The Hidden Economic Logic of Oslo

The following paper is based on a document (in Arabic) presented at this year's May Day conference of the Workers Advice Center in Nazareth. In July, Hanitzotz Publishing House produced the document as a book (in Arabic) under the title: "The Palestinian Working Class Faces Globalization". The paper also formed the basis of a lecture given by Roni Ben Efrat to a conference of The Association of Women in The Mediterranean Region (AWMR) in Gallipoli between July 8 and 12. The theme of the conference was Women and Work.

PART ONE: Decades of Anomaly

It was Israel, not the PLO, that five years ago initiated the talks at Oslo. This fact seems to have escaped Palestinian leaders, who have behaved all along as if the Zionists do them a favor by deigning to negotiate. The fact remains, however, that after decades of refusal, Israel came to the table first. There must have been a reason. In past issues of Challenge we have emphasized that the Gulf War split the Arab world. The PLO, having supported Iraq, was cut off from the sources of its funding. After winning the elections of 1992, Yitzhak Rabin and Shimon Peres understood how weak Yasser Arafat had become. At last they could get the kind of accord they wanted: open-ended, in stages and with no guarantees from them on vital issues (settlements, land and water, the status of Jerusalem, Palestinian statehood, the return of refugees). Yet the PLO, from the outset, would give them the main thing they desired: by signing an agreement, it would break the long-standing taboo on Arab relations with the Jewish state.

Rabin and Peres understood: If Israel does not normalize its relations with the Arab world and globalize its economy, it will not keep up with the West. For the Likud, on the contrary, economic imperatives have never counted for much – not for Menachem Begin, who fueled inflation to nearly 400%, not for Yitzhak Shamir, who stalled at Madrid in 1991, thumbing his nose at $10 billion in American loan guarantees, and not for Benjamin Netanyahu, who is stalling today while the economy flounders. The Likud views Israel, it would seem, as an extension of the Allied landing at Normandy, with an indisputable claim to unending supplies from the rear.

This is not to imply that Israel's economic imperative, as understood by Labor, bodes well for the Palestinians or the Arab states. On the contrary. Where the First World borders the Third, "normalization" translates to domination, "globalization" to exploitation. That fact makes it crucial, however, to understand the depth of Israel's need. The ongoing conflict with the Arabs has warped its economy. We shall look first at the history of the distortions, then at the Oslo initiative as an attempt to correct them. The pre-state era: Early Zionist colonization required vast mobilization of resources in order to establish a Jewish economy in Palestine. Two organizations focused the effort: the Jewish National Fund (JNF), which bought land and closed it to the Arabs, and the Histadrut, an umbrella labor union, which created an exclusively Jewish labor market and took control of major enterprises. The Histadrut became a conglomerate "encompassing, at its height, agricultural, industrial, construction, marketing, transportation and financial concerns, as well as a whole network of social service organizations," including the main health fund. (1)

Statehood, stage one, 1948-1967: During the war of 1948, Israel expelled most of the Palestinians in the areas it took (at least 639,000 became refugees), seizing a hundred thousand homes and two million acres of arable land, more than four times the amount it had ante bellum. (2) At the same time it was taking in about 400,000 Jewish immigrants from Arab countries. These would come to be known as the Mizrahim (Easterners): Jews who were born, or whose parents were born, in Asia or Africa. Lacking local capital, Israel had to achieve a high degree of economic self-sufficiency. The government and the Histadrut, which brought in loans, grants and contributions from overseas, insisted on a major role in determining where the money went. The Histadrut ensured the hegemony of its political adjunct, Mapai (chief forebear of today's Labor Party), composed of veteran Ashkenazi "pioneers". (Ashkenazim may be defined analogously to the Mizrahim, except that their origins are in Europe or America.) The involvement of government in the economy was thus built in, giving rise to the mistaken notion that Labor Zionism was a form of Socialism.

Through the first decades it was an economy by transfusion. Israel got its capital from American contributions, mainly private but also governmental, as well as German reparations. It invested this in growth-related infrastructure: irrigation, electricity, railroads, ports, a shipping line, and mines in the Negev. By 1967 it was producing 85% of its food needs. In response to the demands of the new immigrants – and protected by import restrictions – industrial output quintupled. Local raw materials, (e.g. minerals, cotton, and citrus, provided the basis for exports. Another line of exports was based on skill, including electronics and precision instruments. Israeli firms also imported diamonds and furs, which they finished and sent out again. Between 1952 and 1965, the per capita GNP rose, on average, 6.3% annually, to $1135, ranking Israel midway among the world's thirty richest states. Thus the combination of unprecedented capital infusion from abroad and investment in infrastructure enabled the economy to "take off". Yet the "per capita" figure is misleading. In 1948, Israel had been a largely egalitarian society. By 1961, after the massive immigration of the Mizrahim, it was divided into classes: Ashkenazim on top, then Mizrahim, then Arabs. The bottom fifth of the population was earning 5% of the national income, while the top fifth got almost half. (Figures from Sachar – see Endnote 2 – pp. 528-32.)

