THE ISRAELI-SYRIAN ARMS RACE: RUNNING ON FOREIGN AID

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89S01450R000300250001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 27, 2016
• Document Release Date: September 4, 2012
• Sequence Number: 1
• Publication Date: May 1, 1988
• Content Type: REPORT

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Directorate of Secret
Intelligence
The Israeli-Syrian Arms Race:
Running on Foreign Aid
PRD~7 ' MNgF
Secret
PAGE NUB
TOTAL NUMBER OF ODPIES
DISSEM DATE
EXTRA OOPI
NESA 88-10028
May 1988
Copy 397
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Directorate of Secret
Intelligence
Running on Foreign Aid
The Israeli-Syrian Arms Race:
Office of Near Eastern and South
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Asian Analysis. It was coordinated with the
_
Directorate of Operations.F
~
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Comments and queries are welcome and may be
directed to the Chief, Arab-Israeli Division, NESA,
Secret
NESA 88-10028
May 1988
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The Israeli-Syrian Arms Race:
Running on Foreign Aid 25X1
Summary Israel and Syria are committed to an expensive arms race that heavily
Information available burdens their economies and ensures their continued dependence on foreign
as of I March 1988 aid. Israel is likely to maintain annual defense spending in the $4.5-5.5
was used in this report.
billion range well into the 1990s to ensure its military's qualitative edge
over potential Arab adversaries, especially Syria, by purchasing and
developing state-of-the-art military systems. Syria will have great difficul-
ty in sustaining defense spending at the present $3.6 billion annual level
needed to import advanced weapons and maintain large numbers of full-
time soldiers.
Massive defense programs coupled with limited domestic resources-
including manpower and finances-leave both countries with defense
burdens that rank among the world's highest. Syria devotes 17 percent of
its gross domestic product to the defense budget, while military outlays
consume about 10 percent of the Israeli gross domestic product. Our
econometric analysis suggests that the two countries' defense burdens will
continue to dampen investment and the growth of gross domestic product
and are major factors behind their budget and foreign payments deficits.
Israel's defense program receives steadier foreign support than that of
Syria. The outlook for foreign aid from Syria's benefactors, especially
Arab donors, is less certain than for Israel, which obtains almost all its mil-
itary aid from the United States:
? Cash grants to Syria from moderate Arab states have fallen 65 percent
since the early 1980s. Following the expiration of 1978 Baghdad summit
payments later this year, Arab support could fall further and require
Damascus to make deeper cuts in defense spending. Soviet-Syrian
relations are likely to remain stable, and weaker support from other
benefactors will strengthen Moscow's potential leverage with Damascus.
? US financial assistance will be the critical factor determining Israel's
ability to import the military hardware needed for its modernization
program. Israel has relied on US military assistance to purchase nearly
all Israeli military imports since 1973. Nearly all the $1.8 billion in aid
programed through September 1989 is earmarked for existing arms
contracts or otherwise committed and does not provide enough money to
finance all of Israel's military procurement plans, which Tel Aviv expects
will cost $2.5 billion by then.
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NESA 88-10028
May 1988
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Both countries will continue to pursue a guns-and-butter policy that
minimizes cuts in public welfare spending, even in the face of their heavy
defense burdens. The repressive Damascus regime, however, has shown
itself more willing than Tel Aviv to sacrifice living standards to maintain
high defense spending. The regime is almost certain to continue to devote
most of its resources to the military at the expense of needed civilian
programs in areas such as agriculture and electrical power generation.
Israel, on the other hand, has less latitude to reduce civilian outlays to help
protect domestic military spending.
Nagging structural problems in Israel's economy-including persistently
high inflation and a heavy tax burden-will hold real economic growth to
about 3.0 percent through 1990, about the rate Israel has experienced since
it began its austerity program in 1985. Even in the unlikely event the
economy grows at the officially planned rate of 3 to 4 percent per year, the
defense burden will remain heavy.
Both countries will be compelled to adjust their force structures to
accommodate the realities of fewer domestic resources and insufficient
financial aid. Israel's wide margin of military superiority over Syria is
almost certain to hold steady and may even grow:
? Although budgetary belt-tightening in Israel has trimmed operational
expenses, it has not led to major cutbacks in manpower or hardware that
would produce significant cost savings over the long term. Tel Aviv will
continue to focus on spending for high-technology weapon systems to
replace older and obsolete equipment in its inventory. Despite Syria's
impressive array of hardware, Israel's air force and armor units will
remain the best in the Middle East, and Israel's military training,
leadership, and better educated manpower pool will give it an advantage
in future conflicts.
? Syria's economic weaknesses have a profound effect on its military. The
military's recent reductions in maneuver training, cuts in imports of spare
parts and updated equipment, and the release of many skilled personnel
will hinder its operational readiness and performance. Sluggish economic
growth and uncertainty over aid levels probably will keep Damascus's
military buildup at a near standstill and may impose further force cuts.
The main consequence will be additional incentives to develop unconven-
tional systems, principally chemical and biological weapons, to supplant
weakened conventional forces.
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Syria 6
Syria
Coda: Impact on the Military Balance
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Scope Note This paper analyzes the economic burden the arms race between Israel and
Syria places on both states. It examines defense spending and foreign
military aid for each country. Direct comparisons between the two states'
defense budgets are complex. For example, Syria provides no details on its
spending beyond the Defense Ministry allocation. Comparisons of US and
Soviet military aid to the two countries are dissimilar and complicated.
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Mediterranean Sea
-.,J *NICOSIA
Cyprus
Syria
' The Gaza Strip and the West Bank
are Israeli occupied with status
0 75 Kilometers to be determined.
Red Sea Boundary representation is
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The Israeli-Syrian Arms Race:
Running on Foreign Aid
Differing Israeli and Syrian national priorities and
perspectives drive the arms race between the two
countries. In its quest for "strategic parity," Damas-
cus is bent on strengthening its armed forces, first, to
deter an Israeli attack and, second, to threaten a
credible offensive to retake the Golan Heights. Syria's
President Assad also relies on the military to guard
against internal dissent, to protect national unity, to
project influence in Lebanon, and to centralize power
in his hands. Israel's determination to preserve its
territorial integrity and to ensure its long-term surviv-
al impels its military modernization effort. Israel
believes that Syria's growing military capability poses
the greatest long-term danger to its national security.
The Arms Race and the Defense Burden
Israel's security strategy emphasizes costly, high-
technology weaponry and extensive training and sup-
port for its personnel. Syria has concentrated on
developing one of the strongest armed forces of any
Arab country through massive acquisition of modern
weapons and force buildup. As a result, the two
primary antagonists in the region have among the
highest defense burdens-those of finances and man-
power-in the world. Israel is better suited than Syria
to maintain and develop its defense program because
it has a more sophisticated and diversified economy
and a more skilled labor force.
Israel. Israel's military spending strategy in the 1980s
focuses on streamlining its armed forces by eliminat-
ing marginal units while increasing the combat effec-
tiveness of remaining units. Instead of expanding its
existing inventory, the Israel Defense Force (IDF) is
emphasizing the development and acquisition of more
lethal, high-technology weaponry, according to the
US Embassy in Tel Aviv. For example, Israel is
improving the design of its Merkava tank as well as
upgrading its inventory of almost 3,500 older tanks.
Underscoring the preeminent role Israel places on
airpower, the air force is procuring advanced weapon
systems such as Popeye, a long-range precision-guided
munition, to improve its ground attack capability. Tel
Aviv also is investing in the development of antiballis-
tic-missile research to counter Syria's growing sur-
face-to-surface missile inventory.
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Allocations to the military-particularly for modern-
ization programs-have placed a heavy burden on
Israel's narrow physical resource base. US Embassy
reporting and official Israeli data indicate that, as a
share of gross domestic product, domestic defense
spending has absorbed 10 to 14 percent of the total
output during the 1980s. By 1987 defense spending
was roughly $2.8 billion or about 10 percent of gross
domestic product, according to our estimate.
Although significantly lower than during the 1970s, 25X1
when the burden averaged roughly 20 percent, the
current figure is still one of the highest ratios in the
world. In comparison, defense spending among
NATO members averages about 5 percent of the total
output, for the United States about 6 to 7 percent,
and, according to our estimate, for the USSR approx-
imately 15 percent.
