John Kerry is back in Israel, to push for progress on Israeli-Palestinian peace talks. The American government has revealed little about what Kerry has said, but if his past comments are any indication, he may discuss the importance of peace to the Palestinian economy. He’s less likely to talk about the importance of peace to the Israeli economy.
Israel’s G.D.P. per capita was more than thirty-three thousand dollars in 2011, and the country attracted more than ten billion dollars in foreign direct investment last year. The Bank of Israel is flush with reserves, almost eighty billion dollars, with which it can stabilize the shekel. Newly discovered gas fields are estimated to be worth billions of dollars. Last year, Israeli companies exported about sixty-two billion dollars’ worth of goods. And Israeli entrepreneurship is justly famous: in June, Google announced it had bought the Israeli mapping startup Waze, reportedly for a billion dollars.
No wonder CBS’s “60 Minutes” last year ran a swooning report about greater Tel Aviv, describing it as “Miami on the Med.” “The recession has passed Tel Aviv by,” the leftist Israeli journalist Gideon Levy told Bob Simon. It appears many on the Israeli left doubt that a continued occupation will lead to economic harm. During the summer of 2011, when hundreds of thousands took to the streets to protest social inequalities, organizers generally elided mention of the conflict. Palestinians, for their part, insist the occupation is boosting Israel’s companies at the expense of Palestinian ones.
The Israeli right seems even more convinced that the occupation hasn’t hurt the economy. In 1998, Prime Minister Benjamin Netanyahu told me in an interview for Fortune that Israel’s military research, along with immigration to the country by Russians, would lead inexorably to prosperity. “Peace would be a useful, additional condition,” he said, “but it is not the primordial, necessary condition, which is, anywhere, economic freedom.” Last year, Dan Senor, an American writer and political adviser who has promoted Israel as the “Start-Up Nation,” took Mitt Romney—his candidate (and Netanyahu’s)—on a pre-election trip to Jerusalem. Romney said Israel’s economic progress provided a “model for others throughout the world.”
The problem is that it is difficult to determine the opportunity cost of the conflict. How well might the Israeli economy have done if the conflict hadn’t taken place?
Now, Yusaku Horiuchi, my colleague in Dartmouth College’s government department, has applied a fascinating new method for deriving just this. Imagine, Horiuchi explained to me, that we could take a pool of countries similar to Israel in various respects—exports as a percentage of G.D.P., urban population, mortality rates, consumption, government expenditure as a percentage of G.D.P., and so on—and then use that pool—call it a “donor pool”— to create a “synthetic Israel” that we could track alongside the real one. To do this, you could use known statistical methods to combine these countries’ economic records, so that the weighted average record of economic performance in the pool tracked with Israel’s record over, say, a generation.
True, crucial characteristics in other countries would not be like Israel’s. Other O.E.C.D. countries are bigger; they do not have ultra-Orthodox communities; they don’t have, per capita, as many edgy scientists—or drivers. But when you track the real Israel against synthetic Israel, their economies behave quite similarly, and that’s what matters to the analysis. This isn’t a completely new method of analysis: Horiuchi is applying to political economy an approach similar to what some asset-management companies apply to investing.
Now imagine a catalytic event that affected Israel but not synthetic Israel—an event with long-term ramifications, like an eruption of the violent conflict with the Palestinians. We could then compare Israel to synthetic Israel and see if any divergences in economic performance seem attributable to this event and its aftermath. If a demonstrable gap opens up, and is never closed, we would have a sense of the opportunity cost of the conflict’s exacerbation.
I could not resist. We experienced precisely such an event in the early aughts, the Al Aqsa intifada, which disrupted a long period of hopeful normalization and kicked off a decade of tension and periodic war. As it happens, this was precisely the decade in which the “Start-up Nation” was said to have come into its own.
I suggested that we track Israel’s G.D.P. per capita from 1980 to 2000—which in spite of the 1982 Lebanon War, and the comparatively nonviolent intifada of 1988, was a relatively peaceful, even hopeful, time—and then build a synthetic Israel for the same period. Couldn’t we then determine what Israel’s G.D.P. per capita might have been, if that relative peace had continued during the decade that followed?
Imagine, in other words, that Ehud Barak and Yasir Arafat had come to terms at Camp David in 2000, rather than ending direct talks in frustration and mutual recrimination. How would Israel’s economy have looked in 2010? What have Israeli citizens been missing?
Horiuchi and a Dartmouth student, Asher Mayerson, ran this analysis. First, they built a synthetic Israel made up of real countries: 3.7 per cent Belgium, 22.9 per cent Finland, 38.3 per cent Greece, 9.6 per cent New Zealand, 11.2 per cent Singapore, and 14.3 per cent Turkey. From 1980 to 2000, the growth of per capita G.D.P. of synthetic Israel tracked with Israel’s almost exactly—from about fifteen thousand dollars per year (in 2005 dollars) to about twenty-three thousand dollars. Both were entered into a graph.
