ISRAEL

• Document Type: FOIA
• Keywords: ISRAEL
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 0001518685
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 37
• Document Creation Date: June 22, 2015
• Document Release Date: September 30, 2008
• Case Number: F-2007-01889
• Publication Date: June 29, 1972

APPROVED FOR RELEASE DATE:
23-Sep-2008
 THIS ESTIMATE IS SUBMITTED BY.'THE DIRECTOR-OF CENTRAL
INTELLIGENCE AND CONCURRED IN ' BY THE UNITED STATES
INTELLIGENCE BOARD.
The folio wing In telligence organizations :participated
the estimate:
n the preparationx c
of 'the Depart=
The Central Intelligence Agency.: and the. intelligence organizations
ments of State, Defense, and the Treasury, and -4116-NSA
Concurring:
The; Deputy Director of Central .intelligence
The' Director of Intelligence and tesearch, department of State
The Director, Defense Intelligence Agency
The; Special Assistant to fide Secretary f the Treasury
The Director,
National Security Agency
'he'_ Assistant General Manager, ?tamic Energy otiur~ission
Abstaining
The; Assistant Director,
of his jurisdiction.
federal Bureau of Investigation,
This material 'contains in of~ r
within the meaning of the esn
e subiect being outside.'
e'"'Jnited States
and 794, the;r'ans
of which, in, any _manner to an?unauthorized person as
 N I E 35-72
ISRAEL
 CONTENTS
Page
NOTE ............................................................... 1
CONCLUSIONS ..................................................... 2
DISCUSSION ........................................................ 5
1. THE ATMOSPHERE ............................................ 5
II. MILITARY PROGRAMS ......................................... 6
A. Forces Envisaged ............................................. 6
B. Procurement and Production ................................... 7
Aircraft ...................................................... 7
Missiles and Other Weapons ................................... 8
III. HANDLING THE ARABS ....................................... 10
IV. THE KNESSET ELECTIONS OF 1973 ............................ 11
A. The Leadership ............................................... 12
B. Impact on Domestic Policy .................................... 13
V. RAMPANT PROSPERITY ........................................ 16
VI. SOME SOCIAL CHALLENGES-IDEOLOGIES AND REALITIES . 20
VII. 11ELATIONS WITH OUTSIDE POWERS ......................... 22
ANNEX A
 ISRAEL
NOTE
This paper discusses likely developments in Israel during the next
several years, with particular emphasis on major policy-related issues
such as defense procurement plans and economic prospects. Israeli
attitudes relating to the chances for a breakthrough in peace nego-
tiations or for a major eruption of fighting are discussed in paragraphs
18-20 and 60. Judgments elsewhere in the paper are predicated on
continuation of something like the existing no-peace, no-war situation.
 CONCLUSIONS
A. Security considerations override all other aspects of Israeli
policy and influence all areas of Israeli life. Israelis today are confi-
dent that military preparedness will insure the future survival of the
state, although deeply ingrained fears and uncertainties remain.
B. The Israeli effort to attain economic and military self-sufficiency
has necessitated a short-run increase in Israeli dependence on the US.
Israel has purchased aircraft and other weapons in the US and has
embarked on programs to produce its own supersonic fighters, missiles,
tanks, and a wide range of other armaments. By the mid-1970s, it
will be making most of the items needed by the Israeli Defense Forces
and will be substantially independent of foreign arms suppliers; im-
ports of finished arms and equipment will slow significantly.
C. In the process, arms production and exports will become in-
creasingly important to the economy. If Israel succeeds in finding
foreign buyers for the weapons it does not need itself, its foreign
exchange requirements could begin to decline. However, the Israelis
will face stiff competition from other suppliers who have substantial
advantages in terms of costs and access to markets.
D. Over the next several years, Israel can look forward to very
substantial real economic growth, accompanied by a high rate of in-
flation. Gross national product is likely to rise from about $5 billion
in 1971 to about $8 billion in 1976; at that stage Israeli incomes will
approximate those now common in prosperous West European coun-
tries. Foreign exchange considerations are unlikely to interfere with
attainment of these goals. Foreign gifts and loans currently exceed
$1.5 billion annually; they would probably have to fall below $1
billion before reserve drawdown became severe enough to force serious
changes in economic growth policies.
E. Knesset elections scheduled for the fall of 1973 are unlikely
to bring about immediate major changes in the top ranks of the Israeli
Government. Pre-election maneuvering for advantage, however, prob-
ably will result in passage of expensive welfare legislation and in re-
laxation of already ineffective government efforts to control inflation.
Elections also are likely to affect the evolution of Israeli policy toward
the occupied areas.
2 S?EftEfr
 F. Israeli attitudes toward retention of Arab territories seem cer-
tain to harden further as time goes on. The continuing movement
of Israelis into the areas will contribute to the process. At present,
there are about 40 Israeli settlements in the territories; by the mid-
1970s, there probably will be close to 60. In addition, at least 25,000
Israelis will then be living in portions of greater Jerusalem that were
under Jordanian control until June 1967.
G. The Israelis clearly intend to retain substantial portions of oc-
cupied territory. They are searching for a way to do so without se-
riously diluting the Jewish character of Israel. Thus far, however,
the conceptual framework has not been devised, and policy toward
the Arabs in the occupied territories tends to evolve gradually from
piecemeal decisions. The best hope for maintaining a Jewish majority
in the future state, whatever role Arabs play in it, lies in immigration
from the USSR. Problems stemming partly from the flow of immi-
grants, including increased financial burdens and exacerbated social
strains, are worrisome but far from critical.
H. Much of Israel's frustration with the outside world-and the
outside world's periodic frustration with Israel-stems from a very
fundamental difference in perception. Outsiders keep trying to pro-
mote change in the Arab-Israeli situation in the hope of effecting
improvement. The Israelis are trying to prevent change in the hope
of staving off deterioration. They are extremely skeptical that any
major change would work to their own advantage. They are most un-
likely to accept a peace agreement that depends on Arabs acting in good
faith. They want to continue on their present course until the Arabs
are anxious for an agreement, not reluctantly willing.
1. Israel's policy toward the superpowers will continue to be a
balancing act designed to keep the US as a friend and to avoid an-
tagonizing the USSR unnecessarily, while pursuing two major goals.
It wants to maximize the flow to Israel of arms and money-coming
largely from the US-and immigrants-coming increasingly from the
USSR. Tel Aviv also strives to avoid the extremes of Arab-Israeli ten-
sions that could lead the US and the USSR either into diplomatic
agreements at the expense of Israel or into physical confrontation in
the area. Given the role that military aid to the Arabs plays in main-
 S'f
taining the Soviet position in the Middle East, real Soviet-Israeli cor-
diality is a remote prospect. So long as the Israelis remain uneasy
about Soviet motives and intentions, they will continue to seek the
insurance against disaster that only a very large and very strong ally
such as the US can provide.
 DISCUSSION
1. Israel still has problems aplenty, but they
are largely the results of military, diplomatic,
and economic success, rather than reflections
of external threat and internal weakness. Is-
raelis today are confident that their military
preparedness will insure the survival of the
state, although deeply ingrained fears and
uncertainties-about a potential Arab/Soviet
threat and about the dangers of relying on the
US-remain. Today there is no recession, no
unemployment, no imminent Arab threat, no
worry about arms supply, no balance of pay-
ments drain, and no shortage of new immi-
grants. Best of all, there is no pressure-
either from inside the country or from the
US-to make territorial concessions to the
Arabs. Instead, the Israelis are struggling to
adjust to new and disorienting affluence, a
stream of immigrants, and the problems of
governing a large Arab population.
2. Thus, a sense of confidence in a promis-
ing, secure future currently permeates the de-
bates, quarrels, recriminations, crises, and
compromises that typify Israeli political life.
The single most important variable essential
to this mood is Israel's assessment of the
attitude of the US. The concerted Israeli
effort to become economically and mili-
tarily self-sufficient, particularly since the
June 1967 war, has necessitated a short-run
increase of their dependence on US assistance.