The 150,000-200,000 Palestinians who remained within Israel's borders after 1948 had the smallest part in the "take-off". Considered a potential fifth-column, they were kept under military rule until 1966. Israel confiscated nearly 40% of their land: 75,000 acres (on top of the two million acres it had taken in the 1948 war). The kibbutzim and moshavim grabbed all they could handle. Much remained, however, and by 1954 some 5000 Arab families had persuaded the authorities to lease them 25,000 acres. The rest was turned into woodland. (The pines and cypresses were planted to keep the former owners from coming back, but they also proved a money-maker: "Plant a tree in Israel!") By 1967 the Arab population had doubled, while the proportion of Arab workers tilling the soil had dropped from 70% to 35%. (It would continue to decline, diving to below 10% in the eighties.) Since no industrial development was permitted in their villages, workers of the new Arab generation had to get military permits and seek menial jobs in the booming Jewish towns. (Figures from Sachar, pp. 387-88, 533.) By the end of this period, three flies had appeared in Israel's ointment because of the conflict. First, the Arab boycott isolated the new state, hindered the shipment of goods, and prevented commercial relations between Israeli firms and many foreign companies.

Second, the constant readiness for war proved inflationary. Apart from direct military expenses (which multiplied sixteen times over), reserve service lowered output, and much money went into non-productive border settlements. Third, the government subsidized foodstuffs, gasoline, and transportation and maintained the high standard of living despite low productivity. In fact, it was bribing the population to continue living in a state of conflict, to do reserve service (forty days per year), and above all not to emigrate (though hundreds of thousands did). (3) Because of these warps, by 1965 foreign currency reserves had dwindled and inflation was rising. Fearing that exports would be priced out of the world market, the government cut spending and restricted credit, prompting a recession. Unemployment rose, and GNP growth dropped to 1%.

Stage two, 1967-1973:

Israel's victory in 1967 established it as a regional super-power. Its viability was now proved beyond doubt, and the US began to view the "brave little democracy" both as a strategic asset in the Cold War and as a bulwark against Soviet-supported national-liberation movements (for example, Gamal Ab’d al Nasser's Egypt, the Ba’ath party in Syria, and the PLO). A regional arms race was on. Although military imports grew, new foreign currency reserves - largely the result of contributions and investments by Diaspora Jews - kept pace. After France imposed an arms embargo, the local weapons industry took off. On this basis, the country would eventually become a major supplier to repressive regimes and counterrevolutionary movements. Research and development in weapons would also provide the basis for the growth of high-tech, Israel's only long-term economic hope. Investments in infrastructure were now paying off. After Egypt’s President Nasser blocked the Suez canal, the Negev desert became a conduit for cargo from Eilat on the Red Sea to the Mediterranean. A pipeline carried Iranian oil along the same route. Tourism boomed. Immigrants poured in – almost half from Western countries. Financial contributions and investments seeded independent enterprises (independent, that is, of the Histadrut), out of which would emerge a new class of non-protectionist entrepreneurs.

In addition, Israel had conquered the West Bank and Gaza, which would soon become its single largest market after the United States. It flooded them with subsidized goods while imposing restrictions on Palestinian producers. By 1972 its "exports" to the Occupied Territories amounted to three times more than its imports from them. It forbade the development of industry there, while allowing Israeli entrepreneurs to subcontract orders in textiles, furniture, rubber and shoes to Palestinian workshops. (See Challenge # 50, "Special Report: Gaza.") Not only did Israel's boom wipe out its own unemployment, but as new jobs opened up in electronics, arms and transportation, the Jewish labor force was able to rise a notch, leaving room at the bottom for Arabs. First came the so-called "1948 Arabs," namely those with citizenship. They could get jobs in industries that were not security-related – for example, construction, hotels, tourism, and textiles. The last industry is a case in point. Major textile factories moved their main branches from the Tel Aviv area to Jewish cities in the north to be close to the pool of cheap Arab female labor. Before the land confiscations, most Arab women had been part of a family economic unit working the soil. With the loss of the land they were left in the lurch, because cultural restrictions kept them from accepting employment outside the family. It is considered acceptable, however, for a woman to work for a wage between school and marriage, supplementing family income. About 15% of Arab women do so, more than half in textiles. (4)

