Analysis

Officials Warn Lockdown Will Cost the Israeli Economy Very Dearly

As government debates more severe measures to contain the coronavirus, they warn the damage could be akin to the impact of the Yom Kippur War

A nearly empty Mahane Yehuda market in Jerusalem following the corona outbreak.
Emil Salman

A sharp dispute is under way at the top of the Israeli economic policy establishment over how to cope with the coronavirus epidemic without imposing huge costs on business, employment and the budget.

The recommendation of the Health Ministry, which enjoys the backing of Prime Minister Benjamin Netanyahu, is to impose a de facto shutdown on the economy. It would be a declaration of an emergency under which only critical businesses, which constitute about 30% of the total, would continue to operate. The plan is expected to be approved shortly, bringing with it severe economic damage.

Top economic officials are resolutely opposed to the Health Ministry proposal and say that other policy solutions that would have a less severe impact have not been studied in depth.

Israel's coronavirus crisis could be Bibi's swan song. Haaretz weekly podcast

They point to countries such as South Korea, which have emphasized mass testing and monitoring, with lockdowns imposed only in specific areas that are determined through monitoring to have a specific problem. They also say that Britain has a model that Israel should consider which targets for isolation only those most likely to be severely affected by the virus, namely the elderly and sick.

The critics of a mass lockdown are focused on the economic cost. They estimate is that it would be so high as to be unsustainable for more than a month or perhaps six weeks at the most. If the epidemic has not run its course by then, the government would have no choice but to try alternative measures because the economy will no longer be able to bear the cost.

These officials warn that the cost of a cessation of economic activity on the scale that the Health Ministry proposes would be equivalent to the blow Israel sustained as a result of the 1973 Yom Kippur War.

A lockdown of four to six weeks would cost between 4% and 6% gross domestic product. Israel’s ratio of debt to GDP would rise to at least 70%, and a longer lockdown would increase the debt burden even more.

The cost of a two-thirds reduction in economic activity would be a 4% reduction in GDP, on the assumption that continues no later than the Passover holiday, which ends April 15. A lockdown that continues for six weeks would reduce GDP by 6%, or by 80 billion to 90 billion shekels ($22 billion-$24.6 billion).

These officials say the Israeli economy could sustain a blow like that, if there was no other choice and if indeed the measures succeeded in ending the epidemic.

The experience of China, which at least for now has succeeded in containing the epidemic through a draconian lockdown on tens of millions of people for a period of 50 days, is the basis for Health Ministry officials’ contention that a lockdown is the most efficient solution to the problem. If this assessment is correct and a lockdown of more than six weeks does contain the virus, its economic cost could be absorbed economy, these officials said. They expressed confidence that a lockdown of limited duration would allow the economy to recover relatively easily.

The principal problem is that there is no assurance is that a lockdown of limited duration would, in fact, contain the epidemic. The great fear is that after one of 4-6 weeks, a second wave of the virus might emerge. In such a case, health officials would be tempted to extend the lockdown for perhaps many months, perhaps without a predetermined end date. If so, the economy would no longer be able to weather the fallout.

“A shutdown of several months without knowing in advance when it would end would bring us to the same situation as we were the Yom Kippur War,” said one official who spoke on condition of anonymity.

The war caused Israeli GDP growth to contract within two years from 12% annually to just 1.5% followed by what is now known as the “lost decade” for the economy.

“That would be a heavy blow with long-term implications because businesses will go bankrupt and a great deal of capital will be lost. It will be very difficult to yet economy moving again,” the official said.

“It would also have a profound impact on the budget because tax revenues would collapse and the government would need to provide support unemployed and businesses. A decision to impose a lengthy lockdown is one that must be taken after careful consideration and an understanding of the price involved in such a step,” he warned.

Already there are signs that the economy is slowing. Major elements of economic activity have ceased, including educational institutions, the tourism industry, places of entertainment and the courts. Large numbers of people are hesitant to leave their homes to shop. The economy has continued to function because the government hasn’t explicitly ordered activity to cease, the officials said.

They said that any shutdown of the economy must only be imposed for a explicit duration, for example until Passover. If it becomes apparent that the time allocated is not enough and the epidemic continues to spread, the officials say that instead of simply extending the lockdown, the government should reconsider the model altogether.

“We can go ahead with this undertaking for a month and see if it works,” said one. “If the epidemic hasn’t been stopped, we can’t continue with a lockdown. We will need then alternative policies, including the British option of not trying to stop the epidemic.”