Despite their ardent declarations that they
are a self-sufficient people, they realize that
they are still critically dependent on US good-
will and material assistance. Israelis are
acutely sensitive to any indication-however
tenuous-that US support for their cause
might be waning.
3. The Arabs, whether they are across the
borders or under Israeli control, are a constant
source of concern, but have shown no capacity
to create the kind of trouble or to make the
kind of convincing political gestures that could
cause the Israelis to question their own funda-
.SECRET 5
 mental policies and convictions. Events such
as the slaughter at Lod Airport in late May
1972 generate anger and grief, but they do
not undermine the fundamental Israeli con-
viction that Israel is in the Middle East to stay.
Convinced that they understand the Arabs, the
Israelis are little given to questioning past
actions or fretting about future difficulties.
Rather they go on from day to day, taking the
steps that seem desirable at the moment while
seeking to keep their long-range options as
open as possible.
4. In fact, the Israelis are reasonably satis-
fied with the status quo in their relations with
the Arabs and the major powers. They are ex-
tremely skeptical that a change-in the form
either of intensified military activity or of in-
tensified diplomatic action-would work to
Israel's advantage. The Israeli leadership no
doubt has plans for either contingency, but it
is preparing more actively for years of stale-
mate than for great change. As Israelis see it,
the practical problem is to consolidate their
own military and economic strength within the
existing framework of relations with other
states.
A. Forces Envisaged
5. Decisions made in the name of national
security place limits on all other facets of
Israeli policy. It is clear from both public and
private statements that the Israelis expect no
major military attack from any Arab quarter
in the near future. Defense Minister Dayan's
late May statement that an Egyptian attack
was unlikely at least until sometime in 1973
was only the most recent reflection of growing
Israeli conviction that Arab leaders recognize
Arab unpreparedness. From the Israeli point
of view, maintaining superiority great enough
and apparent enough to cope with minor in-
cidents and to dissuade the Arabs from seri-
ously considering an assault on Israeli-held
territory is the single most important policy
imperative. Israel will, therefore, continue to
improve its military forces.
6. The Israeli Defense Force (IDF) has
been steadily strengthened since the June 1967
war. It is now well equipped with modern
weapons, primarily of US manufacture. It is,
as before, manned by highly trained and com-
petent professionals and conscripts, with a
remarkable 250,000-man reserve force which
can be called up within a week. The total
number of men and women on active duty has
increased from around 90,000 just after the
war to about 120,000. In the same time period,
the number of combat aircraft has doubled-
from 166 to over 300, the tank inventory has
increased from 1,250 to over 1,500, and the
number of armored personnel carriers has
been increased from about 1,500 to more than
3,000. The navy, which had a dozen or so
active combat vessels at the war's end, now has
twice as many. Qualitatively, the improve-
ment has been even more marked than num-
bers alone would suggest, since much old
equipment has been retired and replaced with
more modern and more powerful counterparts.
7. Personnel expansion will probably con-
tinue in the next few years, although at a
somewhat slower rate. In part, this judgment
is based on the manpower needed to operate
equipment now on order. By 1976, the air
force probably will receive 300 new fighter-
bombers. Even if many of the older fighters
now in use are transferred to standby reserve
status, active duty units will have almost 40
percent more planes in 1976 than in 1972.
Plans to acquire new armored personnel car-
 ricrs, plans for series production of an Israeli
tank, and plans to commission at least 15
medium and small combat vessels during the
next four years may require a modest expan-
sion of ground and naval forces.' More sophis-
ticated equipment requires increased main-
tenance. Furthermore, with universal conscrip-
tion, the number of draftees continues to in-
crease as the population grows; the military
training establishment-which probably in-
volves some 25,000 people or roughly a quarter
of the active duty force-must adjust both to
the larger number of conscriptees in the basic
training cycle and to the additional training re-
quirements ancillary to new and more complex
weaponry. Without any major change in the
ceasefire lines or any major outbreak of hos-
tilities, therefore, the IDF is likely to have
about 130,000 active duty personnel by 1976.
B. Procurement and Production
8. Israel's heavy military purchases in the
past few years are a reflection of three over-
lapping aspects of procurement policy. Israel's
determination to obtain as much equipment as
practicable, whenever possible, to guard
against the effects of a future embargo has
been a traditional mainstay of Israeli thinking,
and it remains compelling. Interest in devel-
oping a military manufacturing capability as
further insurance against an embargo has long
been prevalent, but it has become increasingly
important in practice as Israel's industrial
capacity has increased and the Israelis have
come to look on exports of arms manufactured
or assembled in Israel as potentially lucrative
as well as politically appealing. These two
ideas underlay an Israeli forecast formulated
in 1969, as the basis for a request to the US
for assistance, that envisaged imports of mili-
tary equipment and military-industrial goods
totaling some $2.1 billion in value during
1970-1972 and a further $2.3 billion during
1973-1975.
9. The Israelis had barely begun to imple-
ment these plans when the massive buildup of
Egypt's air defense system and the introduc-
tion of large numbers of Soviet personnel into
that system added a third element. Israel
rapidly began seeking additional equipment-
largely aircraft, other sophisticated weaponry,
and electronic gear intended to counter the
missiles in Egypt. Israel requested and is re-
ceiving some $300-$400 million worth of
weapons from the US that were not envisaged
in its 1969 forecast. Israel also appears to be
importing equipment and goods for its mili-
tary industries well in excess of the amounts
planned in 1969, although information on this
subject is fragmentary and unclear. In any
event, military-related imports during 1970-
1972 actually totaled $2.6 billion or more; they
may come to $3.0 billion or more in 1973-1975.
Aircraft
10. Israel's interest in simultaneously pur-
suing all possibilities in the search for military
hardware is illustrated by its plans for ad-
vanced fighter aircraft. In its 1969 forecast,
the IDF was planning for its cumulative pur-
chases of US aircraft to reach 75 F-4s and 200
A-4s-at a total price of about $600 million-
by mid-1973. Israeli requests escalated in the
face of the Soviet buildup of Egypt's air de-
fenses, and the US thus far has approved sales
of about 125 F-4s and 250 A-4s. As the delivery
schedule stands, the value of deliveries will
reach $850 million by mid-1973 and about $1
billion by the end of 1974. Attrition losses have
been small, and most of these planes pre-
sumably will still be flying in 1975, unless
there is another major round of fighting in
which the Israelis suffer severe air losses.
 11. By that time, Israel will have a substan-
tial domestic fighter industry (See Table).
Since the summer of 1971, Israeli Aircraft In-
dustries (IAI), owned by the government, has
been assembling Mirage 5 aircraft from struc-
tural parts and engines purchased in France.
By late 1973 or early 1974, the IDF will have
about 50 IAI-assembled Mirages. Initial stages
in the production of an Israeli-made fighter
apparently are being integrated with the
Mirage assembly program. The project will
produce about 110 fighters by 1976, consisting
of a modified and strengthened version of a
Mirage frame powered by a J-79 engine.
Several US companies, as well as French and
West German firms, have contracted to manu-
facture certain key airframe parts. An initial
production run of at least 80 planes is to in-
corporate these components. A capability for
domestic manufacture is being worked in by
linking contracts for airframe parts with pur-
chase of the tooling to make them. In similar
fashion, Israel has purchased 50 complete
engines from General Electric, received 20
more in kit form for assembly in Israel, and
hopes to initiate domestic production of en-
gines under a license agreement. The delivery
schedule for components points toward rollout
of the first Israeli fighter in late 1972 or early
1973. Production and assembly programs will
overlap in 1973-1974; by 1975, Israel will have
assembled 60 or so of the new planes, and
those coming off the production line will be
made primarly from locally manufactured
parts. Total costs for both programs through
1976 are estimated at $600 million or more.
