It is clear that Israel is paying a heavy price for the 37 years of occupation of the Palestinian territories, one that is sorely felt in most households. The Palestinians are paying a much heavier one, but this does not make the Israeli price any less significant.
The Israelis are paying the price of arrogance that spread throughout the ranks of the Israeli leadership and population in the aftermath of the military victory in 1967. That victory awarded Israel unchallenged rule over the entire territory of Mandatory Palestine as well as the bulk of the Palestinian people. Israel neither found the wisdom nor the bigness of heart needed at the fateful hour to take advantage of the new circumstances to realize the political solution that the Zionist leadership itself had embraced only twenty years earlier: partition of the land between the two nations. Israel proceeded to sever the West Bank from Jordan and the Gaza Strip from Egypt, but instead of holding them as a safe deposit until a fair agreement was reached with the Palestinians, an agreement based on the recognition of the national rights of the two communities, Israel opted to attain long-term control and to annex large chunks of Palestinian territory.
For the first twenty years, the price of occupation was relatively low. But since the outbreak of the first intifada, in 1987, Israel has been paying the price of arrogance. The Palestinians cannot defeat the Israel Defense Forces (IDF) on the battlefield, but their very readiness to return to the battlefield, again and again, to express their desire for independent national life has, since 1987, become a constant threat to Israel's political and economic stability.

PART I: 1967-1987

The Palestinian territories occupied by Israel in 1967 are not rich in resources. For Israel's leadership and for many rank and file Israelis, the main attraction of those territories was not economic but rather political and ideological: the possibility of establishing a "greater Israel" that would encompass most of the territories of the biblical Jewish kingdom, marginalizing the local population.
Until 1987, the economic balance of the occupation was positive, as the new sovereign, Israel, spent very little on the military and economic maintenance of control, and made some very significant economic and financial gains.

Expenditures

A. Military expenditureswere low as Palestinian resistance, waged mostly from across the border by Palestinian groups in the early stages of organization, was largely ineffective. Control of the occupied territories was achieved by relatively few troops.

B. Government expenditures were also low, as the Israeli government was determined to maintain control at minimum cost, meaning, in effect, no investment in the economic development of the Palestinian territories. The budgets of the Israeli Civil Authority were largely covered by local taxes. Low government expenditures were balanced by the inflow of money from Palestinians working in Israel.

Gains

A. Captive Market for Israeli Products: As the occupied Palestinian territories were cut off from Jordan and Egypt, and as the Israeli occupation authorities discouraged any economic development that might result in competition to Israeli producers, the Palestinian territories became a captive market for Israeli products. In the 1980s, the territories accounted for 10 to 12 percent of all Israel's exports - second only to the United States market.

B. Profits of a Forced Customs Union: Israel controls all exit and entry points to the Palestinian territories and collects customs and other taxes, at Israeli rates, on all products destined for the Palestinian territories or emanating from them, thus creating, in effect, a forced customs union. Until the signing of the Oslo agreement, those taxes, which between 1970 and 1987 amounted to about $5 billion, were withheld by the Israeli treasury. After the establishment of the Palestinian Authority (PA) in 1994, taxes began to be transferred to it.

C. High Water Consumption: In 1967 Israel gained control over all the water resources west of the Jordan River. Mekorot, Israel's government water corporation, became the only non-municipal water supplier in the Palestinian territories, providing water for domestic, agricultural and industrial consumption to the Israeli settlements at Western levels, while restricting similar uses by Palestinians.

