He’s not alone. Ever since the latest intifada began two years ago, Israel’s economy has gone into a serious slump. Economic output has been shrinking for two years. Unemployment now exceeds 10 percent, and inflation will reach 8 percent this year. The country’s construction and agriculture industries have been in steady decline, but now the malaise has spread to business sectors that, not long ago, were thriving.
The intifada, which has taken an even higher toll on the Palestinian economy, is not solely to blame. “We’ve been hit by series of complicating factors,” says Nadine Baudot-Trajtenberg, an economist with Israel’s Bank Hapoalim. Tourism and regional trade have certainly been walloped by the bloody conflict with the Palestinians, which has never looked more intractable. But the large high-tech industry–which powered Israel’s economy through the late ’90s and accounts for an astonishing 65 percent of industrial exports–has fallen victim to a worldwide plunge in technology spending. Israelis who do have jobs complain of salary erosion due in part to a sharp weakening of the local currency. Israelis are even buying less meat, drawing cattle raisers into the cycle of hardship.
Yet while an economic issue–funds for Jewish settlements in the West Bank–was the pretext for the breakup of Israel’s broad governing coalition last month, analysts say the election tentatively slated for late January will not be fought over the economy. That’s because voters have always viewed security matters as paramount in Israel, and economics as a political luxury. “Candidates have tried to campaign on economic issues, but they usually don’t resonate,” says Hanoch Smith, a Jerusalem pollster who has advised parties on both sides of the political map.
Prime Minister Ariel Sharon’s political fortunes illustrate the point. While only about 20 percent of Israelis think he’s done a good job managing the economy, according to Smith, about 65 percent are satisfied with the way he’s handled the security issue. And that’s just where his overall approval rating stands–65 percent. Smith says some people tend not to blame the government for their financial woes because they perceive them as being caused more by external factors than anything else. Even critics of Sharon’s economic policy tend to overlook it once at the ballot box. “People think about the bombings and the peace process when they cast their vote. Other things are secondary,” Smith says.
In Israel, the two things–peace and prosperity–are to a degree inextricable. Many sectors of the economy, like tourism, are critically dependent on a climate of security. Tourism revenue in 2001 totaled $2.5 billion, a decline of 42 percent compared with the year before. Two years ago tour guide Julie Baretz, 40, had more than a year of advanced bookings in her calendar. “People were saying at the time that the country was going to implode because of all the tourists,” she says. But more than half of her clients canceled while fighting raged in the West Bank and Gaza Strip, causing her income to plunge. She recently opted for government-sponsored retraining and now works as a gardener. Even the country’s high-tech industry is linked in some ways to the age-old conflict: overall exports dropped more than 10 percent between 2001 and 2002, from roughly $45 billion to about $39 billion. Yariv Klonover, who is 30 and single, had been working for a software company in a $60,000-a-year job–a healthy salary by Israeli standards–until forced out by layoffs 16 months ago. He thinks foreign companies are afraid to invest in Israeli firms for fear of terrorism. “I know there’s a connection. I believe companies are afraid their names will be tied to Israeli ventures,” he says. When the going was good, Klonover took out a short-term mortgage loan and bought an apartment in Netanya, north of Tel Aviv. Now, three years later, he’s behind on his payments and has run up a debt of several thousand dollars. “I don’t go to the movies, I don’t eat at restaurants. I think twice about buying a can of soda on the street,” he says.
The government’s response to the crisis has been to limit fiscal spending and wait for better days. But with defense spending hovering at 11 percent of GDP–nearly three times what it is in the United States–and with the government’s many coalition partners tugging at the purse strings, it hasn’t been easy. Israel’s budget deficit will be just under 4 percent of GDP this year, though the government’s original target was 3 percent. Sharon’s 2003 budget includes painful cuts on handouts to pensioners and students–but it doesn’t touch financial incentives awarded to settlers for moving to the West Bank. In addition, it earmarks billions for construction of a fence that would separate Israelis and Palestinians. International credit companies have already downgraded Israel’s local bond ratings. Further penalties might force Israel to ask the United States for loan guarantees. That last time that happened, in 1991, the United States leveraged Israel into curbing settlement expansion.
Zeev Holtzman, who heads Giza Venture Capital, insists the situation is better than it looks. Holtzman concedes that investments in Israeli companies have dropped 70 percent over two years, but he says the venture-capital decline in the United States has been sharper. Another executive, Bob Trachtenberg of Keryx Biopharmaceuticals, says that while investors balk at visits to Israel as long as the violence continues, Cyprus has become an alternate venue for meetings. “Cyprus replaced Beirut as a meeting place when the violence raged over there. Now it’s replacing Tel Aviv as well,” says Trachtenberg.
For restaurateurs like Basson, however, only peace can truly ensure a return to good fortune. Until then, he simply tries to keep his head above water. His staff of 30 has been reduced to just three people on salary. He says debt collectors come around every few weeks asking for money. The rent alone at his downtown location is $3,600 a month and, though the municipality has given him a break on some local taxes, the money is running out. “As long as I stay open, I can make occasional payments and fend off the collectors,” he says. But for that he needs customers, who for now are staying home.