Then, in 2001, the first year after the outbreak of violence, comes a startling break in the lines on the graph. By 2004, the per capita G.D.P. for Israelis was $22,637, while the comparable figure for synthetic Israelis was $25,942. The gap then widened slightly and never closed. (The possibility that this deviation was the result of chance is under five per cent, Horiuchi shows.)
There could, of course, be other reasons for the divergence. Likud officials have insisted that Israel’s unimpressive growth rate in the aughts had to do not with the conflict but with the bursting of the dot-com bubble. But at least a couple of the countries that make up synthetic Israel—Finland and Singapore—had larger high-tech sectors than Israel’s in 2001, as measured by the countries’ high-tech exports as a percentage of total manufactured exports. Yet Finland and Singapore saw their G.D.P.s grow more between 2001 and 2008 than did Israel—and so, too, did synthetic Israel. The 2000 intifada, meanwhile, had such a profound impact on Israel that it would appear to have been the most significant reason for the gap between real Israel and synthetic Israel. Cumulatively, from 2001 to 2010, Israel’s per capita G.D.P. was $25,513 less than that of synthetic Israel’s.
What is $25,513 per capita in the grand scheme of things? A great deal. For an Israeli family of four, even after income taxes, it might have meant a down payment on an apartment, a college education for a child, or a couple of new cars. Because tax rates in Israel are generally around forty per cent, there are implications for the government, too: based on conservative estimates (assuming, for instance, that only a third of the revenue goes to taxes), the lost G.D.P. could amount to nearly sixty billion dollars going to the government—a big proportion of the country’s annual budget. Horiuchi’s analysis ends in 2010, but if the trends have continued since then, the lost G.D.P. would have grown.
That is no small matter. We are talking about a government that has been cutting desperately to cover a deficit. This is a country where only about sixty-four per cent of the adult, non-elderly population participates in the labor force (a figure that is fourteen points below that of the Netherlands and four points below that of Greece), and where forty per cent of children are, according to Israel’s Central Bureau of Statistics, “in significant risk of falling below the poverty line,” about double the O.E.C.D. average.
The boasts from Israel’s promoters also obscure tremendous inequalities in the country. In Sweden, which has progressive taxation and social-welfare policies much like Israel’s, the share of income held by the top percentile was seven per cent in 2011. In Israel, it was nearly thirteen per cent. At Israel’s poverty rate of about twenty-one per cent is the highest in the developed world. The repercussions are felt throughout the country: Hebrew University has made massive cuts, especially in the humanities and social sciences, to try to cover an operating deficit of about fifty-five million dollars. The Taub Center, a Jerusalem-based research institute, reports that for every ten tenured or tenure-track faculty members at Israel’s colleges and universities, there are nearly three Israelis filling similar positions in the United States. Gershom Gorenberg argued in The American Prospect that this is “a rate of intellectual exodus on a greater scale than that of any other country in the world.”
Israel should be thought of as several countries in one: Tel Aviv, an advanced, global hub, could be compared to Singapore, while dozens of less developed towns, like Yerucham, have more in common with Turkey. Peace in Israel would mitigate the social tensions between the country’s rich and poor. But beyond that, the rapid growth engendered by peace would allow Israel to improve social relations even more—especially as so many of the poor are Arabs.
“We can grow without progressing toward peace,” Stanley Fischer, the former governor of the Bank of Israel, said back in 2007. But he added that with peace, growth would be much higher: “We are talking about the difference between four percent growth a year and growth of five to six percent a year.”
Imagine, in other words, if Israel looked more like its synthetic counterpart. It would not have to invest so much more of its national budget on defense than what other O.E.C.D. countries spend, freeing up funds for social programs and infrastructure. Investment in its academic institutions and hospitals would likely mean an early return to Israel of scientists and physicians; the gain in intellectual capital would prompt expanded innovation.
Consider, also, the boost to tourism. (Jerusalem, in a good year, gets about three million tourists. Florence gets ten million.) An improved tourism industry, as with industries like construction, retail, and food processing—precisely those industries that a growing Palestinian state will need—would translate to jobs for Israelis who live in parts of the country that are least like Singapore.
Nor should the prospect of continuing conflict be considered a tolerable steady state. Even in the most high-tech industries, very few Israeli companies make consumer products like Waze’s app. They tend, instead, to solve problems for other companies, which entails building relationships with product-development groups around the world. Venture capitalists worry that, should Israel become a political pariah, many global corporations—potential customers for their portfolio startups—would write off dealing with Israelis as just too much trouble. On the other hand, imagine Israeli businesses, with Palestinian partners, building customer networks in Saudi Arabia and the Emirates.
That’s why some of the very people Bob Simon interviewed for “60 Minutes,” including the high-tech guru Yossi Vardi, later organized a conference in Amman to push for peace, under the auspices of the World Economic Forum. “We come from the field, and we’re feeling the pressure,” one participant told Haaretz. “If we don’t make progress toward a two-state solution, there will be negative developments for the Israeli economy. We’re already noticing initial signs of this. The future of the Israeli economy will be in danger.”