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The Victory of the New Israel

I

The Palestinian scholar Walid Khalidi said to me recently that Menachem Begin may yet succeed where Nasser failed in bringing unity to the Arab world. No doubt this is why Yasir Arafat expressed satisfaction in June at the good prospects for Begin’s reelection. Yet the diplomatic and military pressures now mounting against Israel from Arab rejectionists, European leaders, and State Department officials have not united the Jewish state. The mean-spirited campaign that preceded the June 30 election has in fact revealed a country passionately divided by ideology, class, age, attitudes toward Orthodox faith and law—and crucially, ethnic origin. The ingathering of the exiles, it seems, has been a simpler matter than consolidating the nation.

What this election has also made clear is that the pro-Likud constituencies of the “new Israel,” composed mainly of Jews of North African origin, have proven even more convincingly to be a majority—albeit a slim one—in this turbulent society. It was these Jews whose support for Begin was decisive in the elections of 1977.1 They now may have superseded once and for all the institutions and values of historic Labor Zionism which before 1977 had presided over the Jewish settlement and the state without interruption since 1933.

Their victory was more convincing this time because by contrast to the campaign of 1977, they now supported a Likud government running on a record of economic mismanagement, civil corruption, and growing diplomatic isolation. Yet Begin’s coalition has held its strength: Likud will have forty-eight seats in the tenth Knesset to Labor’s forty-seven, and it seems the only party the president can call on to form the next government. By contrast, Labor and the Democratic Movement for Change shared forty-seven seats in 1977 to Likud’s forty-five.

To understand just how disastrous Likud’s policies have been to Israel’s economy, consider that in 1977 about ten Israeli pounds traded for one American dollar, while today the rate of exchange is 115 to the dollar and is climbing daily. Of course, this figure by itself is misleading: Israel has an efficient system of cost-of-living escalators which the finance ministry under Yoram Aridor has recently instituted along with a larger package of reforms. Wages, bank accounts, marginal tax brackets and so forth are now all 100 percent linked to the inflation, which is why, ironically, savings rates among Israelis are among the highest in the world in spite of the startling rate of inflation with which they must contend.

Still, as Uriel Lynn, the Likud-appointed commissioner of state’s revenue (and now a strong candidate to become governor of the Bank of Israel), conceded to me, the climate is foul for the long-term investments in industrial and high technology production that Israel needs to avoid economic collapse—including investments in aviation, computer software, and medical equipment, which now make up 9 percent of the GNP.

Much of Israel’s most vigorous industry is, in fact, now financed by foreign credit, and Aridor’s recent economic policies have greatly depleted reserves of foreign exchange—some fear by as much as a half billion dollars—in an effort to reduce short-term inflation rates in time for the election. He did this by lowering the purchase tax on a number of consumer goods—cars, televisions, refrigerators, and more—which Israelis from all classes rushed to import from European suppliers. The balance-of-payments deficit may reach $5.5 billion in 1981. Moreover, the Israeli treasury under Aridor’s direction has maintained an artificially high value for Israeli currency during this period, which is informally pegged to the surging American dollar. This combination of soaring inflation at home and over-valued Israeli pounds in Europe has put Israel’s crucial export industries, and agriculture, in such bad shape that Aridor had to pay exporters a 5 percent subsidy in June just to keep them solvent.

Aridor’s depletion of foreign reserves to promote a pro-Likud mood—something his predecessors Simha Ehrlich and Yigael Hurwitz have stubbornly resisted since 1977—may so adversely affect the solvency of Israel’s government that its guarantees to foreign banks lending money to Israeli industry will become as worthless as those from “developing” countries. Hebrew University political economist Avishai Margalit fears that credit may dry up in the near future and create unemployment in just those sectors of the Israeli economy that are the keys to the country’s future. In 1979, about $73 million in foreign investment was liquidated; in 1980 about $202 million. So Margalit may be right that foreign investors have already begun to withdraw credits.

Likud’s most serious economic failure has been its laissez-faire—one might say, après-moi-le-déluge—approach to economic productivity, in which there has been virtually no rise for the last five years. Don Patinkin, an economist at Hebrew University, points out that actual growth under the Likud from 1977 to 1981 is running at about 19 percent, half of what it was on average during the two preceding Labor governments.2 The main reason for this decline is the faith of Likud’s finance ministers that Israel’s entrepreneurs living in the suburbs of Tel Aviv will use their growing fortunes to invest in Israeli industry during this inflationary time instead of playing the market in bonds and stocks. Capital gains on both are, remarkably, tax-free in Israel. The government props up the market with indexed issues to secure short-term revenue. There may be a cautionary lesson here for representative Jack Kemp, who was in Israel recently to study the Likud’s economic record, which an economist friend of mine calls “supply-sadism.”

