The One Thing Properly Managed

With hindsight, history seems to have been rather unfair regarding the first Lebanon War in 1982. At least its fundamental goals - eradicating Katyusha rocket attacks on the Galilee, and driving the PLO out of Lebanon - were achieved. In the Second Lebanon War, 24 years later, the army failed to achieve even the most modest of its goals.

Yet despite its partial military successes, the first Lebanon War exacted a heavy price from Israel, not only in terms of human life but in economic terms as well. The year 1982 has gone down in history as a year of capital market meltdown, to a large degree because of the repercussions of the war.

During the following three years, hyperinflation reared its head. The government ran gigantic budget deficits and the economy neared the point of collapse, from which it was saved only by the Economic Stabilization plan of 1985.

Though the first Lebanon War was not a total military fiasco, it reduced the economy to the brink of the void. Twenty-four years later, the Second Lebanon War, which was the most abortive in Israel's history, ended with economic growth, no inflation to speak of, narrowing deficits and dropping national debt. Israel's sovereign credit rating did not suffer in the slightest.

The economy swallowed the Second Lebanon War with barely a sign, despite the military debacle and the heavy price borne by the home front.

What changed?

What changed in those 24 years? Certainly, military management did not change for the better: if anything it seems to have deteriorated. Strategic and diplomatic management doesn't seem to have improved since the 1980s, and the Winograd Report revealed just how bad it was.

What had changed, dramatically, was Israel's economic management. "The Yom Kippur of the economy", namely the economic meltdown in 1985, led to conclusions among the policy-makers of Jerusalem - the Finance Ministry and Bank of Israel.

The Yom Kippur war led to no rethinking in military echelons or in government. But the Yom Kippur of the economy did. Israel's economic leaders learned the importance of setting policy goals and sticking tot hem, and first and foremost, learned the importance of keeping inflation low and the budget deficit under control.

Twenty years later one might call the war on inflation a stunning success, and preen in the achievements regarding the deficit and debt. The ceaseless war that the Bank of Israel and Finance Ministry have been waging, with the government's support, enabled the economy to weather the two main tests the last five years unscathed: the economic crisis of 2001-2003, which was the worst Israel had ever suffered, and the crisis of the Second Lebanon War.

In both cases the tremendous strength that the economy had developed over the last 20 years proved itself: Israel can pick the fruits of its uncompromising economic management.


The Brodet panel examining the defense budget wrote: "Asymmetry in respect to defense spending is associated to a large degree to the fact that defense expenditure is certain, but efficacy is measured in terms of events that did not happen in practice, in terms of deterrence and preventing war."

The asymmetry isn't only on the military front, but on the economic one as well, in terms of the economic crises that Israel managed to prevent (the Second Lebanon War) or managed to escape at a relatively low cost (the second Intifada).

The problem with such asymmetry is that it's easy to overlook it, and easy to underestimate its importance.

That is the backdrop for the attack on Israel's economic policy since 2003 by Knesset members, ministers, social organizations and the media; Israel's economic achievements are being taken for granted. So taken for granted, so unappreciated, that it's hard to justify the need to continue the good fight, which bears a cost in the form of less social services by government.

Paradoxically, the better economic management becomes, the more it comes under attack, because the hard times that birthed the need for such management becomes forgotten. Just as the army has managed to forget the lessons of the Yom Kippur War, it's easy to forget the lessons of the 1985 economic crisis.

From that perspective, the upheavals of the Second Lebanon War teach an important lesson. It reminded the army what it forgot after 1973, and reminds economists how important it is to remember the lessons of 1985. Israel's economic recovery since 1985 enabled it to bear the expenditure of the Second Lebanon War including compensation to civilians with relative ease, the committee headed by David Brodet pointed out . "Therefore," he wrote, "it is necessary to stress to the government the need to preserve economic goals, in order to avoid repeating the mistakes of the past that damaged the economy. A healthy economy is the strongest back and strongest guarantee for the military."