Palestinian defiance having an enormous impact on the economy of the zionist state

Empowering Weak & Oppressed

Abul Fadl

Dhu al-Hijjah 16, 1422 2002-03-01

Special Reports

by Abul Fadl (Special Reports, Crescent International Vol. 31, No. 1, Dhu al-Hijjah, 1422)

Almost eighteen months after the launching of the second Palestinian intifada in September 2000, many observers continue to argue that it is achieving nothing, and that a return to the ‘peace process’ is inevitable. In fact the intifada is causing massive damage to the Israeli economy. Khalil Osman reports.

It’s official. The second Palestinian intifada has plunged the Israeli economy into its worst recession since the zionist state was established in 1948. Available figures paint an increasingly gloomy economic scenario, with no improvement in prospect. The intifada has cost the Israeli economy more than $3.2 billion in lost output, attributed mainly to the staggering drop in tourism revenues. Data released by Israel’s Central Bureau of Statistics on February 18 confirm that gross domestic product (GDP) fell by an annualized rate of 0.5 percent for 2001, the worst figure since 1953 (when the GDP contracted by 1.4 percent) and unemployment rose to an unprecedented 10.2 percent of the workforce in January. Business output and private consumption in the second half of 2001 dropped at the annualized rates of 6.9 percent and 1.6 percent respectively, compared to the first half.

A closer scrutiny of the data indicates that the rate of economic contraction increased during the year. The GDP fell by an annualized rate of 4.7 percent in the second half of 2001, the highest ever half-yearly drop, compared with a drop of 2.8 percent in the first six months of the year. Indeed, the fourth quarter witnessed the lowest point, when Israel’s GDP nose-dived by an annualized rate of 7.2 percent, following a 4 percent drop in the third quarter, a 3.5 percent drop in the second and a 1.3 percent rise in the first; Israel’s GDP had registered a rise at an annualized rate of 6.4 percent in 2000. Per capita figures show another serious aspect of the GDP’s vertiginous dive. GDP per capita dropped by an annualized rate of 9.5 percent in the fourth quarter and 7 percent in all of 2001.

Industrial indicators are just as bleak. Industrial production is expected to contract by 2.5 percent this year, whereas investments in the industrial sector are projected to decline by 7 percent. A Bank of Israel survey of 670 companies in January showed declining orders both domestically and internationally, an indicator that points to the persistence of hampered activity for most local companies. Nor is contraction of output the only problem besetting Israeli companies. Industrial firms have also reported a decline in their workforce and a further decline in inventories.

In fact the deepening recession has pushed overall unemployment to an unprecedented level in the last quarter of 2001, with 258,600 workers out of employment. That means one of each 4.3 working-age Israelis, those over 15 years old, were jobless: 23.3 percent of the adult population. Joblessness not only deepened but also spread; in January there were 24 townships where unemployment was more than 10 percent, compared to 15 in 2001. The increase is not because Israelis refuse to take jobs offered to them, but because of lay-offs and the decline in the number of vacancies available. The Israeli Manufacturers Association estimates that the industrial sector has lost 19,300 jobs since 2000, and is expecting a further contraction. Industrial exports are forecast to drop by 1.5 percent in 2002.

There are signs that the lay-offs and unemployment could pose a threat to social peace and stability. Workers at the Bagir textile plant in southern Israel staged a strike in early February, barricading themselves inside the plant, setting bonfires and threatening suicide over a rumour that more than half of the plant’s 1,080-strong workforce were about to be laid off.

The link between Israel’s current economic crisis and the intifada becomes evident when one compares the present gloomy economic outlook with the dizzying optimism and economic boom that prevailed after the signing of the Oslo accords in 1993. The Oslo accords led to a period of unprecedented economic growth in Israel. The prospect of peace helped Israel to attract colossal amounts of foreign investment. Unemployment dropped from 11 percent to an impressive low of 6.5 percent, at a time when immigration from the former Soviet Union was in full swing and 200,000 foreign workers were attracted to the country.

Yet nothing demonstrates the link between the intifada and the Israeli economic downturn better than the tourism statistics. Israel’s hotels faced their toughest year ever in 2001, even in tourist sales in relatively safe regional resorts such as Eilat and the Dead Sea. Overall, tourism has fallen by over 50 percent since the intifada started, according to the Israeli Hotel Association. In October the hotel industry posted a decline of 66 percent in its occupancy rate, compared with October 2000, and 81 percent compared to October 1999. The Bank of Israel said that almost all hotel and hospitality companies responding to its survey were expecting further declines in the future.

