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Tuesday, 18 February, 2003, 08:48 GMT
Israel's fall from economic grace
A graph to show Israeli GDP


One of Israel's leading commentators has resorted to satire to get his message across.

"If your quality of life and personal security have improved, go ahead and do it: Vote Sharon," says Yoel Marcus of the left-wing newspaper, Ha'aretz.

The economy is not always the number-one priority

Prof. Avia Spivak
Bank of Israel
"If you feel that after 700 Israelis have died and 1,600 have been injured, your life has improved immeasurably - then Sharon is your man."

Mr Marcus' diatribe touches upon all the issues that have laid siege to the Israeli way of life: the Palestinian conflict, poor security and a dismal economy.

In the last two years, renewed conflict with the Palestinians has helped plunge the Israeli economy into the worst recession for 50 years.

Downward spiral

The link between conflict and economic sloth has become increasingly evident as unemployment soars, incomes drop and poverty increases.

Election posters of Ariel Sharon
Mr Sharon's budget precipitated the elections
"It the deepest recession that we have ever experienced in this country," Uriel Lynn, chairman of the Israeli Chamber of Commerce, told BBC News Online.

"We have lost about $2.5bn (1.5bn; 2.3bn euros) in terms of business product."

In 2002, economic growth contracted by 1%, just two years after Israel saw an expansion of more than 7%.

Even before the flare-up of the Palestinian conflict, the bursting of the tech bubble in 2000 hurt a country that had carved itself a niche in the global IT sector.

The subsequent Palestinian intifada - or uprising - in the same year has cost the country about 3% of its GDP and distracted attention from economic reform.

"The economy is not always the number-one priority," Professor Avia Spivak, deputy governor of the Bank of Israel, told BBC News Online.

"Israel is fighting to have its borders defined... in that context, economic reform comes second to political fundamentals."


War effort

The country is now seeing precious funds drain away, as it funds an expensive military campaign.

As a proportion of the budget, military spending, though historically high in Israel, had been declining over the last decade.

However, in the last year it spiked again, accounting for more than 10% of government spending, compared with an average of 2-3% in the UK and 5% in the US.

The amelioration of conflict is a necessary condition, but I'm not sure it is sufficient

Prof. Avia Spivak
Bank of Israel
During 2002, the Bank of Israel was also forced to raise interest rates to control spiralling inflation and stem the decline of the shekel.

Prime Minister Ariel Sharon, meanwhile, has pushed through a budget designed to cut public spending and rein in a widening deficit, but paid a high price.

Disputes within Mr Sharon's coalition left him without a parliamentary majority and forced him to call the general election.

Election run-up

There is not much clear water between the economic policies of Mr Sharon's Likud party and its left-wing rival, Labour.

Ariel Sharon giving a speech
Sharon's Likud and Labour have similar policies
But whichever party wins the election will have its work cut out.

The Bank of Israel is crying out for reforms to the tax system and would like to see greater investment in infrastructure to stimulate the economy.

The business lobby wants to see less red tape, a reduction of taxes and more privatisation.

"There is need for a massive reform so that the business sector can continue to grow," says the Chamber of Commerce's Mr Lynn.

Economists also estimate that the new government will also need to cut budgetary spending by between 5bn shekels and 15bn shekels.

However, the worry for Israel is not the need for reform - that is only too patent - it is whether the winning coalition will be tough enough.

"The lack of a single party majority, along with Orthodox parties demanding a big chunk of social spending, have made the situation very difficult," says Timothy Ash, an economist at Bear Stearns.

Looking for recovery

Without prudent management of the economy, Israel risks the return of inflation problems, devaluation of its currency and flight of capital.

"There would be a feeling that things were out of control," says Avia Spivak, who is also an economics professor at Ben Gurion University.

Mr Lynn, who is only "50% optimistic" that reform will happen, says that "if it is not forthcoming in 30-60 days, it will become a matter of emergency".

But there is no easy solution. "The amelioration of conflict is a necessary condition, but I'm not sure it is sufficient," adds Professor Spivak.

Every day Israelis are shutting their wallets, getting laid off and even going hungry.

Any improvement in the Israeli "quality of life" may be a long way off.

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Avia Spivak, Bank of Israel
"We know there is more demand for food where food is allocated to very poor people, so yes the Israelis suffer"

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