Chapter 9

Globalization Widens the Gap between Israel and the Arabs

THE 1991 DEFEAT of Iraq by the United States and its allies gave Middle East countries a sharp push toward the global capitalist system. The Madrid conference of October-November 1991 gave political expression to the economic system that was taking over all the countries of the region. A "normal" relationship with Israel became a kind of visa allowing Arab countries to join the world capitalist economy.

To grasp the nature of the agreements that Israel signed, first with The Palestinians and then with Jordan, we need to look at the regional Effects of changes taking place in the international alignment of forces- Notably America's imposition of economic globalization. In the Middle East, Israel alone was poised to gain from this new world order, because it alone had developed an advanced capitalist economy. A major structural economic crisis during the mid-1980s had pushed it to seek a more stable investment climate, possible only in the context of some agreement with the neighboring Arab countries.

Israel therefore suddenly found it conceivable to abandon several stubbornly held policies-for example, its traditional refusal to negotiate with the PLO. As a result of these changes, Israel's position in the world economy became stronger: the Arab embargo melted away, and a flow of foreign investment invigorated the Israeli economy.

The Arab countries regress

The political and economical transformations resulting from the Gulf War damaged the Arab countries. During the 1980s, these countries had cooperated economically; the oil revenues of the petroleum-rich states had helped all of them to cover their needs. Jordan, for example, sold Iraq half of all its exports (and went on to support Iraq during the war). Egypt could rely- until it joined the U.S. alliance against Iraq-on revenue from the 1.5 million Egyptians working in the oil-producing countries, especially Iraq.

After the defeat of Iraq, oil prices went down; the Arab economies began to suffer. Egypt lost an important source of employment and revenues. Jordan lost a main market for its exports and was forced to allow in hundreds of thousands of new refugees. Kuwait, for example, expelled most of the 350,000 to 400,000 Palestinians - workers and their families -who had lived there. These became refugees in Jordan, sharply increasing the unemployment rate.

The destruction of the strong Iraqi economy created a vacuum in the Arab world. Many Arab countries seeking a substitute for the lost inter-Arab support threw themselves into the arms of the IMF. In 1991 Egypt, hoping to attract foreign investment to develop its economy, adopted the IMF-backed Economic Reform Program. This regimen, U.S.-led but imposed through the international financial institutions, concentrates on the privatization of national industries, public utilities, transport, and communications. In addition, the IMF recipe for third world states in crisis calls for the abolition of welfare and subsidy programs, the reduction of tariffs that protect national products, and enormous tax exemptions for foreign investors.

The Arab League took a step of tremendous significance in the same year with the transfer of its seat from Tunis to Cairo. The Arab states had declared a boycott of Egypt in 1979, after Egypt signed the Camp David peace accords with Israel. The League's 1991 relocation signaled Egypt's return to a leading role in Arab politics. This time, however, it was not leading the opposition to Israel and the U.S. Far from it: Egypt's main task now was to encourage the other Arab countries to normalize relations with Israel and accept U.S. hegemony in the region-especially U.S. policies toward Iraq. When the Arab League returned to Cairo, it lost its original aim- to protect Arab interests-and became a tool through which the United States could establish a grip on the whole region.

The economic gap widens

Israel's economy differs sharply from those of its Arab neighbors- just how sharply, we can see with a glance at comparative volume. In 1998, for instance, Israel's per capita production was $16,400, while comparable figures were $2,800 for Egypt and a mere $900 for Syria. (WTO report) Standards of living show a similar gap. The minimum wage is $700 a month in Israel, but $20 and $40 a month, respectively, in Egypt and Syria.

These figures clearly expose the relative underdevelopment of the Arab economy. Israel's output is not all diamonds, tourism, and cut flowers; it relies heavily on export of advanced technological products like computers, medical instruments, and weapons. Egypt, in contrast, lives from tourism, oil, Suez Canal fees, and remittances from its workers abroad. Moreover, while the Egyptian worker is obliged to emigrate in order to find work, Israel employs more than 250,000 foreign workers (among them Jordanians and Egyptians), besides 100,000 workers from the West Bank and Gaza. (Report by the US administration to the Senate Foreign Relations Committee, January 1998).

