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«American Aid to the Middle East: A Tragedy of Good Intentions By Yuval Levin Aid in U.S. policy American aid to the Middle East is a tragedy of good ...»

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To maintain its control over the allocation of capital and resources and its dominant role in the economy, the government – again following the usual statist pattern – has established an intricate system of transfer payments and benefits to individuals. Public spending in Israel accounts for over 57 percent of the nation’s GDP41 (compared with 33 percent in the United States at all levels of government combined). Of course, what the government gives it must first take away, and so tax revenues constitute nearly 54 percent of GDP.42 The top marginal income tax rate is over 60 percent, and all purchases are subject to a value added tax. Such massive government spending, taxation, and ownership of capital and resources is highly detrimental to growth and prosperity.

Government officials and their cronies utterly dominate the nation’s economic life.

Government activities and the rules that support them, the non-corrupt ones as well as the corrupt, hamper the development of Israel’s private sphere, and provide a serious disincentive to entry for potential investors and entrepreneurs.43 Over the past 25 years, American aid and other lesser forms of “free money” have made this bad situation worse and have created an attitude of dependence which permeates the thinking of Israeli policy makers. Israel has come to conceive of itself as a charity case, and to live off the kindness of strangers, without in truth needing to do so. Figures made available by Israel’s own Central Bureau of Statistics reveal that the era of aid has been a dark age for the Israeli economy. Between 1950 and 1973, the pre-aid age for Israel, per capita GDP grew at an average annual rate of 5.59 percent -- a healthy rate indeed for a new nation developing in difficult circumstances. But between 1974 (when sizeable U.S.

aid began) and 1999, Israel’s per capita GDP grew at an average annual rate of only 1.51 percent.

“Statistical

Abstract

of Israel 2000,” 20.13, [http://www.cbs.gov.il/shnaton51/st20_08a.pdf]. Table 20.8a notes that in order to properly compare expenditure with revenue, the figure used here for expenditure excludes repayments (or rollover) of existing debts (approximately NIS 42 billion in 1998), and thus includes only net new borrowing (approximately NIS 17 billion) as a form of spending. Government spending thus amounts to NIS 166 billion, or some 57.12 percent of GDP Ibid., 20.12. Table 20.7 notes that for proper accounting and comparison, this figure also includes that portion of capital receipts which may be considered genuine revenue (NIS 11 billion in 1998) along with straightforward tax revenue (NIS 145.6 billion). Revenue thus amounts to NIS 156.6 billion, or some 53.8 percent of GDP.

For more on this picture of the Israeli economy the reader is invited to examine 15 years worth of rigorous analysis and commentary by the Division for Economic Policy Research of the Institute for Advanced Strategic & Political Studies, and the writings of Alvin Rabushka and the Institute’s Koret Fellows.

American Aid to the Middle East: A Tragedy of Good Intentions Page 15 The causes of this sharp decline in growth have much to do with the habits of dependency that have developed around the unearned infusions of funds that flow into Israel by the billions of dollars each year. Under their influence, the Israeli economy ceased even to strive for self-sufficiency, and the nation ceased to depend on its own productivity to support its standard of living. The costs – in real terms and in lost potential income – have been enormous.

Figure after figure and statistic after statistic demonstrate that Israel is not economically self-sufficient, and that the Israeli government seems untroubled by this fact. In 1998 the government spent some $2.3 billion more than it took in through taxes.44 In the same year, even more remarkably, the nation imported nearly $6 billion more in goods and services than it exported.45 This massive trade deficit amounted to over 8 percent of Israel’s GDP.

Such gross imbalances have persisted in Israel for decades, but the Israeli government’s response has not been to reduce spending or rein in consumption. Quite the contrary, government spending has increased by at least 5 percent annually through the past decade, despite staggering disparities between revenues and outlays.46 Private consumption growth has meanwhile steadily outpaced GDP growth.47 Israel is clearly living well beyond its means.

