Israel: The Road To Peace Runs Through The Economy

After his impressive May 17 electoral victory over Israeli Prime Minister Benjamin Netanyahu, Labor Party leader Ehud Barak began constructing the broad government coalition he'll need to restart the moribund Arab-Israeli peace process. But as the 57-year-old soldier-turned-politician focuses on reviving talks with the Palestinians and bringing Lebanon and Syria back to the negotiating table, he faces a more immediate challenge. If Barak is to persuade fractious Israelis to go along with his dramatic political initiatives, he'll have to protect his popularity by reviving the ailing economy.

After three years of moves by Netanyahu to alter a peace process he never believed in, hope for progress, if not tranquility, is returning to the Middle East. Euphoric voters are also hoping that Barak can return the economy to the high rates of growth it enjoyed in the early 1990s. Surrounding nations hope the benefits will spread to them.

Economic issues, in fact, played a much bigger role than in past Israeli elections and were a key part of the Labor campaign. The past two years have seen poor growth of less than 2%, despite a population increase of 2.5%. This year the economy is unlikely to perform much better. Unemployment, once virtually unknown in Israel, is close to 9%, its highest rate in years. Even the boom in the high-tech sector has slowed in recent months, owing to a drop in exports to the Far East and a cut in government research spending.

NETANYAHU SPENT FREELY. Although Barak has promised to create 300,000 new jobs, a budget deficit amounting to 2% of gdp leaves precious little leeway for pump-priming the Israeli economy. Barak can thank Netanyahu for that. While the outgoing Prime Minister claimed to be a card-carrying free marketeer, Netanyahu liberally funded such special-interest groups as settlers in the occupied territories to retain their support. And Barak knows that any inflationary moves to stimulate the economy will face opposition from Jacob A. Frenkel, the tough Bank of Israel governor.

The trick for Barak will be to redirect government funding to projects with a big economic payoff. Among the likely losers are the 144 Jewish settlements in the West Bank and Gaza Strip. By contrast, Israel's educational system, a target of some of Netanyahu's harshest cuts, is going to be a top priority for spending, Barak's aides say.

The task of implementing the new government's economic policy could fall to Shlomo Ben-Ami, the current front-runner for Finance Minister. The 54-year-old history professor and former ambassador to Spain is of Moroccan background. He is also sensitive to the needs of the country's lower-income families. Appointing Ben-Ami and other Sephardic Jews would help Barak win support from Israelis of Moroccan and Middle Eastern origin. Barak is keenly aware of the rising economic desperation in Israeli development towns--towns established after 1948 to absorb immigrants. In these traditional Likud bastions, many have switched allegiance to the ultra-religious Shas party, which saw its share of the vote rise dramatically on May 17.

A NEW GENERATION. A revived peace effort could also pay economic dividends, particularly to the Palestinians. To show he can be trusted, Barak is expected to quickly carry out provisions of the Israeli-Palestinian Wye Plantation accords reached last October. These include easing travel across Israel proper between the West Bank and Gaza, and opening Gaza's seaport to shipping. "I expect Barak's win will help breathe new life into the Palestinian economy," says Mohammed Ishteyeh, head of the Palestinian Council for Development and Reconstruction.

Dramatic changes sweeping the broader Arab world could help Barak's efforts to bolster the economy. A new generation of Arab leadership, less resistant to change, is in the wings. The February 7 death of Jordan's King Hussein after a 47-year reign is only the prelude to more torch-passing in Syria, Saudi Arabia, and inside the Palestinian National Authority.

And for the first time ever, substantive economic reform is bringing such countries as Egypt and Morocco into the broader global economy. Even Saudi Arabia and other arch-conservative members of the Gulf Cooperation Council are starting to experiment with privatization and deregulation as they position themselves to enter the World Trade Organization.

Reviving the peace process and the economy are Barak's biggest challenges. Progress in one will profoundly affect the other. The payoff for all could be enormous.