It is now officially recognized that the Israeli economy is in the throes of a deepening recession. According to Israel Bank figures at the end of June 2001, the "combined index for examining the situation of the economy" suffered a sharp decline of 0.6 percent in June, and this is the eighth consecutive month of decline, amounting to an overall 3.5 percent decline in this period. This followed ten months (January-October 2000) in which a 6-percent increase in the index had been achieved. These figures indicate that, up to October 2000, the economy had enjoyed real growth, to be followed by months of real recession. What happened in September 2000 to exert such an influence on Israel's economic situation? The answer is, of course, the Intifada.
According to an estimate made in May 2001, damage to the Israeli economy caused by the Palestinian Intifada amounts to about 8.5 billion New Israeli Shekels (NIS), or over $2 billion. In reporting this to the press, Yosi Shostak, director of Israel's Chamber of Commerce, added that those branches particularly hit were tourism, construction and real estate, as well as exports to the Palestinian Authority (PA). Shostak knows what he is talking about, since he leads an organization representing the whole trade and services sector.
His estimates indicate that in the eight months since the Intifada broke out, tourism lost half of its income, about NIS 4 billion. The losses of the construction industry, which is suffering from a shortage of trained manpower (Palestinian workers), amount to NIS 3 billion, and NIS 1 billion has been lost in exports to the PA. Is NIS 1 billion a significant sum? It represents the half-yearly income of one of the largest food concerns in the country - Osem - a household name for most Israelis, whose products for home and foreign markets range from snacks, soups and canned goods to the vegetable schnitzel, which it makes in the Tiv'ol factory.

The 'Nasdaq Intifada'

Shostak considers that, as a result of the Intifada, the Israeli economy is suffering "significant damage." The Histadrut (labor movement) was silent on this subject, but according to data provided by the Ministry of Labor and Welfare, 85,000 people lost their jobs since the start of the Intifada; 45 percent of these worked in the tourist branch and in hi-tech-related branches.
Unemployed hi-tech people? One must add to the damage from the Intifada another no-less-important factor: the international crisis in the hi-tech branches of the economy, or the "Nasdaq crisis," as the Israel media calls it. Finance Minister Silvan Shalom told investors in New York, in May 2001, that Israel's economic problem "is more Nasdaq than Nablus." This crisis far exceeds the widely reported decline in shares of elite technological companies and nobody dares to estimate the damage suffered by the economy from the "Nasdaq Intifada." The total could be larger than that caused by the Palestinian Intifada.1
Koor, the giant concern once owned by the Histadrut (Labor movement), was privatized and is now owned by foreign investors and Israeli banks: its losses in the first quarter of 2001 came to nearly NIS 1 billion. Are these minor or major losses?2 Osem (also owned by local investors along with Nestlé, one of the biggest multinational firms in the world) has to sell its products for half a year in order to reach the losses incurred by Koor in three months.
Osem is a major company wholly involved in the "old economy" (food), but Koor is a different story. Under Histadrut ownership, it divided its activities between traditional branches and new ones such as electronics. Since 1977, it has been under the part-ownership of the Canadian Bronfman family (which made its money from the drink and food industries). The company changed course, moving from the "old" to the "new" economy. It sold "old economy" enterprises in order to concentrate on hi-tech. At first sight, there is nothing in common between the damage to the Israeli economy caused by the Nasdaq and by the Intifada. The decline of the computer industry in the world and the growing recession in the U.S.A. and Western Europe (not to speak of Japan) have no direct connection to the Palestinian struggle for independence. But the connection does exist, and this if only because Englist from the Goldman-Sachs Investment Bank says "an F16 plane in the skies of Gaza has economic significance."3

The Sewing Shop in Gaza, the Administration in Tel Aviv and the Owners in New York