Missiles and Other Weapons
12. Israel has been involved in an expensive
program to develop and produce a short-range
ballistic missile for at least a decade. In 1963,
Israel contracted with Dassault, a French firm,
to develop a 260 nautical mile missile system
which the French called the MD-620. Devel-
opment work went on in France for about five
years, producing a two-stage, solid-propellant
missile some 45 feet in length and designed to
carry a variety of warheads. In June 1968, the
contract was renegotiated; Dassault agreed to
turn over to Israel all the remaining produc-
tion tooling and check-out equipment as well
as the 10 or so missiles not expended in the
French test program. At that point, the Israelis
had paid Dassault at least $100 million; the
major remaining development problem was
the inertial guidance system, which had been
a persistent difficulty.
13. To support production of the missile,
which they called the Jericho, the Israelis have
constructed a number of major facilities in
Israel which have probably involved another
$100 million or so in payments to foreign
suppliers since the early 1960s. These include
a solid-propellant motor research and develop-
ment facility, propellant production and test
facilities, and a missile assembly and check-out
plant. The Israelis have continued to purchase
missile testing equipment in the US suitable
for a missile of the Jericho type, and sporadic
reports of plans for deployment have been re-
ceived o assembled
missiles have been seen in Israel, however, and
none is known to have been flight tested there.
Mirages (assembled) ... 25
20
Israeli Fighters (assem-
bled/produced) ..... -
5
20
35
50
110
Cumulative Total ...... 25
50
75
110
160
160
 Deployment seems to have been delayed and
it appears that the Israelis have been improv-
ing the missile or that the guidance problems
persist. In any case, the amount of money and
effort devoted to the ballistic missile program,
coupled with the known characteristics of the
1968-style Jericho, strongly suggest that the
missile the Israelis are working on is not in-
tended solely for use with conventional high
explosive warheads.
16. Israel already produces more than 80
percent of the ordnance used by its army, in-
cluding guns, mortars, and rockets, and it is
pursuing a wide variety of other weapons pro-
grams. It is developing a family of aircraft
rockets, including an air-to-air missile similar
to the US Sidewinder and an Israeli version of
the US Zuni air-to-surface rocket. The army
recently tested a new solid-propellant un-
guided tactical rocket of Israeli design which
can deliver a payload of 250 pounds to a range
of 23 miles. A prototype for a tank of Israeli
design should be ready for testing by the end
of 1972, and the Israelis plan to have it in
production by 1975. Except for engines and
transmissions, which Israel plans to obtain in
the US, all sub-assemblies will be locally fabri-
cated from raw materials purchased abroad. A
prototype of a lightweight armored recon-
naissance vehicle capable of transporting eight
troops has been designed and field tested. Two
missile-equipped fast patrol boats, out of a
planned total of at least half a dozen, are near-
ing completion at the Haifa shipyards. A
hydrofoil missile patrol boat is slated to follow
in the late 1970s. One ship-borne missile al-
ready is in production and is being exported;
an improved version is in the final stages of
development.
17. Barring some major change in its arms
plans and requirements, Israel will be virtually
independent of foreign suppliers by the latter
 half of the 1970s. Through acquisition of
weapons, technological competence, and dili-
gent training, Israel will remain militarily
superior to its Arab neighbors for many years.
The Israelis will be able to repulse any com-
bination of Arab forces-which continue to
lag behind in skill and morale-that might
line up against Israel and able also to inflict
devastating damage on their Arab neighbors.
III. HANDLING THE ARABS
18. Israel's military programs have political,
as well as military, aims. At present, the
physical protection of Israel against assault
is only a minor aspect of the problem; neither
the Palestinians nor the Egyptians currently
pose a serious threat to Israeli life or prop-
erty. Although the Israelis have no expecta-
tion of imminent major Egyptian military at-
tack, they are determined to be fully pre-
pared for anything from an all-out attack to
a minor Egyptian military effort. Any Israeli
response to an incident will be designed to
stop military activity, rather than escalate
it. The Israelis hope, by periodically demon-
strating their overwhelming superiority, to
convince the Egyptian Government that it has
no alternative but to seek a political settle-
ment.
19. Sadat's various public and private state-
ments of willingness to reach some sort of
peace agreement with Israel are a sharp break
with the Egyptian past, but they fall far short
of satisfying Tel Aviv's requirements. Initially,
the Israelis were taken aback by Sadat's 1971
"peace offensive"; some Israelis were ready
to test his intentions. The Israeli Government
delayed, however, both because formulation
of a response was politically difficult and
because Israel's leaders were skeptical; they
wanted the Egyptians to be anxious for settle-
ment, not reluctantly willing. Sadat saw Is-
rael's delay and US silence as evidence of a
trick and feared the consequences within the
Arab world of his non-billigerent stance; ulti-
mately, he renewed the flow of aggressive
rhetoric, confirming Israeli skepticism and
removing-so far as the Israelis were con-
cerned-any need to test his intentions by
making concessions, verbal or otherwise.
20. The gulf between the two thus remains
very wide. The Israelis, pointing to repeated
Arab violations of various undertakings and
agreements, have little faith that any agree-
ment entered into by any Egyptian Govern-
ment would be honored. An agreement satis-
factory to Israel would, by definition, be un-
satisfactory to the Arabs. The Israelis are
most unlikely to take chances on Arab good
faith in the interests of reaching a poten-
tially hazardous agreement, since there is no
domestic pressure for one, nor any compelling
external pressure to make accommodations,
for that matter. Indeed, the gradual harden-
ing of the government's position on the future
disposition of the occupied areas-which has
been particularly marked over the past year
or so-has been welcomed by most Israelis.
21. In the immediate postwar weeks, the
Israeli Government declared that it had no de-
sire to retain any occupied territory other
than East Jerusalem. Before the end of 1967,
however, it dropped its public declarations
opposing annexation and officially fell silent.
As the occupation continued, the Arabs pre-
pared for and resumed limited hostilities, and
Israeli citizens again began to die at Arab
hands. Personal, unofficial suggestions for
settling and retaining various areas were
bruited about by individuals inside and out-
side the government. Most widely discussed
was the formulation initially put forward in
July 1967 by Deputy Prime Minister Allon.8
' The Allon Plan envisaged permanent Israeli settle-
ment and control of strategic areas, e.g., the Jordan
Valley, along with some form of autonomy for heavily
populated Arab areas not vital to Israeli security.
10 L?eRE1-
 SECRET
At first, the Allon Plan received no official
sanction and aroused considerable criticism as
being far too acquisitive. With the passage
of time, however, the Arabs of the occupied
areas proved docile on the whole; Israelis
began to settle in their midst, in carefully
controlled and guarded areas generally con-
forming to the Allon Plan, and they were
seldom injured or threatened.
22. Over time, the possibility of a negotiated
settlement seems to the Israelis to have re-
ceded into the distant future, and the security,
sentimental, and/or economic attractions of
certain parcels of land have become more ap-
parent. Government policy now includes re-
tention of the Golan Heights and Gaza within
the future borders of Israel and continuing
Israeli physical control of Sharm al-Shaykh
and of a substantial share of the West Bank
including a strip along the Jordan River. There
are now around 40 Israeli settlements in the
territories (see map). They probably have
a population of about 3,500. Most are para-
military settlements or cooperative farms set
tip with government assistance and approval.
In several instances, however, most notably
Hebron, Israelis have moved in and defied
government efforts to make them leave. The
government has gone along with the fait ac-
compli. The government decision to build
housing units in the northern, eastern, and
southern suburbs of Old Jerusalem was has-
tened by the tremendous demand for settle-
ment in these neighborhoods on the part of
Israeli citizens, and some 5,000 or so Israelis
may already have established residence. Al-
together, the government has expropriated
about 4,000 acres of land in greater Jerusalem,
of which some 3,000 acres were owned by
Arabs. Under current plans, between 15,000 and
25,000 housing units, for 60,000 to 100,000
people eventually will be built on this land.
23. The process of "creating facts" is a
time-honored Israeli procedure that will con-
tinue to be pursued in the occupied areas.
