ISRAEL: COPING WITH 'PEACE' AND 'PROSPERITY'

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R00967A000400030009-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 20, 2016
• Document Release Date: March 27, 2006
• Sequence Number: 9
• Publication Date: January 26, 1972
• Content Type: MEMO

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Secret
OFFICE OF
NATIONAL ESTIMATES
MEMORANDUM
Israel: Coping with "Peace" and `Prosperity"
Secret
26 January 1972
Copy No.
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CENTRAL INTELLIGENCE AGENCY
OFFICE OF NATIONAL ESTIMATES
26 January 1972
MEMORANDUM
SUBJECT: Israel: Coping with "Peace" and "Prosperity"*
In its Zess than 25 years of history, Israel has
survived numerous crises and traumas and thrived. Its
people, individually and collectively, have overcome
obstacles to their nationhood and created a country
that is frequently pointed out as an outstanding social
and economic success. Its political institutions were
born of adversity and they served a struggling new
country well. But the existing political mechanism
may not be able to cope so successfully with the twin
challenges it now faces -- "peace" and "prosperity".
Over time, these seemingly favorable circumstances
may produce problems more intractable, within the
Israeli system, than the Arab-Israeli issues that Zoom
so large in past and present intelligence commentary.
The potential difficulties Zook at first glance to be
economic in nature, but they would arise from political
and social causes.
The Key Role of Labor
1. Organized labor and politics are inextricably inter-
twined in Israel. In one guise or another, the union member
is the basic source of political and economic power in the
This memorandum was prepared by the Office of National Estimates
and discussed with other components of the CIA, who are in
general agreement with its judgments.
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country. It is a moot point whether the Labor Party controls
the Histadrut (federation of labor) or vice versa. The
Histadrut began as a voluntary association through which
Jewish labor activists in Palestine pooled their meager re-
sources to provide social and economic services to the Jewish
community. It established schools, hospitals, and even an army.
Since the establishment 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. Although it has been shorn of many of its original
quasi-governmental activities, it has become the country's largest
single employer, by virtue of its ownership of industrial establish-
ments.
2. Union membership is prerequisite to membership in the
Israel Labor Party -- a 1968 coalescence of various elements that
split from a single labor party of the 1930s or from one of its
assorted descendents. Its core -- called MAPAI until the latest
merger -- has remained intact throughout the pre-history and
history of the state and has dominated the major governing bodies
of Jewish Palestine throughout its existence. In the six Knesset
(parliament) elections that have been held, MAPAI has always had
a large plurality of the vote -- but never a majority. Voting
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patterns have been remarkably stable; the labor groups as a
whole have always received 48 to 51 percent of the popular
vote; the leader of the MAPAI grouping has always been the
Prime Minister.
3. Jointly, by agreements normally worked out between
the Labor Party leaders of the government and the Labor Party
leaders of the Histadrut, party and union formulate the Cabinet
position on all issues of urgent concern to the worker. In-
dividuals reach key positions in this combine by remaining loyal
to its agreed policy at all times, since one cannot be elected
to national or union office until he has been appointed to the
slate of candidates by the Labor Party leadership. Under the
laws passed by the Labor Party-dominated Knessets, virtually
all financial transactions -- wages, interest rates, wholesale
and retail prices, rents-- are linked together by cost-of-
living escalator clauses, and the escalator is almost always
going up, speeded by expansionary monetary and fiscal policies.
4. The inflationary nature of the institutional arrange-
ment is obvious, but its impact has been somewhat restrained in
the past by philosophical convictions, as well as by the realities
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of limited resources. Mrs. Meir and the group that lead Israel
are notable for their longevity and firmness of convictions;
they have governed for
decades according to a set of fundamental assumptions that were
shared unquestioningly by the bulk of the population. Belief in
the existence of an active Arab military threat to the state and
in the willingness, indeed the eagerness, of all Israelis to make
great personal sacrifices for the common good served to restrain
demands for personal benefits and channel resources into the
country's agricultural and industrial base and into a strong
military establishment. Foreign sources provided generous aid,
but even so the balance of payments situation was constantly pre-
carious.
5. The spirit of self-sacrifice remained strong at least
until the early 1960s. In its early years, Israel was composed
of the pioneers of the pre-World War II era who had come with
high ideals and created a country out of nothing, refugees from
persecution who were grateful for escape and willing to wait for
material benefits, and a relatively small number of immigrants
from prosperous circumstances in the West. They fought the
desert and they fought the Arabs, and they built one of the most
egalitarian societies in the modern world. However, they became
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in a sense victims of their own success. By 1964, the com-
bination of rising living standards and dwindling Arab threat
led to a slackening of the inflow of foreign funds. This cir-
cumstance coincided with domestic inflation that made exports
less competitive. Immigration -- an important source of new
workers, new money, and new demands for housing and goods --
dropped off, partly in response to the developing recession.
