The Roots of Israel’s Economic Crisis

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First published In: Leon, Dan (Ed.) (2004), Who’s Left in Israel, Sussex Academic Press, Brighton

 The June 1967 war, which resulted in the Israeli occupation of the Palestinian territories, accelerated the militarization of the Israeli economy and society which at the beginning of the 21st century is also increasingly influenced by the unprecedented concentration of finance capital, resulting in unemployment and economic hardship for entire sectors of Jews and Arabs in the population. Despite the heavy cost of the continuing rule over the Palestinian territories conquered in 1967, the West Bank including Jerusalem, and the Gaza strip, the Israeli establishment is prepared to pay rather than accept the establishment of a viable Palestinian state alongside Israel.

The feeling of euphoria that followed the 1967war and the increase in business opportunities resulting from the occupation created a sense of economic prosperity. Israeli military control of the territories was exploited for the expansion of the domestic market by Israeli companies (consumption items, investment, financial services, insurance, etc.) by an additional 2.5 million consumers, and for the employment and exploitation of tens, and later hundreds, of thousands of Palestinian workers earning lower salaries and receiving fewer social benefits than Israeli workers

(1) When they are permitted to work in Israel, Palestinian workers are employed mainly in two sectors: construction and agriculture. Half of the workers in these two sectors are non-Israelis, either Palestinians or migrant workers. According to the statistics of the Histadrut Workers’ Federation (2003), in 2001 the average wage for an Israeli construction worker wasNIS6,423, as opposed toNIS4412  for migrant worker andNIS2302 for a Palestinian worker from the occupied territories.

           Expropriation, settlement, military economy

The continuation of the Israeli-Palestinian conflict created a population of modern colonists who live in the Israeli settlements in the territories occupied since 1967. As in other colonial situations, these settlers form a social lobby that pushes for the continuation of the occupation (what the settlers call defending our homes), and which strengthens right-wing annexationist parties. According to data of the Central Bureau of Statistics (which do not include the Jews living in Jewish neighborhoods in greater Jerusalem formerly Palestinian-owned and annexed to Israel in 1967), at the end of the year 2000 some 200,000 settlers were living in 138 settlements in the West Bank and Gaza Strip.

The first settlements were established in the occupied territories in 1968, shortly after the end of the war, with government approval (in advance or retroactively) and financing, under close military security, and on expropriated Palestinian lands. The government fully subsidized the physical infrastructure, family housing, construction and public services, which are known to be more modern and extensive than those inside Israel, and which employ some 40% of the settler workforce. Security also constitutes a profitable economic branch (2)

The occupation accelerated Israel’s transformation into a ‘war society’ where top priority was given to the army, the military budget, army service, and the development of military industries. But as the burden of military expenditures grew, and as social polarization increased in Israeli society, it lost its old self-confidence and was overtaken by a sense of siege and fear. The Israeli government exploited these feelings of anxiety in order to continue the occupation, financing it at the expense of welfare state benefits of the Israeli population.

It is important to note that while they received large tax breaks, at no stage did the large corporations in Israel make do with the handsome profits they garnered from the occupation. As early as the 1970s they increased their efforts to achieve speculative financial profits, for example in 1972 by manipulating the bank shares, whose huge profits were tax-exempt. At the same time local and foreign financial companies were lobbying for the privatization, which was soon to be implemented, ofIsrael’s government-owned and public-owned  companies.

Israel’s transition to a stagflation economy, which also took place in the 1970s, together with the sociopolitical earthquake cause by the Yom Kipur war of October 1973  led to a change of government. In the 1977 general elections the Labor Party was defeated and the Likud Party headed by Menachem Begin came to power for the first time. This change in political leadership, which has lasted, except for short periods, up to now, continued on a three-track policy: maintaining the occupation, assuring the profits of the large companies and eroding the welfare state.

After 1977, the Likud government gave a new impetus to the settlements, ruling in 1979 that it was possible to unilaterally declare land in the territories as ‘state land’ (with no need for any ‘security’ argument) and to build settlements on it.  At the same time, in the framework of its neoliberal economic policies, at the end of 1979 the government allowed Israelis to purchase land privately in the territories. Less than three years later, in April 1982, the establishment of privately initiated settlements in the occupied territories was permitted. (For the record, Ariel Sharon was defense minister at that time).