We believe that the demands the military has placed
on domestic resources have contributed to the diver-
sion of goods and services that otherwise would have
been designated for civilian investment. Although
other variables play a role-especially interest rate
levels-our econometric analysis suggests that in- 25X1
creases in domestic spending for defense have contrib-
uted to declines in gross investment since 1980. In
particular, Tel Aviv has traded off rapid progress on
its ambitious program to develop alternative sources
of energy, according to the US Embassy. Highway
construction projects also have taken a backseat to
defense spending, according to the press. The shortfall
of resources for the civilian sector even contributed to
delays in the government timetable for the construc-
tion of six new Israeli settlements in the occupied
territories by the end of 1986.
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We believe that the official data of both Israel and
Syria understate actual military spending and cloud
the true impact of the defense burden on their
economies. Because both sides closely guard this
information for reasons of national security, much is
not officially published, and published information
lacks sufficient detail to permit analyzing the true
level of defense expenditures. Unacknowledged de-
fense spending is concealed within civilian budget line
items, making it impossible to distinguish the mili-
tary's share of total spending. Unidentified uses of
foreign exchange and poor audit trails for military
aid also are responsible for underreporting of defense
spending.
Israel makes among the world's largest commitments
of labor to the military in relation to its population.
On the basis of military manpower ratios-the num-
ber of active-duty military personnel per 1,000 popu-
lation-Israel's defense burden measured nearly 34.3
in 1987. If part-time IDF reservists-who total about
400,000-are included, Israel's military manpower
ratio leaps to 129.
Israel's large manpower ratio suggests that it is
stretching its labor pool to maintain current military
manpower levels. Tel Aviv has a universal draft that
requires nearly all 18-year-old Israelis-male and
female-to serve at least two years in the armed
forces. A Jewish population of about 3.6 million-of
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Figure 1
Israel-Syria: Defense Burdens, 1975-87 a
Real Defense Outlays/GDP
NATO average b 0 Israel ? Syria
20
15
F
1
10
5
-1
ILI
0 1975 80 81 '82 83 84 85 86 87
a Israel data reflects domestic defense spending in constant prices.
Syria data reflects total defense spending less estimated financial
concessions from arms suppliers.
b Defense spending as a share of GNP.
which only about 700,000 qualify for military
service-leaves Israel little room to expand the size of
its military forces.
Syria. Syria has placed primary emphasis on gaining
numerical superiority over Israel in weapons and
manpower. On the basis of observed deliveries, we
estimate that the Soviets have transferred more than
$15 billion in military equipment to Syria since 1980,
making Syria the second leading importer (behind
Iraq) of Soviet weapons in the Third World. Massive
Soviet deliveries have allowed Syria to surpass Israel
in some key equipment categories with more than 300
helicopters, 580 fighter aircraft, and more than 2,700
artillery pieces. Syria's tank force-more than
3,700-approaches Israel's and exceeds that of Great
Britain and France combined. By 1985 the Syrian
Arab Army had expanded from six to nine divisions.
The authorized personnel strength of the armed forces
has grown to almost 400,000, triple the level preced-
ing the Arab-Israeli war in 1973 and almost double
the level of 1980.
Figure 2
Israel-Syria: Military Manpower Ratios,
1980-90
I I I I
0 80 81 82 83 84 85 86 87 88a 89a 90a
Syria's economic and military structures are marked-
ly different from Israel's and in most respects less able
to support high defense spending. We estimate that
total military outlays, including arms imports, in-
creased 350 percent from 1975 before peaking at
almost 6 billion in 1983. Military spending has de-
clined since then as Damascus has reduced its weap-
ons imports and begun to consolidate its forces and
integrate new weapons into its arsenal.
Syria devotes a higher share of its resources to defense
than does Israel. Syria's defense burden has averaged
almost 20 percent of gross domestic product during
the 1980s. Although total Israeli and Syrian spending
has been roughly equal over the past five years ($21.7
billion and $21.6 billion, respectively), Syria's burden
is heavier because its economy is smaller.
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Table 1
Israel-Syria:
Defense Spending, 1975-89
Defense Defense Total
Budget Imports
1987 a
2,800
2,600
5,400
1988 b
3,100
1989 b
3,400
1986 a
2,066
984
3,050
1987 a
1,814
1,810
3,624
1988 b
1,800
a Estimated.
b Projected.
Syrian budget data converted at: 1975, SP 3.49/$1; 1980, SP
3.925/$1; 1981, SP 4.28/$1; 1982, SP 4.65/$1; 1983, SP 4.735/$1;
1984, SP 5.033/$1; 1985, SP 5.57/$1; 1986, SP 6.582/$1; 1987,
SP 7.275/$1.
d Defense budget data probably include some imports. Defense
import figures are our estimates. Total spending figure may include
double counting of imports.
We believe military spending has had an adverse
long-term effect on economic development in Syria
and is a key cause of the underlying economic mal-
aise. Although defense spending initially stimulated
the economy by mobilizing available resources and
attracting politically motivated outside financial sup-
port for both the military and civilian sectors, the
long-term impact has been to retard economic growth
by absorbing human and financial resources and
slowing implementation of development plans. Heavy
military expenditures also have expanded state budget
deficits and accelerated inflation. Massive arms
imports, only partly offset by credits, have worsened
the foreign payments deficit.
As in Israel, military manpower requirements are a
drain on the Syrian economy. The most recent data on
military manpower ratios indicate that Syria ranks
fourth worldwide, well behind Iraq and about equal to
North Korea and Israel. We estimate that Syria's
armed forces grew from 7.7 percent of the labor force
in 1979 to more than 15 percent by 1987. The
principal manpower burden is in the technical fields,
where, until recently, Syria often forced skilled
reservists and conscripts to stay in active service
beyond the minimum requirement. This practice com-
pounded the shortage of skilled labor in civilian
enterprises.
The burden of this rapid growth through conscription
is partly offset by lack of productive alternatives to
defense employment in Syria's sluggish economy.
Likewise, the budgetary burden of conscription of
unskilled troops is not severe. Privates serving their
compulsory duty are paid only about $15 per month.
Budgetary Impact
High spending for national defense and civilian wel-
fare programs has left Israel and especially Syria with
budget problems and heavy debt burdens. Both coun-
tries have financed substantial portions of their defi-
cits through inflationary domestic borrowing and
money creation. Likewise, the military's priority
claim on budget resources probably has crowded out
domestic investment projects.
Israel. Tel Aviv's decision to maintain high levels of
military spending-which consume about 10 percent
of budget expenditures, according to official statis-
tics-has been an important factor behind the govern-
ment's economic difficulties during the 1980s, in our
judgment. Domestic defense expenditures grew rapid-
ly up to the Israeli invasion of Lebanon in 1982 and
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vca.^ ct
specific acquisition programs and requests.
The Israeli military's annual budget cycle begins
with the Ministry of Defense intelligence estimate of
the potential threat to Israel. On the basis of this
assessment, the Israel Defense Force's (IDF) planning
branch establishes the general order of battle the
military will need to meet the perceived threat,
according to US Embassy reporting. Divided into
five-year time frames, longer term force structure
projections are cast in terms of general intentions and
requirements, while near-term plans reflect more
In formulating their spending programs, IDF and
Defense Ministry economic advisers take into consid-
eration the resource constraints that affect the overall
implementation of the plan. Using a computer model,
the planners compare anticipated military activity
with available economic resources, including man-
power levels. The Defense Ministry also assesses
technical advances made by its potential adversaries
to determine research and development spending
needed to maintain Israel's qualitative edge. Toward
the end of the yearly budget cycle, the Defense
Ministry factors in gaps in the projected force struc-
ture and acquisition plans to be filled by US systems
purchased with US military aid.
The Defense Ministry budget proposal then wends its
way through the approval process. The planning
branch along with the service commanders rank
spending priorities, which are given final approval by
the IDF Chief of Staff. The approved defense budget
is next submitted to the Ministry of Finance, where it
is integrated with the requests from the other
spending about $2.8 billion in 1987.
reached an alltime high of about $3.2 billion that
year-about 15-percent increase over the 1980 level,
according to official statistics. Despite government
mandates to reduce defense outlays by $1.2 billion
over the next three years because of mounting budget
deficits and growing inflation, the military was still
ministries into an overall projection of revenues and
budget deficit, according to the US Embassy. After
revising the Defense Ministry proposals, the Finance
Ministry responds with its allocation to the Defense
Ministry-normally a compromise between the de-
fense spending target and the revenue available from
the projected government budget. Finally, various
Knesset committees-and eventually the full Knes-
set-approve the budget, generally with little change.