Balance of payments pressures brought on a government austerity
program. Israel found itself in a serious recession that per-
sisted until the 1967 war.
6. The short war was followed by new prosperity. Con-
tributions from abroad swelled, immigration picked up, and
Israel's determination to build a major defense industrial
establishment provided a new source of demand for both workers
and products. A boom ensued that raised per capita real incomes
more than 20 percent in four years, while population was growing
about 12 percent. Unemployment of Israelis is minimal, and
about 45,000 Arabs from the occupied areas work in Israel. The
government has had rapidly growing amounts of money to allocate
-- both from increased domestic production and from even more
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rapidly increasing massive foreign gifts and loans -- and has
channeled most of the increment into defense and into invest-
ment. Personal consumption has risen, but not as fast. (See
Table I.) The public accepted the government's statements that
vast defense expenditures were necessary to counter the Arab
threat, and various measures to restrain the growth of personal
consumption passed the Knesset with relative ease and were imposed
on the citizenry with comparatively little complaint and no mas-
sive attempt at evasion until recently.
7. In the past two years, however, evidence has accumulated
that many Israelis are less disposed to sacrifice immediate
economic gains in the interests of problematical future improve-
ments. They have become so inured to hollow Arab military threats
-- and so accustomed to expecting foreign sources to help finance
necessary military measures -- that they are much less receptive
to exhortations about the need to delay internal programs in the
interests of military preparedness. Austerity and the struggle
for survival have been replaced by prosperity and the struggle
for individual shares in a boom country. One or another union
has been out on strike without Histadrut approval almost constantly.
Employers, faced with rising demands for goods and a paucity of
workers, have offered under-the-table benefits beyond the legal
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maximums, and various other ways of evading price and wage
controls have become common. Prices rose more than 10 percent
in 1970 and over 13 percent in 1971; wages rose about 15 per-
cent in 1971, and increases in excess of 10 percent are expected
in early 1972. Fragmentary information now available on the
second half of 1971 indicates that private consumption spurted
while government spending slowed.
8. Meanwhile, conspicuous consumption has appeared on the
Israeli scene. The disparity between rich and poor in Israel is
more keenly felt, and it has been fueling increasing animosities
between various social groups. The cultural, social, and educa-
tional divisions between Israelis of European origin and those
from Eastern (largely Arab) countries that had become trouble-
some in the mid-1960s disappeared from sight and discussion during
and immediately after the 1967 war, but they have re-emerged with
emphasis on the economic grievances of the Eastern youths. Special
benefits offered to attract immigrants and make them want to re-
main appear to the Easterners to be aimed largely at Westerners
in general and recent arrivals from the USSR in particular. East-
erners who were born in Israel or have been there for years and
have had poor housing and low incomes throughout that time resent
both the financial discrimination and the apparent "racial" basis
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for it. Their resentment has been publicly voiced of late by
the self-proclaimed Black Panthers, who have taken to public,
occasionally somewhat violent, demonstrations to publicize their
grievances.
9. Another large segment of the population deeply resents
being forced by religiously imposed law -- or lack of law -- to
pretend to religious convictions it does not hold. In the past
couple of years, heated disputes -- growing, for example, from
the absence of civil marriage or divorce and the denial of cer-
tain civil rights to children whose parents have failed to conform
in some way to religious law -- have attracted wide publicity
and attention. The Labor Party leadership, depending as it
always has on an alliance with the National Religious Party for
an absolute majority in Knesset, has refused to permit relevant
legislation to be considered, leaving each individual case to be
compromised somehow in out-of-court settlements that typically
are reached at the last possible moment before the courts would
be forced to make judgments that might set undesirable precedents..
10. The kinds of problems outlined above are not new; they
have erupted in passionate disputation from time to time through-
out Israeli history. In the past, however, their divisive impact
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on society has been minimized by the felt need for national
solidarity to counter danger from the surrounding and hostile
Arabs. In the event of a renewed feeling of threat from the
Arabs, intramural quarrels would disappear in a trice. At
present, however, there is very little concern that the Arabs
will launch a major attack on Israel and even less worry that
such an attack would do serious damage. The Israeli public is
continually reassured by its leaders that it is militarily
stronger in relation to its neighbors than ever before in its
history; it feels more secure and safe than ever. Paradoxi-
cally, this feeling is reflected in an argument that is unique
-- a debate over the size of the defense budget.
11. Israeli military spending has rocketed since the 1967
war. The military establishment has swollen, it has acquired
new armaments, and it has adopted some of the habits of large
professional armies elsewhere.* At the time of the 1967 war,
Some examples: The Israeli Defense Forces have begun awarding
medals and campaign ribbons; soldiers are being forced to get
haircuts; the military is developing a special toothbrush and
toothpaste for soldiers; a computerized supply system has been
introduced.