The American market is Israel's mainstay

Israel is considered one of the most enthusiastic devotees of U.S.-style neo-liberalism. It ranks second among all foreign countries (after Canada) in number of companies active on Wall Street's New York Stock Exchange (NYSE). More than one hundred Israeli companies are registered with the NYSE, and they have raised $2 billion through public offerings. In recent years Israel opened the door to U.S. capitalists seeking to purchase existing technology companies and absorb their know-how. 

Mr. Jacob Frankel, The person who was the director of Israel's Central Bank for most of the Nineties, is highly regarded in international financial circles. Frankel belongs to the Group of Thirty, an influential body, headed by former U.S. Federal Reserve Board president Paul Volcker, which includes many of the world's leading economists. 

Although Israel's economic prosperity of the 1990s included all sectors, rising unemployment increased social imbalances. Investment was primarily directed to the technology sector and internet development. On the other hand, in accordance with the stipulations of the WTO, the government reduced tariffs, opening the local economy to fierce competition from foreign products. As a result, the traditional industrial sectors were severely damaged. Thousands of manufacturing jobs in textiles, metal, wood, and leather vanished, while nationalized industries like weapons and aircraft production laid off workers. 

In addition, the introduction of foreign workers increased unemployment in low-paid jobs, traditionally occupied by Arab citizens and residents of peripheral Jewish townships. Officially, unemployment in these populations reached 10 percent; unofficially, it was far higher. Israeli economic strategists chose to develop new enterprises in the technology sector rather than invest in established industries and create new jobs. 

The groundwork for this economic shift began with Israel's establishment in the mid-1980s of venture capital funds to support new companies in the technology sector. Between 1985 and 1997, the sum of venture capital invested in such technology start-ups soared from $29 million to $800 million. (The Macro View, Howard Rosenblum, Venture Update, winter 1997).

By the turn of the century, U.S. corporations were already taking over some of these new companies. Notable was Intel's October 1999 purchase of DSP, a company specializing in cell phone development. Obviously shopping for expertise, Intel paid $1.6 billion for a company whose previous year's revenues had reached only $100 million. Former Israeli intelligence officers skilled in advanced computer technologies had founded DSP, which employs 300 developers in computer programming and cell phone technology. Now it seemed that a U.S. firm was poised to profit from Israeli technological investment and skill.

In fact, however, Israel can't take all the credit for the capital or the technological expertise behind its technology-based economic "miracle". This development rests on the education and experience of thousands of Russian technicians and engineers who emigrated after the fall of the Soviet Union. Moreover, it could never have happened without generous financial support from the U.S. government, donations from American Jews, and reparations from Germany. Despite increased unemployment, the common Israeli citizen enjoys financial facilities and credit that allow him or her to live a more comfortable life than the real economy could provide.

Investments never reached the Arab Countries

Israel alone gained substantially from the economic Summits in Arab capitals (Casablanca in 1994 , Amman in 1995, Cairo in 1996, and Doha in 1997) that the 1991 Madrid Conference mandated. U.S. and European companies had started considering further investment in the Middle East as part of the peace process. As they decided when and where to put their money, they saw Israel as the region's only country with a developed technological infrastructure and market. In addition, they believed that Israel could provide security and economic stability. Investment therefore flowed into Israel, at least for a time.

As for the Palestinian territories, they were hurt by the agreements, suffering a decline in revenue that eventually reached 30 percent. The Palestinian Authority (PA) created an impression of economic irresponsibility by countenancing protectionism, lack of necessary legislation, and widespread corruption. The PA's assurances that it accepted the laws of the free market had little effect, particularly as it was monopolizing the import of basic commodities like flour, gasoline, cement and tobacco. The PA used the revenues from these imports to buy political support and finance the numerous security bodies that serve Arafat and his cronies. 

Largely as a result of these failings, neither foreign nor Palestinian investors were willing to put their money in the territories. The agreements signed between Israel and the Palestinians thus maintained Palestinians' economic dependence on Israel, since Palestinian workers employed in Israel remained the primary source of income for the Palestinian economy.