During the budget year, the Defense Ministry can
reallocate funds among defense line items to meet
unanticipated changes in military needs. Juggling
budget categories, however, cannot exceed estab-
lished guidelines, according to the US Embassy. For
example, military pay may not go beyond that autho-
rized in existing wage agreements. Moreover, reallo-
cations above government prescribed ceilings require
the prior approval of the Finance Ministry or the
Knesset subcommittee that oversees the defense bud-
get.
The Ministry of Finance has little political leverage
to cut the defense budget, given Israel's obsession
with national security.
The government has bowed to intense lobbying from
powerful interest groups in the civilian sector by
leaving intact the operating budget for most nonde-
fense programs, including spending on health and
education, which accounts for about 10 percent of
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operating expenditures. Tel Aviv was particularly
loath .to cut spending significantly for politically
sacrosanct social programs that included transfer
payments and subsidies. As the economy's largest
employer, the government also was unwilling to risk
labor discontent-especially within Histadrut, Israel's
powerful trade union federation-by reducing wages
or laying off government workers. To provide finan-
cial breathing space, Tel Aviv apparently took the
politically expedient course of sacrificing development
outlays, which fell from over $1 billion in 1986 to
approximately $930 million in 1987. Despite these
cuts, total budget outlays reached nearly $20 billion
in 1987, as compared with about $18.7 billion in
1986.
Israel has been unable to spread domestic revenues
thin enough to cover spending on both guns and
butter. The government's attempt both to field a
modern defense force and to preserve costly welfare
programs turned Israel's 1986 budget surplus to a
$625 million deficit last year, or about 2 percent of
gross domestic product. Despite having one of the
world's highest tax burdens-as a share of gross
domestic product gross taxes rose from about 45
percent in 1980 to over 52 percent in 1986-sluggish
economic growth helped depress government tax reve-
nues. Nontax revenue, including interest income and
profits from state-owned enterprises, performed even
worse.
Israel's reluctance to deal with the deficit by imposing
sharper cuts in either domestic defense or civilian
spending has left the government with a sizable
internal debt service that has become the single
largest expenditure in the budget. By 1987 the debt
amounted to roughly $37 billion or nearly 120 percent
of gross domestic product. In 1987 the government
had to meet approximately $10 billion in total debt
obligations-repayments that accounted for about
50 percent of total budget spending, according to
official statistics. Although data are not available for
the military's portion of the debt, we believe this share
is substantial because of the amount defense con-
sumes in the budget. Repayments of defense debts
have increased the military burden and retarded
investment in the private sector. The government's
overwhelming need for financing has crowded out
investors who must compete for funds in domestic
capital markets and has helped fuel a 16- to
20-percent inflation rate.
Syria. Syria's expansionary fiscal policies have pro-
duced structural budget deficits that are consistently
larger than Israel's. The overall deficit averaged
about 19 percent of gross domestic product from 1980
to 1985. During this period, almost all categories of
spending-both civilian and defense-grew at simi-
larly high rates. Damascus has made progress over the
past two years in curbing the deficit, but the narrow
tax base and reliance on foreign aid make substan-
tial improvements in fiscal performance almost im-
possible.
Syria's budget deficits arise from Damascus's attempt
to combine its military buildup with rapid economic
development and high welfare spending. In general,
Syria has increased spending on a range of items
rather than reallocate resources from welfare spend-
ing to defense:
? Published defense budget figures, which we believe
represent mainly domestic outlays, show a 55-per-
cent nominal increase from 1980 to 1985, the final
year for which actual data are available, and ac-
counted for 30 to 40 percent of the total budget.
? During the same period, budget data show that
investment outlays for transportation and utilities
increased by 174 percent and agriculture and irriga-
tion by 131 percent. Explicit price subsidies grew
293 percent, while state spending on education
increased 74 percent.
? In contrast, public investment in manufacturing,
mining, and power generation fell 42 percent from
1980 to 1985. By 1985 public investment in these
sectors was only 14 percent of total public invest-
ment, as compared with 37 percent in 1980.
The effects of favoring civilian welfare and defense
spending over investment in industry have been
mixed. High current expenditures have had little
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positive impact on growth and have accelerated infla-
tion. Syrian public investment in industry during the
1970s was poorly implemented and probably not
absorbed. We believe continued high investment
through the 1980s would have resulted in a similar
waste of resources.
Declining external support has forced Damascus to
rely on domestic resources to finance budget deficits.
Before 1982 deficits were largely covered by official
transfers, or grants, from Arab donors, which funded
53 percent of budget deficits during the period 1980-
82. Foreign grants and loans have fallen sharply since
1982, and we estimate official transfers covered less
than 25 percent of planned deficits during 1983-86.
Syria's state-owned banking sector is financing a
growing share of the government's budget deficits and
other liabilities of the public sector, a policy that has
stimulated inflation. Growth of domestic credit,
fueled by government borrowing, reached 37 percent
per year during the period 1980-85. Treasury borrow-
ing by 1985 amounted to 11 percent of gross domestic
product, or about $1.6 billion. Damascus has curtailed
its borrowing since 1986, but past expansionary fiscal
policies have produced high inflation-102 percent
last year-according to an unofficial survey conduct-
ed by the US Embassy in Damascus.
Foreign Payments Impact
Both Israel and Syria depend heavily on arms imports
to meet their defense needs. Although Israel has a
domestic defense industry, it cannot meet most of the
IDF's requirements and, as a result, the Israelis must
import most major weapon systems from the United
States. Nevertheless, the ability to earn foreign ex-
change from arms exports gives Israel an advantage
over Syria, which has a limited indigenous weapons
production capability. Because neither country has
adequate foreign exchange to afford military pur-
chases along with civilian imports, each has accumu-
lated sizable foreign payments deficits and external
debts. Damascus, however, is suffering a much more
severe foreign payments crisis that is only beginning
Israel. Accounting for about 18 percent of total
imports, direct defense imports-which have averaged
$1.7 billion since 1980-have been a major contribu-
tor to Israel's chronic foreign payments shortfalls.
Indirect defense imports, which include spending for
raw materials used by the domestic defense industry,
have added another $500-900 million to the annual
defense import bill, according to official data.
Israeli arms exports probably have offset most of the
cost of the indirect defense imports and have helped
defray military research and development costs. By
1986 defense exports climbed to approximately $1.2
billion from $666 million in 1980, according to official
data and press sources. Israel sells mostly small arms,
ammunition, and communications and electronic gear
overseas, but sales also have included large items such
as Kfir fighter airplanes and obsolete equipment such
as M-51 Super Sherman tanks. These exports have
fallen short of covering the costs of direct military
imports.
Tel Aviv has amassed a military debt to the United
States of about $8.5 billion, over half of the govern-
ment's foreign debt. Repayments on this debt impose
additional burdens on Israel's foreign payments. To
make the 1987 payment of about $1.1 billion, most of
which was in interest, Israel used nearly all of the
$1.2 billion of US Economic Support Funds, which
could have been devoted to civilian spending priori-
ties. These funds, however, have allowed Israel to hold
its debt service ratio-repayment on military debt
from exports, services, and unilateral transfer pay-
ments-at ments-at about 10 percent, a figure well below the
25-percent threshold that international lenders con-
sider to be too high.
Syria. The most critical and immediate economic
burden imposed by Syria's defense spending is on
foreign payments. Syria's current account, even ex-
cluding most arms imports, has accumulated a deficit
of more than $4.1 billion since 1980. Adding to this
deficit, Syria has imported more than $17 billion of
arms, financed primarily with Soviet military credits.
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Israel's Defense Industry: A Troubled Asset
As an export leader, a major employer, and the
domestic supplier of arms to the Israel Defense
Force, Israel's defense industry plays a central role in
the economy. Weapons producers employ about
100,000 industrial workers who account for about
one-third of the total industrial work force in the
economy, according to the Israeli press. Most defense
work is concentrated in machinery and electronics-
two of Israel's fastest growing industrial sectors. Now
accounting for nearly 20 percent of total merchandise
sold abroad, arms exports have become Israel's
second-largest trade category after diamonds, ac-
cording to official data and the press. Moreover, the
defense industry is an important training ground for
scientists and engineers who move on to the civilian
sector. Civilian industries, including those in commu-
nications, optics, lasers, and microcomputers, also
take advantage of research and development spinoffs
from defense firms.