No factory went up in an Arab town. Either sweatshops arose, doing piecework, or middlemen bussed the young women to and from Jewish factories, taking fat cuts from their pay. In both cases, salaries remained below the minimum wage, and conditions were brutal. Barbara Svirsky has called this phenomenon "internal colonialism". The exploitation of young Arab women was permitted by a tacit agreement between the Histadrut and local entrepreneurs, who began to emerge as a major force in Arab society. At the bottom of the ladder, room opened for Palestinian workers from the Territories. Lacking a political initiative for ending the Occupation, Israel knew it would have to provide them with jobs or risk explosion. By making the Palestinians economically dependent, it could ensure tranquillity for a time. The gates swung open, and for twenty years the West Bank and Gaza served not only as Israel's Number Two export market, but also as its Number One market for cheap, commuting manual labor.

Amid these heady, boisterous times, warning signs appeared. Private consumption added to the overall excess of imports over exports. The deficit rose. All this time the Histadrut continued to act both as chief trade union and chief employer. The once-powerful organ was on its way to becoming a flaccid dinosaur. Its huge companies (such as Solel Boneh in construction, Koor in manufacturing, Klal in insurance, and Bank Hapoalim) could run at a loss and depend on the government to bail them out. At all levels and in a wide range of professions, its wards received tenure, many became unproductive or redundant, and per capita output fell. At the same time, the regime continued to subsidize basic goods and finance a generous welfare state. Inflation and deficit climbed in tandem. The victory of 1967 had merely put off the problems endemic to an unwieldy economy, under siege, dependent on constant foreign infusions.

Stage three, 1973-1977:

During and after the 1973 war, the Arab countries discovered the power of oil, bringing Western Europe to its knees and getting the African nations into line against the Zionist occupation of Arab land. The war had cost Israel $7 billion. Then the Gulf states re-armed Syria and Egypt. A year later Israel was putting $3.6 billion into the military: 33% of its GNP. (Two years later the proportion would be 47%.) World oil prices were rising (they increased twentyfold during the seventies). The country had to take huge loans and deepen its deficit. Inflation jumped to 40%. It would have been even higher, were it not for cheap Arab labor. By the mid-seventies, Arabs with Israeli citizenship, as well as West Bankers and Gazans, made up almost a quarter of the country's factory labor, half the construction workers, and half of those in service industries such as hotels, garages, and sanitation. (Figures in Sachar, 807.) After the debacle of the 1973 war, Prime Minister Golda Meir was forced to resign, and a new generation took over. PM Yitzhak Rabin initiated a period of austerity, raising taxes, cutting subsidies, and devaluing the currency. Such measures proved hard to maintain, however, after revelations of high-level corruption. In 1977 a financial scandal toppled Rabin and brought on new elections. By this time both the Arabs in Israel and the Mizrahim were disgusted with Labor. The Arabs, by our calculation, were stripped of all but 5% of their original land. In protest against the confiscations, many switched their allegiance from Labor Party "patrons" to the Communists. The Mizrahim, for their part, understood that Labor had closed ranks to keep them from moving upward. In order to improve their position, they would first have to get power. Menahem Begin promised them this, and in 1977 their votes brought him and the Likud to the top.

Stage Four, 1977-1987:

When the right-wing took over, most of Israel's budget was going into non-productive channels: the military, interest on the national debt, and social welfare. Almost 40% of the work force was employed in the government, 6% in agriculture, 24% in industry, and the rest in business, finance, transportation and tourism. The companies owned by the government or the Histadrut were bloated with make-work and redundancy. The country remained addicted to infusions from abroad. These weaknesses went so deep as to be almost structural. Although Egypt broke ranks with the rest of the Arab world in 1977 at Camp David, the Middle East arms race was not reversed. The Histadrut thwarted change in the structure of the workforce. The government tried to sell off some of its companies, but they were in such bad shape that it could only get rid of one, a mortgage bank. Nor could Begin cut deeply into food or gasoline subsidies, for this would hurt the Mizrahim who had put him in office. Instead, the regime extended the years of free education, diverted funds to religious institutions, subsidized public housing, lowered import fees, intensified the building of settlements in the West Bank and Gaza ($1.5 billion per year for seven years in public funds alone) and printed money. Then it went to war in Lebanon (about $5 billion) – and printed more money.