D. Palestinian Workers in Israel: Soon after the occupation, Israel allowed the entry of Palestinian workers into the Israeli labor market. By the late 1980s, about 100,000 Palestinians, accounting for more than one-third of all employed Palestinians, worked in Israel, especially in construction and agriculture. Their employers certainly profited from them, as their cost was lower than that of Israeli workers. The workers also gained, as their Israeli wages, low as they were compared to those of other Israelis, were higher than the wages of their neighbors who were employed in the Palestinian territories. The great losers were Israeli blue-collar workers, whose bargaining position vis-à-vis Israeli employers was weakened by the entry of low-cost competitors.
The Israeli treasury also gained from the employment of Palestinians: Israeli employers of Palestinian workers were required to deduct full Social Security taxes from their paychecks (and to add their own contributions); however, Palestinian workers were eligible for only a few of the Israeli Social Security programs (the main one being work injury insurance). That part of the deduction which was meant for the rest of the Social Security programs, to which Palestinians are not entitled, such as child allowance or old age insurance, were deposited with the Israeli treasury. According to one estimate, between 1968 and 1993, the total deduction amounted to $250 million.
Finally, the Histadrut, Israel Federation of Labor, also benefited from the employment of Palestinians, as employers were required to deduct 1 percent from their paychecks for union dues, which were transferred to the Histadrut - despite the fact that the Histadrut did not offer any protection to Palestinian workers.

The Single Israeli Investment in the Territories: The Settlements

The one big investment that Israel made in the Palestinian territories was the establishment of about 150 Jewish settlements, with a population of more than 200,000 (not including the population of Jewish neighborhoods built in areas that Israel unilaterally annexed to Jerusalem immediately after the 1967 war).
At first, the settlements were placed in strategic locations, such as the Jordan Valley. Later they were created throughout the Palestinian territories, with the aim of establishing de facto Israeli control over the area.

The settlements have no intrinsic economic value, and for all practical purposes they serve only as bedroom communities. When calculating the investment in them, we took into account the extra costs involved in establishing a settlement in the Palestinian territories, as opposed to housing their residents in existing localities inside Israel's pre-1967 borders. The extra costs are due to a need to fortify the settlements - as many of them were erected adjacent to Palestinian towns and villages that do not welcome them - and to the various benefits offered by the Israeli government to would-be settlers, with the aim of increasing the settler population.

According to an estimate made by Ha'aretz, the total government over-funding of the settlements between 1967 and 2003 amounted to 45 billion new Israeli shekels (NIS), or about $10 billion. The Adva Center calculated that between 1990 and 1999, the government gave the settlements per-capita municipal funding above that given to localities within the Green Line, amounting to $500 million. Israeli settlements also enjoyed generous government financing of the building of public facilities, of special access roads and roads that by-pass Palestinian villages, and of industrial zones, as well as generous financing of the operation of schools and health clinics, and finally, generous tax benefits.

All those government expenditures are soon to be doubled, following Prime Minister Ariel Sharon's disengagement plan from the Gaza Strip and the northern sector of the West Bank: each family of settlers to be re-settled inside Israel will be entitled to between $350,000 and $750,000. In addition, the Ministry of Defense is envisioning an expenditure of some $500 million for the relocation in Israel of IDF facilities presently located in the above areas. The Road Map envisions the relocation into Israel of many other Israeli settlements; the expected expenditures will certainly amount to several billion dollars, making the Israeli settlements in occupied Palestinian lands the most expensive civil-military adventure in Israeli history.

PART II: THE ERA OF PALESTINIAN UPRISINGS

The intifada that broke out in 1987 began exacting the price of arrogance. The sustained resistance of a good part of the local Palestinian population required the involvement of a large Israeli military force. In Israel, the conflict exacted many casualties, slowed economic growth and exacerbated internal political divisions. Eventually, the first intifada led to the Madrid Conference (1991) and later to the Oslo agreements, which established the PA. But that was not the happy end that some may have expected: the massacre of Palestinians by Baruch Goldstein in Hebron was followed by an endless string of suicide bombings within Israel by Islamist Palestinian military groups. At the same time, the number of Israeli settlers in the occupied territories nearly doubled. The second intifada broke out in September 2000. While the first intifada was a popular one, the second one was armed. The number of casualties on both sides was much greater than ever before. The economic slowdown worsened. The cost of arrogance became higher and higher, and it put the entire period of occupation, beginning in 1967, into a new perspective.
The price can be seen in four main areas: political stability, military costs, economic losses and social costs.