Palestinians weren't the only ones who became disillusioned with the economic outcome of the peace process. The Arab states' involvement in the U.S. war on Iraq was not rewarded with the promised foreign investment. Investors were unenthusiastic about the chronically underdeveloped Arab markets and the corrupt and dictatorial political systems that enmeshed them. 

Foreign investment in all the Arab countries together reached a mere $4 billion in 1995; the following year, it fell to $2.3 billion. (Figures taken from Middle East Times issue, 1998, and the Washington Post, August 1997). The Arab economies were sinking into prolonged decline. 

Egypt and Jordan are pointed examples. In exchange for joining in the war, Egypt hoped for massive foreign investment. What it got was relief of its $6.8 billion debt to the U.S. and half its debt to the group of credit institutions known as the Paris Club. It then discovered that it was required to institute an austerity program-but not even that made it attractive to investors.
Jordan's lot wasn't much better. First, it had to sever its relations with Iraq-a major source of its income. Then, fearing that the Palestinian economy would burgeon at its expense, it rushed to strengthen its relationship with Israel. A peace treaty with Israel, Jordanian politicians believed, would help their country gain tourist revenues and foreign financial help and investments. They were wrong. Tourism did not pick up; what Jordan got was an Israeli industrial park employing 6,000 workers at very low wages. After 1996 Jordan's economic growth ceased. Its commercial exchange with Israel reached no more than $30 million. (Jewish World Review, The Economics of Peace, November 1998).

Beyond concern for the Palestinians, the Arab world has been quick to recognize that the only beneficiaries of the peace process are Israeli capitalists, while the Arabs lose jobs and become poorer. Arab public opinion and intellectual circles have stubbornly rejected the peace agreements and any establishment of economic or cultural relations with Israel. As long as these problems remain unresolved, Israel will be unable to guarantee the stability that foreign capitalists require to protect their investments and secure the profits they demand.

Israel's split personality condemns it to limbo

Israel's inability to find a stable place in the Global Village stems from social and economic traditions that collide head-on with the demands of the new world order to strip away government responsibility. These traditions express two foundational aspects of Israel's identity: as a settler colony and as a social democracy.

As a settler colony, Israel remains in a state of continual formation. Its demographic make-up is unstable, since it remains committed to absorb more Jewish immigrants in order to complete its colonialist vision. Its political system is continually transformed as political parties, many of them based on ethnicity, appear and disappear. Its borders, too, are unsettled, since it continues to occupy Palestinian and Syrian (and, until 2000, Lebanese) territory.

These colonial characteristics spur Israel to resist such IMF requirements as keeping budget deficits below 2 percent of the GDP and privatizing its banking system and infrastructure utilities. Because of perceived colonial and security requirements, Israel's government feels a need to keep vital economic sectors under its hold. Because its colonial activities create economic and security problems for its Jewish citizens, the government also needs to retain a minimum of welfare benefits to prevent them from emigrating.

Public ownership and welfare concerns are part of Israel's tattered social democratic heritage as well. From the beginning, the unions (the Histadrut Labor Federation) and the state controlled much of the economy, and welfare programs were central to government policy. This traditional commitment has made it even harder for Israel to privatize government-held industries and facilities. 

Israel took some steps in this direction in 1985, with a set of liberalization measures that effaced many aspects of the welfare state. These led to a sharp social change, drastically widening the gap between rich and poor. By 1998, the household income data released by Israel's Bureau of Statistics showed a clear gap of 12 to 1 between the richest tenth of the population, with 31,462 New Israeli Shekels a month (US$ 7,500) and the poorest tenth, with 2.655 NIS. (US$ 650).
Israel's postwar benefits, however, proved equally illusory. In spite of the structural changes of the 1980s, in spite of the budding peace agreements, Israel could not maintain an atmosphere that could secure a continuous flow of investments. Foreign investment, for example, rose from $537 million in 1992 (before the signing of the Oslo agreements) to $3.6 billion in 1997. The following year, however, the election of Binyamin Netanyahu as Prime Minister increased tensions between Israel and its neighbors, frightening off investors. Foreign investment dropped by 40 percent. These figures, published by the World Trade Organization (WTO) in September 1999, show how badly Israel needs normal relations with the Arab countries to guarantee the political stability and security that investors demand.