By 1984 the rate of annual inflation had settled into triple digits. The foreign debt had doubled to $23 billion. Fearing an end to international loans – with subsequent restrictions – people started selling bank shares (the banks had propped them up artificially for years) in order to buy dollars. The result was panic and collapse. Thousands lost their savings. The government stepped in – though too late for most – using $9.1 billion of taxpayers' money to buy controlling shares in the four largest banks. Foreign reserves dropped below the $3 billion red line.

The Turning Point:

The danger of utter chaos was so clear and present that, in the elections of 1983, Labor got its foot in the door. It formed a national unity government with the Likud, and Peres took the helm for two years. Together with Likud Finance Minister Yitzhak Moda'i, he managed to gain public acceptance for an Economic Stabilization Plan. This included a big budget cut, especially in subsidies for basic goods; a 19% devaluation; a temporary drop in real wages (the Histadrut complied); a time-limited price freeze (the manufacturers complied); monetary restraint and extremely high interest rates. The US chipped in $1.5 billion on top of the $3 billion it was already giving. Peres also pulled the army out of most of Lebanon, cutting military costs. He slowed the money drain to West Bank settlements. Inflation sank to 2% monthly, and the deficit dropped to a point where foreign aid could again close the gap. (5)

Peres also addressed the economy's deeper, quasi-structural weaknesses. The country had no future, he understood, if it remained an anomalous Western transplant rejected by its surroundings, stunted by the Arab boycott, and dependent on continuous foreign infusions. It was this understanding that would eventually lead him to Oslo. In the eighties, however, he looked toward Jordan. If Israel could reach an agreement with the Hashemite kingdom, by which the latter would return to the West Bank on a cooperative basis, then the Palestinian question could be diluted. The way would then open for an end to the Arab boycott and for Israel's acceptance into the area of its nearest, most natural markets. That was the long-term goal. In the meantime, the economy had to be made rational and efficient. A 1975 agreement with Europe's Common Market, providing for reciprocal tariff reductions, had already proved a bane, accounting for $15 billion in deficit. Yet Peres expanded the accord to include more products. He went on to forge a free-trade pact with the US. Clearly, Israel's industries would not be able to compete if worker output did not improve. His answer was to dismantle, prune and/or sell ("privatize") forty corporations belonging to the government and the Histadrut, including the huge industrial conglomerate, Koor, which was $1.3 billion in debt. Given tight, expensive money, firms had to rationalize. From 1985 till 1989, industrial output shot upward without increases in staff – instead, unemployment rose from 6-9%.

The only long-term hope lay in exports, and in the eighties that meant weapons. They accounted for a quarter of all overseas sales, keeping a quarter of the workforce in jobs. Satisfied customers included Taiwan, the Philippines, Indonesia, South Africa (Israel's partner in developing nuclear bombs), the junta in Guatemala, the Honduran dictatorship, El Salvador's army, Chile's Pinochet, and – through an Iranian link – the Contras in Nicaragua. Such "dirty work" often overlapped with US interests in places where Washington had to show clean hands. Thus Israel not only made money, but also fulfilled its role as America's strategic ally. Yet weapons could not be the answer forever. What then? Here was a tiny country with few natural resources in hostile surroundings, surely a recipe for failure – unless... unless it could specialize in a type of export that did not require such resources. And fortunately for little Israel, it happened to be perched on the edge of a new era, the "Information Revolution". Its people had a reputation for scientific and technical ingenuity. American giants like Mennen Medical, Control Data, and Motorola undertook joint ventures with private Israeli companies, supported by low-interest loans. By 1985 there were more than a hundred such projects, and seed money was becoming available for many more. Shimon Peres and his disciples saw high tech as the salvation of the Jewish State.

(The second and concluding part, "Israel Goes Global", will appear in the next issue of Challenge.) Endnotes: (1) Yoav Peled, "From Zionism to Capitalism," Middle East Report), May-June/July-August 1995, pp. 14-15. (2) Unless otherwise noted, all statistics cited in this report for the years until 1993 have been culled from Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our Time), New York: Alfred A. Knopf, 1996. (3) The threat of emigration has always played a major part in the framing of policy. In the past – Zionist mythology notwithstanding – the Jews were not forced) to leave the land. (Archaeology attests a significant Jewish presence well into the Middle Ages.) They left because of poor economic conditions. (4) Barbara Svirsky, Israeli Women on the Assembly Line,) Haifa: Brerot, 1987 (Hebrew), p. 77. (5) For the economic crisis of the early eighties, see Sachar, op. cit., pp. 934-36. See also Israel Yearbook & Almanac 1996,) Jerusalem, IBRT, 1996 (E-mail:, pp. 157-58. Henceforth cited as IYA (plus year).