Israel as a Western Watchdog in the Middle East ‒ By Shlomo Fraenkel

10 August 1987

in Articles, Khamsin Bulletin 1

The following two Items are taken from a series of three articles published in the Israeli daily Hadashot [=News]. The series provides a historical analysis of Israeli economic policy, in the context of Israel’s role as a Western gendarme in the Middle East. Although Hadashot is far from being a left-wing or radical paper, both the content and the style of the articles are very critical, frank and incisive. They are a typical example of some of the extremely revealing material published in the Israeli press. We present a translation of two excerpts from the second article in the series, and the whole of the third article.

A Dirt-Cheap Policeman on the Beat

(Excerpts from an artlcle by Shlomo Fraenkel in Hadashot, 17 April 1987)

The great turning point came at the beginning of the 1970s. Until then, American support for Israel was half-hearted. But then Golda Me’ir and Richard Nixon established themselves In Israel and the United States, and the Israeli policeman, who had hitherto functioned as a sort of mobilized militia, received an official mandate. This found an expression in the size of American aid. In 1970, the aid had amounted to $71.1 million, of which $30 million were a military loan. In 1971 the aid was greatly increased to $600.8 million, of which $545 million were a military loan. The Egyptians and the Syrians also received weapons from the Soviets, and the arms race Intensified.

[…] 

Following the [October 1973] Yom-Kippur War, there was an increase in the order of magnitude of the aid, which now reached billions of dollars per annum. Also, they began to give part of the aid as [non-returnable] grant, for which we are meant to be particularly grateful. Over the years, the Israeli policeman-on-the-beat has received aid amounting to $33 billion. Almost the whole of this was, of course, retained in the United States, as payment for the inflated prices charged by weapons manufacturers, and some in exchange for grain and [other] civilian goods. What Israel has retained are the debts. Today these have reached a total of about $10 billion, and there is no danger of them diminishing.

During recent times, the policeman-on-the-beat has become particularly cheap to maintain. Here is an example from the current year: the Americans have approved aid amounting to $3 billion, of which the greater part by far is to be retained In America. But a few days ago the Bank of Israel published some data about Israel’s debt repayments. It transpires that this year Israel is repaying debts ‒ capital and interest ‒ to the tune of $3.3 billion. Of this sum, 85 per cent, amounting to $2.8 billion, are dollar debts repaid to the United States. Almost the whole of this amount is to be repaid in good money (there is an agreement according to which the Americans are supposed to buy $150 millions’ worth of goods from Israel, but this is not being implemented), produced by the toil of Israel’s inhabitants and the taxes they pay. That is to say, the Americans do not in fact spend much on maintaining their policeman-on-the beat, and the continuation of the loans makes it certain that the debt will go on increasing. What Israel receives is a large quantity of planes and ammunition at exorbitant prices, whose maintenance sucks the Israeli economy dry and turns all talk of economic independence into a pathetic farce.

A Large Textile Mill

(Article by Shlomo Fraenkel in the Israeli dalily Hadashot, 21 April 1987)

After two years of independence, the leadership of Israel turned the country into a watchdog of Western Interests in the Middle East. With the decline of the colonial powers, Britain and France ‒ the Suez War was their swan-song in this region ‒ the United States became the only boss. When it was decided to enslave Israel to the West, this seemed to be a lesser evil. The big powers of both blocs, the United States on the one band and the Soviet Union on the other, pressed the smaller nations to commit themselves, and for many years it seemed as though the Israeli leadership had made the right choice.

A certain research institute ‒ somewhat amusingly, an American one ‒ has recently published a list of aII nations, graded according to their quality of life. Israel is graded 32nd. One grade ahead of it, in the 31st place, is Fidel Castro’s Cuba. This is amusing, because Cuba’s role In the Caribbean region is surprisingly similar to Israel’s role in the Mediterranean region. Cuba is a Soviet satellite, just as Israel is an American one. Cuba’s achievement is impressive, because its initial conditions, when Fidel Castro seized power, were worse than those of Israel at that time; and now Cuba is ahead. Does this mean that Israel has made the wrong choice, or that the Soviets are more generous bosses than the Americans? Not at all. All it means is that Fidel Castro has been much wiser than Israel’s leaders and knew how to demand from his Soviet employers a wage fairer than that demanded by the Israeli leadership.

