Sorry to Burst Your Bubble, but Israel's Economy Won't Gain Much From Peace

Peace isn’t the financial panacea its naive advocates suggest, although that’s no reason to reject it.

David Rosenberg
David Rosenberg
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A worker walks past iron rods ready for shipment at Israel Shipyards Port in Haifa February 5, 2014.
A worker walks past iron rods ready for shipment at Israel Shipyards Port in Haifa February 5, 2014.Credit: Reuters
David Rosenberg
David Rosenberg

The Union Army’s Gen. William Tecumseh Sherman, who laid waste to much of Georgia during America’s Civil War, pretty much summed it up with his declaration, “War is hell.”

But economically speaking, if it is hell, it’s no more than the first circle for Israel. For the better part of a decade we have been living a kind of double life, where rockets rain down on us on a regular basis while the economy prospers. There is the perpetual threat of boycotts, sanctions and divestments, but they have yet to materialize. The prospect of a real war against a conventional army that results in massive death and destruction seems a distant prospect.

Israel is paying the price for not being at peace with its neighbors, but it has not been a particularly steep one.

What kind of dividend would we collect on peace?

There’s a shocking naiveté on the part of people advocating peace as a panacea for all of Israel’s economic woes. All we have to do is sign on to the Arab League initiative and the next morning we’ll be dining on hummus in Damascus, Hamas leaders will make solemn visits to Jerusalem’s Yad Vashem, Holocaust memorial, the settlers will realize the error of their ways and look for new homes in Kiryat Ono that will be built quickly and efficiently by well-paid Palestinian labor, and billions in foreign investment will flow into Israel. The Syrians and Iraqis will stop killing each other, Iran’s supreme religious leader Ayatollah Ali Khamenei will redirect his country’s nuclear program to medical purposes and electric generation and Egyptian President Abdel-Fattah al-Sissi will hold free and fair elections that result in a social democratic government.

To put a modern spin on the prophet Isaiah, guns will be beaten into 3-D printers. The Middle East will look just like Europe, without the debt.

In this vein, a study by economists Yarom Ariav and Yoram Gabbai holds out the prospect that within a decade after a peace agreement, Israeli exports will rise by 30 billion shekels a year and incoming tourism will grow to eight million visitors a year, from three million, pumping $22 billion into the economy. Foreign investment will grow by $10 billion a year, while a higher credit rating for an Israel at peace will save $2 billion in interest rates payments on our debt. Defense spending will decline by 10 billion shekels a year.

The miracle that
 didn’t appear

Peace advocates hark back to the early days of the Oslo Accords as the precedent for this glorious vision. It is true – and often forgotten, particularly by those on the right – that Oslo enabled Israel to join the global economy. Foreign investment soared and companies that had refrained from doing business with Israel suddenly appeared at our doorstep. The economy enjoyed many years of very strong growth, and benefits to this day from the Oslo dividend.

But the Middle East is a very troubled place: Its people have failed to achieve stability without autocracy, economic growth when there is no oil or to produce political models that don’t involve a heavy dose of reactionary Islamism.

More than three years into the Arab Spring, it seems a little bizarre to think that if Israel and the Palestinians can surmount their very real differences, their agreement will somehow change any of this.

Evidence of this was already visible in the Oslo years: The miracle that peace advocates remain confident will occur this time never appeared. The talks with the Palestinians stalled and the great majority of the Arab world (most particularly the militant groups that are today the biggest armed threat to Israel) never signed on.

In any case, Israel’s economy grew for multiple reasons, not just Oslo: The 1990s were the years that large numbers of immigrants from the former Soviet Union were being absorbed, the high-tech sector was taking off and the government was slowly but surely liberalizing and privatizing.

What is more probable is that an Israeli-Palestinian accord will be rejected by Hamas, Hezbollah and Syria. Maybe the Gulf states will sign on, but odds are we will have something of the same cold peace with them that we have with Egypt and Jordan today.

The region will remain as a volatile as ever. Israel’s defense spending will remain pretty much the same and its geopolitical situation about as precarious.

There will be no appreciable peace dividend from trade with our neighbors, because there is nothing to trade. The kind of foreign investment that would see tens of billions of dollars flowing into the country is the kind Israel will probably never attract – big energy, infrastructure and manufacturing projects. We don’t have that kind of economy and never will. Unless we are invited to join the European Union – a process that is long and convoluted in the best of circumstances – we will remain an economic island.

It is a little depressing to say there is no glorious future of peace and prosperity ahead of us. It’s bad enough to be scurrying to a shelter to escape rocket attacks; it’s worse to realize that we’ll be taking cover for years to come and so, likely, will our children and maybe our grandchildren.

Economy doomed?

But does that mean our economic well-being is likewise doomed to everlasting distress?

The fact is that with or without peace, we face a future of slower growth because our population is aging and becoming on average less educated and less productive, as the Arab and ultra-Orthodox Jewish populations increase. But economically speaking, there is still a lot of slack that can be tightened.

Israel’s Arab citizens must be thoroughly integrated into the wider society, through better education and an end to pervasive discrimination. Without that, a fifth of Israel is economically speaking under-utilized. It’s a task admittedly more difficult as long as we are at war with their Palestinian brothers, but it is by no means impossible.

Our educational system has to be improved to bring not just Arabs and Haredim but the rest of Israel’s underclass into the knowledge economy. The West Bank settlement enterprise must be strangled financially, as the Haredi sector should be, to free up resources for critical things such as infrastructure, health and education. Much more work has yet to be done in order to eliminate the near-monopolies in industry and labor.

The problem for the strongest advocates of peace is that they are frequently the biggest critics of Israel. There is certainly much to fault in terms of Israel’s democratic values and its economic failures. For moral reasons, we have every interest in ending the occupation and the bloodshed. But much of the criticism of Israel’s current state is unhinged to the point that peace advocates portray peace as the only way to rescue Israel from its benighted condition.

But the fact is in spite of very poor odds, we are not doing badly at all, which has the side effect of raising the bar for most Israelis to take the risks that a peace agreement would entail.

There will no doubt be a dividend from peace when the day comes. But it won’t be something we can live off of – or need to.

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