Israel's defense industry is a highly sophisticated
organization that is engaged in the research, design,
development, and production of selected state-of-the-
art weapon systems. The multitiered complex in-
volves the government, private companies, and Is-
rael's trade union federation, Histadrut. The largest
government-owned or -controlled firms are Israel
Aircraft Industries, Rafael (the Defense Ministry's
development authority), and Israel Military Indus-
tries. Histadrut owns Koor Industries, Tadiran (the
electronics giant), and Soltam, a producer of ground
forces equipment. The private sector consists of more
than 100 companies, including Elbit Computers and
El-Op Electro-Optic Industries. Other organizations
augment the military-industrial sector by providing
marketing and trade services. For example, SIBA T,
an agency under the control of the Ministry of
Defense, is responsible for monitoring Israeli arms
exports.
The defense industry has fallen on hard times in
recent years because of inflexible monetary policy,
increased production costs, lack of investment capi-
tal, and budget austerity. Cutbacks of about $600
million in the domestic military budget since 1983
have resulted in up to a 50 percent reduction in IDF
orders for locally produced arms, according to the
press. Rising costs for imported raw materials also
have made the industry less competitive. Salary costs
at Israel Aircraft Industries, moreover, increased
from about $460 million in 1985 to $550 million in
1986. Insufficient research and development funding
has made startup costs for new weapon systems
prohibitive. Israel can use only $400 million of fiscal
year 1988 US assistance locally to boost domestic
demand. Even so, about two-thirds of these funds
went to help defray costs of the Lavi cancellation.
The growth in arms exports-which account for
about 80 percent of total Israeli defense industries
production, according to public statements by De-
fense Minister Rabin-has slowed as well, because of
an overvalued currency and rising production costs.
Other Third World arms competitors-such as Bra-
zil and South Korea, which sell comparable equip-
ment-can underprice Israel in the world arms mar-
ket. Moreover, these countries are not hampered by
the political limitations that restrict the potential
market for Israeli arms. Countries that purchase
from Israel, such as Argentina and Kenya, are having
financial problems that are forcing them to scale
back procurement plans. Several other buyers, such
as Southeast Asian countries, are financially stable
and reliable customers.
Slumping sales at home and abroad apparently have
thrown the industry into a recession. Some firms,
such as Soltam, are operating in the red, and as many
as 200 smaller firms linked to defense may be forced
to shut down, according to the press. Flagging busi-
ness has led to a substantial increase in unemploy-
ment within the industry. Because of a drop in total
sales, firms including Israel Military Industries, Is-
rael Aircraft Industries, and Tadiran have laid off
5,000 to 7,000 workers-many highly skilled engi-
neers and scientists-over the last two years, accord-
ing to press reports. Rabin and other defense spokes-
men have publicly stated that as many as 3,500 more
employees may lose their jobs. Given the poor state of
the industry, we believe Israel may be overly optimis-
tic in its plans to find alternative employment for
workers laid off from the Lavi project.
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Secret
Figure 3
Israel: Military and Civilian Imports,
1975-87
Civilian
Military
Figure 4
Israel: Military and Civilian Exports,
1975-87
IJ Civilian
Military
We believe that these purchases, combined with debt
service payments, follow-on support, and arms pur-
chased from the West, have weakened the country's
foreign payments position.
Poor finances have intensified the competition for
foreign exchange resources and even curtailed mili-
tary imports. Foreign exchange earnings from oil
exports, worker remittances, and official transfers
have fallen by more than one-third from 1982, and
foreign exchange reserves, last published in mid-1986,
were only $10 million, equivalent to only two days of
imports. Private importers have been denied foreign
exchange through official banking channels since
1985, while the military continues to receive priority
allocation of foreign exchange. Critical shortages are
hurting the military, forcing the suspension of most
military contracts requiring payment in foreign
exchange.
25X1
Damascus receives most of its arms imports from the
USSR and East European sellers on credit, but even
these transactions strain Syria's current account.
Syrian debt to Western entities is fairly low at $4.4 25X1
billion, while debt to the Soviets may total $13 billion.
On the basis of Syria's arms imports and terms
common in Soviet arms contracts, our analysis indi-
cates that Syrian obligations falling due in 1987 have
totaled more than $1.3 billion-an amount far ex-
ceeding Damascus's ability to pay.
special agreements negotiated 25X1
since 1982 may have reduced current payment obliga-
tions by about half. Syria probably confines its cur-
rent payments to the Soviets and East Europeans to
aircraft and weapon system overhauls, selected spare
parts imports, specialized training, and possibly down-
payments on new contracts. As Syria's weapons inven-
tory has grown, these related payments-payable in
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Figure 5
Syria: Imports of Soviet Arms, 1970-87
Moscow replaces losses
against Israel in Lebanon
3.0
New aid deal, no
vi
2.5 Arab-Israel war
political concessions
s -
visits
visits
Moscow
2.0 Soviets expelled
from Egypt
Moscow wants
1.5
cash for arms
1.0
-0000
0.5
0 1970 71 . 72
hard currency and on commercial terms-also have
grown and absorb a higher share of Damascus's
foreign exchange resources.
Damascus is pursuing development of indigenous _
arms manufacturing to curtail imports and debt. The
Syrian Industrial Establishment for Defense is in-
volved in production of small arms and tank and
artillery ammunition independently and with some
East European firms.
The firm recently was denied
an export license by London, but Damascus will
attempt to continue the project. Beyond these efforts,
Damascus remains overwhelmingly dependent on im-
ports. Syrian military exports are not substantial and
consist mainly of reexported artillery, small arms, and
ammunition to Iran and Libya. In addition, Syria
earns foreign exchange from the estimated 1,000
military advisers and pilots stationed in Libya.
Moscow presses Syria
to attend Geneva Conference
Foreign Aid-A Sine Qua Non
Massive foreign aid is the fuel that drives the Israeli
and Syrian military machines. US military assistance
to Israel-about $1.8 billion annually-has been sta-
ble and finances almost all Israeli arms imports.
Syria, on the other hand, is straining under the
pressure of reduced aid from the moderate Arab
countries and Iran and more uncertain support from
the Soviets.
Israel. Loans and grants from the United States have
allowed Israel to pursue its military modernization
program without forcing major sacrifices in civilian
imports or exhausting foreign exchange reserves.
Foreign Military Sales funds, which averaged $1.6
billion during the period 1982-86, have financed
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3VIUM
Table 2
Israel: US Military Aid
Received, 1982-89
Israel converts $300 million of these funds into local
currency to help support the domestic defense indus-
try. Since 1985, US military assistance to Israel has
been on a grant basis. Before that time, approximately
half the assistance was provided as loans, which Israel
is obligated to repay.
To reduce its overall future debt-service burden,
Ministry of Finance officials have expressed a desire
to refinance Israel's outstanding debt at a lower
interest rate, according to the US Embassy. The
Israelis believe that interest rates have dropped
enough since mid-1987 to warrant negotiations to
reduce interest payments on old debts. US require-
ments that prohibit such reductions, however, have
inhibited changing interest payments. For fiscal year
1989, interest will represent about 80 percent of
Israel's scheduled $1.2 billion debt repayment,
according to the Embassy.
Programed US military aid through September 1989
will leave Israel scant money to fund the IDF's new
procurement plans that the Israelis anticipate will cost
$2.5 billion. The IDF will face a nearly $650 million
shortfall in defense budget allocations for new weapon
systems during this time. Payments on existing con-
tracts will use up about $2.2 billion of the $4.6 billion
on support will almost exhaust the balance.
available during this period, according to the Embas-
sy. Over $1.3 billion is earmarked for the Israeli
defense industries, and another $1.1 billion for follow-
exchange receipts have dwindled, Baghdad payments
have been channeled from defense to essential civilian
as foreign 25X1
Syria's military capability.
Syria. Since the late 1970s a major infusion of cash
grants from the Arab Gulf states (particularly Saudi
Arabia) and credits from the Soviet Union have
financed the Syrian military buildup. Damascus has
also reaped substantial benefits from Iranian oil aid
since 1982. Nonetheless, total aid levels have declined
steadily since 1982, requiring that Damascus accumu-
late debt and reduce foreign exchange costs. Likewise,
Soviet arms deliveries have steadily decreased since
1983, until a recent upturn. Further reductions in aid
from Moscow or the Arab Gulf states could send the
economy into a tailspin and force a marked change in
Cash transfers to Syria from Arab states were formal-
ized at the Arab summit meeting in Baghdad in 1978,
which called for underwriting the military capabilities
of the states confronting Israel. Arab aid peaked at
$1.7 billion in 1981, and we believe that the Arab
cash aid has covered most Syrian military purchases
from the West-$332 million since 1980-and down- 25X1
payments on Soviet and East European equipment.
