A reasonable level of security is a necessary condition for the existence and growth of a free economy.
Palestinian terror is damaging Israel’s economy. This damage is not a temporary or passing phenomenon, but rather one that has repercussions for the product and the structure of the economy in the long term. The damage caused by terror has unique characteristics that differentiate it from other security-related threats. For the past two years, the personal security of Israel’s population has been undermined in a manner that affects their economic behavior in general, including the patterns of consumption and distribution of consumption over time.
The team estimates that the cumulative damage caused by the Intifada and terror from October 2000 until the end of 2002 will account for approximately 6-8 percent of the product. In 2002 alone, the damage will come to approximately 3.5 to 5 percent of the product. An expansive government policy can reduce the damage in the short term, but such a policy itself is undesirable. This type of policy would trade severe economic damage in the short term (reduced product) for more severe economic damage in the near future (financial crisis? inflation?).
These assessments are consistent with findings from the Basque region in Spain, where it was found that terror reduced the Basque GNP by approximately 12 percent, and also with estimates derived from the Israeli capital market’s reactions to terror attacks. We found that the worsening of the wave of terrorand the doubling of the number of casualties, with all other conditions remaining constant, reduced the value of the Israeli market by about 6 percent as compared to the value of the US stock market.
The State of Israel, after losing a decade of growth in the years of inflation following the Yom Kippur war, is losing a decade of growth in the per capita product as a result of the current conflict. The endurance demanded from the Israeli public is not, therefore, only endurance in the face of a large number of casualties, but also endurance in the face of a harsh and worsening economic reality.
Any government policy must take into account that the product of the Israeli economy will shrink relative to its size in the pre-Intifada period. An attempt to return the economic situation to its former state, without restoring the former security situation, will not succeed and is liable to cause a financial crisis or an inflationary flare-up.
The most important quantitative element in the effect of terror on the product and on growth is the increase in uncertainty and risk confronting the public and business sector alike. The government, including all of its branches and extensions, must not implement a “business as usual” policy. Processes that might be appropriate in normal times should be reconsidered and their effect on the uncertainty faced by the business sector carefully examined. In the present timing, a move that temporarily increases uncertainty could cause irreparable damage to a specific industry or the entire economy.
In a state of economic-security equilibrium accompanied by active terror, the expenditure of the Israeli economy for security needs will increase. This expenditure will increase both through the public expenditure and through a rise in private security-related expenditure. In searching for sources of funding for the increase in public expenditure, special attention should be paid to the fact that defending against terror, as opposed to defending against full-scale war, has a significant private component. In particular, this phenomenon should be noted in light of the reality that inequality in Israel has greatly increased over the past 15 years.
The economy’s loss of product is a parameter for the price of the Israeli-Palestinian conflict. If specific security-related expenditure reduces the loss of product at a rate that exceeds its cost, it should be implemented immediately in order to reinforce the economic robustness of the economy.