By the mid-1970s, there probably will be
close to 60 Israeli settlements, with some
15,000 Israeli inhabitants, in the Golan
Heights, the West Bank, Gaza, and the eastern
half of Siani. At least 25,000 others will be
living in portions of greater Jerusalem that
were under Jordanian control until June 1967.
As settlement proceeds, government policy
and public opinion seem certain to harden
further on the issue of the areas that Israel
should retain in any settlement that might be
negotiated. This hardening process will be
reinforced by trends in domestic Israeli
politics.
IV. THE KNESSET ELECTIONS OF 1973
24. Knesset (Parliament) elections, due to
be held in the fall of 1973, are likely to affect
the evolution of Israeli policy toward the
occupied areas. The current outlines of offi-
cial government policy are likely to become
the minimum basis for formulating the Labor
Party platform plank on this issue. Since Labor
inevitably will form the government, its plat-
form, in turn, will become the minimum basis
for negotiating a post-election coalition agree-
ment with other parties. Thus, even the rela-
tive "doves" in the post-election government
would be bound to a fairly hardline position.
25. Elections, moreover, require administra-
tive actions such as definitions of voter eligi-
bility and location of polling booths that might
alter the legal status of portions of the terri-
tories. In 1969, the Arabs of East Jerusalem
were permitted to vote in municipal elections
but not in national elections. This time, they
may get full voting privileges; no other action
would be consistent with repeated Israeli
declarations that East Jerusalem is now part
of Israel. Measures similar to the 1969 arrange-
ment for East Jerusalem may be tried in the
thinly populated Golan Heights, where there
has already been some talk of forming local
-5E T 11
 branches of Israeli political parties for the
several thousand Syrian Druzes there. It is
less likely that any sort of election will be
undertaken in Gaza, which is thickly populated
by Arabs. Some legal foundation also is likely
to be laid for voting by Israeli civilians resident
in Golan, Sinai, Gaza, and the various West
Bank enclaves.
A. The Leadership
26. The elections are highly unlikely to
bring about immediate major changes in the
top ranks of the Israeli Government. The
Labor Party, or one of its direct antecedents,
has always held far and away the largest block
of scats in the Knesset, and the inflexibility
of Israeli voting patterns virtually guarantees
that it will once again win a plurality. Its
leader, therefore, will be the Prime Minister.
Mrs. Meir dominates the Labor Party; she has
tremendous personal popularity and the vir-
tue--highly esteemed by the Israeli public-
of being acceptable as Prime Minister to all
major figures in the Labor Party as well as
its coalition partners. Although she recently
has spoken of retirement and probably does
hanker to relinquish her office, she almost
certainly will be persuaded that duty to party
and country demands that she spend at least
another year or two in office. Should she be
incapacitated, the most likely replacement is
Finance Minister Sapir; he is in poor health
and lacks charisma but has the proper party
strength and credentials and is the choice least
likely to create a crisis within the party.
27. Deputy Prime Minister Allon and De-
fense Minister Dayan tend to block each
other; neither is likely to be selected as Prime
Minister so long as both are contenders. Each
has a devoted following, and Dayan-on a
purely popularity basis-probably is second
only to Mrs. Meir in domestic appeal. But
popularity is not the key to Labor politics.
Allon and Dayan are arch-rivals of long-stand-
ing; neither appears willing to work for the
other, and the Labor Party, as well as the
Israeli public, would far rather have them
both in subordinate positions than risk losing
the services of one by elevating the other.
Two other military heros-Ambassador to the
US Rabin and Minister of Commerce and
Industry Bar Lev (the last two Chiefs of
Staff) appear to be ruled out, for the time
being, by lack of proven loyalty and service
to the party structure and by the party and
government crisis likely to flow from the
elevation of either over the heads of Dayan
and Allon. Should health problems eliminate
both Mrs. Meir and Sapir, therefore, a com-
promise candidate probably would be chosen
from among those who have served the Party
long and faithfully. It might be any one of
several relatively colorless ministers or party
functionaries. It might even be Histadrut Sec-
retary General Ben Aharon.
28. The Histadrut (Federation of Labor),
a uniquely Israeli institution, was formed in
Mandate days as a voluntary association
through which Jewish labor activists in Pales-
tine pooled their meager resources to provide
social and economic services to the trade
union elements of the Jewish community. It
established schools, hospitals, and factories.
At independence, its schools formed the nucleus
of the state school system. Since the establish-
ment of the state, it has more and more be-
come concerned with economic interests-that
is, with benefits for the workers. In short, it
has come to more nearly resemble a labor
union. However, it continues to be the coun-
try's largest single employer, by virtue of its
ownership of industrial establishments.
29. The relationship between the Labor
Party and the Histadrut is intimate; union
membership is prerequisite to membership in
the Labor Party. Cooperation with the Party
is the only sure way to get ahead in the Hista-
drut. Party and union, working together
 through the Party leaders of each body, formu-
late the Cabinet position-and thus the gov-
ernment policy-on all issues of urgent con-
cern to the workers. In theory, policies are im-
plemented through the party discipline that
governs all concerned. In reality, the various
interests of the party/union complex-as gov-
ernment, as worker representative, as political
competitor, as employer-often come into con-
flict. In a recent crisis, Mrs. Meir inserted her-
self as mediator in a wage dispute. Ben Aharon,
who has a long record of party service and an
excellent reputation as a dedicated social re-
former and friend of the worker, resigned in
protest at this government intervention. He was
persuaded to return to office, probably in ex-
change for implicit or explicit promises in-
volving future wage agreements as well as
his own position. The resolution of the wage
dispute itself was typical-grounds were found
for justifying raises in excess of the govern-
ment's guidelines.
B. Impact on Domestic Policy
30. It is in the fields of economic and social
policy that election year politics are likely to
make their most powerful impact. The Labor
Party is a merger of several socialist groups.
Its ideology-when translated into individual
opinions on income distribution, social organi-
zation, and ownership of production facili-
ties-includes virtually every shade of opinion
except outright communism and unfettered
capitalism. In effect, it occupies the middle six
lanes of an eight lane road. The broad ideo-
logical spectrum, coupled with a system of
voting by state-wide lists, makes Labor elec-
toral triumph relatively easy and Labor policy
formulation and implementation extremely
difficult.
31. The largest electoral competitor is
Cabal. An electoral alliance, it combines the
Liberals, who espouse enlightened free enter-
prise, and Herut-a party notable for its
antecedents among the anti-British terrorist
movement and its unabashed demand for max-
imum territorial expansion. Gahal joined the
government coalition in 1969 but left again in
1970, when the Israeli Government went on
record as willing to negotiate the possibility
of some return of territory to the Arabs. Since
Gahal returned to the opposition, it has found
a following among the economically and
socially disadvantaged in Israel, because it has
championed them as victims of the establish-
ment. Its electoral prospects have also been
somewhat brightened by the upsurge of im-
migration from the USSR. A number of re-
cently arrived Russian Jews, apparently re-
acting against anything associated with social-
ism, have shocked the Labor Party by seeking
affiliation with Gahal.
32. From Labor's point of view, Gahal's
electoral strength is a very real challenge;
Gahal has no hope of winning control of the
government, but it now appears to be in a
position to reduce Labor's plurality in the
Knesset. If elections were held in the im-
mediate future, most Israelis believe that
Gahal would increase its share of Knesset
seats from 26 to more than 30 (out of 120),
Labor (in alignment with left-wing Mapam)
would shrink from 56 to 53 or so, and Labor's
traditional coalition partner, the National
Religious Party (NRP) might lose one or two
of its current 12. Ten or so Knesset seats
usually fall to extremists-ultraorthodox re-
ligious groups who have opposed the state itself
as contrary to religious law and two Commu-
nist groups-who cannot be counted on as
coalition members. If Cabal's appeal remains
steady or grows until the elections, Labor,
Mapam and the NRP together might fall short
of a majority, and Labor could have serious
problems in negotiating a solid coalition. For-
mation of a government, therefore, could en-
tail important concessions to other splinter
parties, either in the form of policy agreements
or in the form of control of key ministries.
