The Dove of Peace Will Bring With It a 67 Billion Shekel Dividend

Peace? What peace? Israeli society is busy in recent days with acts of war, starting with the abduction and murder of the three youths, through the large scale rocket attacks covering almost the entire country — and no one knows how the latest round of hatred and violence will end, or when. Only a very few people remember that only six months ago the focus of the debate in Israel was on the agreement to be presented by U.S. Secretary of State John Kerry, which was supposed to placed before the Knesset “in the spring or early summer.” The questions revolved around whether to approve it in a popular referendum or some other political process. But why is there really a need for a peace arrangement with the Palestinians and Arab nations?

There are those who will answer in moral terms: One people should not rule another people, this rule corrupts and poisons the souls of the rulers. There are those who will speak of their basic personal security, and that of their children: Citizens should not be injured then from terrorist acts, and soldiers will not be killed in wars. Many will repeat the center-left claim about the character of the future democracy: If we do not choose the solution of two nations for two peoples, within a short time Israel will be a binational state that cannot remain democratic.

But there is another answer to this question, which does not receive the attention it deserves: The claim that such a peace agreement will benefit all the residents of Israel and send the economy leaping to a higher level, and we will have a standard of living on the level of that in the rich Western nations, while without a peace agreement the economy could very well deteriorate to the level of Eastern European nations.

Today, ignoring this is actually quite strange. After 60 years in which the Israeli public discourse focused almost completely on security, diplomacy and politics, Israeli citizens have discovered over the past five years that quality of life and a personal standard of living interest them no less than questions of security, territories and settlers, or of the details of peace agreements if and when they may happen. In practice, this was the major innovation that the social protests of summer 2011 brought with them.

People went out en masse into the streets to protest housing prices, inequality, distribution of natural resources, tycoons who are stealing their customers’ and investors’ money, and the high cost of living. After the Trajtenberg committee, which was established by Prime Minister Benjamin Netanyahu after the protests to recommend ways of lowering the cost of living, other committees were set up: to examine the cost of vehicles, food prices, reforming the health system, housing prices, and poverty. Thousands wanted to act, without making a profit, to improve the civil dimension in their community life. Social activism began to blossom.

Even the defense budget, once a complete taboo, turned into something the public wanted to discuss. The public wanted to hear about the conditions given to the professional army and members of the security establishment - and to be able to influence them. Politically, those who are today’s stars are seen as representing “social” and consumer concerns. An example is former Communications Minister Moshe Kahlon, who is credited with opening up the cellular market and subsequently, a drastic drop in prices. Polls that show any party he would lead could snatch up dozens of Knesset seats. There is almost no sacred cow left in Israel that was not slaughtered. All issues are now open to public debate - economic, social, civil. But as for the theoretically enormous sums that each Israeli would profit from were a peace agreement to signed - along with the question of what would happen to our money if such an agreement is not reached - there has been no public debate.

More exports, more tourism, more services, more income

The amounts really do seem to be enormous. But exactly how big? The newest and freshest research on the subject of estimating the economic benefit from the signing of a peace agreement was conducted by a team of economists, which included Yarom Ariav, the former director general of the Finance Ministry; Yoram Gabbai, the former director of the state revenues administration; Eldad Brik; along with Yigal Tamir and Koby Huberman of the Israel Peace Initiative, which sponsored the study.

It is not at all simple to quantify economically the effect of a regional peace such as that the Peace Initiative imagines. The peace arrangement they back is based on the Saudi Peace Initiative, which was basically adopted as the Arab League peace proposal. It includes a return to the 1967 lines, land swaps, and the normalization of relations between Israel and 57 Arab and Muslim nations. But for Ariav, what is more important than the numbers is the positive atmosphere that will be created once such an agreement is reached.

“When you examine the Israeli economy under the existing status quo, you discover that the traditional growth engines are beginning to exhaust themselves,” said Ariav in an interview that preceded the Haaretz Peace Conference that took place last week in Tel Aviv. “Israel’s [economic] growth potential under the conditions we live in now converges on 3% a year. The potential growth from the Arab population and Haredi sector joining the workforce is already included in this number. The [state] budget is fixed, and every attempt to change national priorities runs into the limitations of the basic resources of the economy. Therefore the almost only thing that can move the needle of the speedometer of the economy is a peace agreement with the neighbors. Such a thing would be a real tie-breaker, an event that would break through the glass ceiling, open possibilities and allow setting new priorities,” said Ariav.

Gabbai, the other main author of the study on the economics side, also sees a peace arrangement - mostly in its regional version - as almost the only possibly opportunity to avoid the forecast of deterioration into mediocrity and socioeconomic stagnation. “The Israeli economy is on a dead end street. The Trajtenberg committee proved that concerning public infrastructure, any attempt to find budgets for any matter will require raising taxes to a similar extent - and usually on the same population. As you write in TheMarker, there are large benefits given to certain sectors - government companies, settlements, Haredim, capital investment - but there is no political capability of changing this, even if the politicians talk about it,” said Gabbai.

