JERUSALEM — THOUGH questions of war and peace are never far below the surface of Israeli politics, Yitzhak Rabin's new Labor government knows that it will stand or fall as much on its economic skills as on its statesmanship.
Again and again during the recent election campaign, Mr. Rabin and his supporters hammered on the fall in living standards that many voters suffered under the last Likud administration, on the record unemployment level of nearly 12 percent, on the half-million Israelis living in poverty, on deteriorating public housing and declining social services.
If former Prime Minister Yitzhak Shamir's attention to such problems was distracted by his determination to settle as many Jews as possible in the occupied territories, Rabin has made change the keynote of his four-year term of office.
"We are going to change the national order of priorities," he pledged last week, introducing his government to the Knesset for a vote of confidence. "Preference will be given to the war on unemployment and to strengthening the economic and social systems."
Though the details of these changing priorities will be decided in September when the next budget is drawn up, the outlines have already emerged with the government's steps toward halting construction of settlements in the occupied territories. Finance Minister Abraham Shohat and Housing Minister Binyamin Ben Eliezer announced yesterday that they were canceling contracts for 6,881 houses in the territories, which Mr. Shohat estimates would save the government approximately $416 million.
The political motives behind this decision are clear, with the United States conditioning $10 billion of loan guarantees on a halt to settlement, in order to promote the Middle East peace process. But the government has its economic reasons too, as it seeks to free up resources for its war on unemployment.
At the same time, the political and economic factors are intimately linked. "This government has two major commitments: moving the peace process and improving society," says Shimon Shitreet, the economy and social development minister. "In order to accomplish the first goal, we have to maintain public confidence on the second front.... We have IOU's all over the country."
The money saved in the occupied territories, Shohat says, will be diverted to infrastructure projects inside Israel, such as roads, railways, and industrial parks, and to research and development.
Job creation from these public-works projects will go beyond simply taking up the new slack in the construction industry, whose frenzied activity over the past year contributed heavily to economic growth, Shohat said in an interview.
Mr. Shitreet hopes that if and when the US administration releases the $10 billion in loan guarantees, aimed at helping Israel absorb new immigrants from the former Soviet Union, the government will be able to use some of the money to finance projects that will boost the economy generally.
Unemployment is rife among the 420,000 Russian immigrants, nearly 60 percent of whom have no job, or a job well below their capabilities. The US loan guarantees, Shohat says, "are critical if we want to absorb these people and find them jobs." The money would also free "resources to stimulate the private sector to invest in the economy," he adds.
The lack of private investment in the Israeli economy has long been one of its weakest points, balanced only by the generosity of Jewish benefactors worldwide, and the $1.2 billion that the US provides in economic assistance each year on top of $1.8 billion in military aid.
The new government, says Shohat, "is going on a big scheme of privatizations, liberalizing the capital markets, and ensuring less government intervention in the economy, which will create an atmosphere that it is reasonable to invest here." Such promises are not new. Movement toward a freer market has been slow, and government critics say the Labor government, with its ties to the trade unions and their myriad businesses, will be less enthusiastic than its predecessor in opening Israel's market.
Shohat, however, dismisses such reservations. In the end, however, he acknowledges, no amount of free-market reforms or government encouragement will be enough to boost the economy while Israel remains at war with its neighbors. But "if there is a change in the political situation, if we start moving towards autonomy" for the Palestinians, says Shohat, "we believe investors from all over the world will come to Israel."