threaten the one major achievement of his coalition: an economic reform that will greatly strengthen Israel and also enhance its ability to make peace.

Sharon, who led his Likud party to a landslide victory in the 2003 elections by rejecting Ehud Barak’s attempt to reach peace by making dangerous concessions to Arafat, has enjoyed a stable center/right coalition. By excluding Labor’s crypto-socialists, the ultra orthodox and the ethnically based welfarist parties, it facilitated bold economic reforms under the strong leadership of Minister of Finance Benjamin Netanyahu. An out-of-control $70 billion government budget (allocating over 33% to transfer payments) was cut twice, as were public sector wages and the number of public sector employees. Taxes, reaching 60% at the margin, were reduced, though not enough. Netanyahu pushed through a reform of pension funds whose assets had been squandered by the Labor Federation controlling them. He also started privatizing state-owned entities such as Israel’s airline and, more importantly its ports.

Next in line is his crucial undertaking to break the monopolies in Israel’s financial markets, especially the bank duopoly that totally dominates them. This duopoly has caused two decades of non-growth by misallocating credit (70% was given to 1% of borrowers, usually cronies; 10% of these loans may have to be written off). Consequently, Israel suffered massive unemployment, low wages and enormous social misery, as hundreds of thousands of families were unable to make ends meet.

The change of direction rescued the Israel economy from going the way of Japan or Argentina. In only 18 months, Netanyahu – helped by the revival of the world’s economy, especially in high tech – has turned crisis into stability, and the beginning of growth (forecast as 3.5% for 2004). Another major factor was the support of the US government that conditioned its loan guarantees on economic reform.

It was a dramatic achievement, but it may not last. Netanyahu may not get the necessary support for his forthcoming reforms, because following the desertion of Sharon’s right-wing coalition partners Sharon no longer commands a Knesset majority. He is seeking new partners, chiefly in Labor, which is hostile to reform. Its leader, Shimon Peres, whom Labor wants to replace Netanyahu as Finance Minister, termed Netanyahu’s pro-market reforms “a capitalism of pigs”. Within Likud too, Deputy Prime Minister Ehud Olmert is trying to undermine Netanyahu, his rival for succession, by calling for an increase in the deficit and in government spending. This despite Israel’s undertaking to drastically cut both as a condition for receiving US loan guarantees.

Consequently, the growth of the Israeli economy, achieved with tremendous effort, may be cut short; or worse, Israel may slide back into deep economic malaise.

The unilateral withdrawal plan from the Gaza strip and several West Bank settlements is already tearing apart the Israeli public and its political system. It may prove extremely costly and dangerous. So why is Sharon, a very shrewd politician, ready to gamble so much on such a questionable plan? Why would Sharon, the indefatigable warrior who fathered the settlements suddenly agree to a unilateral withdrawal that the Arabs will interpret as another case of Israel caving in to terrorism?

Some say that Sharon wants to leave his mark on history as peacemaker, like his mentor Begin did; or that he simply grew old and weary. Others charge that Sharon launched this initiative to deflect attention from threatening corruption charges.

Sharon explained his sudden policy change by the need to forestall a European attempt to impose on Israel a solution based on the Geneva Accord. This accord, which the European Union financed and promoted, is a private “settlement” reached by some Israeli peaceniks with a few marginal figures in the Palestinian Authority. It concedes most Arab demands, including, apparently, the right of return. The Europeans, with the assent of some Americans (like Secretary Powell) could claim that it was “the only game in town” capable of “reviving” the stalled road map plan.

Sharon decided to preempt Geneva by advancing an Israeli unilateral withdrawal plan that the Europeans and their friends in Foggy Bottom, clamoring for Israeli concessions, could not resist.

Sharon claims that while he got no quid pro quo from the Palestinians for his risky concessions (as if what they do promise is worth anything), he did get important strategic assurances from the US. But critics retort that most of these assurances, like promising not to impose any peace plan on Israel or to guarantee Israel secure and defensible borders (whatever that means) have already been given in the past. They contest Sharon’s claim that President Bush also added some new assurances like denying the Palestinian’s right of return or affirming Israel’s right to keep its non-conventional deterrence. They point out that Secretary Powell assured Arab leaders who protested these putative new assurances that the binding document for interpreting them is the Road Map. Altogether, critics argue that it was a mistake for Sharon’s amateur advisors to make basic, non-negotiable Israeli rights conditional on withdrawal and to accept meaningless assurances as a reward – like the promise that the Palestinians will not get a state until the PA gets rid of terrorism and reforms its institutions, when everyone knows that this will never happen.

As a result, 17 Likud Knesset members, including several ministers, refused to buy Sharon’s claims and are trying to undermine his efforts to form a new coalition with Labor. Should Sharon fail to form a new coalition he will call new elections, he announced.

A new Likud-Labor coalition and internecine wars within Likud risk undermining the economic recovery plan that was to rescue Israel from economic decline. For Israel, economic prosperity is not a matter simply of a better standard of living. It is a matter of survival. Israel will not be able to keep its young at home on the $1200 a month that most Israelis earn, nor will its laggard economy be able to pay for its growing defense bills.

Israeli peaceniks have always insisted that only peace could revive the Israeli economy. As if breaking up the monopolies that infest the Israeli economy must wait for Arafat being crowned King of Jerusalem.

Ironically, it now turns out that the reverse may be true, that an obsession with peace processing will not only fail to deliver peace, but may actually undermine the Israeli economy. This also spells trouble for the Palestinians, who still lack any prospects for economic advancement without an economic partnership with Israel. Until the Al-Aksa intifada, over 50% of Palestinian GNP derived from work in Israel and trade with it, more than quadrupling Palestinian standard of living in the 37 years since Israel occupied the West Bank and Gaza. Even the partial economic separation from Israel that Arafat’s war forced on the Palestinians resulted in a great drop in their standard of living and in massive unemployment and excruciating poverty.

Prosperity is a precondition for the emergence of a civil class in Palestine that, unlike Arafat and his corrupt “Authority”, will have a real commitment to peace. A “peace process” that sets the Israeli economy back will therefore seriously damage the prospects for true reconciliation.