                                 Economic crisis

The first Palestinian Intifada, which erupted at the end of 1987, increased the cost of Israel’s military control of the territories and decreased the corporate profits guaranteed by this control. Because of the Intifada, work permits for Palestinians were cancelled in the early 1990s and the government decided to allow Israeli employers to exchange their Palestinian workers for migrant workers. Without work in Israel, the   incomes of Palestinian families in the occupied territories decreased by at least 50%. As a result of the destruction of their economy, Palestinians purchased much less from Israeli companies, but even today they remain dependent on Israeli products and thus continue to be part of the ‘expanded Israeli market’.

The Israeli economic crisis, which had begun in 1996, intensified and deepened on an unprecedented scale following the renewal of Israeli military actions in the occupied territories, which continued on and off throughout the second half of the 1990s . The situation deteriorated following Ariel Sharon’s provocative visit in September 2000 to the area of the historic mosques in Jerusalem and the repression by force of Palestinian protests, leading to the outbreak of what is known as the ‘second Intifada’.

During the course of the conflict since the end of the year 2000 an ongoing closure has been imposed on Palestinian cities and villages, internal economic life was strangled and the Palestinian economy  collapsed. Few Palestinian workers have been permitted to work in Israel and unemployment among Palestinians now exceeds 50% of the workforce (in Gaza– 65%), and the majority of Palestinian families live on less than $1 a day per person.

As for the Israeli economy, the war situation has caused a rapid rise in military expenditures in the state budget, which has grown to about 10% of the gross domestic product (GDP). The continuing occupation, and the perpetuation of the war, have engendered a vicious cycle of  killings and suicide bombings, undermining the sense of security in Israel. The effect on the Israeli economy was significant: a serious crisis in the construction industry, with  a wave of dismissals of  building workers; a two-thirds decrease in the number of tourists visiting Israel in 2002, as against 1999, putting tens of thousands employed in the tourist trade out of work..The accumulated damage to the business sector (in annual terms) from October 2000 to June 2002 was 12.5% (3). Also, the flow of Israeli capital abroad has increased, as have foreign financial investments earning quick profits from the high Israeli interest rate (in mid 2003 the basic interest rate in Israel was eight times higher than that in the U.S.).

The war also led to a 1% decrease in Israel’s GDP in each of the years 2001 and 2002. On a per capita basis, the picture is even worse: the per capita GDP went down from $18,000 in 2000 to $14,000 in 2002 (4). If at the end of the 1990sIsrael’s GDP put it in the third decile of countries worldwide, even ahead of some of the developed European countries, by 2002Israelhad regressed to the fifth decile, alongside undeveloped third world countries (5). The increase in military expenditures and the long-term political decision to give preference to maintaining the territories and settlements intensified Israel’s socioeconomic crisis.

                              A ‘new’ Middle East

These problems led various Israeli governments to seek ways to create a situation whereby the occupation would continue, but within the framework of Palestinian self-rule as in the 1993 Oslo accords, signed by a Labor government The 1994 Paris agreement, the economic annex of the Oslo accords, intentionally left all the Palestinian territories in the condition of an economic appendix to Israel. The Oslo Agreements were intended to create more favorable conditions for business and investments for Israeli companies both in the territories and in Arab countries, a ‘New Middle East’ in the words of Shimon  Peres.(6). This was cut short by the assassination of Prime Minister Rabin in 1995 and the return of the Likud (headed by Netanyahu) to power in the 1996 elections.

In 2002 the American government initiated “The Road Map” plan. From the point of view of the Israeli government, the implementation of  “The Road Map” is supposed to enable the continuation of the Israeli occupation in at least half of the West Bank and leave most of the settlers in their homes. A sort of Palestinian state (a “temporary state”) will be established in only half of the West Bank and the Gaza Strip, but this state will continue to be dependent on Israel in every way. Israel’s large investment in the ‘separation wall’ is intended to unilaterally determine the border between Israel and Palestine and to ensure the inclusion of most of the settlements inside Israeli territory.

There is some similarity between the above and the US ‘Road Map’ plan of 2002, which according to the Israeli interpretation can lead to a ‘Palestinian state’ in about half of the occupied territories, dependent in every way, including economically, on Israel.