If the Israeli government were to fully accept the conditions of globalization, it would thus face a serious confrontation within its Jewish population, between the "haves" (generally of European origin) and the "have-nots" (commonly Jews who came from the Arab world). Arguably, only the availability of a common enemy-Arabs and Palestinians-has preserved a national consensus to this point. This social reality has restrained the government from turning capitalism loose and allowing the market to decide the course of the economy.

Israel's damaging confrontation with the Arab world feeds on its refusal either to absorb the Palestinian people or to detach it by granting full political and economic rights. Shimon Peres, architect of Oslo, says he's worried by the projection that by 2020 the population of Israel and the Occupied Territories-some 26,000 square kilometers-will reach a jam-packed 24 million, half Jewish and half Arab. 

Peres' anxiety expresses Israelis' concerns about the need to separate the two populations. It also indicates their unreadiness to grant the Palestinians full independence, a step they believe would threaten both the dominance of Israel and the security of Jordan. What Israel is willing to offer is a weak Palestinian entity dependent on Israel.

Israel remains in a state of schizophrenia. Enthusiastic about globalization and the new economy, it yet identifies itself as a colonial power, in which security and demographic considerations matter more than purely economic ones. It also remains in some sense a social democracy, in which social outweigh economic concerns. Israel's self-definition thus prevents its complete integration into the global capitalist market on the U.S. pattern. International recognition and peace agreements cannot save it if it cannot establish economic and social stability.

The Arab world at the crossroads

The difficulties that confront the Arab world on its way to join the global economy are different from those that Israel faces. If Syria, for example, wants to be accepted as a member of the new economic order, it will first have to accept Israel's definition of peace. It will also be compelled to open its markets to foreign capital and normalize its relations with the Zionist State. Such a development could provoke a real revolt against the present regime, which monopolizes the economy, including banks and insurance companies-and which is based on nationalistic rhetoric.
Egypt faces an even more delicate situation, since it is considered one of the region's main supporters of the world capitalist economy. If it fails to adapt to the dictates of this economic system, it may confront a social and political earthquake that could shake the whole Arab world. Accepting these dictates, however, also risks shattering Egyptian society.

The Mubarak regime long ago lost its credibility in the eyes of its citizens and the Arab world by its privatization of state-supported industries during the last eight years-and by its maintenance of diplomatic relations with Israel for the last twenty. The Egyptian people suffer from a political system that systematically represses civil rights. The country's political and economic institutions are replete with corruption.

As a condition for joining the global club, Mubarak is expected to erase the remnants of the economic system created by Abd El Nasser's Nationalist Regime during the fifties and sixties. If Mubarak fulfills the U.S. directives, he will have to transfer Egypt's oil facilities and the Suez Canal to foreign monopolies and to abolish the subsidies for bread and cooking oil.

The Egyptian government owns industrial facilities that employ 25 percent of the working force. These are starved of development capital; if they are privatized, many will close immediately. The effect on the unemployment rate and the already low standard of living of vast layers of the society could be explosive. (The Senate's Report and Le Monde Diplomatic, October 1999)

The Egyptian government's dilemma is clear. If it refuses to fulfill the conditions of the World Bank, the acute lack of investment will create a growing wave of economic, social, and political problems. If it goes through privatization, it will lose its control of key economic sectors and its grip on the unions. The social gap will widen and eventually explode; the upheaval in Jordanian society when its government raised the price of bread merely hints at what would ensue.

The present game involving the regime, the unions, and a nominal opposition can continue without disturbance so long as the Egyptian citizen gets his $20 a month minimum wage and cheap bread. But if the economy is liberalized in compliance with the conditions imposed by the international financial institutions, nobody can guarantee the regime's future, for it will then face people who are not merely poor, but hungry.

Impending economic collapse is not restricted to Egypt, even if its effects are deeper there because of Egypt's central role in the Arab world. Rather, it threatens all the Arab regimes that hurried to seek membership in the world capitalist market, ready to normalize relations with Israel and to adopt economic measures that are leading their countries to social and economic disaster.  n

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