Has the Peace Process Reaped Economic Dividends? Eliyahu Kanovsky Policy Paper No. 11, From the book: Israel at the Crossroads, Arieh Stav (ed.), ACPR Publishers, 1997, 196 pages (Presented to the J.E.C. on Capitol Hill, October 21, 1997)

Summary

Shimon Peres, first as Israel’s Foreign Minister and later as Prime Minister, assured his people that with so important an economic stake in the "peace process" the Arabs surely would favor continuing peaceful relations with the Jewish state. His calls were echoed by other leaders and diplomats, perhaps most recently by US Undersecretary of State Joan Spero, who said in a speech on October 11, 1996: "Ever since the Camp David accords, the peace process has had an economic as well as a political dimension, with the goal of giving all the parties an economic stake in its success." More than three years have passed since the Oslo Accords were signed on the White House lawn and acclaimed as the harbingers of peace and prosperity to the Middle East. The prospects for peace have been widely discussed.

Public statements and wishful thinking aside, the Oslo agreements can contribute little or nothing towards the achievement of economic prosperity, the present theme.

The Declaration of Principles (DOP) was followed by numerous Arab-Israeli meetings and multinational economic conferences (notably in Casablanca and Amman), the purposes of which were to forge and to cement Arab-Israeli economic relations, to attract foreign as well as local investors, and to deliver ever-growing prosperity to the region. Various scenarios were depicted for the future of the Middle East, the essentials of which were as follows:

1. The peace agreements would be followed by a significant reduction in military spending in the Arab countries as well as in Israel. The reallocation of substantial resources from the military to the civilian economy would stimulate and finance greater investment in infrastructure, as well as in educational and health services.
    

2. Regional infrastructure projects in transportation, communications, water and power, etc. would be supported by foreign aid.
    

3. Joint Arab-Israeli economic ventures would be fostered especially in industry, agriculture, and tourism.

A large and growing inflow of foreign private investment would ensue, which would give a strong boost to the regional economies, raise personal incomes, and steadily reduce the high levels of unemployment prevailing in the Arab states.

Israel’s economic history is varied: a series of major achievements accompanied by serious problems. The 1950s, 1960s and early 1970s were highly successful in terms of economic growth, with the exception of the 1966-67 recession. The Yom Kippur War of 1973 and the oil shock of 1973-74 greatly aggravated inflationary pressures and balance of payments problems. The second oil shock (1979-80) raised Israel’s oil import bill to over $2 billion per annum, a value that exceeded the grants which Israel received from the United States. The oil shock and the huge revenues acquired by the rich Arab states helped to stimulate the Middle East arms race, further straining the Israeli economy. Hyperinflation, amounting to hundreds of per cent per annum, became the norm, with all of its attendant evils. The results of the 1985 national unity government were very beneficial in curbing inflation: Based on an international comparison, since 1990 Israel has enjoyed a high rate of economic growth, around 6% per annum, three years before the signing of the Declaration of Principles. The improving state of employment in the course of the 1990s was accompanied by moderating inflation, which by 1995 was down to 10%. But the improving state of employment was accompanied by moderating inflation, which by 1995 was down to 10%. These deficits were covered, for the most part, by loans and a growing external debt.

The data do not suggest that the Oslo agreements had any perceptible effect on the Israeli economy. Israel’s recent economic woes are attributable mainly to unwise government economic policies. It has been wise or imprudent economic policies which have made the difference. Only basic, fundamental economic changes can significantly improve the performance of the Middle Eastern economies, and provide jobs and decent incomes for the vast army of unemployed and under-employed, the poor and downtrodden — not interstate politics.

In the past decade the Palestinians suffered from a series of severe setbacks. The sharp decline in oil prices since the early 1980s, and especially since the mid-1980s, reduced the demand for imported manpower to the rich Gulf states. The Intifada, which started in 1987, had a depressing effect on the Palestinian economy. Following the liberation of Kuwait by the US and allied forces in the Gulf war, Kuwait retaliated with a mass expulsion of about 400 thousand Palestinians. The large annual financial contributions from Saudi Arabia and Kuwait to Arafat also came to an end in 1990. Restrictions on entry to Israel following suicide bombings have also damaged the Palestinians’ economic position.

Despite generous international aid, the two million Palestinians under Palestinian Authority control "have yet to see tangible benefits. For many, living standards have declined." The Economist notes that the underlying problems stem from gross inefficiency and endemic corruption. Little of the aid money is available for investment in infrastructure, for developing industry and agriculture, etc. The inefficient and often corrupt administration which has emerged in the Palestinian Autonomy often discourages, rather than encourages, productive enterprise and investment.

Between 1972 and 1982, real GNP (corrected for inflation) rose by an annual average rate of 9 to 10%, or 5 to 6% per capita, a very noteworthy achievement. However, much of the prosperity was due to temporary external stimuli. Between 1982 and 1987 GNP was stagnant as compared with a very rapid growth of 10% per annum in the previous five years. By 1990 things had got so bad that the Economist wrote "With popular resentment over past corruption still acute, and with little prospect of a substantive economic improvement, the political situation remains explosive."

The immediate aftermath of the Gulf War of 1990-91 was an even more depressed Jordanian economy. As a result of siding with Saddam Hussein, aid from various quarters was cut off and also workers in Kuwait and Saudi Arabia were expelled and returned to Jordan. In 1991 aid was resumed by the USA. Between 1987 and 1991 GDP (corrected for inflation) fell to a disastrous 13%, and on a per capita basis by 21%. But this was followed by four years of rapid growth, with GDP increasing by 38% between 1991 and 1995, or 13% per capita, over the four-year period. Paradoxically, according to one report, the refugees brought in about $1.5 billion, much of it for housing construction. This was a massive infusion into an economy with a GNP of $5 billion in 1992. But the very wide and growing gap between the few rich and the many poor may well foster revolutionary unrest and political instability. Rising unemployment and inflation, and falling living standards for the large majority, while a small minority engages in conspicuous consumption, can only add fuel to the terrorist fire: in fall 1996 the prime minister stated in parliament that there had been thirty-six attempted terrorist incidents.