 Israeli Settlements in the Occupied Territories
? Israeli settlement
[_] Occupied territory
Port Said
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S A U D
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JO DAN
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Jerusalermy
 Israeli Administration in Jerusalem
El
Israeli-expropriated area,
December 1971
Israeli-administered municipal
area, 28 June 1967
Built-up area, 1967
Municipal boundary, 1947
U.N. Armistice Line, April 1949
Nebi
Samuel
Mt
Scopus
--. Hebrew University
0 5,000 10,000 15,000 Feet
r i t
0 1,000 2,000 3,000 Meters
 33. Bent on minimizing this danger, the
Labor government will be inclined to try to
negate the growth of Gahal's popular appeal
by shifting its own position on key issues be-
fore election time. Its best bet for winning
potential Gahal votes is more welfare legisla-
tion-programs such as increased family al-
lowances, special provisions for citizens of
Oriental background, additional emphasis on
housing for newly married couples, and
beefed-up programs to appeal to Russian im-
migrants. Concurrently, fearful of defections
from its own membership, Labor in its gov-
ernmental incarnation will be increasingly un-
willing to oppose union demands for large
wage increases or to introduce and enforce any
of the economic austerity measures that the
Finance Ministry, the Bank of Israel, and the
academic economists have been urging. For
example, both the cost of living allowances
and the wage guidelines to be negotiated in
early 1973 are likely to be even more generous
than usual. The economic costs of staking out
positions for the coming election are, there-
fore, likely to be extremely high.
V. RAMPANT PROSPERITY
34. Economically, things are so good in
Israel that the country's political and financial
institutions-which developed over a long
period of perpetual shortage and austerity-
are faced with problems and challenges for
which they are ill-equipped. Since 1967, GNP
has risen 45 percent, private consumption has
gone up 35 percent, government consumption
has risen 60 percent, investment has more than
doubled. In per capita terms, real income has
risen 60 percent in the past decade, making the
average Israeli about as well off as the average
Englishman. If recent growth rates are main-
tained for the next several years, Israeli in-
comes will approximate those now common in
prosperous West European countries. In-
dustrial capacity is fully utilized, jobs are
going begging, and imports which once were
luxuries are considered necessities. Thanks to
foreign gifts and loans, the balance of pay-
ments, traditionally a matter of great concern,
is running a large and growing surplus. The
only really worrisome difficulty is inflation,
which stems mainly from the combination of
full capacity production and booming demand,
supported by a massive inflow of foreign ex-
change. Prices have risen about 25 percent in
the last two years; they currently are going up
about one percent each month. Theoretically,
the government could slow or stop inflation in
one of several ways, but the necessary meas-
ures fly in the face of political and interna-
tional imperatives as perceived by Israelis.
35. Israel is in the unusual position of
having both a chronic current account deficit
and a favorable balance of payments position.
Habitually, the current deficit has been offset
by gifts and loans from abroad. After the June
1967 war, Tel Aviv felt impelled to increase its
defense spending at home and abroad at a
rapid rate. It also took advantage of a sudden
inflow of funds from world Jewry to pump up
the economy, which had been in a serious re-
cession in the two prewar years. When both
civilians and defense imports soared and ex-
ports failed to keep pace, foreign exchange
reserves plummeted. Faced with a choice be-
tween curtailing spending or becoming in-
creasingly dependent on aid, the Israelis
turned to Jews abroad and to the US Govern-
ment for more money. The response, as it
happened, was greater than they forecast, and
the need was less. The result was a major up-
surge of foreign exchange reserves, from about
$400 million at the end of 1969 to over $1
billion in early 1972.
36. The influx of foreign money added pur-
chasing power in a period when the labor
force was fully employed, and the govern-
ment's determination to build up the domestic
 defense industry aggravated the shortage of
workers. Booming prosperity, coupled with
financial incentives, attracted foreigners both
as immigrants and as contract employees,
adding new demand for housing, transporta-
tion, and the whole array of goods and serv-
ices provided by a modern economy. Workers,
although more prosperous than ever before,
recognized that they were in a strong position,
and strikes became common. Employers, with
unfilled orders on hand and no pool of un-
employed to call upon, were willing to pay
whatever was necessary and legal. The gov-
ernment, dominated by a union-based political
party, was ineffective in enforcing austerity.
Indeed, with foreign reserves rising for the
past two years, the public has seen no need for
austerity.
37. As long as the inflow of foreign money
continues to grow, Israel can continue its
present economic policies without serious re-
percussions. In a foreign-trade oriented econ-
omy, the most serious impact of inflation is a
deteriorating foreign competitive position. In
Israel, where foreign spending is not limited
by foreign earning, this is not a vital concern.
Prospective receipts of foreign exchange are
sufficient to finance an annual increase of
civilian imports in excess of 10 percent. Fur-
ther imports can be financed, if necessary, by
drawing down foreign exchange reserves. Re-
peated devaluations (Israel has undertaken
seven in its 25 year history) and additional ex-
port subsidies can be used to maintain the
profitability of exports.
38. Israeli confidence in the balance of pay-
ments outlook is underscored by recent dis-
cussions of import liberalization as a means to
cheek inflation. The idea of deflecting demand
from domestic products to imported products
obviously rests on the presumption that cur-
rent levels of foreign, private, and official aid
will not be seriously affected by Israeli eco-
nomic policy. There is a remarkable contrast
between this attitude and the near crisis at-
mosphere of 1969, during which Israel passed
or proposed a series of forced saving measures
at home to convince the foreign Jewish com-
munity and the US Government that Israelis
themselves were making severe economic sac-
rifices in an attempt to make ends meet.
39. The government could slow down the
economic boom and the accompanying infla-
tion by more fundamental adjustments, but
the actions required are politically distasteful
or potentially dangerous from the Israeli point
of view. Heavy domestic investment can be
curtailed; this, however, means retarding the
growth of defense industry-which is seen as
a security risk-and slowing the economic
growth rate-which is seen as detrimental to
the attraction and retention of immigrants.
The severe recession of 1965-1966, brought on
by an over-rigorous austerity program, is a
fresh and painful memory. Foreign exchange
inflows can be curtailed-by refusing new
loans or repaying old ones ahead of sched-
ule-but this runs contrary to every instinct
in a country that has suffered from foreign ex-
change shortages in the past and fears foreign
exchange shortages in the future. Wages and
prices can be held down by heavier taxation
and curtailed social service expenditures-but
this is emotionally repugnant and politically
dangerous in the Israeli context. Given the
inflow of foreign money, such steps appear un-
necessary to the Israelis. In existing circum-
stances, therefore, an average annual price in-
crease of 10 percent or so is likely to prevail
over the next few years.
40. The availability of labor, which is nor-
mally a constraint on growth in a full employ-
ment economy, has not been a serious limita-
tion in Israel in the past several years. A severe
shortage of Israeli labor has been met pri-
marily by hiring an increasing number of
 Arabs from the occupied territories, and even
a few workers from such countries as Yugo-
slavia and Italy to fill vacant jobs. The natural
increase of population combined with immi-
gration at the levels of recent months increases
the Israeli labor force by some 4 percent a
year. If military force levels remained steady,
productivity increases on the order of the 4
percent annually attained in the recent past
would permit growth to proceed at 8 percent
without any need for additional Arab laborers.
However, we expect the military forces to
need 10,000 or so additional personnel by
1976. Moreover, the tendency of workers in a
prosperous country to curtail their working
hours as wages rise is likely to lead to more
jobs for Arabs from the occupied areas.
41. In these circumstances, the incremental
need for Arab workers appears likely to be on
the order of 5 or 10 percent a year, rather than
the doubling that occurred in 1970 and again
in 1971. As a proportion of the work force, the
non-citizen Arabs might increase from about 4
percent in 1971 to something approaching 5
percent by 1976. If per capita productivity
stagnates or immigration falls off, employment
can be increased by hiring additional Arabs.