Israel’s most respected economists, such as Patinkin and Professor Haim Ben-Shachar, who was slated to be finance minister in a Labor government, wants to see the government and the Histadrut—Israel’s general federation of labor—again take the lead in organizing new industrial production. Labor party experts also claim that he would have attempted to cut the swelling defense budget and certainly phase out the millions of dollars in expenditures on West Bank settlements. If these austerity measures are not soon enforced, the value of the Likud’s shiny new shekel seems likely to decline twice as fast as that of the pound. Obviously, this economy is no place for poor people, or much of the middle class for that matter, which largely explains why some 100,000 Israelis have moved to the United States and Canada in the last four years. The inflation has barely touched real wages but it has put housing—still the most lucrative speculative investment in Israel—out of reach for virtually all families who do not qualify for government flats in Jerusalem suburbs or development towns.

I wrote in 1977 that the Likud government could not be expected to do much for Israel’s poor and that it might have to create circuses (such as altercations with Helmut Schmidt?) when the bread runs out. No one expected then that their finance minister would simply borrow money to subsidize bread—and poultry, milk, gasoline, and other essential commodities—for several months before an election, to contrive an illusion of prosperity. This is just what Aridor has done. Since February he has announced subsidies that will cost 18 billion shekels—while the whole year’s budget calls for 6 billion in subsidies. He has, in effect, spent 30 percent of the national budget during the months he was to have spent just 15 percent. He has even had the temerity to borrow almost 900 million shekels from some domestic private banks and not from the Bank of Israel in order to keep the impact of short-term inflation to a minimum. To his credit, Yaacov Levinson, president of the Workers’ Bank, would not go along. But the subsidies will have to be reduced and economists are predicting 250 percent inflation—or more: 35 percent of Israel’s budget already goes to servicing the national debt, nearly a 9 percent rise since 1977, and little has been done about the widespread problem of tax evasion which Uriel Lynn considers a “serious spur to inflation.”

II

Aridor’s actions invite what seems to me the most intriguing question of this election campaign: to which of the 800,000 Israelis who make up the Likud electoral plurality, aside from the religious parties, can such an irresponsible economic regime possibly appeal? Also, what deeper loyalties has the Likud been drawing on to maintain its coalition in spite of its failures of social administration? The answers lie in some of the basic demographic facts of Israel’s politics. Both Likud and Labor count on the support of specific groups of voters. In the case of the Likud, these include Tel Aviv industrialists and commercial promoters and hawkish veterans of the old Irgun and Sternist underground, and the young. It has also counted on the Sephardic poor of the “shechunot“—the marginal hastily constructed neighborhoods of Israel’s cities—and development towns such as Dimona.

The latter group remains the core of the Likud’s power, and Aridor’s largesse was directed mainly to them—to the industrial workers, vegetable peddlers, taxi drivers, waitresses, and petty clerks of the “second Israel,” who are mainly of Moroccan origin. They, or their parents, arrived in Israel in the 1950s and came to view the movement and the Histadrut as a condescending network of high-handed Ashkenazi bureaucrats who maintained control over the property and industries of the emerging state. The Moroccan immigrants had little patience for agricultural communes—although a good number joined moshavim. They refused to shed their cultural traditions and warm-hearted patriarchal families for the sake of Labor Zionist theories they could barely understand.

Few could speak Hebrew, most of the women were illiterate, and nearly all remained fixed in a universe of Jewish law and Oriental custom. They were shunted off for years to tent cities—maabarot. Superficial and reckless theories of “modernization” were inflicted upon them by European settlers who were inspired by their own revolutionary euphoria.3

The new immigrants and their children were then housed in slapdash housing developments which quickly became slums where schools were inadequate. Their previously strict Orthodox religious practices gave way to a mood of religiosity tempered by Israel’s urban street culture. They were hired by the Histadrut and various corporations but could not gain power in unions dominated by old labor officials. Some wound up in prefabricated towns and abandoned Arab villages in rural areas, such as Beit She’an, where once they proved allergic to socialism they were shunned by the residents of nearby kibbutzim and established moshavim such as Degania, Mesilot, Beit Alfa. The Labor aristocracy on their collectives used to consider it bad form to allow their children to marry the Moroccan immigrants. Most of the intelligentsia of the Moroccan, Jews went to live in France or Quebec. Today, only about 20 percent of Israel’s university students come from the “second Israel.”

Of course, much of the “second Israel” suffered from the good intentions of what Eli Vazana, a young Moroccan Jew I talked to, calls the “establishment.” Vazana is a resident of Katamon Tet, Jerusalem’s Moroccan quarter that overwhelmingly backs the Likud. He was one of the founders of the reformist “Ohalim” movement which the Begin government, to Vazana’s regret, absorbed during the last two years. Vazana and other Moroccan Jews I talked to acknowledged that a substantial Sephardic middle class has emerged since 1967; but the success of these owners of small retail stores, car repair garages, and other small businesses has only confirmed the rest of the Moroccan community in its suspicions of socialist planning and ideology. The Sephardic middle class has been joined, in recent years, by the overwhelming majority of immigrants from the Soviet Union who now number about 200,000 and seem even more contemptuous of democratic socialism.

  1. 1

    See my report on that election in The New York Review of Books, June 23, 1977.

  2. 2

    See Yediot Aharonot, June 26, 1981.

  3. 3

    The Haifa University sociologist Shlomo Swirsky has acutely criticized the “modernization” doctrines used in Israel.

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