A year ago, Israel was a darling of the new global economy, a high-tech Middle East oasis awash in entrepreneurs, innovators and investment funds. Today, the Finance Ministry says it expects the growth rate for 2001 to be no more than 1%, down from the robust 6% it was predicting at the beginning of the year, and economists here already are forecasting recession.
Israel's problem, economic analysts here say, is that its future has collided with its past. Other Western economies have been hit by the contraction in high technology. But Israel is also grappling with the fallout of its failed peace negotiations with the Palestinians. An economy that a year ago seemed cutting edge is now mired in the Middle Eastern muck of violence and ethnic struggle.
"Most Israeli economists didn't expect that the intifada [uprising] would last so long, and we still can't see the end of it," said Gilad Soreq, an economist with the Federation of Chambers of Commerce in Israel. "Uncertainty is spreading and deepening as the months pass because it seems like there is no rational solution to this conflict, as we expected there was six or seven months ago."
Soreq and other economists say it's difficult to tell how much of the drop in the economy's growth is caused by the ongoing violence, and how much is caused by the worldwide economic slowdown and high-tech shakeout, but they generally agree that at least 2 percentage points of the drop here is directly related to the conflict's impact on the economy.
Finance Minister Silvan Shalom says he expects that the already high 8.6% unemployment rate may reach 10% by year's end. In addition to high-tech job and revenue losses, industries such as tourism, construction and agriculture are all in a tailspin. Worst of all, Israeli workers are beginning to wonder when they will see the end of the bad economic news.
Amir Orly, a tour guide who worked full time and earned a good living before the Palestinian revolt erupted last September, grew so desperate for work recently that he took an $8-an-hour job as a caregiver for an 80-year-old man suffering from Parkinson's disease. The pay is far less than he earned as a tour guide, and the job is one he never trained for.
Orly said these are the worst times he's seen in the business since he became a guide in 1979.
"From October until now, I had one half-day of work as a guide," said the 46-year-old father of three. His wife, a psychologist, is the family's breadwinner now. The family's problems are compounded because the Orlys bought a house in a Jewish settlement just outside Jerusalem three years ago and abandoned it shortly after the fighting erupted.
"From October, when the shooting began, until December, when we left, there were about seven attempts to blow up the children's school bus," Orly said. "No one was hurt, thank God, but we decided that it was just a matter of time."
Now the Orlys pay mortgage and taxes on a house they cannot sell or rent, and pay rent on the Jerusalem apartment where they live.
Recently, Orly said, he decided to go back to college to complete a doctorate in hopes of becoming a full-time academic. Like many Israelis, he believes that the conflict will drag on and that Israel's economy will contract more severely, for a longer period of time, than other Western economies because of it.
"The rest of the world is suffering only from the slowdown of the American economy," said Oded Tyrah, president of the Israeli Manufacturers Assn. and head of the Chamber of Economic Organizations. "Here, our situation is accelerated by the intifada."
Prime Minister Ariel Sharon underscored the nation's problem recently when he summoned industrialists, labor representatives and government bureaucrats for a brainstorming session on the economy. Recovery is necessary, the prime minister told the Jerusalem gathering, so that the state can finance its increased security needs.
In recent budget negotiations in the Knesset, Israel's parliament, nondefense spending was slashed in order to transfer money to the Defense Ministry. Finance Minister Shalom has said the government will allow the budget deficit to increase this year from the targeted 1.5% to as much as 3% of gross domestic product to help finance security.
Despite its woes, Israel still is in far better shape than the Palestinian Authority. Israel's blockades of Palestinian cities have brought economic activity in the parts of the West Bank and Gaza Strip controlled by the Palestinians to a near standstill. Israel's ban on most Palestinian workers has caused unemployment in those territories to soar to 60% and more. Foreign investment has all but dried up, and growing numbers of Palestinians are surviving on handouts of food from the United Nations and other relief organizations.
But Israelis say the current economic trough is the worst in years. It is affecting both those whose livelihoods were earned in the old economy and those who were highfliers in the new economy.
Julia Phernheiser, a 28-year-old immigrant from Germany, worked as a technical writer at a high-tech firm for 10 months before she was laid off in May. Well-educated and fluent in Hebrew, German and English, Phernheiser said she only recently managed to find a new job as an assistant to the chief executive of the Israeli branch of a German-owned car company. Her new job pays much less than the 14,000 shekels (about $3,400) she earned monthly at the high-tech firm, Phernheiser said.
"Firms I've interviewed with said that we in high tech were spoiled, that we were paid too much," she said. "Most have been offering about 7,000 shekels (about $1,700) a month. I tell them I'm not greedy, but I have to live."
Ultimately, Phernheiser said, she accepted a pay cut, although she declined to say what she's earning at an old-economy firm where she won't be using her technical writing skills. Still, she said, "I'm lucky. My five closest friends are still unemployed." Two of them--immigrants like herself--have decided to leave Israel and return to Europe to look for jobs, Phernheiser said.
"People are stressed out," she said. "If I didn't have money saved, I would be in a very, very bad situation now. As it is, I don't go to see a movie, I don't eat dinner in restaurants or go to clubs that cost money. My friends and I do things that don't cost money, like go to the beach or go to free music festivals."
The downturn in high tech has actually been good news for one Israeli employer: the army. Three years ago, with high tech booming and start-ups proliferating like mushrooms after a spring rain, highly trained computer programmers and engineers were leaving the army in droves. So many declined to re-up that the government authorized pay increases and perks such as cars and paid vacations for junior officers in an effort to hold on to them.
But with the high-tech slump, the trend has started to reverse itself in the last two months, said Brig. Gen. Moshe Markovitz, head of the army's signal, electronics and computer corps.
"Now, it is easier to sign young people up for our division, and we have officers who left for high tech who are asking to come back to the army," Markovitz said.
So many have asked to return, he said, that the army has been able to pick and choose, "and some will not be able to come back." Former officers are learning, Markovitz said, that although they don't have stock options in the army, they also don't have the fear that they'll be out of a job if the company's stock plunges in value.
"Still, we're trying to act as though the economic crisis did not happen," Markovitz said. "We think it is good to fish while the pond is full."