Political Stability

The position vis-à-vis the Palestinian territories has become the main dividing line in Israeli politics, pushing aside issues that account for the distinction between "left" and "right" in other countries. The issue of Palestine has stalemated Israeli politics, with neither camp being able to carry out its preferred solution, thus leading to inaction - or to the formation of "national unity governments," like the one that implemented the neo-liberal emergency stabilization program of 1985, and to carry out the disengagement from Gaza. Three prime ministers failed to have their budgets approved by the Knesset, due to opposition within the governing coalition to steps taken on the Palestinian issue, leading to new elections. And finally, there was the assassination of Prime Minister Yitzhak Rabin by a right-wing extremist who opposed the Oslo agreement.

Military Costs

With the outbreak of the first intifada, the costs of military occupation increased significantly. The IDF assigned two permanent divisions to the West Bank and the Gaza Strip. Almost every regular combat unit has served time in the Palestinian territories.
The full budgetary outlays are unknown, as the Israel defense budget is not made public. However, the yearly budget proposals do contain figures about special budgetary additions to the defense budget due to "events in the territories." From 1987 to 2005, those additions amounted to close to NIS 29 billion, or about $ 6.5. This figure does not take into account the regular costs incurred for controlling the occupied territories, such as the maintenance of the two divisions mentioned earlier.
To the costs incurred by the Ministry of Defense we should add those incurred by the Ministry of Internal Security. Ever since Palestinian organizations began attacking Israeli civilians within Israel's borders, the regular Police and the Border Police, both under the wings of the Ministry of Internal Security, have acted as integral components of the Israeli defense apparatus opposing Palestinian insurgents. From 1994 to 2005, the ministry's budget doubled.
Defense expenditures now include a special item - the construction of a security barrier, designed to stop Palestinian infiltrators and potential suicide bombers, between Israel and the Palestinian territories. The length of the Green Line separating the two is about 350 kilometers. Had the fence been built along the Green Line, its cost would have amounted to NIS 3.5 billion (about $800 million). However the Israeli government decided to include many Jewish settlements within the barrier, annexing large chunks of Palestinian territory and lengthening the barrier to almost 600 kilometers, doubling the budgetary cost.
Following a 2003 critical advisory ruling by the International Court of Justice in The Hague and critical rulings by the Israeli Supreme Court, the Ministry of Defense once again changed the route of the fence. This required new expenditures for re-planning and re-routing. So far the government has allocated NIS 3.5 billion to the construction of the fence.

Fatalities, Injuries, and Compensation

The most tragic cost of the Israeli occupation and the Palestinian uprising is the cost in human lives and injuries. From September 31, 1987, to November 15, 2004, Israel suffered 1,355 fatalities and 6,709 injured persons, both civilians and military personnel. The figures on the Palestinian side are 4,661 fatalities and 28,217 injuries.
The Israel Institute of Social Security pays indemnities to civilians killed or injured in hostile acts. In 2003, those payments amounted to NIS 350 million (about $80 million). The Israeli Ministry of Defense pays compensation for soldiers injured or killed, and these payments are much higher than those paid to civilians. The exact figure is not known, as the budget of the Ministry of Defense is secret. It is not unreasonable to assume that the total cost of payments amounts to at least NIS 1 billion ($230 million).
To this we should add the cost of compensation for property damaged by Palestinian attacks - buses, restaurants and other public facilities damaged by suicide bombers or by rockets fired from the Gaza Strip. According to one report, in the second intifada, indemnities for lost or damaged property in the Gaza area alone amounted to NIS 0.5 billion ($115).

Economic Losses

The economic losses in the first intifada, are difficult to isolate, since beginning in 1989 a large wave of Jewish immigrants from the former Soviet Union and from Ethiopia began arriving in Israel, affecting all aspects of the economy. The figures show that the growth in gross domestic product (GDP) decreased from 6.1 percent in 1987 to 3.6 percent in 1988 and to 1.4 percent in 1989, while growth in per-capita GDP dropped from 4.6 percent in 1987 to 1.9 percent in 1988 and to - 0.3 percent in 1989. Unemployment, which stood at 6.1 percent in 1987, rose to 8.9 percent in 1989.