Given the existence of substantial numbers of
potential workers in Gaza and the ability of
Israeli employers to pay high wages, attain-
ment of full employment conditions on the
West Bank only slightly interferes with this
process. If economic growth is slower than
expected or worker productivity rises rapidly,
Arab workers can be laid off without domestic
political repercussions.
42. Aid from official and private sources
in the US has been of crucial importance
to Israel's balance of payments position. Offi-
cial aid has increased sharply since the 1967
war, as the US has become Israel's princi-
pal source of military equipment and has
financed a large share of Israel's equipment
purchases. Official aid is running in excess of
$500 million a year, in the form of grants,
loans, and loan guarantees. Of the 1972 total,
$300 million in loans and loan guarantees was
tied directly to purchases of military hard-
ware, and a $50 million grant was provided as
security supporting assistance. Private assis-
tance by US citizens is comparable in amount
to official aid, and a large proportion of it is
in the form of gifts. Private aid receded in
1968 following a tremendous upsurge in the
year of the war; however, it subsequently has
increased steadily.
43. Foreign exchange considerations are un-
likely to interfere with Israeli economic ob-
jectives in the next few years. With an eco-
nomic growth rate of 8 percent, the current
account deficit probably will amount to about
$1.3 billion in 1972 and in 1973. Civilian ex-
ports are growing more rapidly than civilian
imports; when imports of finished military
equipment peak (probably by 1974), the
deficit should begin to fall fairly rapidly. If
efforts to encourage exports are pursued suc-
cessfully and imports are kept under control,
the current deficit probably will decline to
about $850 million in 1976 (see table).
Foreign gifts and loans now exceed $1.5 billion
annually. Israel is, therefore, continuing to ac-
cumulate reserves. If the sum of private assis-
tance and German restitution payments re-
mains near current levels, as seems likely,
Israel could dispense with extraordinary US
Government assistance. Indeed, unearned in-
come from abroad probably would have to fall
below $1 billion annually before reserve draw-
down became severe enough to force serious
changes in economic growth policies.
44. Thus the emphasis in present Israeli
economic policy is not on retarding inflation
or conserving foreign exchange; rather, it is
on fostering substantial economic growth and
maintaining full employment, while satisfying
 BALANCE OF PAYMENTS
(Million 1971 US Dollars)
1971
1974
1976
ACTUAL
FORECAST
FORECAS'T'
A.
Imports ..........................................
2,917
3,800
4,200
Finished Military Equipment ......................
532
650
400
Other Goods (including imports for defense industry) ..
1,670
2,200
2,650
Services ........................................
715
950
1,150
B.
Exports . .........................................
1,713
2,600
3,350
Goods ..........................................
903
1,400
1,750
Services ........................................
810
1,200
1,600
C.
Deficit on Current Account (B -A) ..................
1,204
1,200
850
D.
Unilateral Transfers ................................
745
750
750
Institutions (largely United Jewish Appeal) ..........
265
300
300
German Restitutions ... ...... . . ..........
220
200
200
Personal (largely immigrants' remittances) ...........
260
250
250
E.
Deficit after Transfers (D - C) ......................
459
450
100
F.
Net Inflow of Capital Excluding Extraordinary US
Assistance .....................................
485
450
400
G.
Surplus (FE) ...................................
26
0
300
II.
Extraordinary US Assistance .........................
305
...
...
1.
Final Surplus (H - G)*
331
0
300
military needs. With such policies, Israel prob-
ably can continue the 7 to 8 percent real
growth rate of the past two years into the
middle of the 1970s, reaching a GNP in 1976
of roughly 32 billion Israeli pounds (about $8
billion) in 1971 prices compared to about 22
billion pounds ($5 billion) in 1971. This
would amount to a per capita GNP of over
$2,000 and per capita resources of over $3,000.
The projected growth of GNP allows for a 10
percent annual increase in domestic invest-
ment and public consumption increasing at
about the same rate as GNP, with private con-
sumption rising less rapidly.
45. An appreciable part of the expected
growth will come from military-related indus-
tries. Production of military-related goods will
total over $500 million this year; it is expected
to double by 1976, while other industrial pro-
duction rises about 50 percent. At that stage,
output of military goods would account for
about one-fifth of industrial output, with the
proportion continuing to rise. Employment in
defense industry, which has doubled since
1967, will continue to rise rapidly, tying the
job market increasingly to the weapons
market. Exports of relatively simple military
products have been extremely successful in
the past. As the proportion of industrial
capacity and talented personnel devoted to
weapons manufacture increases, however, the
economy will become more and more de-
pendent on finding buyers for complex items
Israel needs only in small quantities and can
produce only at high cost. Israel will have dif-
ficulty competing with other producers, most
of them larger and many of them well estab-
lished in certain lines. By late in the 1970s, it
could find itself the owner of expensive facili-
ties for producing sophisticated weapons it
can neither use nor sell.4
'See Annex B for a discussion of this subject as
illlustrated by the Gabriel Missile Program.
 46. Israel's defense spending probably will
continue to grow. A 10 percent increase in the
number of active duty personnel, coupled with
a 3 to 4 percent annual increase in real wages,
will raise personnel costs some 30 percent by
1976. Foreign procurement costs in budget
terms (that is, before allowing for foreign
credits) will remain high, at least until 1974,
when US deliveries of aircraft now on order
are to be completed. According to present
Israeli plans, defense imports will decline by
1976, and domestic production will provide
most of the goods needed by the IDF. At that
stage, Israel will be substantially independent
of foreign arms suppliers. If it also succeeds in
becoming a major arms exporter, its reliance
on foreign money also could begin to decline.
In real terms, the total defense budget prob-
ably will increase about 30 percent by 1976
(see table). If price increases in the economy
as a whole proceed as rapidly as we estimate
in the preceding paragraphs, the military bill
could easily double in money terms.
ESTIMATED DEFENSE BUDGET
(Million 1972
Israeli Pounds ' )
1972b 1976
Wages ................... 500 650
Transfers (primarily pensions) 340 500
Construction .............. 160 100
Weapons Procurement
Domestic ............... 1,900 4,000
Imports ................ 2,640 1,700
Industrial Goods'' .......... 600 1,200
Total .................. 6,140 8,150
' Calculated at the current official rate of 4.2 Israeli
pounds=$1.00.
b Based on data revealed by Israel in connection
with Draft Budget for April 1972-March 1973.
Compiled from estimated personnel levels and
data on Israeli defense production and defense import
plans.
a Figure is incomplete in that it includes only those
industrial goods imported directly by the Ministry of
Defense; imports of defense manufacturing firms are
not included in the defense budget.
VI. SOME SOCIAL CHALLENGES-
IDEOLOGIES AND REALITIES
47. In the concept of its designers and pio-
neers, Israel was to be Jewish, egalitarian, and
politically liberal. The overriding requirements
of security, however, have always forced com-
promises of these ends, and the challenges of
the 1970s-unforeseen in the days when Zion-
ism was formulated as an idea-will force the
Israelis to make new and difficult choices.
48. There are compelling arguments for in-
creasing the ties between Israel and the West
Bank. The territory is a security asset, and
the workers are becoming more and more im-
portant to Israel's current prosperity. Yet, the
demography of the situation conflicts with the
concept that Israel should be a Jewish state.
At present there are about 2.7 million Jews
and 1.35 million Arabs in the area under
Israeli control, but only about 300,000 of the
Arabs are Israeli citizens. Including the popu-
lation of East Jerusalem would bring the num-
ber of Arab citizens to 375,000; adding the
Arabs now in Gaza would bring it to 725,000.
If all occupied areas are retained, Jewish
immigration continues at moderate levels, and
there is no mass exodus of Arabs, the Arab
population within the area Israel now controls
could begin to approach the Jewish population
by about the year 2000.
