October 24th, 1993
The Impact of the Peace Process on Economic Trends
in the Israeli Economy -
Quantitative Estimates
by Haim Ben-Tzruya
(Issued by the Israeli Association of Chambers of Commerce)
A. INTRODUCTION
Since the mid-eighties, dramatic changes have taken place in the world
political and economic constellation. These changes have not passed over
the Middle East. The ending of the Gulf War marked the beginning of a
political process in the region in the aim of achieving long-term
stability. The Arab-Israeli dispute in general and the Israeli-
Palestinian dispute in particular constitute a central element in this
process. Despite the dynamic and complicated reality of the Middle East,
particularly in terms of the Israeli-Arab dispute, there is a strong
likelihood that the process will continue and that finally, in spite of
the hurdles along the way, an arrangement in the region will finally be
reached. This assumption is even more founded in view of the dramatic
boost given to the peace-making process with the signature of the accord
between Israel and the PLO.
Removing the political obstacles in the peace process will establish the
pivotal role of the economic element in the process. The implementation
of the agreement will bring about a substantial change in the region and
the economic possibilities available to the economies in the Middle
East, and particularly in Israel, both from the inter-regional and
global standpoint. The economic advantages, resulting from the existence
of new opportunities in a state of peace in the Middle East, will mainly
be expressed in the intermediate and long terms.
This paper tries to provide initial quantitative estimates of the impact
of peace on the economic trends which are anticipated without the making
of peace. The central result of this paper is that the achievement of
peace by itself will not trigger a "revolution" in the Israeli economy,
in the sense of shifting the economic activity toward the Middle East.
On the direct macro-economic level, a state of peace and economic
relations (primarily trade relations) with Arab countries does not have
a significant effect on the Israeli economy.
The main reason for this is that in a state of peace the relative
advantages of the Israeli economy as opposed to the relative
disadvantages of the Arab countries will become even more g in relation
to the present situation, since the "natural sphere of competition" of
the Israeli economy is in the Western and developed countries. However,
the achievement of peace with the Arab countries has very profound
indirect (economic) implications on the Israeli economy (detailed in
Section B), and they are the ones that will steer Israel into the lap of
the industrialized countries.
B. BASIC ASSUMPTIONS
In order to provide quantitative estimates for the impact of peace on
economic processes in the Israeli economy, several basic assumptions
must be made.
1. An agreement on the establishment of autonomy for Palestinians in
the territories of Judea, Samaria and the Gaza Strip will be
signed in the near future. Within this framework, the following
relevant assumptions, based on the accord between Israel and the
PLO, are accepted:
1.1 During the interim period of the arrangement there will be no
physical borders between the territories of the autonomy and
Israel.
1.2 The authorities of the autonomy will assume the classic
economic roles.
2. Following the signing of the autonomy arrangement, peace treaties
with neighboring Arab countries will be signed - Jordan, Syria,
Lebanon, and possibly also with other Arab countries.
3. Following the signing of the peace treaties, a process of
normalization between the countries will commence, including
economic relations. Within this framework, the Arab boycott and
all its aspects will be lifted.
C. DIRECT AND INDIRECT QUALITATIVE RESULTS
This section presents the direct and indirect qualitative results which
will be obtained (with high probability), based on the assumptions in
Section B.
1. Lowering the Defense Burden - A regionwide political arrangement
that will prove to be reliable in the long run, will create
political stability, which is a prerequisite for sound social and
political systems. This stability will allow for a significant
deceleration in the military armament process, particularly in
Israel. The reduction of the defense burden will release newly
available resources for positive, alternative applications, such
as investments in infrastructures, education, public welfare and
health.
2. Reducing Uncertainty - Increasing the political and military
stability in the Middle East will directly reduce the uncertainty
and risk involved in economic projects in the region, and
accordingly the price of capital available to local and foreign
entrepreneurs for financing their investments. This will lead to
increased investments in Israel and in the neighboring Arab
countries.
3. Lifting the Arab Boycott - Israel will benefit from the lifting of
the Arab boycott and all its aspects, thus removing difficulties
and obstacles in trade and in economic and business relations
between Israel and the rest of the world. This will generate an
increase in foreign investments and export, increase the range of
import sources to Israel, lower the costs of export and transport
to and from Israel.
4. Economic Cooperation - Agreements will be signed for economic
cooperation between Israel and its Arab neighbors. This agreement
will facilitate mutual trade and the (restricted) movement of
capital and labor, but the free movement of tourists within and
outside the region. Business partnerships between the economies of
the region will develop on their own, without government
intervention. Government intervention is necessary and desirable
(at least in coordination and establishment) when there is
cooperation between the economies for the purpose of exploiting
natural regional resources and the development of such regional
resources as electricity and transportation networks. Such
cooperation will be expressed in exploiting the advantages in size
in various economic projects.
5. Regional Tourism - Reducing uncertainty and increasing stability
will raise the Middle East's proportionate share of overall world
tourism.
6. Structural Change in Industry, Trade and Business services.
The implementation of the political arrangement will bolster the
trend of the strengthening of the trade and business services
sectors in the Israeli economy, while possibly turning Israel into
a regional strategic center for international companies in many
fields, such as finance, communications and logistics. In
addition, the Israeli economy's relative advantages in industry
will be based on high-tech technology and human capital, while
minimizing the need for artificial incentives (e.g. the
encouragement of export).
7. Research and Development - The proportionate share of R&D
activities will increase in Israel in the fields of medicine,
industry (high-tech industries) and agriculture.
D. QUANTITATIVE ESTIMATES
Qualitative results were presented in Section C. The quantitative
estimates for a new equilibrium in the economy, in a state of peace as
opposed to the situation if peace is not achieved, are based on the
central assumption that the trends that are destined to take place
without the making of peace will strengthen in intensity (the direction
is kept). The reason for this is that in a state of peace there will be
less effective restrictions in the Israeli economy, and the various
adjustment processes (such as structural changes) will enjoy greater
flexibility. The results are summed up on the following pages. Here are
a few comments:
1. The data for 1992 is first of all presented as the base year. The
source is data published by the Central Bureau of Statistics. The
estimates are for two points in time: 2010 and 2020. Two series
are presented for each point in time. The first column indicates
the projected figures without the making of peace, and the second
- in a state of peace.
2. The long-term estimates are based on the model of a small open
economy with an exogenous growth path. Four central changes in
relation to the basic outline are expressed in a state of peace.
a. Significant autonomous growth in investments in the economy
(reflecting investments of foreign companies).
b. Reduction of the defense burden.
c. Lowering of taxes.
d. Significant autonomous growth in the proportionate share of
tourism to Israel and to the Middle East of the total world
tourism.
1987 was chosen as the base year in tourism (1,379,000 entries),
since 1992 was an irregular year; it compensated for 1991, the
period of the Gulf War.