In parallel and in close connection with the militarization of the economy and society, the great complex of monopolies and cartels, mergers and takeovers, which began to dominate the world economy in the 1980s and 90s, also took root in Israel, and, from its point of view, reaching a high point during the Sharon governments (of 2001 and 2003), with Benyamin (Bibi) Netanyahu as Finance minister.

The economic regime in Israel from the establishment of the state in 1948 until the June 1967 war was characterized by the expansion of the local capital market:  capital import on a large scale; the addition of large numbers of Jewish immigrants as workers and consumers; the expropriation of most of the  lands owned by Palestinian Arab citizens.

                               State capitalism

The expansion policy of this capitalist economy depended largely on intensive governmental intervention in the areas of investment, the import of capital, urban and rural development but also but also on buildling social services (the most important of which was the establishment of the National Insurance Institute in 1954). In the face of the relative weakness of the Israeli bourgeoisie in the 1950s and 60s, the government took upon itself the task of subsidizing new factories and developing those that had been established during the British Mandate, such as the Electric Corporation and the oil refineries. The governments headed by Mapai (which in the course of the years changed their names to the Labor Alignment, and later to the Labor Party) combined incentives to private capital with direct government investments in infrastructure, including the construction of apartments for sale and rent (7) (8).

Israeli governments worked in close cooperation with the three major banks at that time: Bank Leumi (established in 1920 by the Zionist movement), Bank Discount (established in 1935 as a private bank by the Recanati family), and Bank Hapoalim (established in 1921 by the Histadrut General Labor Federation according to an agreement with the Zionist Organization). In addition to the veteran investment companies (P.E.C., Palestine Economic Corporation, and AMPAL, American-Palestine Trading Corporation), collaboration between American entrepreneurs and the banks and generous government incentives, led to the establishment in the 1960s of four investment companies which quickly became the dominant forces in the Israeli economy: the Rassco, the Israel Investors Company, the Clal Company and the Israel Company.

In Israel’s era of state capitalism, the governmental sector played a major role. In 1967 the number of government companies (including subsidiaries) reached some 250, and the government’s percent of their capital amounted  to 55%. During these years, the economic institutions under the supervision of the Workers’ Company of the Histadrut General Labor Federation also played a dominant role. In 1965, some 24% of all wage workers in Israel were employed by companies and cooperatives connected to the Histadrut (9) But contrary to what the heads of Mapai tried to claim then, the public economy, based on its two principal components – the government and the Histadrut – was never a socialist economy, but rather an economy based on state capitalism, which fulfilled the expectations of the big banks and the private investment companies. Moreover, as the years passed, the corporations succeeded in crushing the public sector, first and foremost the Histadrut economy, and taking control of its companies and factories. Corporate replaced public capital..

From the 1970s privatization proceeded. During these years the Israeli economy went from the model of expansionist capitalist economy to the economic model based on stagflation. This transition was accompanied by a government policy that turned its back on active involvement in economic development and adopted a different goal, developing over time a no-growth economy, in which inflation existed together with unemployment (10).

That same Likud government that initiated ‘liberalization’ in the area of Jewish acquisition of land in the occupied territories, also initiated liberalization’ in the area of foreign currency. In October 1977, the Likud government officially announced the  removal of supervision over foreign currency and an exchange rate regulated according to economic developments; cancellation of the purchase tax while raising the V.A.T. from 8% to 12%; cancellation of most subsidies for basic food products and a rise in the prices of electricity, water, and public transportation. These measures, together with inflating the rates of the bank shares, led to hyper-inflation that reached 400% in 1984. (11).

              Privatization and centralized capital

In the 1980s, after the speculative stock exchange bubble burst (the bank shares crisis erupted in 1983 and forced the government to ‘nationalize’ four big banks), the large corporations increasingly pressured the government to make structural changes in its policy, preferring the income, especially from tax breaks, of the private sector profit to budgets for the welfare state. In 2003, as opposed to 1986, the rate of corporate tax had decreased from 61% to 36% and  employers’ payments to national insurance had fallen from 15% to 4% of their workers’ wages.

