Israel: Why Sharon Is Zeroing In on the Economy

In his four decades in politics, Ariel Sharon has never had much time for economics. The wily old general always figured that security was not only his strong suit but also the top priority of Israeli voters. In defending his qualified endorsement of the U.S.-sponsored "road map" toward peace with the Palestinians, however, the Prime Minister has changed his tune and dangled the hope that a revival of negotiations could inject some life into the moribund Israeli economy. "There will be security, there will be quiet, and with the revolutionary economic steps we're taking now, there will be investment in Israel, and there will be growth," Sharon declared to a gathering of Likud Knesset members on May 25.

Why the sudden focus on economics at the ripe age of 75? Sharon is not wildly enthusiastic about the road map, which calls for a series of steps leading to the creation of a Palestinian state by 2005. But he thinks Israel has little choice at this stage but to play along with the U.S. effort to follow up the victory in Iraq with a major push to resolve the Israeli-Palestinian conflict. He views the prospect of an improved economy as a useful selling point for controversial steps that the road map may force him to take, including dismantling illegal outposts and some settlements in the occupied West Bank.

Sharon also has his ear close enough to the ground to realize that the economy, which didn't figure much in his election win earlier this year, is on the verge of becoming a major political issue. After a spell as one of the world's hottest tech spots in the late 1990s, Israel has suffered two years of economic decline, and growth in 2003 is expected to be less than 1%. Polls show Israelis are increasingly unhappy about seeing their near-European living standards evaporate.

The economic implosion has already had a huge impact on many Israelis. The intifada initially hit tourism and industries, such as food and cement, that exported to the Palestinian areas. But now thousands of businesses have closed, lifting unemployment from 8.8% two years ago to 10.8%. With tax receipts in free fall and the budget deficit soaring, the government has adopted an austerity plan that trims government workers' pay for the first time and takes a bite out of pensioners' checks. Tens of thousands took to the streets on May 27 to protest against the plan, which was devised by Sharon's rival, Finance Minister Benjamin Netanyahu. But the chances of this austerity plan returning Israel to its old growth track are slim, unless the threat of violence is sharply reduced. Foreign investors, who have slashed their financial flows to Israel from $11.5 billion in 2000 to $3.8 billion last year, continue to be turned off by the conflict. A pickup in the high-tech sector may offer some relief, but not enough to kick off a broad recovery. "The current security situation will limit our growth to 2% or 3% at best," says Leonardo Leiderman, chief economic adviser at Tel Aviv's Bank Hapoalim. That's less than half what Israel enjoyed in much of the go-go '90s. With its fast-growing population, Israel needs higher growth to generate jobs.

Investors gave Sharon a hint of what might be when they lifted the Tel Aviv stock exchange index 12% after the Cabinet approved the road map. The markets also applauded President Bush's decision to meet with Sharon and Palestinian Prime Minister Mahmoud Abbas in Jordan in early June. If Sharon really does stick to the road map, the economic pressure may prove a crucial factor in his decision.

By Stanley Reed in London and Neal Sandler in Jerusalem

Edited by Rose Brady

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