“Without a diplomatic arrangement Israeli [economic] growth will shift into neutral, with 3% growth in GDP annually for a decade, which is 1% to 1.5% per capita, no more than that. We can be stuck now with such figures for a decade. On the other hand, a peace agreement can create an economic takeoff, as happened after the Oslo Accords. Without that we have no chance, and we will suffocate. It will be impossible to advance the public health system, welfare, academia, education and other areas. I sat with the people from the Budgets Division [in the Finance Ministry] during the process of preparing the last budgets, and I saw the suffocation. I saw how every shekel that must be spent, first has to be taken from somewhere,” he said.

Ariav and Gabbai give a great deal of weight to mass psychology. They claim that just as after the Oslo Accords the Israeli economy grew quickly because of the outbreak of optimism and the appetite for commerce and business, so too will a new agreement acceptable to the international community and neighboring countries also send Israeli GDP soaring.

“Israel is an island, an isolated economy that is captive to a reality of constant existential security threats, and a great deal of the energy in [the economy] is directed at coping with this and not for business and economic growth. After the Oslo Accords a valve was opened. The ‘state of mind’ is very important, and if we change our mentality of an island surrounded by enemies to one of energy of innovations and doing business, we will see wonderful things here. We must remember that Israel is a nation of trade: Imports and exports together make up 80% of GDP, and a jump in exports - for example through trade with the Palestinian Authority or with Arab countries and the removal of the fears of a European boycott - is enough to see a jump n GDP, and with it a jump in state tax revenues.”

The research cites the possibility of a 30 billion-shekel a year increase in Israeli exports - year after year. They see a sharp rise in incoming tourism from 3 million visitors a year to 8 million, which will add $22 billion to GDP - a similar number to what other studies have found. They see a $10 billion annual increase in foreign investment in Israel, and also expect an improved credit rating, which in itself is worth $2 billion in lower interest rates paid on government bonds. They also speak of cuts in certain areas of government spending, such as a 10 billion shekels annual cut in the defense budget - to be reached gradually. A cut of 1 billion shekels a year in budgets for the settlements - after offsetting the costs of evacuating the settlers.

All told, these cuts in the budget along with the growth in the private sector and other economic benefits will add up to - in terms of higher wages - an estimated benefit to the state’s coffers of 67 billion shekels a year. This sum can then be used for social services including revolutionary changes in health, preschool education, housing, higher education, welfare - or any other area the government decides on.

In which country would you rather live?

Are these estimates realistic? Do they really reflect the economic considerations once a peace agreement is signed?

The answer is: Yes and no. As a general estimate, the present evaluation is not very different form previous ones. It does not ignore, for example, the cost of evacuating some 50,000 to 100,000 settlers from the West Bank, which is estimated at 50 billion shekels. This will be paid for, claim the study’s authors, by the international community and by issuing bonds specifically for this purpose.

The analysis is based on similar cases elsewhere: From the Oslo Accords here to the situation in Northern Ireland after the peace deal there. Earlier works gave a greater emphasis on the dismantling of a large number of the isolated settlements in the West Bank, and the section on use of the cash reserves that will flow into government coffers after such an agreement seem to be a bit arbitrary . After all, the government that will rule after such an agreement will decide where the money goes - to public health, or possibly to increasing the compensation for the evacuated settlers. But in general terms, the study is an objective and serious economic attempt to estimate the numbers.

In comparison, what is missing in the research of the Israeli Peace Initiative is the other economic side, the negative and painful part: The economic price the Israeli public will pay if such a peace agreement is not reached. The authors are aware of this problem, but say they decided to focus on the positive side and not on the negative scenarios. It is possible their decision stemmed from marketing and considerations and the public image they wanted to project: As opposed to those experiences in politics, they thought it was preferable not to concentrate on frightening the public and on fear as a strategy for selling their ideas. But since the figures in the work are a sort of educated guess, a broad outline with a thick brush - it would be a mistake to ignore the economic results of not reaching an agreement.

Then what would happen? Here the economic exercise is even more difficult, since the reality in which we live may seem natural to us. But it is impossible to know what the future holds in store. We can still provide some price information: the cost of European economic boycott against Israeli products, the cost of terrorism. The cost of another Intifada, of one type or another, especially on tourism, as we have seen in the past. In 2002, then-Finance Minister Silvan Shalom saw his forecast of 4% growth turn into a shrinkage as a result of the Second Intifada, a financial crisis, a stock market drop and a spike in government bond yields to a level that put in doubt the government’s ability to roll over its debts. There is no reason to think that another Intifada will not bring similar economic effects.

True, the Israeli economy is much stronger than in the past, and we are already an “affluent society,” and it will not collapse under a serious security situation, such as now under Operation Protective Edge. But at the same time there is no doubt that this will cost every Israeli in terms of their standard of living, or at the very least in a missed opportunity to improve it. In practice, in the case of continued fighting such as the present situation, all we have to do is take all the economic studies about the peace dividend - and change all the plus signs to minus signs.