At the same time, the  Likud (and Labor) governments accelerated the privatization of the government companies in various branches – chemicals, gas, construction, communications  and aviation, as well as the banks that had been nationalized. The Histadrut ‘ Workers’ Company, which included the large industrial concern “Koor,” the investment company Ampal, and Bank Hapoalim – was dismantled and privatized in the 1990s. From the 1990s onward, there were waves of takeovers, with large companies taking over each other, and of merger agreement, resulting in  groups representing foreign capital strengthening their control over the Israeli economy.

These processes created an unprecedented centralization of capital inIsrael. A survey conducted by the Tel Aviv Stock Exchange revealed that six families controlled 40% of the value of the shares traded on the stock exchange: the Recanati family (Discount Bank, I.D.B.; the Ofer brothers (Mizrahi Bank, shipbuilding); the Bronfman and Culver families (Koor, aviation, Tadiran); the Arison family (Bank Hapoalim, Koor, Solel Boneh); and Dankner investments (Bank Hapoalim and Koor). (12). Ha’aretz, August 2, 1999). These six families control 12 of the 17 economic conglomerates in Israel, and their total sales amount to 10% of Israel’s annual GDP. As a result of their dominant status, the capital groups of these families netted  some 90% of the net profit of these 17 economic conglomerates. (12) (13). This centralization is of especially great significance in the area of the commercial media, particularly newspapers, the commercial television channels and cable television. The control of this economic branch is in the hands of the banks (Hapoalim and Discount), the families who own the daily newspapers (Moses, Fishman, Nimrodi), and foreign companies. This control enables them to concentrate far-reaching political power in their hands (14).

This explains why  foreign corporations and entrepreneurs today own 50% of the 20 largest companies in Israel that trade on the stock exchange, including banks,and companies involved in high-tech, chemicals and drugs, insurance  and investment.. Israeli governments, who should according to their Zionist ideology create and maintain  an independent national state, have given up the goal of achieving political and economic independence.Israelis becoming increasingly integrated into the American military strategy and into the global expansion of the multinational companies based in the U.S.The refusal of the American government, which grants more aid per head to Israel than to any other country, to allow Israeli military industries to compete with those in America, mi and Israel’s obligation to purchase the maximum amount of military equipment in the U.S. – led to a crisis in Israel’s military-industrial complex. What Israel calls its ‘integration into international financial markets’ comes at a high price, expressed in billions of dollars of annual interest payments.

                               Poverty and unemployment

The ever deepening structural crisis of the economy has been accompanied by the institutionalization of unemployment (more than 10% of the workforce); and unprecedented gaps in income levels, hitting the poorer sections of the population in general, including women, old people, children, large families, one-parent families, the disabled, etc. Among the victims was the Arab sector, which has always suffered as an ethnic group from grave economic discrimination.(double the unemployment rate of the Jewish sector).

Influenced by the policies of the IMF and the World Bank, Israeli governments too blamed the economic crisis and the government’s growing budget deficit on social welfare expenditures, the size of the public sector, and the unreadiness to work’ of the unemployed. financing these services from the government to the needy families themselves; the government cut health and education budgets and  withdrew from the area of public housing (except for the settlements). Contrary to government propaganda about the oversized public sector, public expenditure in Israel, relative to production, is slightly higher than in Europe not because of social spending, but because of military spending. Without the exceptionally high military expenditures public spending in Israel is similar to the norm in Europe(15).

According to recent National Insurance Institute (N.I.I.) statistics, the number of families living in poverty on the basis of their incomes (before welfare payments and direct taxes) is 32% of all families in Israeland 36% of the children in Israel. After the welfare payments and direct taxes, 18% of the families and 25% of the children lived under the poverty.. Contrary to the public stereotype, poverty is not necessarily linked to the unemployment of the head of the family. The statistics show that more than half of those found beneath the poverty line (52%) live in families where there is a wage earner. The rate of those living in families with a wage earner, among all those living below the poverty line, grew from 33.5% in 1990 to 45.2% in 2000. At the same time the rate of those living in poverty among all the wage-earning families grew from 14% in 1990 to 22% in1998. In other words, the wage erosion caused by the rapid polarization in incomes, and the growth of employment by manpower companies, push tens of thousands of wage-earning families under the poverty line. At the same time unemployment in the first half of 2003 went up to 285,000, or 10.8% of the workforce.