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Israel had a 55,000-man standing army equipped with about 1,100
tanks and about"250 fighter aircraft. It fought the Arabs and
won handily. Now, it has 85,000 ground troops on active duty,
12. Domestic defense expenditures have also doubled and
redoubled; more personnel have received higher pay and greater
fringe benefits, fortifications such as the Bar-Lev line have
been costly, and purchases of domestically produced defense
goods have gone up markedly. The defense budget totaled $400
million in the last pre-war year (one-quarter of the total
budget); it will come to about $1.6 billion (half of the total)
in the 12 months ending in March 1972. The original proposal
for the fiscal year ending in March 1973 came to $1.6 billion,
but Defense Minister Dayan pared it to $1.4 billion before sub-
mission to the Cabinet. A number of Israelis are beginning to
question the need for such outlays to protectsIsrael's new, more
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defensible cease-fire lines against enemies without any per-
ceptible aggressive capability.
13. The availability of foreign financing has contributed
to the growth of military expenditures. Obviously, current
defense -- especially during the active war of attrition -- and
future preparedness required new and better arms, and fear of
a future cutoff of foreign supplies would have spurred the develop-
ment of local manufacturing capability even if diversion of funds
from civilian to military pursuits had been necessary. In
practice, however, it has been possible for Israel to get private
or official sources abroad to finance its military needs. There
has been little real competition between military and civilian
requirements for funds. The military has been able to take for
granted the availability of whatever money was necessary to pay
for whatever it considered important. The government as a whole
may have become accustomed to this comfortable state of affairs.
Although Finance Minister Sapir has publicly described the past
level of official US aid as "a miracle", his request to the US
for the current year -- about $750 million in aid of various
kinds -- indicates that he expects the miracle to be repeated.
(See Table II.)
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14. The Israeli defense establishment, in drawing up its
requirements, is trying to provide for all contingencies. The
economic advisor to the Minister of Defense commented a few weeks
ago that no military activities could be reduced in size or cost
without risk to Israel's security, since any budget cuts reduce
the military options, and any reduction of options entails in-
creased risks. At about the same time, a commentator writing in
Israel's major newspaper on the defense expenditure question
pointed out that the government has failed to make any choices
among possible alternative policies on defense and/or settle-
ment. He urged the government to decide where it wants to go
on these related issues so that the budget actions could reflect
agreed priorities. His suggestion makes excellent economic sense,
but it is unlikely to be followed; it would entail decisions
that cannot be made without precipitating political crisis at
home and diplomatic crisis abroad. Consequently, the debate now
underway almost certainly will not result in substantial curtail-
ment of current or future defense budgets; the government's
present plan is to trim $60 million or so from Dayan's defense
request as a gesture to the other ministries. The latter will
have to absorb cuts of over 20 percent of what they have requested.
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15. Over the long run, the most significant facet of the
budget debate is the new attitude that has been revealed. In
the past, when many Israelis were poor, most lived modestly,
and very few were rich, the military budget was scarcely debated
and never cut substantially. Now, however, Israelis are arguing
that defense is no longer a sacrosanct area -- it should have to
compete for funds with other goals, such as housing and education,
as well as private consumption.
Spend Now, Worry Later
16. Israel's citizens do not, at present, perceive any
pressing need for individual economic restraint. They feel more
secure from Arab attack than in the past and do not, in any case,
believe that the availability of military hardware is dependent
on Israeli ability to pay for what is necessary. In the face of
a $260 million increase (63 percent) in foreign exchange reserves
over the past two years, dire warnings from the Finance Ministry
and the Bank of Israel of future foreign currency imbalances
sound hollow indeed. The threats Israelis do see -- future
inflation, further currency devaluation, and possible loss of
economic position relative to Israelis in other social groups
-- are personal, and getting as much as possible for himself
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as quickly as possible looks to the individual to be the best
17. Reconciling public demands with Israeli resources
probably is no longer possible; in any event it would require
a major change in the outlook of the government leaders. The
leadership, however, is notable both for longevity and for
firmness of conviction; the same people have led, according to
the same notions, for 30 years or more. Inspiration and cajolery
that worked in an austere and threatened era no longer do so;
carefully drawn agreements on nation-wide abstemiousness are
breached within hours or days. Israel's leaders know Israel's
resources are inadequate to meet rising demands, but they are
not prepared for the political consequences of a rigidly enforced
austerity program. Chances are that Mrs. Meir and others of
her background do not recognize a basic problem: that some of
the premises on which they founded and built the state are no
longer accepted by the majority of their fellow citizens. With-
out consensus on such premises as the need for sacrifice to build
and defend the society, the machinery of the state cannot deal
with certain problems.