The details of this precipitous decline in the tourism industry, which started soon after the outbreak of the intifada, are noteworthy. There has been a 60 percent drop in hotel occupancy by tourists from abroad. Tourists from North America and Europe have always been the Israeli hotel industry’s traditional customers. What is left of the occupancy rate nowadays is made up mostly of Israelis, particularly on the weekends. In fact, there was a 14 percent surge in occupancy by Israelis. The current total of 3.8 million tourist overnight stays at Israeli hotels is the lowest in more than 30 years. Only in 1970 was there a lower tourist occupancy (3.4 million), but the number of Israeli hotel rooms available then (15,000) was less than one third of their current number (46,000). The crisis in the hotel industry has prompted many hotels to look to the government for help. The finance ministry has promised hoteliers subsidies and discounts on property taxes and other fees. However, hotel managers believe that these measures are not enough to keep them in business (The Jerusalem Post, January 1, 2002).

Global trends have compounded the damage to the Israeli economy caused by the intifada. The economic recession affecting Israel’s key export destinations, viz. Europe, Japan and the United States, is another sign of further impending bad news for Israeli industry. Exports of Israeli-made telecommunications equipment fell by 18 percent in 2001, while exports of electronic components and manufacturing equipment dropped by 20 percent and 10 percent respectively. Repercussions of the bursting of the hi-tech start-up bubble and the simultaneous plunge of its patron NASDAQ market two years ago, which were aggravated by the attacks of September 11, have reverberated throughout the once high-flying Israeli hi-tech sector. Israel’s Union of Electronics and Information Industries revealed early this year that between 500 and 600 start-ups, or some 20 percent of the total number of Israeli hi-tech start-ups, went out of business in 2001. The organization added that large- and medium-sized hi-tech companies have also moved to lay off some 5,000 workers. Total hi-tech sales, domestic and foreign, dropped 18 percent, to $14.25 billion in 2001 from the previous year, with electronics exports falling 20 percent, to $11 billion, the sector’s first-ever drop in 20 years.

Even Israeli hi-tech start-ups that have so far managed to stay afloat have been registering decreased revenues. For instance, Internet telephony transmission systems developer AudioCodes in January announced results showing a 50 percent decline in revenue for 2001: $35.7 million, compared to $71.8 million in 2000. The company netted a loss of $13.3 million in 2001, compared with a net profit of $26.7 million the year before.

Worse still, while the economy has shrunk, the government has been diverting more funds to the military establishment, resulting in a progressively more alarming budget deficit. Israel’s budget deficit this year is expected to continue at last year’s rate of 4.5 percent of GDP, or some 21 billion shekels. This year’s budget has virtually no reserve funds. The Israeli finance ministry usually has about 1.5 billion shekels available at the beginning of each year. But this year’s reserve has already been diverted to other purposes. Channelling funds to the military under current conditions further undermines the health of the economy: it creates a sense that the government is not willing to invest sufficiently in infrastructure. It deals an especially severe blow to Israel’s international credit rating, foreign investment and consumer confidence.

Because of the reluctance of prime minister Ariel Sharon to raise taxes, a recovery in state tax revenue does not seem likely. At a hearing of the Knesset Finance Committee in early February, Ohad Marani, director general of the finance ministry, raised the prospect of further budget cuts, saying: “We will follow the developments, and if necessary we will make another decision about budget cuts.” But even if the government decides to raise taxes, which is not likely, the low growth rate will mean that there will be no new revenues to tax.

The deepening recession is likely to further shake the Israelis’ already weakening confidence in the government’s economic policies. A poll in early February showed that 79 percent of Israelis are dissatisfied with the way Sharon is steering the ship of government policy through the dire economic straits. The sickly state of the economy has also prompted Israeli leaders to discuss ways to get a larger injection of American aid. Sharon discussed Israel’s waning economic fortunes and the possibility of further aid with US president George W Bush during his recent trip to Washington. But the sharp economic slowdown in the US probably puts paid to Sharon’s fragile hopes of a tranche of American aid large enough to pump life into the Israeli economy.

There are no visible signs of an imminent rebound. The Bank of Israel has cut interest rates to an all-time low of 3.8 percent, down from 8 percent at the beginning of 2001, to persuade Israelis to take their savings out of the banks and put them into the economy. But lower interest rates are likely to cause further depreciation in the shekel, which has already lost 10 percent of its value against the dollar since September 2001, feeding expectations of an inflationary spiral that in turn would tend to make investments in the shekel less attractive. In theory low rates, which encourage borrowing, tend to fuel consumption in markets such as real estate, mortgages and automobiles. But the intifada makes a recovery in these markets an ever more distant possibility. They will recover only when there are foreign investors willing to invest and Israelis eager to spend and borrow money to buy apartments or new cars. But investors are becoming increasingly nervous about investing in Israel, thus making it more difficult for Israeli companies to raise venture capital.

More ominously, Israelis of European origin, who renounced their former citizenships, and their descendants, have recently been moving to regain or obtain the citizenships of their countries of origin. The heightening sense of political uncertainty and increasing economic insecurity are prompting many to seek immigrant visas to countries such as Australia and New Zealand. So, as the idea of leaving gains ground, the prospect of more Israelis putting their savings into the promised Zionist ‘paradise’ will inevitably grow bleaker.

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