The fall of the Nasdaq and the blows from the Intifada caused great harm to the strategy that Israeli business circles developed in the last decade in their efforts to integrate into the global economy. This is a tale that started in the days of the first Intifada, when Israel gradually lost its control over the occupied territories. It was then that voices started to be heard in the Industrialists' Union, which is the strongest organization of Israeli capitalists, calling for reaching an agreement with the Palestinians and not even negating the establishment of an independent Palestinian state, as long as the economic dependence upon Israel would be preserved.4
The paradigm of the new strategy can be summed up in these words: "establishing a sewing shop in Gaza (or in Tulkarem or in Amman), administering it from Tel Aviv, with the owners in New York." Of course, the product is not intended for the local Arab market or for Israel, but for the heartland countries of globalization - the U.S.A., Canada and Western Europe. On the Arab side, there were those who saw in this strategy "a way of enforcing Israeli economic control over the Middle East." However, this was not the intention. Israel cannot control the Middle East economically or even militarily. Last year's events proved that Israel is incapable of even maintaining military control over South Lebanon or over the Palestinian territories.
Israel, on the one hand, was to have integrated into the Middle East as a base for the activities of multinational companies, and, on the other, to open progressive industry mainly connected to three branches that have enormous development potential - computers, telecommunications and the Internet - all of which are interdependent, and all of which belong to multinational companies, mostly American.
At first sight this strategy proved itself. With the agreements signed with the Palestinians since 1993, gates were opened for foreign investment, the takeover of local companies by multinationals and the merging of local and foreign companies.5 The privatization process, which was one of the economic guidelines shared by all Israeli governments in the last two decades, contributed to the strategy.
Since the Oslo Accords, an impressive rise was recorded in the growth of the national product per capita in Israel. This stood at $5,500 in Israel in 1980, (as against $770 in Egypt, Jordan and Syria). In the European Community it was $9,300. In 1998, the figure "jumped" in Israel to $16,700 per capita and the prognosis was for $20,000 during the course of the year 2001. This can be compared to $1,300 in the aforementioned Arab states and $22,000 in Europe.6 However, one should not draw the conclusion from this considerable growth in the total production that its fruits were equally enjoyed by all the residents of Israel. The socioeconomic gap grew over the last two decades, and particularly in the last six years. The Israeli economy is notable for the increasing concentration of capital in a few hands. Some are of the opinion that this is an economy wholly run by 20 to 50 families and multinational companies. This concentration of capital finds expression in the salaries of the heads of the companies. In 1998, the average yearly salary of the directors of large companies on the Tel Aviv Stock Exchange amounted to $680,000. The comparative figure for England was $645,000, in Japan $420,000 and in Germany almost $400,000.7
Now it is believed that the combination of the Intifada, the fall of the Nasdaq, and the prolonged recession that began when the peace process ran out of steam, will lead to only a tiny or even negative growth in the gross national product (GNP). The Treasury even calls the present recession "the hardest since 1966" - 1966 was the toughest recession in Israel's economy since the establishment of the state in 1948. After the first eight months of the year 2000, which were described as "excellent" by economists, things got worse and worse, following the outbreak of the Intifada, the recession and the economic slowdown. From an annual growth rate of 6 percent, rising to 9 percent in the mid-1990s, the economy now finds itself after nine months of the Intifada with a growth rate in the last two years of between 1.7 and 2 percent. The economic departments of the major banks estimate that this year a growth rate of only 1 percent is to be expected, if not less. This means a negative per-capita growth of 1.5 percent.8

The 'Danger' of Palestinian Economic Independence

When the Intifada broke out at the end of September 2000, voices calling for "separation" between Israel and the Palestinian Authority made themselves heard in Israeli government circles. The term "separation" was never given real substance, and in the Israeli peace camp there was fear that it be transformed in reality into apartheid ("separation"' in Afrikaans). These fears were not only heard in the peace camp. Directors of large economic companies also expressed fears about being cut off from the Palestinian economy, and former minister of finance, Avraham Shohat, made every effort to prevent a Palestinian boycott of Israeli products.
The idea of a separation, which means a Palestinian economy separate from that of Israel, caused considerable nervousness among Israeli capitalists who had worked so hard to prevent this in the framework of peace agreements and economic agreements signed in recent years with the PLO. Arik Reichman, director of Tnuva, whose yearly exports to the PA are estimated at NIS 130 million, told Ma'ariv newspaper that "I can't estimate the damage [from economic separation], but it is very great."9 This was not only a question of sales. He added: "We are engaged in serious cooperative projects with the PA [like] plans to establish a joint milking station and joint distribution channels, all of which can be drastically affected." But the deepest fear of the Tnuva man was that of losing Israel's second-largest export market10 and the base from which one could reach the Arab world.