The purchase of 50 Gazelle helicopters from France
in 1980, for instance, was financed by a cash grant
from Saudi Arabia. By 1987, Arab cash assistance
had dwindled by 65 percent to about $600 million.
transactions, such as food and pharmaceutical im-
ports. Compounding these difficulties, donors at the
Arab summit meeting in Amman in November 1987
declined to renew the Baghdad payments, which
formally expire this year.
Tehran's support, in the form of free oil, price dis-
counts, and delayed payments, totaled more than $1
billion in 1982 and 1983. By 1987 free and discounted
oil support was worth only about $110 million.
Damascus's debt to Iran for past oil deliveries-
almost certain never to be repaid-was almost $1.5
billion by mid-1987.
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OCU7 Cl
Table 3
Syria: Economic Aid,
1980-87
-successive debt reschedulings, debt forgiveness, and
Million US $ indirect Syrian borrowing via accumulated payment
arrears.
Eastern
Europe
25
25
35
35
50
55
100
NA
Western
bilateral
65
65
70
75
15
15
NA
NA
Arab and
Western
multi-
lateral
85
105
40
105
90
115
NA
NA
Arab
official
transfers
1,520
1,710
1,290
1,220
1,120
910
670
600
As Syrian,debt grows, Moscow is pressing for political.
and military concessions by Damascus in exchange
for financial relief. For instance, Damascus apparent-
ly agreed in late 1987 to allow Moscow to build a
naval repair and maintenance facility near Tartus in
'return for additional coastal defense equipment and
the cancellation of part of Syria's military debt,
according to reports
On the financial side, we expect that repay-
'ments to Moscow will remain near the bottom on
Syria's list of creditors. Any increase in foreign
exchange resources will probably go toward essential
purchases from the West.
Syria's financial woes have forced Damascus to cover,!
a larger.share of its arms imports through barter. We
believe that a share of Syrian exports to the USSR-
which average about $350 million per year-is credit=
The balance of Syria's arms imports has been
financed by credits from Moscow and, to a lesser
extent, East European suppliers. Most Soviet military
assistance is provided to Syria without payment dis-
counts, causing Damascus's overall debt to balloon.
Soviet military credits have apparently decreased in
recent years-deliveries during 1984-87 averaged
$1.4 billion versus more than $2.4 billion for 1980-
83-as Damascus became less able to afford and
effectively absorb new equipment. A rebound in 1987
to more than $1.8 billion from the low level of the
previous year is explained primarily by the delivery of
a squadron of MIG-29s promised over a year earlier.
Economic and military ties between Syria and the
USSR remain solid, but tensions have increased over
the past two years as Moscow has sought closer ties to',
other states in the region and has been more willing to
act contrary to Syria's regional goals in pursuit of its
own policies. Syria's weak record on debt payments
further strains ties by transforming a large portion of
Soviet arms sales into de facto "grants" through
ed against the military debt to supplement Damas-
cus's loNv~payments. Most recently, Syria contracted
for more than $2 million in explosives from Yugosla-
via in return for phosphates. Syria is pressing other
militaryr,ltnd civilian trade partners to accept phos-
phates, 'cotton, and textiles' instead of cash.
Easing the Burden-Short-Lived Gains
Israel and. Syria both introduced economic austerity
programs-that included reduced military spend-
ing-to reduce expanding foreign payments and
domestic budget deficits and curb inflation. After
initial gains during 1985-86, Tel Aviv's stabilization.,
program apparently lost momentum by 1987. We
believetahat improvements in budget and foreign
payment deficits owed more to US supplemental aid
than to the austerity measures. Syria has shown less
resolve;.;to address basic weaknesses and by 1987 was
11
takng`nnly halting steps toward additional reform.
Syria's autocratic regime gives it the leverage to
maintAin high defense spending at the expense of
civilian living standards.
25X1
25X1
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LYV%.i Vt
Israel. By 1985 the effects of government overspend-
ing had reached crisis proportions. The foreign pay-
ments deficit had reached about $700 million by
midyear, and the budget deficit's share of gross
domestic product had risen to about 17 percent-the
highest ratio since the 1973 oil price shock, according
to official statistics. Foreign exchange reserves fell to
about $2.4 billion from $3.8 billion in 1982. To help
finance the budget deficit, Israel's money supply had
grown about 310 percent annually from mid-1982 to
late 1985, according to Bank of Israel reports. Fueled
largely by increases in domestic borrowing and money
creation needed to finance the budget deficits, the
inflation rate had soared to an annual rate of about
400 percent.
Apparently recognizing that the growing defense bud-
get had become untenable, the military reluctantly
supported the government's 1985 Economic Stabiliza-
tion Plan. According to the US Embassy, the mili-
tary's budget strategy called for economizing in five
major areas: personnel pay, order of battle, research
and development procurement, training, and logistic
stockpiles. The austerity program trimmed 1984
domestic defense spending just 7 percent to approxi-
mately $2.5 billion in 1986, according to official
statistics. As a result, the military's share of budget
spending fell only about 5 percent from the 1984 level.
The failure of this ratio to decline further was due in
part to a slowdown in the real gross domestic product
growth rate from 2.8 percent in 1985 to 2.2 percent in
1986.
The reduction in military spending contributed to an
improved economic picture during 1985-86, in our
judgment. Cutbacks of $678 million in direct defense
imports from 1985 to 1986, for example, offset about
half the $1.2 billion increase in the nondefense import
bill and permitted an improvement in the total trade 25X1
deficit during this period. During 1985-86 Israel ran
budget surpluses of $62 million and $231 million and
enjoyed foreign payments surpluses of over $1 billion
in each of those years. By the end of 1986 the annual
inflation rate had plummeted from triple digits in
1985 to about 20 percent.
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We believe that other events were more important to
the success of Israel's stabilization program than cuts
in defense spending:
? Israel received US supplemental assistance of $750
million in both 1985 and 1986. These funds were
responsible for most of the foreign payments surplus
in those years, in our judgment.
? The near halving of world oil prices between 1985
and 1986-to about $15 per barrel-saved Tel Aviv
roughly $240 million in foreign exchange, according
to official statistics.
? Israel had a $100 million savings on foreign pay-
ments as a result of lower world interest rates,
according to the US Embassy.
In 1987 increases in both foreign and domestic mili-
tary spending helped reverse favorable trends in the
budget and foreign payments. Concerned about the
impact of a smaller defense budget on the IDF's
deterrent capability, military planners-especially
Defense Minister Rabin-rejected additional
restraints on military spending. As a result, domestic
military expenditures increased last year about 10
percent over 1986 to $2.8 billion, according to the US
Embassy. We estimate that direct military imports in
1987 more than doubled the 1986 level, climbing to
about $2.6 billion. This increase was an important
reason behind the deterioration in Israel's foreign
payments that swung from a $1.3 billion surplus in
1986 to over $1.1 billion in the red last year, accord-
ing to official statistics.
Syria. By 1986, Syria's high military spending, com-
bined with many other factors, caused the economy to
slip into crisis. The oil market crash hit Syria particu-
larly hard, cutting sharply into oil export earnings,
worker remittances, and, to a lesser extent, Arab aid
payments. Foreign exchange reserves, always low, fell
to practically nil during the year, and the Syrian
pound lost half its value in the unofficial market. We
estimate real gross domestic product shrank, and
growing numbers of public and private businesses had
to close or curtail operations.
Austerity measures, though not comprehensive, were
introduced in 1986 to reverse the economic decline.
Imports were slashed by $1 billion, with sharp reduc-
tions in petroleum, foods, machinery, and consumer
goods. Defense and other expenditures were frozen
or cut to slow inflation. We calculate that military
spending, including imports, may have declined
25 percent to about $3 billion. Damascus also intro-
duced new taxes to collect customs fees lost on
smuggled consumer goods and reduced subsidies for
gasoline, meat, and other items. Several partial deval-
uations were announced, including an exchange rate
that implicitly recognized the black-market rate.
Compounding the unfavorable economic environment
were the economic and political sanctions imposed in
November 1986 by the European Economic Commu-
nity (EC) and the United States in response to Syrian
involvement in terrorism, which represented an un-
precedented psychological shock to the economy and
prompted the leadership to initiate several reforms.-
Damascus continued to adhere, more or less, to its
austerity measures through 1987. Damascus reduced
the 1987 planned budget deficit in domestic currency
by 21 percent and even cut the defense budget by 3
percent, although defense remains the dominant
spending category. Total spending was cut 5 percent,
and Damascus optimistically expects strong growth in
revenues. Civilian current expenditures-including
education, subsidies, and interest on public debt-will
remain constant, and investments continue to bear
most of the cuts. Total investments were budgeted to
decline 10 percent, with Damascus favoring invest-
ment in electricity and irrigation projects over indus-
trial enterprises.