This is not particularly surprising. You only need to compare the level of Israeli politicians such as Yitzhaq Rabin, Shim’on Peres or Yitzhaq Shamir with that of leaders of the Arab countries in our neighbourhood, such as Syria’s Hafez al-Assad, King Hussein, Anwar Sadat or even Egypt’s present President Mubarak, to understand why Israel gets such a bad deal. The Arab leaders are pros, whose wisdom and cleverness is impressive compared with the Israeli leadership’s grey mediocrity and pathetic amateurishness. Our political establishment has simply sold us cheap.

In this respect, Israel’s position is getting worse, especially since the political overturn of 1977 (in Israeli political parlance, “political overturn” refers to the defeat of the Labour Party after 19 years of rule, and to the coming to power of the first Likkud government). Recall that, as early as 1950, Herut and the General Zionists [later called “the Liberal Party”, were the two main components of the right-wing Likkud bloc] had supported Israel’s enslavement to Western interests. Upon coming to power, they intensified Israel’s enslavement. Prior to the overturn, it was enough for the Americans that Israel was serving their political interests. They did not interfere much in Israel’s domestic economic policy, although they regarded it as a bit too “socialistic”. The Likkud decided to rectify this.

One of the first steps taken by the new Likkud finance minister, Liberal Party leader Simhah Ehrlich, was to Invite to Israel the American economics professor, MiIton Friedman, in order to advise us on economic policy. Professor Friedman and his students had done the same for other American satellites, in South America. This initiative gave Prime Minister Begin a bit of a fright. Even he realised that the advice Friedman was going to give would be incompatible with Begin’s wish “to benefit the people” [this was one of the Likkud’s main slogans. particularly associated with Begin]. Thus Friedman and his students had to wait a few more years, until the economic policy instituted by Begin went bankrupt. It was Finance Minister Yoram Aridor [Ehrlich’s successor] who really put Begin’s policy into practice. This economic policy maintained that it was possible to raise the standard of living of wage-earners, particularly the deprived strata, while at the same time making the rich richer. In other words, the national product is a bottomless pit; the more you take out of it, the more there is in it.

Aridor, who panicked when his policy produced dire results, looked for a way out: and who could give guidance if not MiIton Friedman and his students? To this day, Aridor brags that he and his advisors invented the “dolarization” plan. The truth is, of course, that it was Professor MiIton Friedman who had claimed ‒ long before the collapse and virtual bankruptcy of the Israeli banks ‒ that the way to stabilize the currency in dollar-bloc countries is simply to link their currencies [directly] to the dollar. Two American professors, Stanley Fisher and Herbert Stein, were involved, as early as 1983, in planning Israel’s dolarizatlon. There was also talk of special American aid, to the tune of $1.5 billion, in order to make the plan feasible. We shall soon see what the precise role of this aid was to be.

The American professors did not come as volunteers. They acted as delegates of the State Department, which has in practice become a super-directorate of Israel’s ministry of finance. The first dolarization plan was buried ignominiously, and dragged Finance Minister Yoram Aridor with it into the political grave. On one thing Yoram Aridor is right: the despised buried corpse of the plan was resurrected two years later, in the form of the “New Economic Plan” under new political patrons, the then Prime Minister Shim’on Peres and Finance Minister Yitzhaq Moda’i, and another spiritual-economic authority, Professor Michael Bruno. What both the burial and the resurrection had in common was the blessing of Professors Stein and Fisher and the State Department, as well as the special aid amounting to $1.5 billion earmarked for the implementation of the plan. This special aid was simply hush-money paid to the Israeli economic establishment ‒ the industrialists and exporters in the private sector, and the Histadrut’s Hevrat ha’Ovdim and its failing enterprises [Hevrat ha’Ovdlm ‒ literally: ”The Workers’ Company” ‒ is the holding company of Israel’s corporatist trade union federation, the Histadrut].