49. The Israelis clearly intend to retain sub-
stantial portions of occupied territory. They
are searching for a way to do so without
seriously diluting the Jewish character of
Israel. The notion of some form of semi-auton-
omous Palestinian entity is being discussed
informally, but it remains an amorphous con-
cept. What Israel is groping for is some new
concept of different classes of citizens under
Israeli hegemony that could be made ac-
ceptable to such allies as the US. So long
as the conceptual framework has not been
devised, however, Israeli policy is likely
 to result largely from the day-to-day decisions
of Defense Minister Dayan and his military
government subordinates. Dayan has proven
so adept at identifying steps that can be taken
without creating either strong opposition from
the Arabs of the occupied areas or an unac-
ceptable outburst of indignation in world
councils that the rest of the Israeli Govern-
ment is increasingly inclined to trust his judg-
ment.
50. Israel's best hope for maintaining the
largest possible Jewish majority in the future
state, whatever its form, lies in a substantial
inflow of Jews from the USSR. Immigration
from Russia was negligible until mid-1968,
when the Soviets cased their restrictions on
this particular group of citizens anxious to
depart. About 3,000 Soviet Jews emigrated
in 1969 and about 1,000 followed in 1970. In
the spring of 1971, the rate increased, and 100
a day were arriving by December, bringing
the 1971 total to about 14,000. Experience
in the early months of 1972 points to a further
increase, to some 30,000 in the full year. Since
about 2.5 million Jews remain in the USSR,
50,000 or more are born annually, and at least
half a million of those now alive probably
are potential immigrants, continuation of the
exodus at the current rate depends largely
on Soviet policy. Because no single reason for
the recent liberalization of Moscow's attitude
can be firmly adduced, and Soviet policy can
be reversed without warning, future Soviet
actions are uncertain. In this case, however,
the easiest explanation may be the most ac-
curate-Moscow may simply wish to rid itself
of a group that has been publicly agitating,
before a world audience alerted by continuing
Israeli publicity. In this circumstance, the flow
of immigrants could continue almost indefi-
nitely, or even grow considerably.
51. Immigration is helpful to the Israelis
in that it adds to the Jewish majority and is
extremely welcome psychologically, but it
exacerbates some of the problems that have
been persistent, though not critical, difficulties
since independence. The costs of attracting
and settling new immigrants are high; the
44,000 immigrants who arrived from all sources
in 1971 may cost the state $300 million or more
for temporary housing, special education ar-
rangements, training for new employment, and
various financial inducements aimed largely
at attracting immigrants from the West. Judg-
ing from past experiences, about a third even-
tually will leave, despite these benefits.
52. Immigrant absorption is, of course, a
popular cause among both Israelis and other
Jews, and funds to cover the costs are being
raised. However, complaints from those im-
migrants who are disappointed by the ma-
terial or social conditions in Israel anger many
Israelis who lived in a far less prosperous, far
more dangerous Israel not many years past.
Moreover, concessions to new immigrants stir
up resentment among Israel's own poor, em-
phasis on attracting Westerners annoys Is-
raelis of Oriental background, and the great
publicity about Russians gives new fervor
to accusations that the "establishment" is dis-
criminating in favor of its own kind at the
expense of the rest of the country.
53. The deep cultural, economic, and po-
litical differences between Ashkenazi Jews
(those of European background) and their
Oriental countrymen is the most persistent
of the various overlapping, intertwining social
splits in Israel. The Oriental Jews generally
are on the bottom of the socio-economic
ladder, and their chances of improving their
relative position are hampered by lower edu-
cational levels, a paucity of high-income skills,
and a higher birth rate. They, or their parents,
were born and raised primarily in the Arab
world, where many were relatively privileged
in terms of education and income, though
not in political or social status. In Israel, the
s egE1 21
 entire atmosphere works against them; the
social and economic system was designed
and installed by Ashkenazis and is still run by
Ashkenazis and their native-born descendants.
54. Substantial effort aimed at ameliorating
the Oriental problem has come from the Ash-
kenazi-dominated government, and in turn
from the Ashkenazi-dominated Labor Party.
The Party has assigned a number of Orientals
to safe places on Knesset voting lists, pushed
Orientals ahead in local governments, and
named a Yemeni as its own Secretary General,
subsequently making him Speaker of the Knes-
set. The government has directed the armed
forces into substantial efforts along these lines
and has undertaken other educational pro-
grams, as well as various welfare measures.
However, the major efforts are directed at
recasting Orientals (who make up more than
half of the present population and are in-
creasing their proportion) into a Western
mold. Eventually, assumption of political
power in Israel by a new generation could
bring about an evolutionary solution, since
there clearly is less separation-physically and
emotionally-among the young. In the mean-
time, progress will remain slow, both because
of the nature of the problem and because
of the many other demands on financial
resources.
VII. RELATIONS WITH OUTSIDE POWERS
55. Much of Israel's frustration with the
outside world-and the outside world's pe-
riodic frustration with Israel-stems from a
very fundamental difference in perception.
The superpowers, the European States, the
Arabs, the various bodies of the UN, the Wise
Men of the Organization of African Unity,
the Prime Minister of Malta, and sundry
other individuals and groups keep trying to
promote change in the Arab-Israeli situation
in the hope of effecting improvement. The
Israelis are trying to prevent change in the
hope of staving off deterioration. They thus
see the superpowers not as separable entities
but as two interacting and balancing elements
to be kept in their present roles as far as
possible.
56. The attitudes and policies of Europe
and the Third World are viewed by Israel
in the context of this balance. The French
have abandoned their role as special friend
of Israel in favor of a campaign to regain in-
fluence in the Arab world, leaving Israel with-
out any urgent interests to protect in Europe.
Nevertheless, the French, the British, and the
Germans have some influence on the actions
of both the US and the USSR. The Israelis
recognize that the Europeans will not remain
wholly inactive and thus strive to retain as
much European sympathy as possible and to
minimize European propensity for urging out-
siders to interfere between the Israelis and
the Arabs. Tel Aviv puts less stock than it
once did in the prospect of winning accept-
ance as a part of the Third World and con-
commitant support against the Arabs, but-
of course-it still has a variety of reasons
for wanting as many friends as possible in
the world at large.
57. From the Israeli point of view, the US
is friend and the USSR is foe, but nothing
about either relationship is simple. The US
is first and foremost a source of arms. That
consideration will remain paramount to the
Israelis for several years, but it will diminish
as Israel becomes more and more independent
of arms imports. Israel's need for financial
support from the US preceded the arms rela-
tionship and will outlive it; Israel can do with-
out either US Government aid or private finan-
cial assistance from American Jews, but it can-
not pursue its present military and economic
policies in the absence of both. The least
pressing, yet most durable, role the US plays
22 -F CRET
 is as a potential buffer against the possibility
of a combined military threat from the Soviets
and the Arabs. Because US friendship is so
vital to Israel, a minor unpleasantness between
the two has far more importance to the Israelis
than anything Israel's enemies say or most of
the things they do.
58. The Soviet-Israeli relationship is more
enigmatic than that between the US and
Israel. There is a psychological tie, rooted in
the Central and East European birth of the
Israeli Zionist idea and of many of Israel's
leaders, that leaves Israelis both attracted and
repelled by Moscow. The USSR exacerbates
the Arab threat to Israel by providing the
Arabs with huge quantities of military equip-
ment and some thousands of personnel, and
by giving firm diplomatic support to its Arab
allies. These obviously are hostile acts, but
they stop far short of the level of encourage-
ment and assistance that would enable the
Arabs to mount a serious threat to Israel. In
choosing to permit emigration from the USSR
to Israel, the Soviets have given Tel Aviv new
reason to hope for an improved relationship as
well as additional reason to fear a deterio-
rating one.
59. Israel's policy toward the superpowers
will continue to be a balancing act designed
to keep the US as friend and to avoid antago-
nizing the USSR unnecessarily, while pursuing
two major goals. First and foremost Israel
wants to maximize the flow to Israel of arms,
money, and immigrants. So long as its own
strength is maintained, it has no reason to fear
the Arabs. One result of this attitude is that
Israel would not be a willing party to any
agreement to control the flow of arms to the
area during the next several years. Concur-
rently, it is anxious to avoid the extremes of
Arab-Israeli tension that could lead the US
and the USSR into either diplomatic agree-
ments at the expense of Israel or physical con-
frontation in the area.
