Why there is an economic argument for peace

6/21/13 Pieria 

Sometimes articles are written that are perverse enough to allow even a non-economically minded analyst such as myself to question them. A few weeks ago, at Stanley Fisher’s final Knesset hearing, he made a pitch for peace with the Palestinians. He did this from his position of central bank wizard who kept the Israeli economy growing through war and global recession.

Remarking on his remarks David Rosenberg decided to publish a piece on Ha’aretz claiming there was no economic argument for peace. There were of course legal and political reasons, but the economic peace dividend that Secretary Kerry and others have spoken of is a myth.

Now David Rosenberg is not anti-peace – the end of his piece is clear that peace is imperative. But his economic reasoning is flawed.

Starting from the top, Rosenberg claims that none of the four major economic threats have to do with the political situation or a bloated defense spending:

“The four big problems the economy faces today, as acknowledged by Fischer in his finance committee remarks, are income inequality and poverty, a poor education system, business concentration and low productivity. None of them can be directly blamed on Israel’s high defense burden or political uncertainty.”

Income inequality and poverty has direct connections to the current political situation as does education to a lesser extent. There is a race to the bottom of the economic tree by both the ultra-orthodox community and the Arab sector in Israel. The ultra-orthodox community by 2023 will make up 33% of all Israeli Jewish kindergarteners (around 26% of the total Israeli population). The Arab community makes up roughly 20% of the total population.

There are issues of systemic discrimination in development or the Arab sector from both the amount of State funds the community receives as well as from institutional discrimination from much of the private sector. There are of course programs that have been set up to try and monitor and improve the situation but to pretend that Israel’s conflict with the Palestinians has no effect on the economic wellbeing of the Palestinian citizens of Israel is insane. The inability for 20% of the population to feel part of their society has big economic effects.

Within education, Israel has three different state school tracts; Arab, Religious and Secular. Within this system the conflict of course is less of a direct cause for underdevelopment (outside of the general discrimination that the Arab sector faces) but the ongoing conflict makes it doing anything within education an absolute minefield.

The current Israeli government is fixed on the ultra-orthodox, getting them into the work place and trying to sort out their schools. The Arab sector however is, sadly, for more of a hot topic to deal with. So to pretend that resolving the conflict will have no effect within these two domestic areas is ignoring the political facts of the matter.

Moving on the article continues to belittle the economic fruits a peace deal could bring:

“Little if any of this is ever likely to happen given the growing Islamization and chaos in the region. But even if some of the elements came into place, Israel would have little leeway to trim its defense spending and it is doubtful that for the foreseeable future the risk premium on our debt would change much either. Even Fischer acknowledges that we live in “unsafe and uncertain surroundings.”

The advantages of trade and economic cooperation that Peres used to market as the “new Middle East” have diminished over the years. We no longer need their capital or their energy because there is no shortage of investment funds and we are drowning in natural gas. The Arab world never needed our high tech because their economies are too low-tech, or our human capital because the countries that are wealthy enough to need it can source it from Europe and Asia. Israel’s natural economic partners are in North America, Europe and the Far East, not in the Gulf or North Africa.

Israel’s tourism industry would benefit from a peaceful Middle East, but is that what we really want? For every manager and marketing executive the industry needs, it employs far more waiters and chambermaids — low-paid, unskilled jobs that will inevitably be filled by foreign labor. Policymakers would do better to focus on creating jobs in high tech and financial services.”

Let’s go point by point.

Is there no need currently for Arab investment within Israel? Within the Israeli Jewish sector I am sure that some firms would love Gulf money and there is plenty of infrastructures where PPP relationships would definitely benefit from the Gulf.  Israel’s 20% Arab population would definitely welcome the ability to attract fellow Arab investments and could act as a bridge from the Arab world  the West.

The natural gas finds in Israel are definitely something to celebrate. Israel yesterday declared that it would export 40% of the gas. The economics of the situation however would be far more favorable if Israel were able to extract the gas and Pipe it directly to Turkey. The inability to progress on the political tract has greatly harmed the chances of Israel piping the gas through Turkey and into the market.

Apparently the Arab world will never need Israeli high tech as their economies are too low tech. The world is changing and will continue to change. To assume that having access to a market of hundreds of millions of people that are on your doorstep is irrelevant makes much of this piece irrelevant.

While I agree that much of human capital that Israel could offer the region would not be taken up immediately but huge sweeping statements that declare that there will be no market opportunity show the poverty of ambition that might live with David Rosenberg, but not with the Israeli business community I know.

Lastly David decides that while there will be a tourist boom, it is not something that Israel should want. It will just provide more low-paid jobs for foreign labor rather the high skilled jobs in high tech and financial services. Firstly an increase in Arab tourism can lead to an increase in the amount of jobs for the Arab community in Israel, that is in desperate need. Secondly the way you get people to open their markets to you, is to allow them to visit you. The two previous issues that David identified above could be greatly helped by having Arab entrepreneurs and investors visit Israel as tourists first.

It is important to state again that David is not anti-peace – he just believes there is not economic value to it. Having looked through his logic I don’t understand his argument. Why should Israel be different to every other country that has resolved its conflict and enjoy a peace dividend, why should it be exempt?

Fischer maintained throughout his tenure that peace would lead to a 5%-6% GDP bump. Nothing that David Rosenberg has written challenges this premise. Israel needs to make peace for many reasons – taking away the economic carrot is not smart, it’s just perverse.