This does not mean that in the interim between the humiliating burial and the wondrous resurrection the Americans just sat aside. In January 1984, when former Finance Minister Yig’al Kohen-Orgad went to the United States, his American hosts pressed him to implement the dolarizatlon. It seems that he asked them to wait until after the Israeli elections. After the elections, when the economic package-deals of late 1984 and early 1985 were implemented [these were part of an incomes policy agreed between the government, the industrialists’ federation and the Histadrut, aimed at halting the rapid inflation. It worked by reducing the workers’ real income], the Americans were not pleased. They wanted dolarization rather than half measures, and as early as December 1984 Secretary of State George Shultz sent Prime Minister Shim’on Peres a strongly worded letter on this subject.

Indeed, from Shultz’s point of view the situation was very convenient. The Israeli finance ministry was headed by a former director general of the Israeli branch of an American concern. This was Yitzhaq Moda’i, who had acquired his practical economic training in the Ravlon concern. The director general of the finance ministry, ‘Immanu’el Sharon, had also been a director general of an American concern. The main academic authority in the Labour Party’s economic team was Professor Michael Bruno, who had a long and well-paid history of American research grants and joint publications with American economists, especially those who supported dollarization.

Again, as in Aridor’s days, the Israelis tried to disguise the true source of the plan and present it in [lsraeli] blue-and-white colours. This was a bit difficult, mainly because exactly the same plan was implemented in Argentina by the State Department and the very same professors. Later there was also a leak of a document known as “Herb’s Ten Points”. “Herb” is short for Professor Herbert Stein, who is remembered from the previous incarnation of the dolarization plan. As if this were not enough, it transpired that there was a joint American-Israeli team that drew up the plan down to the last detail.
The marathon all-night meetings that the Israeli government held with the industrialists and the Histadrut were only designed to ratify the plan, not to draw it up; and in fact they constituted a process of exhausting bargaining over the division of the spoils ‒ the $1.5 billion American emergency aid ‒ among those who sat next to the trough.

The Israeli economy continues to be directed regularly by the State Department, mediated by the Israeli finance ministry. The Americans have not ceased their pressure for the implementation of Herb’s Ten Points. And once more it can be seen that Secretary of State Shultz has reverted to the method of warning letters. Shim’on Peres, in his last days as prime minister, received another, partlcularly strongly worded, letter ‒ following which the preparations for the present income-tax reform began apace.
What is the aim of the American economic policy implemented in Israel? It has one purely American aim: to improve as much as possible ‒ from the Americans’ point of view ‒ trade relations between Israel and the United States. This is the effect of dolarizatlon, whose real meaning is a continual revaluation of the Israeli shekel relative to the American dollar, at a time when the latter is going quickly downhill. This revaluation ensures, of course, that exporting to the US is unprofitable, whereas importing from the US is extremely profitable.

Another aim of this policy is to place Israel In a very definite position within the economic system of the dollar bloc, as a producer of cheap export goods such as textiles, while liquidating, or at least reducing, the more sophisticated [sectors of] Israeli industry such as electronics and arms manufacture. Large American firms, sensing the new trend, have hastened to withdraw from partnerships with advanced Israeli manufacturers such as Elscint and Tadiran. On the other hand, many American investors are looking for partnerships in the textiles sector.

One of the most important ways to achieve this aim of turning Israel into one big textile mill is of course to reduce the Israeli worker’s wages as much as possible. Clearly, the nearer these wages approach those paid to a worker in Taiwan, South Korea or Chile and Mexico, so much cheaper will Israeli-produced goods be.

So, Israel is rather quickly approaching a position where it will be the least egalitarian society in the whole Western world: while the political and economic leadership is distributing the spoils of American aid among its own friends and is growing rich, the wages and living standard of all the others are declining. The whole of the technologically advanced sector of Israel’s industry is in danger of collapse, while sectors such as textiles, based on low wages, are enjoying colossal prosperity. During the whole time, of course, despite high-sounding words about cuts in military spending, the Americans are very careful to preserve the relative strength of the IDF [Israel’s Defence Force ‒ the official name of Israel’s armed forces] compared to other armies in the region: because Israel was and has remained, first and foremost, a cheap policeman on the beat.

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