TEL AVIV — Israel’s diplomatic campaign against the Palestinian Authority and last summer’s Operation Protective Edge in Gaza are no doubt among the factors contributing to Israel’s current economic slowdown.
A study by economists Joseph Zeira and Tal Wolfson from the Israeli-Palestinian think tank Aix Group offers some data illustrating the differences between the recession during Israel’s first decades and the one it has faced since the 1980s.
Israel no longer has broad conflicts with Arab armies, and so its defense expenses have dropped. At the same time, Israel’s business sector has grown and its developed economy has become more vulnerable to economic slowdowns.
In the first three decades after Israel was established in 1948, wars with neighboring countries necessitated growth in the country’s defense expenses. During those years, Israel saw two main recessionary periods. The first was in 1952-1953, when many Jewish immigrants arrived and the country had no foreign currency. Ending this recession was primarily thanks to reparations from Germany.
Israel’s next major downturn was in the mid 1960s, when the German reparations ceased. Later, in the years 1976-1977, after the 1973 Arab-Israeli war, the country’s defense budget stood at 30% of its gross domestic product, with defense expenses endangering Israel’s financial stability. In the early 1980s, inflation spiked to 400%.
Signing the peace accord with Egypt also marked the end to Israel’s wars against Arab armies, and the defense budget shrank substantially to 7% of the GDP. But in the meantime, Israel has increased defense funding in preparation for armed conflicts with the Palestinians.
This kind of conflict is different from past wars — they last longer and have no clear conclusion. They cost less than those wars, but they also become a burden on the Israeli economy. For instance, in recent decades, the country’s defense expenses have doubled to 13% of GDP.
Since conflicts with the Palestinians broke out, the Israeli economy has experienced four recession areas — after the first Intifada (popular Palestinian uprising) that ended in September 1993, following the 1995 assassination of then-Prime Minister Yitzhak Rabin, after the second Intifada that ended in 2005, and in the wake of 2008’s global economic meltdown that largely spared the Israeli economy.
Discontinuation of the peace negotiations between Israel and the Palestinians, the threat of international boycotts, and the upcoming elections bear a heavy economic cost that embodies not only the official defense budget but also expenses for shelters, security and mandatory military service.