It was widely believed that, in the aftermath of the Jordan-Israel peace agreement concluded in 1994, there would be economic co-operation yielding substantial economic benefits to all participants. (The same had been thought about the Israel-Egypt agreement). Three international conferences have failed to further co-operation: Casablanca in 1994, Amman in 1995 and Cairo in 1996. Apart from debt cancellation. Jordan has scarcely anything in the way of benefit. Changes in domestic economic policies are what is needed.

Egypt is a prime example of an economy ruined largely by its own self-destructive policies. Estimates for 1990-95 indicate that the average annual growth rate of the economy was a miserable 1.6%, while population grew by 2.4% per annum; and this in spite of massive financial aid and the Gulf War resulting in a major part of the $50 billion debt owed by Egypt being cancelled. Egypt’s current economic problems stem largely from the legacy of "Arab Socialism," instituted by President Nasser in the 1960s. For example manufacturing industry suffers from gross inefficiency, over-manning and very low productivity and profitability. In the seventeen years that have passed since the conclusion of the peace agreements between Israel and Egypt, it is hard to discern economic progress. Nor is there any indication of any cutback in Egyptian military expenditures.

It is abundantly clear that disruptive forces, economic and other, are becoming stronger in Saudi Arabia. the extended royal family, and others close to the royal family, continue to enjoy very high incomes, while many or most Saudis are suffering from declining living standards: since 1992, the population has grown faster than the economy, i.e., the growth rate of GDP per capita has been zero or negative. Few Saudis have the necessary skills to replace foreign technicians, mechanics, and other skilled workers. The Gulf War and its aftermath made a bad financial situation even worse. The budgets for 1995 and 1996 indicate that the authorities are trying to muddle through without taking any drastic measures to cope with the deficits. It is difficult to envisage cut-backs on expenditure and equally a rise in oil prices or exports. Saudi ability to cope with the financial crisis is greatly inhibited by: (1) the drive to increase military spending; (2) the opposition to sharper cutbacks in subsidies. 3) the pressure to create more make-work jobs for Saudi graduates so reducing their unemployment. (4) the voracious financial demands of the royal family.. Aid to poorer Arab countries has been cut and also arms purchases have been more limited; but the ‘peace process’ has little effect whatsoever on the Saudi economy.

Unofficial estimates for 1995 and projections for 1996 and 1997 point to even larger deficits. The record of the past tells us that persistent and growing balance of payments deficits are a harbinger of future trouble. This might not be the case if there were to be large-scale foreign private investment. In the absence of basic economic reforms, the Syrian economy will continue to be dependent on exogenous factors, as it has since the 1960s—most importantly oil. The possibility of foreign aid, as in the past, is a second important factor. A third factor is Syria’s effective control of Lebanon.

The Syrian forces do not meet with any physical resistance to their occupation of Lebanon and the tribute they collect is substantial—why move? Of possibly greater importance from the point of view of financial rewards is the army’s involvement in the flourishing and lucrative drug trade in Lebanon.

Will Israeli-Arab peace agreements significantly reduce Middle East military expenditures? All the evidence points to the conclusion that the era of beating swords into ploughshares has not yet arrived in the Middle East. Israel’s reduction in military outlays since the 1980s has been unilateral. In democratic countries, the armed forces serve to protect against foreign enemies and the police deal with criminals. In autocratic regimes, the armed forces serve to protect the regime from its internal as well as external enemies as in Egypt, Syria, Iraq, and Saudi Arabia. Oslo promises have not changed the fundamental structures of Arab economies, nor have they stopped the flow of weapons.

What the Iranian revolution shows is the danger in undertaking joint ventures with regimes which can be overthrown. (There had been a joint venture in an oil pipeline from Eilat to Ashkelon). No one can be certain regarding future revolutions when, where, and if they take place, and what will be the policies of the revolutionary regime. As demonstrated by the experience of the World Bank, joint projects often lead to international disputes.

Recent World Bank studies have come to the not very surprising conclusion that good governance is a prerequisite for rapid economic growth. The failure of Egypt’s economy, especially in the past decade, despite massive foreign aid and a peace agreement with Israel since 1979, is due to poor governance and policies adverse to economic growth and development. No peace agreement, even when associated with joint regional projects, free trade, etc., can substitute for wise economic policies.

Included in the many factors affecting regime stability is socioeconomics. Provision of jobs and decent incomes adds to stability whereas militancy (and violent coups) means deprivation and poverty; so the Middle East especially where corruption enriches a select few who flaunt their growing wealth while the large majority suffers from falling incomes and poverty.

Jobs in Saudi Arabia, Kuwait, and other Gulf states could be provided for those Palestinians whom Israel feels pose a security threat, and who may not supplant, therefore, foreign workers. The Saudis, Kuwaitis, and other Gulf Arabs shun manual labor as demeaning and have Asians working for them (2 million foreign workers in Kuwait in 1995).

Syria may prefer, for various reasons, a non-belligerency pact which implicitly sanctions Syria’s continued occupation of Lebanon, or of most of Lebanon, rather than a full-fledged peace pact with Israel: one of the motivating factors behind Syrian policy may be the significance of the Lebanese economy to that of Syria.

Achieving prosperity in the Middle East is dependent primarily on the removal of internal social and economic obstacles. The Oslo agreements can contribute little or nothing towards the removal of the impediments to economic growth and prosperity. They may have engendered false expectations and dangerous disappointments.