 The “Plan for the Recovery of the Israeli Economy” submitted by Finance Minister Benyamin Netanyahu to the Knesset in April 2003 was the most expression of these policies, and is unprecedented even in international terms. For example, according to the N.I.I., the old-age pension for a single individual will drop from 16% of the average wage in 2001 to 11% of the average wage in 2020. The cut in child allowances, cumulative from January 2001 till the end of 2006, will take away 17% of the allowance of a family with one or two children, 38% of the allowance of a family with three children, and 73% of the allowance of a family with 7-8 children. As a result of this policy, the rate of children in Israel living under the poverty line will grow from one-third to one-half, and among Arab children – the rate will grow from one out of two children to two out of three children.

The neoliberal policies encouraged the employment of workers via manpower  companies and contractors, employment by  personal contracts rather than collective agreements, and the employment of  migrant workers. According to Histadrut estimates, 10% of salaried workers in Israel, some 180,000 men and women, are employed t the minimum wage by manpower companies.. They are denied the rights attained by the workers in this sector won over the years by the trade union movement over the years. 16% of all workers employed in the public sector are employed via manpower companies, and this figure rises to 33% for government workers (16).

To this sector of workers without rights must be added the migrant workers. Like the Palestinian workers, most receive less than the minimum wage, without benefits like overtime pay and annual vacations. It is estimated that some 300,000 foreign workers (with and without legal work permits) are employed in Israel, and they constitute some 16% of all wage earners. Thus, these two groups of exploited workers – manpower company employees and migrant workers – already make up about a quarter of  the workers in Israel, and in economic branches such as agriculture, construction, nursing, and security – they account for more than half.

The processes referred to above, along with the privatization of  of the huge Histadrut health fund (in 1995) – reduced the number of labor union members in Israel to one-third of all wage earners. Since most wage earners in Israel are employed in workplaces that are not organized, the main labor struggles, and strikes, take place  in the public sector (government ministries and public companies like  the Electric Corporation, local authorities, universities, etc.).  The government, in a cherist spirit, is acting to further limit the freedom of workers to organize and strike by means of legislation.

                          The price is double

The neoliberal policy dictated by the American government, the IMF and the World Bank was officially adopted at the end of the 1970s, and since then has been continued by all Israeli governments (Likud and Labor). It has been the workers and the poorer sectors of the population who have had to pay both the cost of the economic policy and the cost of continuing occupation and wars. Under these conditions, it is objectively impossible to separate the struggle for a just and stable peace based on the establishment of an independent Palestinian state alongside Israel on the June 4, 1967 borders, from the struggle against rightist economic policies and for the protection of social services, full employment, equality and social justice.

One of the difficult problems of the Israeli left is that, in practice, these two crucial struggles are usually conducted separately. In most cases, those who demand the dismantlement of the settlements and the withdrawal of the Israeli army from all the Palestinian territories, do not at the same time demand the dismantlement of the oligarchic and centralized rule of capital inIsrael– and the other way around. The Histadrut and the trade unions, which oppose government economic policy, do not take a stand against the occupation and its heavy socioeconomic cost; while the peace movement, which for years has struggled against the occupation and its crimes, does not mobilize for the social struggle.

The ethnocentric character of Israeli democracy, the institutionalized anti-Arab discrimination in all areas (budgets, housing, the establishment of new towns, education, infrastructure) and the systematic overall discrimination against Arab citizens who constitute 20% of Israel’s population – all these factors place obstacles in the way of building a joint Jewish-Arab struggle. Yet this is crucial for the success of any political and social campaign.

In  theoretical terms, the Israeli left has to cope both with the nationalist, racist  and social demagogy of the right, which preaches  for a ‘greater Israel’, and with the tradition of what the Labor party called ‘constructive socialism’  which preaches the upbuilding of the country by the labor movement in cooperation with capital.

