The Hidden Economic Logic of Oslo - Part 2

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. This is the second and final part. PART ONE began with the question, Why was it Israel, and not the PLO, that five years ago initiated the talks at Oslo? Israel, we suggested, found itself under an economic imperative: if it did not normalize its relations with the Arab world and globalize its economy, it would not keep up with the West. Surveying the history of that economy till 1987, we found three major weaknesses: (1) most of the national budget was going into non-productive channels, especially the military; (2) the employment structure was heavily tilted toward public services; (3) the country was addicted to huge infusions of capital from abroad. When Shimon Peres took over as the Prime Minister of a national unity government in 1983, at a time of 400% inflation, he instituted a Stabilization Plan. Peres understood that the country had no future as long as it remained an anomalous Western transplant rejected by its surroundings, stunted by the Arab boycott, and dependent on foreign money. It was this understanding that would eventually lead him to Oslo. In the eighties, however, he looked toward an arrangement with Jordan.


Israel Goes Global
Stage Five: 1987 - 1996

IN THE SPRING of 1987, Shimon Peres got his long-sought agreement with King Hussein. Jordan was to return to the West Bank on a cooperative basis, thus diluting the Palestinian question and opening the way for an end to the Arab boycott. By this time, however, rotation had occurred within Israel's national unity government. Yitzhak Shamir was now the prime minister, and he refused to cede an inch to Jordan. Six months later the Palestinians of the West Bank and Gaza revolted. Out of the many effects of the intifada, we may single out, for our purposes, three. First, King Hussein bowed to the PLO and made a public announcement, formally separating his kingdom from the West Bank. The bottom dropped out of the "Jordanian option". If Israel was to end the Arab boycott, it would have to find another route.

Second, since 1967 Israel had been able to compensate somewhat for its isolation, because the West Bank and Gaza had provided it with a captive market for its products, as well as cheap labor. In addition, the open bridges to Jordan had served as a back door for circumventing, in part, the boycott. The intifada signaled an end to this comfortable situation. The Palestinians themselves boycotted Israeli products. Massive strikes, involving more than 60,000 laborers, paralyzed Israeli construction and agriculture, as well as factories and workshops. The country lost $650 million in exports during the first year of the intifada alone.(1) Third, the uprising revealed the occupation in its ugliness and brutality, not only to the rest of the world but also to Israelis themselves. Israel found itself isolated and divided internally. Around this time (1988 - 1990), the Soviet Union came apart. A huge new wave of Jewish immigration began to unfurl. This boded well for the Zionist state – it could put off the demographic showdown with the Arabs – provided the country could absorb the newcomers. That would require, however, another infusion. (Labor, by this time, had left the government.) Shamir asked the US for $10 billion in the form of loan guarantees, which would enable Israel to borrow money at an interest rate connected to the American credit rating, not its own. US President George Bush conditioned approval on a settlement freeze. When Shamir refused, Bush held back.

He was still holding back after the Gulf War. The US, at last, seemed in sole charge of the world. Its Secretary of State James Baker saw a "window of opportunity" for solving the Israeli-Arab conflict, which always threatened to interrupt, once again, the smooth flow of oil to the West. (Baker's "window" amounted to a scheme for ending at last the Arab peoples' aspirations for independent development, and in particular the Palestinian aspirations for statehood.) The PLO was on the skids, the Arab world, divided. As for Israel, the Soviet immigrants were still pouring in (200,000 in 1990 alone), and the country needed those loan guarantees. The US convened the Madrid Conference and forced Shamir to sit down with the Arabs at last, even non-PLO Palestinians. Shamir agreed, just as he had earlier acceded to the US request not to respond to Iraqi missiles. His plan, however, was to drag the talks out for ten years, meanwhile settling half a million Jews in the West Bank. Yet the tactic failed. His coalition allies on the extreme right feared another Camp David; they left the coalition, and he had to call early elections. During the ensuing election campaign (1992), the right wing was divided and perplexed. Labor won by a narrow margin.

Faced with the choice, the Likud's "Greater Israel" or the loan guarantees, Israeli voters opted for the lifeline to Washington. The tail, for a change, had not wagged the dog. The whole affair was a reminder of how fragile and dependent the economy remained. The Peres Stabilization Plan had by this time succeeded in several respects. The sale of state-owned enterprises (privatization) was making strides. Investment has shifted toward small, independent high-tech companies on the cutting edge. By 1990 almost 60% of industrial-export value derived from computer software, medical equipment, solar energy, irrigation technology, and agrochemical products. The Gross Domestic Product began rising about 6% each year, reaching $74 billion in 1994. The military burden had been trimmed to 10% of the GDP.(2) Yet the end of the Cold War brought crisis to the military industry: in the seventies Israel had employed 14,000 workers in 36 army- related factories; by 1995 the number had shrunk to 5,000 in seven plants (See Challenge # 33 "Israel's Economy Marches Out to Conquer the World.") The public sector remained bloated, deficits grew, and inflation continued in double digits.

