On the eve of the outbreak of the Al-Aqsa Intifada, the Israeli and Palestinian economies never looked better. Israel was reaping the benefits of a thriving, cutting-edge start-up industry, with an unheard-of growth rate of 8-9 percent during the first three quarters of 2000. The Palestinians' standard of living was also making impressive leaps. The Palestinian Authority (PA) was working on plans for six giant shopping malls on the invisible border separating Israel and the Palestinian territories to attract even more Israelis to shop on the West Bank. Who, for example, can ever forget the long line-ups on Saturdays at the entrance to Biddya?
So it is especially painful and disappointing to realize just how much wealth, how many golden opportunities for development, for improvement in living standards and for the broadening of intellectual horizons have been lost by both sides as a result of the fighting that began late last September.
l Economic growth. The first variable to become an immediate Intifada casualty was economic growth. Tourism was devastated almost instantly. The construction sector plunged into a deep hole, after only just having shown some signs of recovery midway through 2000. Other economic sectors soon also began showing the harsh impact of the Intifada. Before the latest violence, economic growth was anticipated at reaching 5-6 percent in 2001. Now, however, it is clear that growth will not exceed 1-2 percent, which means a 4-percent production loss - that is, a shortfall of $4 billion, or something like NIS 6,000 per family in Israel.
However, nothing is straightforward in economics, so it is not absolutely certain that the loss can be attributed solely to the Intifada. After all, the Israeli economy sustained a severe blow from quite another direction in the last quarter of 2000, when the Nasdaq stock market crashed, and Israel's start-up companies were badly shaken.
l The flow of investment capital into Israel. The billions of overseas dollars that poured into the Israeli economy last year have simply dried up. The entire flow of investment capital from abroad seems to have evaporated overnight. The principal reason is the crisis prevalent among the start-up firms, which, once upon a time, had no trouble raising billions of dollars on the Nasdaq stock market. Less foreign investment capital means a much more sluggish growth rate for the economy. A dramatic decline can also be observed in domestic investments, which are shying away because of the increased military risks.
l Unemployment. Although the latest figures do not indicate it yet, this year's reduced economic growth rate will inevitably translate into a higher unemployment rate.
l International credit rating. The international credit rating firm, Fitch, this week announced there was a solid chance that it would soon lower Israel's international credit rating because of the deterioration in the security situation since the publication of Fitch's previous report in December 2000, and because of the slim prospects for an easing of tensions or for a renewal of the peace process. A lower international rating for Israel would have a grave impact on the national economy. It would force Israeli companies negotiating loans overseas to pay higher interest rates. This, in turn, would reduce the desire to invest, would down-scale production levels and ultimately would raise the unemployment rate.
l The state budget. This week the government decided to slash NIS 2.8 billion from the various ministerial budgets, in order to have the cash to cover the additional costs being incurred by the defense establishment, because of both the Intifada and threats emanating from Israel's immediate vicinity. Budget-slashing on such a scale will deliver a body-blow to Israeli society - to its social service systems and, most of all, to the basic services available to Israeli citizens in education, health care, immigrant absorption and housing. Everything will be affected by the budget cuts, including the country's infrastructure, because NIS 350 million will be "expropriated" from the Ports and Railways Authority's budget. Less money will also mean the temporary shelving of a double-track rail line for Be'er Sheva.
l The European Union. Israeli exports to European Union countries have, up until now, enjoyed a preferential status that has taken the form of a total customs exemption. But EU pressure is mounting for the imposition of full customs duties on all Israeli exports that have originated in the industrial zones or agricultural areas of the territories. The rationale for this pressure is the argument that the settlements are not part of Israel, proper. The damage of such an EU decision would make exports less attractive. The result would be a further decline in economic activity - and the inevitable further rise in unemployment.
l The long-term impact. The short-term effect of the Intifada's outbreak was serious damage to the Israeli economy, as expressed in a particularly dismal last quarter for 2000. Today, Israel is midway between its short- and long-term effects. The economy is in the adjustment stage, reorganizing to deal with the new situation while private consumption is surprisingly on an upward swing. The problem is the long-term implications.
If the fighting and the bombings continue, and if Israel is again perceived as a garrison state - an international outcast that carries out aerial bombing raids against refugee camps - the economic repercussions will be somber indeed: Investment funding will shrivel up, the prospects for future economic growth will fade, the gloomy economic climate will become even gloomier, and the low morale of the Israeli public will sink even lower.