                      Obstacles facing the Israeli left

At the outset of the twenty-first century, the ongoing occupation and the government’s economic policies have, both together and separately, reached a dead end. According to the public opinion polls, most Israelis support a withdrawal from the territories and oppose the government’s economic plan. It would thus appear that conditions are ripe for conducting a popular struggle for peace and social justice. However, in the sociopolitical reality of Israel today, opposition to the occupation and to the ever-widening social gaps has still to overcome the obstacles presented by nationalistic reactions to events, and the exploitation of Israel’s security problems. The hysteria of the ‘struggle against terrorism’ fanned by the Bush administration rides the same wave that holds aloft the Likud government and the Israeli right wing. With the aid of generals, academics, the mass media, economic ‘experts’ and political commentators, the government is still able to successfully persuade most of the public that ‘there is no partner for peace’, that ‘the struggle against terror’ has priority and that this demands ‘economic sacrifice’.

One of the most serious problems on the way to presenting an alternative social policy is the opportunistic position of the Histadrut leadership, which lacks any vision of fundamental social change. The majority of this leadership supports the privatization of government companies and social services, goes along with employment by non-organize manpower company employees, ignores the distress of migrant and Palestinian   workers, and accepts the government’s claim that workers must also contribute to reducing the budget deficit via wage cuts.

The political parties in Israel (except, in my opinion, for the Israeli Communist Party and Hadash) in the main support neoliberal policies. They are far removed from any kind of critical thinking vis-à-vis capitalism as a socio-economic system, and most reject even the moderate  Social- Democratic version of this criticism. As a result, even those parties in the opposition to the right-wing government and the settlers do not offer a comprehensive principled alternative to the government’s neoliberal conceptions.

Under these conditions, what is required is a campaign which combines the political and social struggles, and  which integrates the efforts of peace, social, and environmental organizations, youth and women’s movements, Jews and Arabs, under a common umbrella. This broad coalition must present the fundamental alternative: a democratic society aspiring to equality and social justice and living in peaceful co-existence with its neighbors.

                                         End notes

  1. Ze’ev Schiff and Ehud Ya’ari,‘Intifada’, Schoken Press,Jerusalemand Tel-Aviv, 1990.
  2. Shulamit Carmi and Henry Rosenfeld, “The political economy of the militarist nationalism inIsrael’ in “Israeli society: a critical look’ ed. Uri Ram, Brarot Press, Tel-Aviv, 1993.
  3. Zvi Sussman ‘Government policy in an economy in crisis: war, the high-tech crisis and world recession’ in ‘The allocation of resources to social services,2002’ed. Ya’akov Kof,  Center for the study of social policy in Israel, Jerusalem, 2002.
  4. Bank ofIsrael, ‘The economy and economic policy’, 2002.
  5. Ya’akov Lifshitz, ‘Economy during a low-grade war: a reevaluation of the dilemma “guns or butter”’ in ‘The allocation of resources…’ 2002.
  6. Efraim Davidi, ‘Globalization and economy in theMiddle East– a peace of markets or a peace of flags?’, Palestine-Israel Journal, vol/7. I & 2, 2000
  7. Tamar Gozansky, ‘Economic independence – how?’, Iyan Press, Tel-Aviv, 1968.
  8. Shlomo Frankel and Shimshon Bichler, ‘The nobility,Israel’s financial elite’, Kadim Press, Tel-Aviv, 1984.
  9. ‘The Histadrut, the workers’ economy 1960-1965’, The Institute for Economic and Sociall Research, Tel-Avov, 1967.

10. Esther Alexander, ‘The power of equality in the economy – the Israeli economy in the 1980s, the true picture’, Kibbutz Hameuchad Press, Tel-Aviv, 1990.

11. Ya’akov Reuveni, ‘The political economy of the Likud 1977-1984: a diagnostical examination’ Economic Quarterly no. 126, October 1985.

12. Shimshon Bichler and Yehonatan Nitzan, ‘From war profits to peace dividends’ Carmel Press, Jerusalem 2001

13. Dun and Broadstreet, ‘’Dun’s 100Israel’s llargest enterprises, 2002

14. Ari Shavit, ‘The citizens Moses and Fishman’. Ha’aret 18.2.02.

15. ‘Arnon Gafny and Zvi Sussman, ‘The democracy of welfare –for increased social involvement by the government in the market economy regime’ in ‘The allocation of Resources…’ 2000.

16.   Histadrut, industrial democracy and manpower section, May,2003  ‘Manpower companies, the present situation,