The Western economies, meanwhile, had all gone global. As an isolated outpost in the Middle East, the Jewish state seemed in danger of becoming a liability, or worse, merely superfluous. The economic imperative was therefore plainer than ever. Unless it solved its conflict with the Arabs over what were, on a global scale, a few plots of land in the remote West Bank, the capitalist economy of the American-run Global Village would remain shut to Israeli high-tech. In Head to Head, a book that preceded the Oslo agreement by just a few months, American economist Lester Thurow charted the path Israel ought to take: "Those not producing oil in the region should be making goods and services for those who sell oil. Israel should bring technology, middle-waged industries and organizational abilities to the table. But none of that can happen unless and until the political and military disputes between Israel and the Arab world are settled". (3) Above all, the Arab boycott would have to end. Likewise, Israel would need access to its economic hinterland. The Territories would have to become reliable again. Beyond them lay countries like India and China as potential markets for Israeli technology and arms, only awaiting a green light from the Arabs. The alternative to some kind of treaty, however, was stunted growth. With its nuclear bombs, an isolated Jewish state could hold on, no doubt – as the backwater of a globalized West, dependent on the kindness of strangers. It could hold on, that is, as long as it could pump up the standard of living in order to bribe its people to stay. If the pump went dry, what then? This is the vision that brought Israel first to the table at Oslo.

The PLO did not comprehend the economic imperative behind Israel's journey. It perceived the Zionist state as a giant, mighty and invulnerable. It gave Rabin and Peres all they wanted, receiving what they no longer had use for – with no promises down the road. By 1994, six Gulf states, including Saudia Arabia, announced that they would no longer penalize companies that did business with the Zionist state. The peace treaty with Jordan was signed in October. A few days later, at the Casablanca economic conference, a huge Israeli delegation met with representatives from fifteen Arab lands. The boycott seemed a thing of the past. Multinationals such as Bayer, Volkswagen, Tissan, and Simmens appointed Israeli representatives. Foreign investment and tourism shot up. The basis was laid for opening factories in Egypt and Jordan. Israel began to reclaim the economic role that the land had possessed in earlier epochs: that of a bridge joining Africa, Asia, and Europe.

We shall not enter here into the factors that brought the Likud back to power in 1996. (See, for example, Challenge # 47, p. 14). When Netanyahu came to power, he knew he would have to abide by the Oslo accords, but he was determined to lower the level of Palestinian expectations. He talked tough, refusing to give without first getting security. The relation with Arafat he saw as one of master and vassal. For his part, Arafat too drew back, mobilizing whatever forces he could in order to isolate and undermine Netanyahu. For two years the Oslo process was stuck. Stuck too has been the process of Israel's acceptance in the region – or "normalization". No country that opened relations has broken them off, nor expelled diplomats, yet there is a general sense of marking time. Twelve joint ventures have gotten underway in Jordan, but others have stalled. The peace with Egypt has again turned cold. Tourism remains down. Only foreign investments appear to have escaped the curse for the moment, but these reflect high-interest rates, which have helped spin the country into recession. The GDP grew by only 2% in 1997 (0% per capita), and unemployment has shot up from 6.3 % to more than 10% today. Yet with or without Netanyahu, this recession was bound to come. In the pre-Bibi years of 7% annual growth, deficits had bulged, privatization had practically ground to a halt, inflation had continued. Meanwhile, Israel has been undergoing a basic and deliberate structural change, away from labor-intensive industries (like food, textiles, shoes) and over to high tech. If the peace process, so-called, had stayed on track, the country would no doubt have done better, but there still would have been a leveling off.

Inflation has dropped under Netanyahu and privatization has taken off as never before. Last year the government sold the controlling shares of the banks it had bought in 1983, as well as Yozma Venture Capital (which had seeded a thousand high-tech enterprises), Israel Chemicals, Bezek (the phone company), and others. The plan of Shimon Peres – the imperative behind his journey to Oslo – was to globalize Israel's high tech, which offers the only long-term chance for economic viability. This plan is on track. Having agreed five years ago not to boycott Western firms that trade with Israel, the Gulf States could hardly raise the barriers again. Israeli companies now freely do business abroad. While the GDP grew only 2% in 1997, industrial exports (excluding diamonds) climbed by 10.1%. A full third of such exports were high-tech goods. "Communications, control, and medical equipment led the way with 23% growth." (IYA 1998, p. 196.) Software exports increased 25% to $500 million. "Israel ranked second in the world, after the US, in high-tech start-up activity." (Ibid., p. 179.)