60. The introduction of Soviet personnel
into the Egyptian air defense system thus
would appear to have diminished any pre-
disposition for a major and sustained Israeli
military attack on Egypt. Confident though
the Israelis are of their ability to handle the
Arabs militarily, they are aware that the risk
to planes and pilots has risen. They must be
concerned that any attack that was successful
in military terms could lead to yet another ex-
pansion of the Soviet military establishment in
Egypt. Moreover, the Israelis surely worry that
a major flare-up, or widespread conviction
that one was imminent, would reinvigorate the
outside diplomatic efforts to intervene or
interfere between themselves and the Arabs
that they find so distasteful. In these circum-
stances, the Israelis are more likely to reply to
any Arab military action with a brief but
devastating counterattack on a carefully
selected target than to use the kind of meas-
ured response, spread over time, that would
involve higher risk of escalating gradually into
another all-out war.
61. Major improvement in Soviet-Israeli
relations is not likely. Israel will, of course,
welcome any evidence of diminished Soviet
hostility. It almost certainly will accept an
offer of full and normal diplomatic relations,
if the initiative comes from Moscow. It will
not, however, curry favor with Moscow by
curtailing its efforts to encourage the exodus
of Russian Jews. Nor will it repose any trust
in Soviet promises so long as the Soviets supply
arms to the Arabs and the Arabs remain hostile
to Israel. Given the role that military aid to
the Arabs plays in maintaining the Soviet posi-
tion in the Middle East, therefore, real Soviet-
Israeli cordiality is a remote prospect.
62. Israel is not, at the moment, seriously
unhappy with any important aspect of its
relations with the US. The weapons that the
US has already agreed to provide and the
 technological data that Israel expects to get
will satisfy most of the military needs Israel
can now foresee. Future requests are likely to
center primarily on technology and on small
components that can be provided with rela-
tively little fanfare. Refusal to provide items
of particular sensitivity is not likely to bring
on an acute crisis in the relationship; there
soon will be little the Israelis cannot make for
themselves if the felt need is vital.
63. Over time, however, there are likely to
be marked changes in specific aspects of US-
Israeli affairs. By the late 1970s, Israel seems
certain to be more populous, more prosperous,
and more self-confident than it is today; it may
even have a markedly changed leadership. Its
dependence on the US for arms and financial
aid is likely to be much diminished. The
psychological strings, however, probably will
endure. So long as the Israelis remain uneasy
about Soviet motives and intentions, they will
continue to seek the insurance against disaster
that only a very large and very strong ally can
provide. The relationship that evolves from
the complex interaction of attitudes and inter-
ests in the US and in Israel may be different
in many details, but it probably will remain
close.
 ANNEX A
NEW MILITARY EQUIPMENT AND ITS MANPOWER
REQUIREMENTS
 THIS PAGE WAS INTENTIONALLY LEFT BLANK
 NEW MILITARY EQUIPMENT AND ITS MANPOWER
REQUIREMENTS
Air Force
1. By 1976, the air force probably will have
taken delivery of nearly 300 new fighter-
bombers-about 140 purchased from the US
and the balance assembled or produced in
Israel. It has 253 first-line planes of this type
at present, along with 51 older fighters (see
table). Some 35 older aircraft already have
been placed in reserve; more will follow as
new planes enter the inventory. If 120 or so
planes are placed in reserve, active duty units
will have about 470 planes, organized in 19
squadrons, by 1976. This probably will entail
an increase in active duty air force personnel
from 16,200 at present to 19,000-20,000.
Ground Forces
2. The tank being developed by Israeli
Military Industries probably will be in produc-
tion by 1975. Based on projected production
rates, some 200 of these new tanks could be
available to the Israeli Defense Force (IDF)
by the end of 1976. They will be used to
replace existing inventory or in the reorgani-
zation of tactical units-both active and
reserve.
3. The Israelis probably will introduce other
weapons and equipment that will require
additional ground force personnel. Among the
items being hurried along are tactical rocket
launchers, armored personnel carriers, and
self-propelled artillery.
Navy
4. Israel's Navy is scheduled to commission
6 large, Israeli-built, guided-missile patrol
boats, at least 6 US-built Swift patrol boats,
and 3 British-built small submarines during
1973-1976. The operational requirements of
these boats, along with the additional shore-
based personnel to support them, probably
will entail some expansion of the navy from
its present 4,000-man regular strength.
Reserves
5. Some expansion of the 250,000-man re-
serve force also is likely.
FIGHTERS AND FIGHTER-BOMBERS IN THE ISRAELI AIR FORCE
JUNE 1972 ORGANIZATION
PROJECTED 1976 ORGANIZATION
Planes
Squadrons
Planes Squadrons
Active
Reserve
Active
Reserve
Supersonic
Mirages and Variants ....... 41
160
40
8
2
Phantoms
.................
84
120
..
5
Subsonic
Skyhawks
................. 128
Other
51
50
TOTAL ..................... 304
_.$E fLT 27
 THIS PAGE WAS INTENTIONALLY LEFT BLANK
 ANNEX B
SOME IMPLICATIONS OF THE GROWTH OF
DEFENSE INDUSTRY
 THIS PAGE WAS INTENTIONALLY LEFT BLANK
 SOME IMPLICATIONS OF THE GROWTH OF
DEFENSE INDUSTRY
1. Israel's own weapons market is neces-
sarily limited. The Gabriel Missile Program,
and its relationship to other Israeli Aircraft
Industries (JAI) activities, is illustrative.
2. After four years of research and develop-
ment, IAI began series production of Gabriel
ship-launched surface-to-surface missiles in
1968. Its present facilities can manufacture at
least 15 copies per month of the first version
of the Gabriel, which has a range of about
11 n.m. A Gabriel II, with a range of 25 n.m.,
is scheduled to go into production in the sec-
ond half of 1972, but it may be delayed. Is-
rael's Navy has 12 missile boats, equipped to
carry up to 8 missiles each. Thus the existing
production capacity clearly exceeds present
Israeli needs.
3. Exports are the obvious answer, but the
idea is easier to formulate than to accomplish.
Costs in Israel tend to be high. The unit cost
of the Gabriel I is at least $90,000; on-board
launch and fire-control equipment costs an
additional $250,000. The Gabriel II will cost
20 percent more. A substantial number of the
potential customers for sophisticated military
equipment prefer to shop elsewhere. Some are
constrained by political considerations. All
must be aware that exports could be cut off
in the event of another Arab-Israeli flare-up.
Israel does not, at least as yet, provide gen-
erous credit terms to buyers as an export in-
centive. The French, who have established
themselves as a reliable, credit-extending,
skilled source of arms, are manufacturing a
competitor-the EXOCET-with twice the
range of the Gabriel I. So far as we know IAI,
despite widespread efforts, has sold only a
few.
4. The Gabriel is relatively small, simple,
and inexpensive, as weapons and military
equipment go. If IAI concentrated personnel
and resources on it, problems of production
and sales would be diminished. IAI's 14,000
employees design, manufacture and sell a
wide range of other products and services,
including two small civilian aircraft, a variety
of aircraft parts, assorted electronics and navi-
gation gear, and a full range of aircraft over-
haul services. The question is whether IAI
can continue doing all those things, recondi-
tion and sell used Boeing 707s, manufacture
and sell a variety of missiles, manufacture and
sell supersonic jet fighters, and begin the de-
sign and development of whatever the IDF
wants for its next generation of missiles and
planes. If JAI proves to have serious problems,
and similar problems come to be typical of a,
substantial portion of the defense industry,
it is clearly possible-though by no means
certain-that within the next few years Israel
will have a sizable share of its personnel and
resources devoted to manufacturing arms in
quantities Israel does not need and will have
trouble selling.
 THIS PAGE WAS INTENTIONALLY LEFT BLANK
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