UN-Truth

There are glimmers of understated suggestions that members of the Israeli government are challenging the country’s sacrosanct Defense structure.

And, there are indications that this effort is being assisted by the American government’s touted effort to give Israel a “Qualitative Military Edge” or QME (see our earlier post from last week here) by allocating some $30 billion dollars a year.  

The QME program began in 2007, but — significantly –became part of American law in late 2008 (just before Operation Cast Lead, as blogger Paul Woodward has just noted on his own blog, War in Context, and also on the mondoweiss blog. The U.S. State Department gave a big promotional push to the QME program last week, as we noted in our post last week, just before U.S. Special Middle East Envoy George Mitchell arrived back in the region what may have been a fifth round of indirect talks, which concluded over the weekend (Mitchell is due back in Washington on Tuesday).

The Governor of the Bank of Israel, Stanley Fischer, told journalists in Jerusalem today (Monday) that the formulation of the country’s new budget, now in the process of being approved, turned on the relative roles of defense and education — with the defense allocation was decreased and the education budget was increased.

He also noted that a ten-year program of American support for the defense budget started just after Israel’s “Second Lebanon War” in July and August of 2006.

Fischer said that the Israeli economy had “very serious problems in the first two years of this decade” — those were the hottest years of the Second Intifada, and 2002 saw the IDF reoccupying all the cities of the West Bank and putting Palestinian leader Yasser Arafat under siege in his alternate Presidential headquarters, the Muqata’a, in Ramallah. Then, slow growth resumed 2.5 percent a year, until the third quarter of 2006 — during the war in Lebanon — when Israel’s GPD went down by 2-3 percent, “because large parts of the country were closed down”, Fischer noted.

But in the last quarter of 2006, Israel’s economy “grew by 10 percent, partly because confidence was being maintained”, Fischer said. “And the exchange rate (of the Israeli currency, the shekel) was stronger at the end of the war — that surprised me”, Fischer added.

This happened as the U.S. announced an increase in military spending, starting with $50 million in 2006, to be continued for the following ten years. The U.S. has just announced a request for a $2.77 billion dollar allocation for Israel for the coming American fiscal year [which starts in October].

There is no American “civilian” aid to Israel now, Fischer stated, only military aid. [There is private American donations that are "significant, but not macro-economic", he added.]

Meanwhile, there has been a policy recommendation in Israel to limit defense spending growth to 2 percent annually, Fischer said — nothing that there is a current argument between the Treasure and the Defense Ministry about whether or not this limit has been observed.

As the Israeli military budget is quietly being pruned, the Israeli educational system may be in for a spending boost. “If we look at exam results, the level of educational attainment in the country is declining, which is a major threat in the long run”, Fischer said. And “every year for the past five years there has been a major crisis in the educational sector”, with the school year not opening on time [due to teacher strikes, etc.]

He noted that “The rate of return for [investment in] higher education is 16 percent — so it is a good investment”, Fischer said.

The Israeli economy grew an estimated 3.4 percent in the beginning of this years, Fischer said (final data will be available in a few weeks), but expectations are “significantly less good for the third quarter”, because export performance, sales, are “not doing that well, and already in May and June there was negative growth in exports” — largely because the U.S. and Europe, the largest customers, are not doing so well. Fischer indicated that there is now an effort to shift rapidly to send exports to the Asian markets.

“What is going on in the rest of the world negatively affects our growth prospects”, Fischer said.

Since 2003, the Israeli economy has had a balance of payments surplus — “We’re exporting more than we’re importing”, said Fischer, a former Professor of Economics at MIT, Massachusetts Institute of Technology.

Israeli consumers, however, “continue to feel good and to buy … so our growth is more driven by domestic factors”, he added.   However, due to strict banking regulations, Israelis are relatively not in debt.  And, unemployment is less than expected, Fischer noted — it’s at a 15-year low, and dropped to around 7 percent last month — although there is a crisis in the world.

“Fiscal policy in Israel is disciplined”, Fischer said, “though Israelis are not”.

Earlier this month, Israel’s Minister of Finance, Yuval Steinitz, said at a discussion in Tel Aviv that Israel’s response to the crisis in the global economy — especially after the collapse of Lehman Brothers in September 2008 –was different than the panicked reaction in other countries. “We in Israel adopted a totally different attitude. Instead of injecting money, which will have to be paid back in two or three years, which is sacrificing the future, he said, “we [in Israel] are giving priority to the future, to save the economy in the present … we gave clear priority to longer-term plans, and we took some immediate though very major steps. While in the U.S. there were several budgets, every few months, but we went to a 2-year budget, a first in the history of the developed world, in the middle of a crisis”.

Steinitz said that this sent a message: “Look, we feel confident enough to plan for two years, and we’ll keep some of our capacities for the recovery stage. Secondly, we came with a totally different tax policy … [Instead of lowering taxes] I raised VAT”.

He said that the government urged businesses not to fire people, because there will be a recovery, and things will be better. And, he said, “we gave very generous guarantees to exporters, and a little extra to R + D [research and development]“.

Reliable longer-range plans will “solve the panic that is the source of the present problems”, he said.

Steinitz, a former Professor of Philosophy at the University of Haifa, cited Aristotle’s observation about regular causality [cause + effect], and “backward causality”, which is what happens when human beings adjust their plans, and change their behavior in the present to achieve something in, say, two years’ time.

“In economy, the future is more important than the present”, Steinitz stated. “The future is even more influential at the present, than the present”.

Filed under: Global Economy, Israel, USA