Syria's austerity policies and the recent increase in oil
output have not corrected the economy's fundamental
problems. As a result, Damascus will probably be
forced to decide between cuts in military spending and
civilian investment, and economic growth will remain
sluggish. We believe Assad has little desire to take the
dramatic, often painful steps to correct Syria's basic
weaknesses-the heavy military burden, overvalued
exchange rates, inefficient public sector, weakened
private sector, and poor fiscal performance. Instead,
we are confident the regime will cling to its present
strategy and rely on stopgap measures to forestall
crises. Moreover, the regime can rely on its powerful
internal security apparatus to quell public objections
to high defense spending.
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occi V L
Military Consequences
Although the armed forces of both Israel and Syria
have felt the impact of austerity, we believe the
military balance has remained heavily in Israel's
favor. Tel Aviv's spending reductions include postpon-
ing procurement, drawing down inventories, and
scrapping the Lavi program. These measures have
had little qualitative impact on the relative combat
capabilities of Israel. Damascus's military buildup has
slowed considerably in recent years, and reductions in
personnel, training, active units, and imports have
combined to weaken offensive and defensive capabili-
ties.
Israel. Although budgetary belt-tightening-affect-
ing all branches of the IDF-has trimmed operational
expenses, it has not led to major reductions in man-
power or hardware that would mean major cost
savings over the long term. According to US Embassy
discussions with Ministry of Defense officials, active
military units have drawn down their armor and
artillery inventories by 10 to 15 percent since 1985,
mainly by retiring older equipment to the reserves.
Despite this transfer, the IDF retains. its preausterity
inventory of about 3,900 tanks and approximately
2,000 artillery pieces.
The cancellation of the Lavi fighter-aircraft project-
the centerpiece of Israel's defense modernization
effort-was the most important concession the gov-
ernment made to the reality of scarcer financial
resources. By the time Tel Aviv scrapped the Lavi in
August 1987, the government had sunk nearly $2
billion in US funding into development of the fighter.
Had the Lavi gone into production, these costs would
have made the airplane substantially more expensive
than the $17 million price tag of the US F-16, its most
likely alternative. Ironically, nearly all the IDF lead-
ership, led by the Minister of Defense, supported the
decision to abort the Lavi program. They feared the
program would have prevented the development of
other weapon systems essential to modernizing the
IDF and, at worst, would have crippled the economy,
according to US Embassy reports.
The military also postponed some procurement,
reduced the level of maintenance, and curtailed train-
ing programs, according to the US Embassy. For
example, armor units cut engine-running hours for
training purposes roughly 50 percent, and the air
force decreased flying time for its pilots. The IDF has
reduced active-duty manpower about 10 percent and
cut the civilian work force at the Ministry of Defense
about 15 percent since 1984, primarily through attri-
tion, according to the US Embassy. The IDF also
reduced purchases from Israel's defense industry.
Other cost-cutting measures include a sharp drop in
the general standard of living within the IDF. The
Embassy reports that rations are Spartan and that
housing upkeep has almost disappeared. Although
spending cutbacks have resulted in a slightly leaner
IDF, they have not significantly reduced the IDF's
combat capability nor seriously eroded morale, in our
view.
Syria. In Syria, the weak economy has thwarted
Assad's efforts to attain strategic parity with Israel
and forced substantial reductions in military spend-
ing. Most cuts were initiated in late 1986 and involve
the Army. We believe that many of the recent
measures, such as reorganization of the ground forces,
were made at the Soviets' behest and are designed to
cut costs, streamline the overgrown Army, and boost
operational efficiency. There is little evidence of 25X1
economy efforts in the Air Force, air defense, Navy,
or specialized units such as electronic warfare and
communications.
Syria's most visible cuts are in personnel expendi-
tures. The basic goal is to reduce the number of
relatively well-paid reservists and replace them with
professional officers and lower paid conscripts. Recent
actions, such as early retirements for officers, short-
ened active-duty requirements, and the cancellation of
combat pay in Lebanon, probably reduced the size of
the ground forces and, according to Israeli estimates,
total defense outlays by 5 percent.
Perhaps most important for Syrian combat readiness,
the military is releasing all reservists.at the end of
their tour of duty. Syria formerly retained reserve
officers, especially those with technical skills, on 25X1
active duty long beyond their required length of
service. Such a move will reduce the number of skilled
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Figure 7
Israel-Syria: Military Balance, 1973-87
Syria
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OVU Cl
Consistent with its greater emphasis on efficiency in
the Army, Damascus made an important decision in
late 1986 to reduce the number of active brigades by
25 percent.
the Soviets pushed for the deactivation of selected
brigades, a move that will boost manning levels of
remaining units to about 70 percent of authorized
strength and ultimately may enhance unit training
and combat effectiveness. The plan entails storing the
equipment of an entire brigade from each of the
regular ground forces divisions and distributing most
personnel to the unaffected brigades in the same
division.
The deactivation effort apparently has proceeded
slowly. By late 1987 we had observed only three
brigades that were deactivated with their equipment
remains unclear whether the reorganization is tempo-
rary or a permanent change for the Army. We suspect
that chronic manpower and financial constraints will
make the reorganization a long-term phenomenon. In
addition, Syria's plans to create two new divisions in
northern Syria probably have been shelved. Syria will
continue the buildup of a new elite armored division
in Damascus, the Republican Guards.
personnel and, for at least the near term, harm
capabilities-especially in the highly technical air
defense and communications fields.
Compounding its personnel weaknesses, Syria is ex-
periencing shortfalls of military imports. There is a
chronic shortage of medical and pharmaceutical sup-
plies at Syrian military and civilian facilities-a
situation made worse by the cancellation of pending
supply contracts in early 1987. Austerity also has
forced reductions in spare parts for equipment and
Western-origin goods. Syria could not afford upgrad-
ed technology for its Soviet-made tanks and suffered a
shortage of spare parts.
Compared with Israel, Syria's support for troops is
deficient. Damascus's total spending per maxi in uni-
form is decreasing and amounts to about $8,000
annually. This amount is about half of Israel's spend-
ing, demonstrating the capital-intensive nature of
Israel's technologically advanced armed forces and
their superior training. Syrian troops receive an inade- 25X1
quate allocation of essentials such as food. Adminis-
trative units are allocated the equivalent of only $6
Since late 1985, Damascus has sharply curtailed its
military training.
the primary constraints on training are
inadequate stocks of fuel and ammunition.
Damascus has suspended several construction projects
and reduced fringe benefits for officers.[
We believe that many benefits formerly enjoyed by
most officers are now limited to selected colonels and
generals.
To compensate for scaling down its conventional
forces, Damascus is expanding its chemical and bio-
logical weapons program. The importance attached to
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this program is reflected by the generous funding
Syria provided to the Scientific Studies and Research
Center, a facility associated with the program. The
US Embassy in Damascus reported that the center
received a substantial share of the second Baghdad
payment from Riyadh in 1987, despite the critical
need for funds to relieve a wheat and flour shortage at
the time. Later in the year the center received the
majority of another cash grant from an Arab Gulf
state
Outlook
We believe that Israel's defense spending will pull
further ahead of Syria's over the next several years.
After two years of austerity, Israeli military spending
is starting to expand again. The IDF's claim on
resources will retard civilian investment and probably
widen the budget deficit, but we believe that political
consensus in Tel Aviv will override economic pres-
sures to reduce defense spending. Damascus's resolve
to maintain defense spending is equally strong, but
the weak economy probably will force further reduc-
tions in defense spending. Projected gains in real gross
domestic product growth and the current account
balance will not obviate Damascus's need for massive
foreign support.
Israel. Although Tel Aviv has reduced defense spend-
ing over the past two years, we believe that the IDF's
reemphasis on technological superiority under the
leadership of its new Chief of Staff, Lt. Gen. Dan
Shomron, probably will preclude further reductions in
Israel's defense burden into the 1990s. Shomron's
program calls for increased reliance on costly high-
technology weapon systems, balanced by a slight
reduction in the size of the IDF, to meet the require-
ments of the future battlefield. According to the US
Embassy, a recent Knesset subcommittee report
unanimously endorsing Shomron's doctrine reflects
the broad support the plan enjoys among civilian and
military officials, academics, and the defense indus-
try.
