What is the economic message to be gleaned from the crushing victory of the right-wing challenger, Ariel Sharon, over the incumbent prime minister, Ehud Barak, in Tuesday’s election in Israel?
If one were to judge by the 25 percentage-point spread that separated the two men in the final tally, one would assume a massive rejection of Barak’s economic program. But the fact is that, with Israel’s relationship with the Palestinians dominating the public debate in the weeks leading up to polling day, economic issues hardly featured at all in the two-month election campaign.
Indeed, Sharon’s entire campaign strategy was to avoid controversy and make as few mistakes as possible. Against that backdrop, no bold messages were provided about any prospective changes in economic direction, leaving most in Israel’s business community believing that, from an economic perspective at least, few dramatic developments are in the offing.
In a traditional sense, the terms “left” and “right” in Israeli terms are misnomers. “Left” in local lingo refers to one who is more ready to make political compromises with the Arabs. “Right” refers to individuals who take a more hard-line approach, especially when it comes to territorial issues.
Consequently, the fact that Barak espoused some of the most conservative economic policy in Israel’s history did little to weaken his “leftist” credentials. On the other hand, Sharon, who many consider to be Israel’s most right-wing leader ever, has in the economic posts that he previously held taken a heavy-handed centralist approach, frequently over-running his ministerial budgets by implementing expensive government spending programs.
Such was the case in the early 1990s, when as housing minister faced with massive immigration from the former Soviet Union, he provided guarantees to thousands of residential construction projects in outlying regions. Most of the immigrants declined to move to these areas, and the government was forced to pick up the tab. Many of the buildings that were built then still stand empty.
The economy that the new Israeli government will inherit appears to be slipping into a recession. This is in spite of the fact that the year just past was actually one of the most successful in Israel’s history. According to the state-run Central Bureau of Statistics the real gross domestic product rose by 5.9 percent in 2000, compared 2.3 percent growth in 1999 and 2.4 percent growth in 1998. Industrial production—excluding that of the diamond industry—increased by 10.3 percent in 2000, compared to 1.2 percent in 1999 and 4.1 percent in 1998.
Production in the commerce and services sector rose by between 10 percent and 12 percent respectively, compared to between 5 percent and 8 percent in 1999. Israel's trade deficit receded by 9 percent in 2000 to $7.4 billion, as exports—excluding diamonds—grew by 26 percent to stand at $21.46 billion and imports rose by 15 percent to $28.86 billion. About one-third of the growth in imports could be attributed to the rise in world oil prices.
But the year 2000 was one with two distinct halves—the first part running from January through September and the second part comprising the final quarter of the year. Two events dominated the final three months of 2000. One was the dramatic drop in prices on New York’s NASDAQ market, where the shares of many of Israel’s leading high-tech companies are listed. The second was the outbreak of violence in the Palestinian territories.
Shortly before the start of the Palestinian unrest last September, Israel’s ministry of finance issued a forecast for economic developments in 2001, which predicted a growth rate of five percent. The ministry said its prediction fell below the figures expected for 2000, because certain sectors that had reported especially steep growth rates in 2000 could not reasonably be expected to repeat their performance in 2001. One of these was the tourism sector, which had reported double-digit growth because of the millennium year.
After the start of Intifadat Al-Aqsa, the finance ministry adjusted its 2001 growth forecast downward to four percent, saying that the unrest would cost the Israeli economy about one billion dollars over the entire the year, or about one percent of GDP. Most of the burden, it said, would rest on the shoulder of those sectors that are reliant on Palestinian labor, or on trade with the Palestinians.
But most economists today believe that economic growth in 2001 will be even lower. Morgan Stanley Dean Witter, the US-based investment house, recently released a report suggesting GDP would grow by three percent in 2001—about half its rate in 2000. However, the report said, because the economic fundamentals of the Israeli economy are sound, an upturn will occur in 2002, with GDP rising at a rate of 4.5 percent.
Israel’s high-tech sector, which in recent years has come to account for 20 percent of Israeli GDP, is only marginally affected by the Palestinian uprising, and then only indirectly. But it has seen its fortunes wane in recent months, mainly as a result of the crash of high-tech shares in the United States and the general reality check that took place across the industry.
The high-tech sector is not about to disappear—indeed, just this past week the Intel corporation announced that it will be setting up another $3.5 billion chip-making plant in the south of the country—but it is likely to generate income now based on performance rather than according perceived value. It is an economic reality that Sharon’s government will be forced to cope with.
To a large degree, the economic program of the new Israeli government will depend on the type of coalition that Sharon will be able to muster. In the event that it is a broad-based national union government, of which Barak’s Labor Party is part, there is likely to be little change in the approach that was taken by the previous administration. It is even conceivable that the next minister of finance could come from Labor’s ranks.
But if Sharon is forced to create a narrow-based, inherently less stable, right-wing government, he will be more subject to sectarian demands from the smaller parties making up the coalition—among whom are representatives of Jewish settlers in the West Bank and Gaza. Furthermore, a narrow right wing government could result in an intensification of the violence in the area, and that could have expensive economic consequences.
But, say commentators, a vehemently right-wing government is likely to run into trouble, and then Sharon could see his coalition disintegrating, as did Barak before him. This could come as soon as the end of March, when Israeli law demands that a budget be passed. If that occurs, Israelis may be going back to the polls considerably sooner that they expected. — (Albawaba-MEBG)
© 2001 Mena Report (www.menareport.com)
