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Has Israel's regional isolation helped protect its economy? - Page 2

Israel and Palestine

Has Israel's regional isolation helped protect its economy?

While Israel's isolation threatens its security, it has done wonders for its economy.

a certain extent, the United States.”

In Israel, the external source — loss of export opportunities as other economies suffered — was contained to a two quarter period in early 2009, after which came a hearty and immediate rebound.

“At no point has any Israeli bank faced the risk of collapse,” Strawczynsky said.

Ironically, Israel’s relative isolation may have helped inure it from greater harm.

“The Israeli government did not need to bailout banks, and also, despite a slight reduction in its tax income due to a light recession in 2008-2009, it was able to overcome the crisis without increasing the public debt,” said Joseph Zeira, a professor at the Hebrew University. “Note, that since Israel is a small, open economy, it is affected by global events and cannot fully escape global recessions. But it can isolate itself to some extent.”

More from GlobalPost: Israelis protest economic inequality

Significantly, the reasons for Israel’s financial caution and conservatism are borne in previous errors and crises buried in its history, “where both the banking sector and the fiscal authorities experienced severe episodes of malfunctioning bordering on disaster,” Zeira said.

“During the years 1967-1985, mainly due to increased defense costs, the fiscal expenditures rose significantly, to around 75 percent of GDP, deficit increased to around 15 percent of GDP, and that lead to increased debt (up to 160 percent of GDP) and to inflation, which at the end was as high as 400 percent annually.”

The trauma was significant and multi-faceted. “During the 70s and early 80s the banks manipulated their shares and gradually started to raise their value above market prices, in a pure Ponzi (or Madoff) scheme,” Zeira said, sparing no words.

“Finally they could not support it any longer, and in 1983 the government bailed them out. This bailout cost the public a lot of money and as a result the banks belonged to the government for a long time until it succeeded to sell them. Actually one of the large banks, Bank Leumi, has not yet been fully privatized.”

However glowing and vigorous the Israeli miracle, it remains subject to numerous potentially grave contingencies, not the least of them the possibility of major regional upheaval or war.

Moav listed five significant vulnerabilities: A lack of competition in certain segments of the economy, which has led to elevated prices on numerous goods and services; powerful labor unions in essential services such as sea and airports — Israel has seen 10 national rail strikes in the past six months; the ultra-orthodox, an “unsustainable situation” of a large and growing population with low labor force participation and high fertility; settlements, including “an entire political security situation making any arrangement between Israel and the Palestinians hard to obtain,” and defense costs.

Zeira sees two potential points of exposure. The first: rising social inequality.

“In the last decade, the GDP per worker rose by 9 percent, while real wages did not rise at all. This means that all the growth was concentrated at the hands of a small elite, the 1 percent, and did not go to the 99 percent. Today Israel is at the top of the OECD in its measures of inequality, just below the USA. Such a rise in inequality is dangerous to the social fabric of the society, as shown in the recent wave of protests. But high inequality is also detrimental to the economy. It means that access to education becomes less common, and social mobility is reduced significantly.”

The second risk is what Strawczynsky refers to generically as “the missile factor,” and what Zeira prefers to call “the lack of peace.”

“An outbreak of war can have significant negative economic effects. This is clear if we have a large conventional war. Such a war is usually very expensive, increases public expenditures and can lead to a fiscal crisis, just as in the 70s and early 80s. It is true that the chances for such a conventional war have been very low for many years, since the peace with Egypt [which took place in 1980.]”

“But the situation today is much riskier. There is a chance for a war with Iran. Also, the peace with Egypt is facing serious challenges as a result of the Arab Spring. Hence the chances for such a large-scale war are quite higher recently … promoting peace is important not only to save lives, but also to improve the econ-omy significantly.”