We believe that Israel will maintain total annual
defense spending in the $4.5-5.5 billion range through
1990-a development that will add to the strain on
foreign payments. Israel's shopping list for high-
technology arms will mean continued large defense
import bills. Israeli acquisition plans call for spending
about $5.7 billion on major new US weapon systems
and upgrades between 1987 and 1991, according to
the US Embassy. Given current trends for other
foreign exchange income and spending, our econo-
metric model indicates that the current account defi-
cit will hover around $1 billion annually through the
end of this decade.
In making the most of its allotted resources, we expect
that the IDF will sustain spending for important
procurement programs and operational requirements
while continuing to stretch out and reduce selected
low-priority procurement programs, to eliminate mar-
ginal maintenance and training, and to trim research
and development projects. Defense Minister Rabin,
who last year lobbied successfully to keep the defense
budget intact, demanded a nominal increase of about
$30 million for the defense budget for the fiscal year
that began 1 April, according to the US Embassy.
Although the Knesset has not approved a military
supplement, Rabin is supported by most political
leaders, who agree that Israel's security depends on a
strong deterrent force.
The IDF's intention to acquire more modern and
sophisticated armaments almost certainly ensures that
military spending will contribute to the heavy burden
defense imposes on the Israeli economy. In addition to
the production of new tanks and the purchase of
fighter aircraft, the Israelis are planning to enhance
the helicopter fleet and to modernize the navy. Such
advanced and high-technology weapon systems will be
increasingly expensive to operate and maintain
Funds saved from the cancellation of the Lavi will not
ease the defense burden by freeing money for use in
the civilian sector. The IDF intends to use the money
originally allocated for the Lavi in other priority
weapon programs, including the purchase of addition-
al US F-16s. Savings also will go toward the procure-
ment of AH-64 Apache attack helicopters that the
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artArt
Figure 8. Israel is looking to sophisticated-and more expen-
sive-aircraft, such as the Phantom 2000, to upgrade its military
IDF could not afford because of the excessive cost of
the Lavi. In addition, the Ministry of Defense is using
funds originally allocated for the Lavi to employ laid-
off workers in other aerospace projects or elsewhere in
the defense industry.
Although Israel will attempt to sell surplus weapon
systems overseas to earn additional foreign exchange,
we believe Israeli arms exports will stabilize in the
years ahead partly because of increased competition
from other producers and weaker world demand.
Israel most likely will focus on traditional markets in
Latin America for its Kfir fighters and excess A-4
1988. The Israelis will look to China and the United
States-its leading arms ex ort markets-for sales of
other military equipment
Tel Aviv will find it politically difficult to reduce
budget spending in the civilian sector enough to
compensate for domestic military spending that is
budgeted at about $3.1 billion in fiscal 1989. The new
Knesset-approved budget calls for civilian expendi-
tures of about $27 billion-a 38-percent increase over
fiscal 1988. With a national election scheduled for
this November, Israeli legislators apparently are un-
willing to reduce allocations for politically sensitive
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oca.1 ca
Table 4
Israel: .
Major Arms Customers, 1980-87
Iran Artillery, ammunition, aircraft, and spare
parts
South Africa Patrol boats, howitzer technology, and
remotely piloted vehicles
China Python III air-to-air missile, avionics, and
tank upgrade kits
Venezuela Probably Mapats antitank guided missiles
United States Popeye guided munition
areas such as health and education, as well as outlays
for an assortment of special interest programs. Other
spending categories-including salaries and entitle-
ments-are virtually locked in. For example, 80 per-
cent of the education budget is earmarked for wages,
and another 10 percent is a fixed contribution to the
municipalities, according to an Embassy source.
Although domestic military spending provides jobs
and income in the near term, it will have a debilitating
effect on economic growth in the long run, in our
judgment. Military spending-both for direct pur-
chases and debt servicing-will continue to siphon off
resources that could be used for civilian investment.
Moreover, recent legislation prohibits the government
from turning to the Bank of Israel for money creation
or new loans to finance budget deficits. Because other
financial institutions are required to give preference to
government lending requirements, this prohibition
will make it more difficult for other investors to
obtain funds in the capital markets. This combination
will contribute to a slowdown in real investment,
which is the key to future growth. Our econometric
model of the Israeli economy projects the growth in
real investment will fall from 5.8 percent in 1987 to
Israel: Economic Impact of Unrest
in the West Bank and Gaza
The Palestinian uprisings that began last December
in the West Bank and Gaza are affecting Israel's
economy. The Ministry of Economics and Planning
estimates that through February the disturbances set
Israel back roughly $320 million in direct military
expenses and indirect costs such as lost output and
sales. The almost certain continuation of the unrest
could reduce annual gross domestic product growth
by at least 1.5 percent in 1988.
The violence has forced higher spending for Israeli
military and police activities in the occupied territo-
ries. The Israel Defense Force demanded last Febru-
ary a $30 million increase in the defense budget to
support the doubling of troop strength in the West
Bank and Gaza. The uprisings also have cut into civil
administration tax revenues. The US Embassy re-
ports a drastic decline in receipts from the value-
added tax as well as other business and consumption
taxes.
Military curfews and civilian strikes have created
temporary labor shortages in Israel in sectors such as
agriculture and construction that employ Palestin-
ians. The Israeli Employment Service calculated that
only about 60 percent of the approximately 109,000
Palestinians who hold jobs in Israel reported for
work last February. Expanded military reserve duty
also has reduced the number of Israeli workers
available to the economy.
The uprisings have disrupted Israeli commerce with
the West Bank and Gaza. Retail sales among Israeli
merchants in Jerusalem have dropped noticeably,
according to the US Embassy. The Embassy also
reports that a recent surge in bad checks constitutes
part of some $40 million that West Bank and Gazan
merchants owe Israeli businesses. After a record
month last January, tourism bookings-which ac-
count for more than 22 percent of Israel's foreign
exchange earnings from services-are off significant-
ly, and cancellations are running about 20 percent.
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3.7 percent in 1988. We anticipate a further decline in
investment growth to less than 2 percent by 1989.
We believe that economic growth will not be rapid
enough to offset the effects of increased military
spending for at least the remainder of the decade.
Serious structural problems-in particular, high infla-
tion, inefficient capital markets, and a heavy tax
burden-will persist. We foresee scant growth in
investment. As a result, we expect real gross domestic
product growth will be less than 3 percent into the
1990s, or not much above the average of 2.5 percent
during the early stages of the stabilization program in
1985 and 1986. If the gross domestic product growth
rate were to reach the planned range of 3 to 4 percent,
the US Embassy reports-and we agree-that it
probably would be insufficient to reduce the defense
burden much below the current level.
Moreover, Tel Aviv is unlikely to sustain the momen-
tum of its structural adjustment programs-in partic-
ular, tax reform and restructuring the capital
market-that are preconditions for sustained eco-
nomic growth. The Embassy reports that the pace of
economic reform has slowed. Israelis believe they
have sacrificed enough and do not want to see a
further decline in their standard of living, according
to public opinion polls. With the approach of the
national election, we believe neither Labor nor Likud
will risk alienating its constituencies by pressing for
additional reforms.
Continued US assistance, in our judgment, will be the
critical factor that determines Israel's ability to
import the military hardware needed for its modern-
ization program without bankrupting the economy.
Israel has no realistic alternative source for arms
imports. In the event of reduced US assistance, Tel
Aviv might turn to West European suppliers for
sophisticated weapons. Because of cash-flow problems
of their own, however, many of these countries would
be unwilling to provide the financing Israel would
need to purchase weapons packages. Moreover, sever-
al of these countries probably would be reluctant to
sell to Israel for fear of antagonizing Arab states that
might retaliate with trade boycotts. On the plus side,
Figure 9
Israel-Syria: Real GDP Growth, 1980-90
a Estimate.
b Projection.
? Israel ? Syria
new US military assistance will impose no additional
defense burden on Israel's economy because it will all
be grant aid tied solely to arms purchases.
Israel still faces the prospect of growing repayments
on previous US military-related loans well into the
1990s. Scheduled annual debt service on US foreign
military sales loans will range between $1.0 billion
and $1.2 billion from 1988 until 1997, according to
Ministry of Finance data provided to the US Embas-
sy. From 1990 to 1993 debt repayments will exceed
the current level of US economic support funds of
$1.2 billion. As a result, Israel has almost no chance
of using the funds for productive civilian purposes in
the years ahead. If Tel Aviv continues using this
funding to repay military debts, it will be able to meet
its total debt obligations without serious problems.