The second intifada, which began in September of 2000, had much more damaging economic effects:

* GDP growth went from a high of 8.0 percent in 2000 (the high-tech bubble) to negative growth of -0.9 percent in 2001 and - 0.7 percent in 2002;
* GDP per-capita growth went from a high of 5.2 percent in 2000 to three consecutive years of negative growth: - 3.2 percent in 2001, - 2.7 percent in 2002, and - 0.5 percent in 2003;
* Estimates of GDP loss in the period 2000-2004 vary from $7 billion-$9 billion (International Monetary Fund) to $12 billion (Business Data Israel);
* Foreign Direct Investment dropped from a high of $ 5.3 billion in 2000 to $1.7 billion in 2002;
* Tourist entries decreased from a high of 2.7 million in 2000 to a low of 0.9 million in 2002;
* Unemployment rose from 8.9 percent in 2000 to 10.7 percent in 2003.
The economic depression had an adverse effect on government finances:
* Tax collection dropped from NIS 157 billion in 2000 (31.2 percent of GDP) to NIS 142 billion in 2003 (28.6 percent of GDP);
* The deficit rose from 2.4 percent of GDP in 1999 (and an exceptionally low 0.7 percent in 2000) to 5.7 percent in 2003;
* As a percent of GDP, Israeli government debt rose from 88 percent in 2000 to 104 percent in 2003.
In order to deal with the fiscal crisis, the government had recourse to two strategies: A series of eight consecutive budget cuts amounting to a total of some NIS 60 billion. Those budget cuts affected almost every area of government services.
* Israel asked the U.S. government for loan guarantees of $9 billion. Those guarantees enabled the government to cover its deficit withou having to increase the burden on the local capital market and without having to raise taxes locally. In fact, it allowed the government to do quite the opposite.
Amidst all the budget cuts, the government decided to implement a tax cut, designed primarily to prevent the alienation of well-to-do Israelis, especially members of the business class and the hi-tech scientists. This is the group that prior to the first intifada had served as the backbone of the IDF officer corps and its most prestigious fighting units. During the first intifada they experienced serious moral conflicts, and began looking for alternatives to service in the occupied territories in particular, and to military careers in general. That group was among the strongest supporters of the Oslo agreement. The tax cut was implemented together with a tax on capital gains. However, the tax cut was quite large, while the capital gains tax was low.
Thus, while the Treasury's losses from income tax breaks amount to NIS 12.9 billion (2003-2005), the income from capital gains tax is estimated at NIS 0.7 billion.

Social Costs

The budget cuts implemented during the second intifada have adversely affected Israeli society in a number of ways. Their cumulative effect can probably be compared to the structural changes introduced into Eastern European countries in the aftermath of the collapse of the Soviet Union, or to the structural changes imposed by international financial institutions on countries following severe financial crises.

The irony is that most of these cuts were not absolutely necessary. Israel has sufficient financial resources that could have been tapped to cover the costs of the intifada. In addition, Israel was able to obtain loan guarantees that were sufficient to cover the budget deficits. The cuts reflected a neo-liberal agenda favored by many in the Israeli elite, cutting across both major political parties as well as a few smaller parties representing the upper middle class. In this sense, the intifada may be regarded as an opportunity that presented itself for the implementation of a plan long in waiting, to downsize the government, cut the budget, lower taxes, privatize government corporations, lower the cost of labor and free capital to invest and expand, with the notion that, eventually, the fruits of economic growth would trickle down to the population at large.The budget cuts affected mainly the following areas:
A Regression in the Social Services: Some of Israel's most strategic social services have been severely hit by the budget cuts.
* Israel's public health system has lost funding. Consequently the Health Maintenance Organizations (HMOs) are increasingly relying on out-of-pocket payments, thus creating a dividing line between haves and have-nots, and corroding support for the public health system as a whole, especially among the haves.

