The Only Thing Still Managed Properly

In retrospect, historical judgments seem to have done a certain injustice to the First Lebanon War of 1982. That war at least managed to achieve its basic military objectives - stopping the Katyusha rocket fire on the Galilee and expelling the PLO from Lebanon. That contrasts sharply with the Second Lebanon War, 24 years later, in which the Israel Defense Forces failed to achieve even the most modest military goals.

Despite its military achievements, however, the First Lebanon War exacted a heavy price from the state - not only in lives lost, but in the war's heavy financial cost. The year 1982 will be remembered in Israeli economic history as one in which the deep economic crisis plaguing the country worsened even further, due in no small part to the effects of the war. Over the next three years, the economy spiraled downward into hyperinflation, a stock market collapse and massive budgetary deficits and eventually reached the verge of economic ruin - from which it was saved only thanks to the economic stabilization plan of 1985.

The First Lebanon War, although not a crushing military defeat, brought the Israeli economy of the early 1980s to the brink of the abyss. Twenty-four years later, the Second Lebanon War - the most unsuccessful in Israel's history - ended with economic growth, negligible inflation, a reduced deficit and an unprecedentedly low national debt, nor did it harm Israel's international credit rating. The national economy swallowed the Second Lebanon War virtually without a trace, despite the military failures and the heavy price paid by the home front.

What changed in those 24 years to make this possible? The army is certainly not run any better, and in fact seems to have deteriorated. Israel's diplomatic and strategic planning processes have also not improved since the 1980s, as the Winograd Commission's report revealed in all its severity. What has changed, and dramatically so, is Israel's economic management.

The Israel economy's "day of reckoning" - the economic collapse of 1985 - forced Israel's economic policy makers, primarily the Bank of Israel and the Finance Ministry, to make substantial changes. While the reckoning that followed the 1973 Yom Kippur War did not lead to improvements in the decision-making processes of either the army or the government, the economic day of reckoning resulted in some very real improvements. The government's economic agencies realized the tremendous importance of setting policy targets and sticking to them, with the highest priorities being lower inflation and a lower budget deficit.

Twenty years later, we can happily declare the end of the war against inflation and cite exceptional achievements on the deficit/debt front. The stubborn battle waged by the treasury and the central bank, and thus far backed by the government, enabled the economy to safely weather two storms in the past five years: the economic crisis of 2001-2003 - the worst that ever hit Israel, but from which the economy recovered in just two years - and the crisis caused by the Second Lebanon War. In both cases, the tremendous strength that the economy has developed over the past two decades proved itself, and Israel is reaping the fruits of its uncompromising economic management.

The Brodet Commission, which recently examined the defense budget, noted that "the asymmetry of defense spending is to a great extent due to the fact that defense spending is a certainty, but its effectiveness is measured in terms of events that did not actually happen - in terms of deterrence and the prevention of wars."

Such asymmetry exists not only on the defense front, but also on the economic front - namely, the economic crises that Israel managed to prevent (the Second Lebanon War) or to recover from at relatively low cost (the second intifada crisis). The problem is that this type of asymmetry is easy not to notice, and it is easy to downplay its importance. That is the root of the attacks on Israel's economic policy since 2003 by Knesset members, cabinet ministers, social organizations and the media: Today, the economy's achievements look like a given. They are so taken for granted that it is difficult to justify the need for continued vigilance, at the price of reduced services to the country's citizens.

Paradoxically, the better the economy is managed, the more it is criticized - because the distress that spawned the need for such management fades from memory. Just as the army has managed to forget the lessons of the Yom Kippur War, it is easy for the public to forget the economic lessons of the 1985 crisis. In this respect, the shakeup caused by the Second Lebanon War taught an important lesson: It reminded the army of what it has forgotten since 1973, and the economists of how important it is to remember 1985.

"The economy's improved strength and performance over the past 20 years," concluded the Brodet Commission, "were demonstrated in its ability to finance the cost of the Second Lebanon War and compensation for civilian damages following the war with relative ease. The government must therefore be doubly aware of the importance of adhering to economic targets, so as not to repeat the mistakes of the past, which undermined our economic strength. A healthy economy is the defense establishment's best insurance policy."