How has this situation continued over so many years? Why has Israel not taken action to end these gaping disparities? The answer is that Israel does not pay for these gaping disparities out of its own pocket. Outsiders cover the costs, or at least a very substantial portion of them. Israeli citizens receive what they perceive as the benefits of the services and transfer payments provided by an omnipresent welfare state, while at the same time importing far more than they export, purchasing far more than they make, and not paying for it all.

The costs are covered by a combination of government borrowing and unilateral transfers from abroad. Domestic borrowing consists mainly of domestic currency bonds issued by the government; while foreign borrowing includes the sale of Israel Bonds, the exercise of U.S. loan guarantees, bond sales in Europe, and a variety of other loans. Net new borrowing in 1998 amounted to approximately $4.1 billion,48 though the figure had been substantially higher earlier in the 1990s, as Israel made use of $10 billion in American loan guarantees granted in 1992. It should also be noted that a fairly substantial portion of “Statistical Abstract of Israel 2000,” 20.11, [http://www.cbs.gov.il/shnaton51/st20_07a.pdf]. See Table





20.7a for revenue figures, and Table 20.8a, 20.13 (for spending figures) [http://www.cbs.gov.il/shnaton51/st20_08a.pdf]. See the two previous notes above for explanations of the calculations used to derive this deficit figure.

Ibid., 8.5. See Table 8.1, [http://www.cbs.gov.il/shnaton51/st08_01.pdf].

“Israeli State Budget, Fiscal Year 2000,” [http://www.mof.gov.il/budget2000/part25.htm]. This text is in Hebrew.

Israel in Figures (Jerusalem: Israeli Central Bureau of Statistics, 2000), 14.

“Statistical Abstract of Israel 2000,” 20.12, [http://www.cbs.gov.il/shnaton51/st20_07b.pdf.]. See Table

20.7b.

American Aid to the Middle East: A Tragedy of Good Intentions Page 16 the money raised through the sale of bonds abroad is never redeemed by the generous owners, and thus becomes a grant.

More importantly, and most amazingly, unilateral transfers – essentially free money – added up to well over $6 billion in 1998. Along with U.S. aid in all its many forms, this figure includes personal restitutions from Germany and other remittances to individuals as well as assorted minor institutional remittances, but the great bulk of it, 64 percent of the whole, is direct aid from the government of the United States to the government of Israel.49 In sum, the Israeli government is able to spend approximately $10 billion more each year than it takes in through taxes, and the great bulk of that amount is in the form of aid funds that never have to be repaid.

This flow of free money creates a set of perverse incentives that distort Israeli government policy in countless ways. Confronted by the difficulties that sometimes beset nations – a negative balance of payments, a government deficit, – the Israeli government looks for a solution not to better policy or stronger growth but to outside aid. This prevents the source of the problems from being addressed, and ensures even greater reliance on aid in the future. The quick and easy fix of aid has become a sort of narcotic for the Israeli political system, and Israel’s elites have convinced themselves that the nation cannot live without it. Under this mindset, aid becomes the overarching goal of policymakers. The purpose of the nation’s economic policies is no longer growth but rather aid; the purpose of its foreign policy is no longer strength but rather aid; the purpose of its defense policy is no longer security but rather aid; and in the end the motivations driving policymakers are not calculations of national interest but the desire for continued and expanded aid.

Israel’s governing elites have been particularly prone to this distorted frame of mind because a cessation of aid would necessarily undermine – indeed it would dismantle – the socialist system, which nourishes the bureaucrats and politicians who now run the country. Aid, therefore, is not only a way to avoid paying the bills, it is a way (in truth the only way) to keep Israel’s socialist system alive, and with it the power and positions of Israel’s elites.

Aid from abroad has both harmed the Israeli economy and put up barriers to repairing the damage. Israel is not only unproductive; it does not strive for productivity. It not only lacks economic freedom, it has no desire for such freedom. It desires only aid, and it constructs its policies accordingly.