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Otherwise, Israel faces the prospect of sharp cuts in
foreign spending unless it can obtain some form of
debt relief.
Past borrowing needed to maintain high levels of
military and civilian spending will leave Israel the
task of servicing a sizable share of its domestic debt
before 1990. By March 1989 the government must
repay over $5 billion due on routine debt redemption,
according to the US Embassy. Available data on
payments schedules for several categories of domestic
debt indicate that Tel Aviv must repay over half the
approximately $22 billion owed on these obligations
before 1991. Not included in published figures are
additional payments owed on bank investment and
savings portfolios on deposit with the Ministry of
Finance. Accounting for almost one-third of the total
domestic debt as of March 1986, such portfolios are
the government's largest single source of debt financ-
ing. Without larger cuts in either military or civilian
spending, the government will have to borrow more in
the years ahead-a prospect that will encourage
inflation.
Syria. Despite Assad's quest for military parity with
Israel, we expect that economic realities will keep
Syria's military buildup at a near standstill through
the end of this decade and force additional reductions.
Syria cannot afford to increase military spending
without a significant boost in outside support from
Moscow or the moderate Arab states. Even if the
current level of aid is sustained, military spending is
likely to decline because of the competing demands of
a surging food bill and needed investments in agricul-
ture and electrical power generation.
We expect Damascus will improve economic perfor-
mance by 1990, but not enough. to allow a renewed
rise in military spending. Growing popular frustration
over economic hardships probably will weaken
Damascus's resolve to reduce the civilian budget
further, and costly, although reduced, subsidies for
consumer items and public enterprises will remain
intact. Syria's rate of investment and economic
growth will continue to depend on the availability of
foreign resources and, without a substantial boost
from foreign benefactors, should be sluggish through
the end of the decade. Consequently, we are project-
ing growth of real gross domestic product to average
less than 2 percent, an improvement over the past four
years but still weak.
Syria's foreign payments outlook, even excluding mili-
tary transactions, remains troubled. The projected
increase in oil production in 1988 and beyond will
almost eliminate Syria's need for crude oil imports,
but cost recovery payments to foreign oil companies
will partly offset the financial gains from new oil. We
project Syria's civilian current account deficit to
decline in 1988, but foreign reserves will remain low.
Beyond 1988 payment obligations to foreign oil com-
panies, if met, and probable increases in food imports
are likely to bounce the current account deficit back
to current levels. Continued high arms imports from
the USSR and other suppliers will aggravate foreign
payments deficits.
Securing firm aid commitments from the Arabs will
remain near the top of Syrian priorities at least
through 1990. Baghdad payments officially end in
late 1988, but we believe that current donors-Saudi
Arabia, and possibly the United Arab Emirates and
Kuwait-will continue providing some assistance
beyond 1988 on a bilateral basis. The key variables
are the Arab donors' perception of Syria's role as
Israel's principal military rival, donors' concern over
possible Syrian retaliation for an aid cutoff, Syrian
efforts to reduce tensions between Iran and the Gulf
states, and Assad's willingness to moderate his hard
line toward Iraq and the Palestine Liberation Organi-
zation (PLO). Damascus's stubbornness on these is-
sues could derail Arab aid after 1988, forcing a sharp
contraction in Syrian military and civilian imports.
We believe the Syrian-Soviet relationship will remain
stable, and military and economic ties may grow
stronger. Despite Damascus's poor payment record
and Assad's political differences with Soviet leader
Mikhail Gorbachev, Moscow and its East European
allies appear willing to continue underwriting Syria's
military and economic development efforts, especially
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Consequences of Increased Syrian Oil Output ,
Damascus is looking to the oil sector to extract: the
country from its economic morass, but increased oil
production alone will not erase Syria's deep-seated
economic weaknesses. Syria has expanded -crude oil
production by over 50 percent since 1985 and is
producing about 250,000 barrels per day (b/d). The
higher oil output includes about 100,000 b/d of low-
sulfur light crude that is well suited for blending with:
heavy crude from Syria's older fields. The principal
benefit from higher oil production will be reduced oil
and product import requirements and possibly a rise
in exports. We calculate that Syria will generate an
oil trade surplus at least through 1990 and will
improve its current account. Cost recovery and profit
payments to Syria's foreign partners in the oil sector
initially will absorb almost half the new oil wealth.
Despite the benefits of new oil production, we expect
Syria's foreign payments situation will remain severe
and constrain military spending.
where there is a perceived payback. We believe
mutual Syrian and Soviet needs for strategic coopera-
tion will override Syria's debt problem, and Damascus
may grow more reliant on Soviet economic support to
compensate for the deterioration in commercial rela-
tions with the West. Evidence of the strong ties is the
large jump in Soviet arms deliveries to Syria following
Assad's visit to Moscow in April 1987 and the Soviets'
apparent agreement to reschedule Syria's debt.
Syria has little latitude to diversify its arms inventory.
Syria's relations with the West and its economy are
too fragile to permit a dramatic shift away from
Moscow. The Soviets seem to recognize Syrian vul-
nerabilities and will try to gain leverage over
Damascus through manipulation of arms deliveries
and promises of debt relief. We suspect that Damas-
cus may accept greater Soviet influence over arms
procurement and order-of-battle decisions, but we
doubt that financial pressures alone will produce
Secret
increased Syrian cooperation with Moscow on region-
al issues, such as reunification of the PLO and Iraqi-
Syrian rapprochement, that Damascus perceives as
contrary to its interests.
Coda: Impact on the Military Balance
Israel will maintain its qualitative military superiority
over Syria and could defeat the Syrian forces in a
conflict within the next five years, in our judgment.
Recognizing the military must adapt to the realities of
Israel's limited resources, IDF doctrine is slowly
moving toward a smaller force structure while placing
greater emphasis on high-technology weapon systems
to preserve the IDF's qualitative edge. The military,
for example, will concentrate increasingly on preci-
sion-guided munitions and develop systems that
reduce the risk of casualties, according to the US
Embassy. We cannot rule out an expanded role for
chemical-biological weapons, given Syria's buildup in
this area.
The temporary shrinkage in the Israeli defense bud-
get-now reversed-will not reduce the IDF's capa-
bility to repel a potential Syrian attack, in our view.
The Israeli air force and armor units remain the best
in the Middle East and are more than a match for
potential Arab foes, according to US Embassy report-
ing and our analysis. Israeli military training, leader-
ship, and intelligence-as well as command and con-
trol-are far superior to that of Syria's armed forces.
Despite the small size of its active-duty units, Israel
would achieve a decisive victory over Syria should war
break out during the next several years, in our
judgment. Innovative uses of resources and flexibility
will give the IDF a decided tactical advantage on the
battlefield of the future. Although most of Israel's
armor units are manned at only about 5 percent of
their authorized strength during peacetime, the IDF
can muster its 400,000-member ready reserve in
about 24 to 48 hours in the event of an imminent
threat. Moreover, the military has a well-developed
logistic and maintenance system to support the IDF in
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The military implications of Syrian efforts to cut
waste and improve efficiency will be far reaching.
Reorganization of units may help improve combat
readiness of the remaining ground forces, but overall
capabilities are almost certain to decline because of
inadequate field training and equipment maintenance
and a slower introduction of new technology and
equipment. Development of Syria's other forces-air,
air defense, and naval-will continue at roughly the
same pace as in recent years-too slowly and uneven-
ly to challenge Israel's wide qualitative edge.
Syria's willingness to sacrifice critical personnel
expenditures rather than major weapon systems im-
ports will increase its key military weakness-the
quality of its manpower. Damascus has concentrated
on buying advanced weapon systems while ignoring its
more important deficiencies in leadership, training,
and morale. Severe manpower shortages in the techni-
cal fields probably will become worse by 1990, and
Damascus may have to resume involuntary extensions
of duty tours. The role and influence of Soviet
advisers and technicians probably will increase as
technical manpower problems worsen. In addition, we
expect Moscow to increase its involvement in Syria's
financial management and weapons procurement
strategy and try to recoup losses where possible.
Finally, and perhaps most important, Damascus will
continue to expand its chemical and biological war-
fare capability as a cost-effective deterrent against
Israel that Assad hopes will partly compensate for its
lagging conventional capabilities and will strengthen
its strategic deterrence against Tel Aviv.
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