The current accelerated and dangerous economic deterioration in Israel and the Palestinian Authority derives to a considerable extent from two factors: security and confidence. Security–at the domestic level in both Israel and the PA; confidence–on the part of both local and foreign investors.
First the case of Israel, where the economic downturn is often attributed by economists to a long list of external factors over which Israel has no control, such as the global recession, preceded by the economic crisis in the Far East, and the events of September 11, 2001. No doubt these events did indeed have a detrimental effect on the Israeli economy. Some also argue that the heightened security costs generated by the current Intifada also caused the present crisis, even though the security budget as a percentage of the total budget was increased only recently for the first time in decades, and not by a significant amount.
Yet the primary factor influencing Israel’s economy is not the security budget but the security situation, and particularly the state of the peace process between Israel and its neighbors. In reviewing the past decade of economic life in Israel it is difficult to ignore the correlation between the state of the peace process and the state of the economy, as reflected in all the relevant indicators: per capita production, investments, unemployment, etc. The economic boom commenced when the Shamir government agreed to attend the Madrid Conference and participate in the peace process that emerged from it. The world opened its doors, we linked in with the emerging markets in India and China, and most important–the new atmosphere of confidence produced a steady stream of foreign and local capital investment.
Yitzhak Shamir was followed by Yitzhak Rabin. The peace process bloomed, and for three years the Israeli economy achieved unprecedented growth. Then came the Rabin assassination, an increase in terrorism and a tough confrontation on the Lebanese border under Shimon Peres, followed by the election of Binyamin Netanyahu as prime minister. The peace process nearly ground to a halt. Tensions increased between Israel and its Arab neighbors, and with Washington. Investments dropped and the economy deteriorated.
The brief Barak interlude was characterized by optimism regarding the peace process and by economic growth, particularly in the hi-tech field. Toward the end of Barak’s period in office the Intifada erupted and the flow of foreign investments decreased. Then came the Sharon era, characterized by an escalated struggle with the Palestinians and deterioration of the economy. For the first time in its history Israel registered a shrinking of its economy (“negative growth”) for two straight years.
This is of course something of an oversimplification; there are additional specific factors of influence. During the Shamir period an important catalyst for the Israeli economy was mass immigration from the former Soviet Union. Netanyahu instituted important monetary reforms whose positive influence was felt only after the passage of time. Nor is it the intention here to argue that we must encourage a peace process at any cost and in any form merely to benefit from economic growth. But the link between the two is undeniable.
The explanation lies primarily with globalization. Israel’s current dependency on international markets and investments has brought us great economic bounty; but it can work against us at times of political-security crisis. The defects and distortions that are built into our socioeconomic reality, such as huge governmental welfare expenses to bridge one of the world’s largest income gaps, the existence of an entire sector, the ultra-Orthodox, that consumes national resources without contributing to the economy, and the presence of foreign guest-workers in numbers equivalent to the number of our unemployed, are all relatively invisible as long as the economy grows at a satisfactory pace. But they become an unbearable burden on the economy when no growth or negative growth is registered.
Turning to the Palestinian case, we find ourselves back at the Oslo agreement. The formulators of the Israeli-Palestinian peace process believed that peace could be based to a large degree on fertile economic cooperation that would ensure prosperity and constitute a catalyst for the building of trust and confidence between the two peoples. In reality, confidence began to collapse the moment the suicide bombings commenced in the streets of Tel Aviv and Jerusalem during the Rabin-Peres era. Borders were closed, closures imposed, and the free flow of labor and goods that is so crucial to prosperity ended. In other words, the difficult security situation between the two peoples destroyed confidence. Under these circumstances the collapse of the Palestinian economy was inevitable, even without the corruption and mismanagement over which so much ink has been spilled.
Today, against a backdrop of security problems and lack of mutual confidence, there is no real prospect in the foreseeable future for successful economic integration between Israel and a future Palestinian state. Thus anyone planning the rehabilitation of the Palestinian economy should not rely on attempts to strengthen links to the Israeli economy in the spirit of Oslo. To the contrary, those links should be replaced by alternative, non-Israeli sources, for the good of both parties.
This is the sad economic interpretation of the increasingly popular Israeli term “separation.” If separation creates a greater sense of security on both sides, then it will also contribute to their economies, even when they lack confidence in one another.
Yossi Alpher is the author of the forthcoming book “And the Wolf Shall Dwell with the Wolf: The Settlers and the Palestinians.”