As Israel fights on, economy reels

Israel's economic growth was negative last quarter amid rising joblessness and a faltering high-tech sector.

A 50-year history and a reputation for the best hummus in town has not been enough to save the Rahmu restaurant in West Jerusalem from the threat of extinction. Eleven of 13 tables were empty during lunch hour Tuesday, as was much of downtown's Salomon Street, where stores and restaurants are folding up.

"People do not want to sit down and then be blown up," says Shmulik Nahmias, one of the owners.

But Mr. Nahmias is determined to stay in business. He reasons that if people cannot reach his hummus, he will bring the hummus to the people. Personally. He has started driving his family car around the city, delivering majadara and moussaka to hungry customers. "Delivery is the future," he says. "If it doesn't work, forget about it, we'll close."

In a sense, Nahmias and a growing number of Israelis, are economic casualties of the year-and-a-half of fighting with the Palestinians.

But despite the personal pinch, economics has yet to play a role in Israel's handling of the conflict with the Palestinians, analysts say. With a widespread feeling thus far that there is no choice but to fight – and with a national unity government facing weak opposition and no significant challenge to its policies – few people are currently linking the economic troubles to the government's militaristic policies, the analysts say. However, this could change as the conflict wears on, affecting an increasingly broad section of the population, they add.

"In any recession the hardest hit are the lower classes," says Haifa University sociologist Sammy Smooha. "If expenditures are cut, it means they get less services, and they cannot provide the services on their own. They are also the ones hardest hit by unemployment. Israeli Arabs, Ethiopian immigrants, working class people, the poor – these are people who are adversely affected. But the small proprietors, the petite bourgeoisie, are losing their clients. These businesses are closing down by the thousands and getting no help from the government."

Unemployment has risen steadily from the 8.8 percent figure it was at the start of hostilities in Sept. 2000 to 10.1 percent in January. Economic growth was negative last quarter.

Also contributing to the recession were troubles in the country's high-tech sector, which predate the fighting.

The fallout is far more acute on the Palestinian side where military sieges and fighting have caused rocketing unemployment and left a growing number of families dependent on emergency assistance from the UN.

Israel is experiencing its worst budgetary crisis ever, with a more than $10 billion deficit that is being widened by the expense of the current offensive in the West Bank, launched after a devastating series of suicide bombings. Spending cuts and possible tax hikes are in the works, and economists believe that middle-class and poorer Israelis will be the ones most adversely affected.

"Overall, the economy is in a difficult situation," says Richard Gussow, Israel analyst for Lehman Brothers. "It is not at a crisis point yet, but certain industries are in crisis, such as tourism and retailing."

At Jerusalem's Malha shopping mall, four security guards and a metal detector have not been enough to save Mekhal Ruimi's job. Ms. Ruimi, who immigrated to Israel from Casablanca, Morocco, five years ago, works in the Zentner Luggage Store, where not only shoppers, but also clerks are afraid of being blown up by Palestinian suicide bombers. The feeling of threat was greatly accentuated last month when police stopped what they said was a would-be bomber on the main road near the mall.

Now, getting inside is like boarding an international flight. You empty your bags and pockets under the watchful sunglasses of a man in black slacks cradling a semi-automatic rifle. You go through the metal detector and if that has missed something, there is still another guard inside. But judging from the mostly empty cafes and shops, few Israelis have been reassured.

That means Ruimi has plenty of time to study for her university entrance exams and she is about to have even more – the shop is due to close for lack of business at the end of the month.

"I started work a year and a half ago and the store was full. But people today are frightened," she says.

Official statistics show a 53 percent drop in tourism during 2001. For Zentner, that meant less business from airlines, who used to issue lost luggage vouchers for the store to their passengers. Ruimi, who earns a minimum wage salary of NIS 3,000 ($650) is already part of a "ripple effect": less spending causing unemployment and shrinking of businesses, in turn causing less spending. "I buy less since I don't know what tomorrow will bring. I buy fewer clothes, and I wouldn't buy a stereo for example," Ruimi says.

She is worried about meeting her rent payments of $220 a month if she cannot find new work. But she considers herself more fortunate than most – she does not have to support a family.

But despite the economic impact of the ongoing conflict, both Nahmias and Ruimi are strong supporters of the offensive in the West Bank. "We live among 300 million Muslims and we are fighting for our homes," Nahmias says.

Mr. Smooha says that economics and American suspension of loan guarantees to Israel helped bring Yitzhak Rabin to power in 1992 and could play a role again – but only after the Labor party leaves the national unity coalition and suicide bombings subside. "The bombings are so dramatic and injurious that it is hard for people to think in an alternative way," he says.

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