Two Israels: One's at War, the Other's Doing Business as Usual

The kidnappings, murders and rocket attacks seem to have little effect on the economy. But how long can these First and Second Israels live side by side?

David Rosenberg
David Rosenberg
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A problem that just doesn't go away: An Iron Dome missile intercepting a rocket aimed at Tel Aviv, November 17, 2012.
A problem that just doesn't go away: An Iron Dome missile intercepting a rocket aimed at Tel Aviv, November 17, 2012.Credit: AP
David Rosenberg
David Rosenberg

It's high time that the term "Second Israel" be revived.

Its original meaning, as a term for the Mizrahi underclass, has fallen into disuse as they gradually entered the upper echelons of political and business establishment and the income gap with the "First Israel" of Ashkenazi Jews is diminishing.

The new Second Israel is that of the Palestinian conflicts. It is characterized by perpetual violence, serial peace processes, occupation and settlements, and the boycott, sanctions and divestment movement. Its denizens are generals, security experts, extremist settlers and emergency medical teams.

The First Israel is the Israel of business, particularly the high-tech business, of shopping malls and consumerism, cross-border investment and low unemployment. Its citizens are entrepreneurs, investors, bankers and an aspiring middle class.

The First Israel, as its name suggests, is the better-off Israel, but it isn't paradise on earth either. It suffers from high housing prices and a lower standard of living than the world's richest countries. It is weighed down by uncompetitive markets and excessive regulation, to name a few structural problems.

But the First Israel's woes are the sort that any developed economy has to grapple with.; The Second Israel's problems are of different magnitude altogether.

While an attack was launched

As different as they are in character and temperament, the First and Second Israels have been co-existing quite nicely, until now.

The Second Israel dispatched its army to search (as it turns out futilely) for the three kidnapped teenagers, suffered the wrenching experience of their deaths and funerals, followed in short order by the kidnapping and killing of a Palestinian teen, and rioting in Jerusalem and Wada Ara.

Throughout all of this, the Second Israel was feeling the brunt of rocket attacks from the Gaza Strip.

In First Israel, meanwhile, business carried on as usual. Qualcomm, the U.S. semiconductor maker, spent some $400 million buying the Caesarea-based company Wilocity and the Kushner group of New York agreed to pay $500 million for a controlling stake in the insurer Phoenix Holdings. The technology entrepreneur Benny Landa raised $130 million from a German company for his Landa Digital Printingand the digital advertising firm Matomy raised $70 million on the London Stock Exchange as Israel launched an attack on Gaza.

There are no economic data from the Central Bureau of Statistics for the last few weeks, but in foreign currency trading, the shekel actually gained 1.2% on the dollar. During June, Israel's sovereign risk premium as measured by the five-year CDS spread declined slightly, to around 78 basis points, according to the Bank of Israel. The Tel Aviv Stock Exchange's TA-25 index rose the first week after the kidnappings and began trending lower thereafter, leaving it down just 0.4% down for the three weeks.

Of course, the TASE has been weighed down by the distressing developing of the kidnappings, killings and rockets, but it hasn't been devastated.

Seemingly immune

The Second Intifada was the last time that the security situation had such a profound effect on the economy, together with the crash of technology shares, pushing Israel into a deep recession.

Not long after, the First Israel emerged from the Second Lebanon War, which barely scathed the pace of economic growth. Since then there have been multiple invasions of Gaza and rockets attacks in between, the Iranian nuclear crisis, fallouts with the White House and the Arab Spring, yet the First Israel enjoyed economic growth averaging 4.5% a year during those years. It even outperformed the economies of Western Europe and North America, which suffered the body blow of the 2008 global financial crisis.

It's a little hard to explain this state of affairs.

In the world today, plenty of countries suffer widespread political violence – Ukraine, Iraq, Syria and Libya to cite the ones that garner the most media attention – but they are all economic basket cases. There's no First and Second Syria or Ukraine. Violence, dysfunctional politics and an ailing economy go hand in hand. The only country in the world whose situation even approximately matches Israel's is South Korea: A thriving economy living side-by-side with the ever-present threat of its nutty, nuclear-armed neighbor to the north punctuated by small-scale violence. But Israel and Korea are the exceptions to the rules.

Who has it tougher is hard to say. South Korea faces a bigger existential threat because its adversary has nuclear weapons and a standing army of some1.1 million. We don't face a conventional and nuclear threat of that scale but we have far more frequent routine violence.

From the point of view of business confidence, the precariousness of Israel's security situation is much more difficult to ignore. Yet not only do Israelis shrug it off as business as usual: so do foreign investors.

The existence of the First and Second Israels has been around for less than a decade, but it is already taken for granted. Indeed, it could explain why Israelis see the peace process as offering them so little and are content to let it wither away. The First Israel is collecting a divided without peace.

But can the two Israels can co-exist inside such a tiny stretch of land astride the Mediterranean?

The working assumption is that this happy state of affairs will go on forever. The muted reaction of the stock market, which is as good an instant barometer of business or at least of investor sentiment as any, signals as much.

But the political and military situation we are in isn't encouraging. A Third Intifada, which has been threatening since the Second Intifada wound down, is the least of our worries. The Palestinians don't seem to have the stomach for another rebellion (although as time goes on the bitter memories of it will recede and the frustration grows) and Israel is better defended against one that it was 14 years ago.

The real threat is Hamas and Hezbollah and (who knows?) maybe ISIS if it creates sufficient chaos in Syria or Jordan. Hezbollah is currently preoccupied with defending its patron in Syria, but the day will come when it returns to its main mission of confronting Israel.

In the meantime, we have Hamas. Each rocket war Hamas launches envelopes more and more of Israel. As tragic as a single death results from these attacks, from an economic point of view, news of Tel Aviv under sustained rocket attack or the Intel plant in Kiryat Gat forced to shutter would be devastating.

The events of this week show we are getting dangerously close to that scenario. It could it just be that as the Second Israel launches another assault on Gaza, it could be delivering a body blow to the First Israel.



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