The key problem remain

High tech is the wave of the future– for those who have a future. The dichotomy between high tech and low is reflected in growing socioeconomic gaps. The Ashkenazim keep doing better than the Mizrahim, who keep doing better than the Arabs inside Israel, who keep doing better than the Palestinians of the West Bank and Gaza. (See Challenge # 48, pp. 16-19.) These gaps keep expanding because of the children. Arab children in Israel, for example, start out with less family wealth, meager education, bad equipment, crowded housing, the poorest locations, and if they manage to surmount all that, they then face job discrimination. Apart from the usual forms of overt and covert discrimination, all security-related jobs are officially closed to them. Since high-tech is always security-related, the Arabs will not be allowed to ride on the wave of Israel's future. At the bottom we find the Palestinians of the West Bank and Gaza. In the spring of 1993, Rabin imposed a blockade (also called "closure" or "quarantine"). Apart from immediate (and questionable) security considerations, this policy turned out to fit very well Labor's notion of Oslo, which was intended to bring about separation between the two peoples. The blockade kept Palestinian workers out (120,000 of them) – as well as goods – except by special permit. The measure has proved disastrous for the people in the Territories. Oslo has not helped: the standard of living has plunged since the agreement was signed.

Rabin's blockade caught Israel itself unprepared. Who would replace the manual laborers, indispensable in construction and agriculture? Under pressure from contractors and farmers, the former Labor government went global in this respect too, contracting with "manpower" companies. Within one year the structure of the labor market changed. Israeli employers discovered an even more dependent and desperate worker, who would put up with subhuman conditions for $500 a month. Today there are at least 200,000 gastarbeiter (over 10% of the labor force) – no one knows how many more. More than half are illegal. For the Palestinians this means that even if some do receive work permits (UNSCO mentions 35,000, while an equal number sneak around the checkpoints) they can hardly find a job. When they do, it is because they are willing to work for less than a foreign worker. Despite the recession, despite the stalled peace process, Oslo has secured for Israel a niche in the West. And yet– ! And yet the West is in crisis. The hallmark of globalization, namely, the free flow of short-term capital without the impediment of national boundaries, has turned out to be a curse, bringing down the hothouse economies of Southeast Asia. The infusion of Capitalism has proved to be the ruin of Russia. Japan, Europe, Latin America, and the US itself are threatened. Amid this crisis, Israel holds on for the moment, but its chief economic weaknesses remain: First, the cost of the military: Having established a nuclear capability, and having spurned, since 1967, opportunities for an acceptable two-state solution, Israel now finds itself up against developing nuclear threats from Iran and Iraq. The price is enormous. The latest breed of American jet fighters, for example – capable of reaching those far-off enemies – goes for $80 million apiece. Deterrence depends on second-strike capacity, and that can only mean, in Israel's case, a fleet of nuclear submarines. The Zionist state simply does not have the money to stay in a nuclear arms race and, at the same time, maintain the capacity for a land war. In an age of missiles, Oslo is too little too late. (See the article on Israel's military in Challenge # 53, upcoming.)

Second, as a result of the rising price of arms, Israel remains dependent on infusions from the US government and American Jews. Their gifts have saved it from overreliance on short-term foreign investments and loans (the recent bane of countries like Indonesia, Mexico, and Brazil). If the global crisis continues, however, the American largesse may no longer suffice. The deficit will grow, it will be hard to attract foreign investment, exports will falter, foreign markets dry up. In such a scenario, the main economic achievement of Oslo for Israel – namely, relief from the worst effects of the Arab boycott – will have turned out to be a mere flash in the pan. Third, the old weakness of redundant employment and low productivity is being replaced by mere unemployment and no place to go. The low-tech industries (textiles, footwear, food) sicken and die. Thanks to liberal import policies, an overvalued shekel, and relatively high wages, foreign goods beat these industries out on the local shelves. (Even the contract for IDF uniforms has gone to the US Army.) The once vital textile firms now farm out production to Jordan, Egypt, and Turkey – lands where wages and benefits amount to a small fraction of the going rate here.

* * * The Labor Party based its journey to Oslo on two assumptions: (1) Given the unique international situation, it could put an end to Palestinian resistance (without having to go to the root of the problem) through a functional arrangement by which the Palestinians would take charge of their people, while Israel would remain the economic overlord. (2) It could then make a high-tech niche for itself in the West. The plan didn't quite work out. Rabin and Peres chose Arafat as the one who could deliver the goods, but by making him sign such an abject surrender, they deprived him of the prestige he needed in order to deliver. The Oslo accords have created, instead, new reasons to revolt, one being the corruption in the Palestinian Authority. Commercially, indeed, Israel was able to broaden its path to the markets of the world, only to find itself ensnared in a global mess. Endnotes: (1) Howard M. Sachar, A History of Israel: From the Rise of Zionism to Our Time, New York: Alfred A. Knopf, 1996, p. 965. (2) Sachar, p. 945. Israel Yearbook & Almanac 1995, Jerusalem, IBRT, 1995 (E-mail:, p. 127. (Henceforth cited as IYA plus year.) (3) Lester Thurow, Head To Head, New York, Warner Books, 1992-93, pp. 216-7.