* The funding of teaching hours in elementary and secondary education has been severely cut, adversely affecting schools in Arab and Jewish working- class towns and neighborhoods.
* Higher education has experienced three major budget cuts, resulting in sharp reductions in funding for research, teaching and facilities such as libraries
* Research and development funds have been severely cut, affecting government programs designed to aid nascent hi-tech industries.
* Housing aid has been severely reduced, making home ownership more and more difficult.
* Government support of municipal budgets has been severely curtailed, affecting especially those municipalities that do not enjoy a strong tax base, such as Arab municipalities and Jewish development towns.
The Dilution of the Social Safety Net: Israel has a good social safety net, wider than that in the United States, and resembling safety nets in Western European countries. Its programs cover old age pensions, survivors' benefits, long-term care, general disability, income support, child allowances, paid maternity leave, work injury, accident injury, and unemployment. The main drawback has been the low level of benefits, compared to those offered by Western European safety nets.

The budget cuts brought about a severe dilution of the safety net programs, in two main ways:
* All benefits have been cut, in varying amounts. Income support was cut by 30 percent on average. Israelis who received a significant portion of their income from the safety net have experienced a serious drop in income.
* All benefits that are linked to the average wage have been frozen until 2006; then they will be linked to the cost of living index rather than the average wage. Historically, the average wage has risen more than the Cost of Living Index, thus, most benefits are sure to erode. According to the National Insurance Institute, basic old age pensions, set at 16 percent of the average wage, will erode to 11 percent of the average wage by 2020.
A Radical Transformation of the Workplace Pension Scheme: Israel's workplace pension was run by the Histadrut, and was financed by designated government bonds at a reasonable interest rate. The government had been looking for ways to withdraw its commitment to keep workers' pensions at a steady level, in favor of directing pension funds instead to the stock market. For years it claimed that the Histadrut pension funds were running up a huge actuarial deficit, a fact that was easily disputed by specialists. In 2003, under the cover of emergency measures required by the Intifada, the government made its move: it nationalized some of the Histadrut pension funds, and then sold them to commercial insurance companies. To make the funds attractive for buyers, the government doubled handling costs. Finally, the interest rate offered on bonds bought by pension funds was lowered. The bottom line is that retired workers now receive smaller pensions, and future retirees no longer know what kind of pension awaits them upon retirement.

b>Social Consequences

The most outstanding result of the economic recession caused by the intifada, combined with the fiscal policy pursued by the Israeli government, has been the increase in poverty. The proportion of Israelis under the poverty line - defined as 50 percent of the median salary - grew from 17.6 percent in 2000 to 19.2 percent in 2003. The depth of poverty increased too: in 2000, Israeli poor had on average an income that was 25.6 percent below the poverty line; in 2003 the equivalent figure stood at 30.3 percent. The most tangible outcome has been the mushrooming of soup kitchens and of "hand-out" societies, previously unknown in Israel except in the Orthodox Jewish communities.

Closing Remarks

The second intifada has hurt Israel deeply - the cessation of economic growth, lowering the standard of living, debilitating its social services, diluting its safety net and increasing the extent and depth of poverty.

Israel comes out of the present intifada a more divided and less cohesive society. Israel has lost the founding vision of a society striving to bring many disparate groups into the mainstream. There is less confidence nowadays that the next generation will enjoy the same level of education as the present one. And many Israelis find themselves now dependent on the good will of communal philanthropy.
Even if it leads to a full-fledged Palestinian state, disengagement will not be the end of the story: while many Israeli politicians promote the vision of a total separation, emphasized by the barrier, it is quite clear that as the strongest and the richest of the Jordan-Palestine-Israel trio, Israel will continue to carry a substantial part of the responsibility for the economic well-being of the Palestinians. The arrogance stemming from the 1967 military victory carries with it a long-term price tag. If Israel desires long-term peace and stability, it will have to begin doing what it refrained from doing up to now: helping the Palestinians to create a viable economy.