18. While the government ponders Israel's problems, social
strains are likely to get worse. The government can do little to
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tft=
alleviate the religious (orthodox/nonobservant) controversy
without risking a parliamentary crisis. The leadership is
so thoroughly European in outlook that drastic action aimed
at quickly eliminating the causes of Eastern grievances is
virtually inconceivable. The growing affluence of one seg-
ment of society is attributable largely to booming prosperity.
The palliative for these social strains -- greatly increased
welfare measures -- would exacerbate inflationary pressures,
add to the strains on the balance of payments, and increase
the need for foreign financial assistance.
19. If a crisis arises from the pressures for higher and
higher wages and more and more social services, it is far more
likely to be an economic crisis than a political one. The
political system does not contain any mechanism whereby the
government can resist the demands of the union; it can only
try to persuade and cajole. The Histadrut, for its part, has
nothing to gain by bringing down the government even if it could,
since no other government would be more responsive to its demands.
Reducing defense outlays can free some funds for other purposes,
but no Israeli leader is going to permit significant weakening
of Israel's defense establishment. The defense budget is, there-
fore, likely to remain very large for the foreseeable future. For
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some period, demands for both guns and butter can be met by
seeking more loans and grants from abroad; the durability of
this solution depends on the size of inflows of foreign funds.
An unmanageable situation will arise only when expenditures
have exceeded income -- earnings, gifts, and loans -- for
enough time and by a large enough amount so that foreign ex-
change reserves drop alarmingly. Then and only then will the
government be able to convince the poeple that economic restraints
are essential to national security. The longer the crunch is
postponed, the greater the necessary adjustment will be. With
the governing machinery at its disposal, the Israeli leadership
apparently has no choice but to go on temporizing and borrowing
until such time as a severe shortfall in foreign income forces
drastic retrenchment and perhaps severe recession.
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TABLE I
EXPENDITURES AS A PERCENTAGE OF GROSS NATIONAL PRODUCT
6 Months
1966
1967
1968
1969
1970
1971
Public Consumption
23.0
31.0
31.5
31.6
36.8
36.4
Of which: Defense
10.0
16.4
17.9
20.4
26.0
N.A.
Private Consumption
67.9
67.2
66.4
67.5
63.3
61.8
Investment
24.6
18.2
23.5
24.2
25.4
28.6
TOTAL
115.6
116.4
121.4
123.2
125.5
126.8
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TABLE II
ISRAEL: MAJOR SOURCES OF INCOME FROM ABROAD
(Million Dollars)
1966
1967
1968
1969
1970
19712-/
l972a/
Earnings (Exports of
Goods and Services)
832
908
1,147
1,228
1,386
1,635
1,890
H
Transfers - Totalb/
Of which:
Institutions (Largely
United Jewish Appeal)
105
322
163
172
257
300
250
00
U
1
W
co
CJ)
Government Long-Term
Borrowing - Total
241
386
379
318
736
850
1,050
Of which:
Israeli Bonds (Largely
US)
124
232
182
184
231
251
220
US Government
39
40
52
94
374
390
75001
a/ Israeli estimates. Numbers in italics are interpolations of data for which
Israeli estimates have not appeared.
b/ Including immigrant remittances and German restitutions.
c/ Israeli request for United States Government assistance of all kinds.
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Next 4 Page(s) In Document Exempt
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Vciv.CRANDUM FOR: ' Mr. W~~~iam Colby
Executive Director-Comptroller
I
By way of further response to your question
about our non-NIE production i am attaching a
list of memoranda done in the last six months,
together with the two most recent ones.
JUHN -HL;IZENGA
Director
~N~' !rs un..r ul ~
M?tional Estimates
28 Januarv72
(DATE
)
WORM NO. i01 REPLACES FORM +0?+0`.
AUG 54 WhCH MAY BE USED
This piece on Israel's Internal political
and economic problems breaks new ground in a
neglected area and has relevance for US decisions
on economic aid. It Is being distributed to the
Bureau in State. ISA, and the NSC Staff.
JOHN HTAZENGA
Director
National Estimates
27 January 1972
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Mr. Harold Saunders
National Security Council
We thought you might be interested in this
piece on Israel. It is somewhat different from
those we have done in the past couple of years,
in that it speculates on looming domestic troubles
in Israel, problems not directly tied to the
conflict with the Arabs.
JOHN HUIZENGA
Director
National Estimates
27 January 1972
Mr. Joseph Sisco
Assistant Secretary of State for
Near East and African Affairs
We thought you might be interested in this
piece on Israel. It is somewhat different from
those we have done in the past couple of years,
In that it speculates on looming domestic troubles
in Israel, problems not directly tied to the
conflict with the Arabs.
JOHN HUIZENGA
Director
National Estimates
27 January 1972
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