Will Peace Pay? |

Stanley Fischer, the Dove That Roared

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These days – meaning any time since the onset of the second intifada – it's hard to find anyone in Israel in a position of power who talks seriously about the importance of reaching a peace agreement with the Palestinians. Yes, there are Shimon Peres and Tzipi Livni, but even a three-toed sloth could easily count the number of politicians who seriously talk about peace without running out of digits.

The idea that there is any urgency to reaching an agreement, much less any practical benefit, has become so far removed from Israel's political agenda that Labor Party leader Shelly Yacimovich's trip to Ramallah last month was treated as a curiosity while John Kerry is regarded as a Rip Van Winkle, a man from the 1990s who hasn't quite figured that he's woken up in another time.

Thus, when Stanley Fischer, making his final appearance as Bank of Israel governor at the Knesset Finance Committee this week, made the case for peace he was ignored by the media.

He not only advocated peace but implied that the government was making irresponsible and tendentious excuses for not pursuing it.

"We must continue to provide ourselves with defense, but the allocation of more money to defense is not the only solution. We must also try to find other solutions, and try to achieve a peace agreement with our neighbors, including with the Palestinians," Fischer said. "The phrase, 'there is no partner for peace' is a self-fulfilling phrase. You need two for an agreement, and if we don’t want to look for a partner, we will remain in the current situation.

Home, home on the Martian range

Why was he ignored? It's not that as homo economicus, Fischer isn't expected to relate to political issues. What he said was simply deemed irrelevant as if he were talking about the benefits of cold fusion or colonies on Mars.

In fact, Fischer didn't stray much from his economic agenda. Whatever he may feel about the moral and political price Israel is paying for more than four decades of occupation, he didn't explicitly mention them.

What he did say is that Israel can't shoulder a heavy defense burden forever. Even with defense spending relative to gross domestic product down to the levels of the 1960s, Fischer said, it continues to rise year to year and impose a heavy cost on the state budget and economy. Israel pays higher rates of interest on its overseas debt because of the risk premium that investors demand for the country's precarious political situation, he added. "A diplomatic process, if the markets attribute any importance to it, would reduce these costs in the final analysis," Fischer said.

There's not a little irony in Fischer's remarks. In his eight years at the Bank of Israel – 2005 to 2013 – he has lived through one war (the Second Lebanon War), two warlets (Cast Lead and Pillar of Defense) and the Middle East's going up in flames in what was once optimistically called the Arab Spring. All along there has been the ever-present threat of a potentially devastating conflict with Iran.

Yet through it all, the economy averaged brisk growth of 4.3% a year and shrugged off the global financial crisis that occurred smack in the middle of his tenure. The Tel Aviv Stock Exchange more than doubled even if it is down from its record high.

The global boycott, divestment and sanctions movement is noisy but remarkably ineffectual, considering how vulnerable Israel is because of its low standing in international public opinion. Exports grew 50% in the Fischer years and more than $90 billion in foreign investment has piled into Israel.

The four big problems the economy faces today, as acknowledged by Fischer in his finance committee remarks, are income inequality and poverty, a poor education system, business concentration and low productivity. None of them can be directly blamed on Israel's high defense burden or political uncertainty.

Political chemotherapy

So, how could Israel gain from reaching a peace agreement with the Palestinians? Let's take the best-case scenario: Hamas signs on, the cost of evacuating the settlers is borne by the United States and the Arab world agrees to normalization with Israel. Let's say that even Tehran views the agreement as a kind of political chemotherapy and deems Israel no longer a regional cancer.

Little if any of this is ever likely to happen given the growing Islamization and chaos in the region. But even if some of the elements came into place, Israel would have little leeway to trim its defense spending and it is doubtful that for the foreseeable future the risk premium on our debt would change much either. Even Fischer acknowledges that we live in "unsafe and uncertain surroundings."

The advantages of trade and economic cooperation that Peres used to market as the "new Middle East" have diminished over the years. We no longer need their capital or their energy because there is no shortage of investment funds and we are drowning in natural gas. The Arab world never needed our high tech because their economies are too low-tech, or our human capital because the countries that are wealthy enough to need it can source it from Europe and Asia. Israel's natural economic partners are in North America, Europe and the Far East, not in the Gulf or North Africa.

Israel's tourism industry would benefit from a peaceful Middle East, but is that what we really want? For every manager and marketing executive the industry needs, it employs far more waiters and chambermaids -- low-paid, unskilled jobs that will inevitably be filled by foreign labor. Policymakers would do better to focus on creating jobs in high tech and financial services.

The real reason for Israel to make peace is political. Inside the Green Line we have enough problems created by unacceptable levels of inequality. Throughout the land large segments of the population – Haredim and Israeli Arabs – live outside mainstream society.

Beyond the Green Line, the problem is magnified many times over by the millions of Palestinians who for all intents and purposes live in Israel but have neither the rights nor privileges of citizens. The lawlessness that is an essential element of the settler enterprise of taking land and building on it at any and all cost infects Israel's political and legal culture.

Both phenomena are politically unacceptable and may in the long run morph into economic malaise as well. They violate basic norms of a democratic and free-market society - certainly one like Israel's that relies so heavily the talents of its human capital - where everyone must be given equal opportunities and the rule of law is paramount. For those reasons, peace is imperative.

A three-toed sloth. Enough fingers for all the pro-peace pols.Credit: Sergio Delgado
Bank of Israel Governer Stanley Fischer.Credit: Emil Salman

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