Dead End

The last Labor government tried to progress along the road that its leader, Ehud Barak, saw as "Rabin's way." The Palestinians have an entirely different version of the goal to which Rabin's way would lead: an independent Palestinian state. In this sense, there is now only "Arafat's way." The question is what is "Sharon's way"? In other words, apart from his use of force, so well known to so many Palestinians in the occupied territories, what is Sharon's longer-term strategy?
Until a few months ago, there was much talk of "separation." Now, many people in the Israeli government think that Israel's colonial war in the West Bank and the Gaza Strip will inevitably lead to the dissolution of the Palestinian Authority. Is this a reasonable political alternative? The answer is negative: Sharon's policies merely deepen the hostility of the Palestinians toward Israel and encourage their struggle for independence. It nevertheless seems that a not-inconsiderable part of Israeli public opinion supports Sharon's policies.
Immediately after his election, and before taking office, Sharon held a large number of meetings with industrialists, capitalists and bankers - in effect, with all the important figures in the 50 or so families who run the economy. It was there that he was to receive strong backing, along with a request to establish a government of national unity. This circle of 50 families, which so strongly supported a "new economy" and "a new Middle East," realized that they aren't so different from those of the "old economy" and that a "new Middle East" cannot be established without solving several basic problems of the "old Middle East," with the central problem being that of Palestinian nationalism.
However, since taking office, Sharon's policies have only served to deepen Israel's economic crisis, which is now beginning to be seen in the economic reports of banks and major economic companies. These show clear signs either of losses rather than profit, or of a significant decline in profits. Nehamia Strassler, the economic correspondent of the daily Ha'aretz, who reflects the thinking of Israel's economic elite, notes that "the problem is a long-term matter. If the violence continues for a prolonged period, and Israel once again will be viewed from outside as in a state of war, or as a pariah state which shells refugee camps, then the economic ramifications will be harsh. The risk involved [in investing] will rise, investments themselves will decline, future growth will be damaged and the present depression will deepen."11
However, the problem is not only future growth. The government must face up to the option of "guns or butter" and it unequivocally prefers guns. During the year 2001 (which isn't over yet), the government increased the budget for the military and the police by about NIS 2 billion. There is now talk of the need to mobilize a further NIS 3 billion for next year's security budget. Mobilizing actually means diverting budgets from non-military ones like welfare, health and education. It is estimated that, since the Intifada until today, 100,000 people will have been put out of work. All this is part of the cost of the Intifada - in human lives, in the economy, in unemployment, and in giving priority to military at the expense of social budgets. The Israeli economy, like the whole of Israeli society, is increasingly in need of a peaceful solution to its conflict with the Palestinians.

1. I am not dealing in this article with the recent economic situation in the Palestinian Authority areas. Many indicators show the gravity of the situation there, including growing unemployment and poverty, preventing investment and "strangling" the economy through closures.
2. Since the outbreak of the Intifada, 25 of the largest companies on the Tel Aviv Stock Exchange suffered cumulative losses of NIS 700 million in the first quarter of the year as against profits of NIS 3 billion in the parallel period last year (Yediot Aharonot, June 3, 2001).
3. Ha'aretz, May 27, 2001.
4. See my article "Globalization and Economy in the Middle East: A Peace of Markets, or a Peace of Flags?" Palestine-Israel Journal, Vol. VII, nos. 1 & 2, 2000.
5. Ha'aretz (February 22, 2000) asks whether Israelis buying the products of Osem and Strauss in their supermarkets are aware that over half the shares of the large Israeli companies are today owned by foreign investors.
6. Shlomo Sversky and Ettie Konor, The Social Picture (Tel Aviv: Adva Center, 2000).
7. Ibid.
8. Yediot Aharonot, May 30, 2001.
9. Ma'ariv Business Supplement, December 8, 2000.
10. Le Monde, May 10, 2001.
11. Ha'aretz, May 24, 2001.