Of course, such a course is bound to end in painful failure. While aid may cover this year’s deficit and next year’s trade imbalance it is no long-term substitute for sound economic policy. And yet, each year as Israel’s troubles grow, the clamor for aid grows only more desperate, and the likelihood of genuine reform dims further. As we shall see “Statistical Abstract of Israel 2000,” 7.6, [http://www.cbs.gov.il/shnaton50/st07-02ab_e.shtml]. Table

7.2 notes the breakdown as follows: personal restitutions from Germany $788 million; other personal remittances $1 billion; Institutional remittances $367 million; intergovernmental remittances $3.95 billion.

American Aid to the Middle East: A Tragedy of Good Intentions Page 17 more clearly in the coming pages, Israel’s desperate desire for aid has much to do with its commitment to foreign policies that weaken it even further.

In the end, the United States is not strengthening its ally with aid, but rather it is contributing to its growing weakness and blindness. The weakening of Israel is certainly bad for America’s strategic interests, both directly and (by the effect of a weakened Israel on the calculations of other American allies like Turkey) indirectly. Yet the United States pays for Israel’s internal and external weakening, as if it were doing good for itself and for its Israeli allies. Tragedy is not too strong a word.

Military Aid

Israel’s defense needs are of course often cited in response to calls for an end to American aid. The bulk of U.S. assistance to Israel is labeled as defense aid, and is targeted toward Israel’s military and defense procurements. Proponents of continued aid often argue that Israel could not maintain its strategic advantage if such aid were halted.

These claims, however, do not stand up to scrutiny. The first and foremost point to grasp about military aid is that, because money is fungible, military aid is in fact a form of economic aid, and must therefore be considered in light of the conclusions reached in our discussion above. One dollar of aid, regardless of where it is spent, allows the government to allocate a dollar of its budget to another purpose. It is true that military aid comes with a number of strings – it must be spent on defense needs, and approximately 75 percent of it must be spent in the United States – but these needs are ones on which the Israeli government would spend money in any case. Most likely, it would spend much of that money in the United States. By providing money for these purposes, the U.S. allows the Israeli government to have more funds for other uses.

With a current annual budget of $43 billion, how badly does Israel really need the roughly $2 billion in military aid?50 The government could easily make up for the loss of these $2 billion by reducing the tax burden on the Israeli taxpayer (thus encouraging growth and increasing government revenue) and focusing on its truly essential tasks like defense.

In fact, many Israelis have come to oppose American military aid, and to believe that Israel does not require cash transfers to maintain its strategic edge. “If we absolutely needed aid for our defense,” says Uzi Landau, a Likud member of the Knesset, “it would be worth the associated headaches, but we do not.”51 Israel should, according to Landau, “wean itself of U.S. aid. It will be a painful process, I’m sure, but ultimately our economy and our national security will benefit.”52 Former Israeli Defense Minister Moshe Arens has expressed similar sentiments. For these Israelis, the main argument against defense aid has to do with the constraints it places on “Israel,” in World Factbook (Washington: Central Intelligence Agency, 2000).

Barbara Opall-Rome, “Military Aid Hot Issue,” Defense News, 10 July 2000, 19.

Ibid.

American Aid to the Middle East: A Tragedy of Good Intentions Page 18 Israel’s own weapons industries, but their opposition goes to demonstrate that Israel does not absolutely require the aid for its security, and that even Israelis who have served at the highest levels of the defense establishment believe it can do without it. The money, Arens says, “is certainly not as crucial today as it was in the past to Israel’s well being since the $1.9 billion is only 2 percent of GDP…it is not something that is going to make or break Israel.”53 Strategic cooperation between the two nations (including joint military development projects and access to weapons and intelligence data) is in the interest of both the U.S.

and Israel. But direct grant aid does not serve the interests of either.

The Strategic Consequences of Aid American aid also contributes to arguably the Jewish state’s most dangerous problem: the Israeli elites’ profound confusion about Israel’s strategic problems as well as the growing conflict between their personal interests with the interests of the state as a whole.



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