By Edward Cody Washington Post Foreign Service Sunday, May 19, 2002; Page A22
TEL AVIV -- The sun sank slowly into the Mediterranean, splashing red on the western horizon, and shadows thickened into a soft Levantine twilight beneath the towering hotels lined up along Tel Aviv's seafront. But Yoav Shionony was definitely not impressed.
"You've got a whole row of empty hotels over there," he snorted, gesturing toward the high-rise buildings usually jammed with business people and tourists enjoying the view. "The whole thing just stopped."
Buffeted by a global economic slowdown and the almost 20-month-old conflict with the Palestinians, Israel's economy has dropped into recession. The boom days of the mid-1990s, when high-tech companies started up at Silicon Valley speed and trade with Arab neighbors seemed within reach, have given way to climbing unemployment, budget cuts and new taxes.
The Manufacturers Association of Israel this past week forecast a drop of 1.8 percent in the country's $110 billion gross domestic product (GDP) for 2002, adding to a decline of 0.6 percent in 2001. It is particularly bitter news for Israelis, because they had grown used to the smooth sailing of the '90s, including 6.4 percent growth in 2000 and an average of almost 4 percent over the previous five years.
Government officials and business leaders have predicted that the Israeli economy can rebound if the U.S. and European economies pick up, restoring Israeli export markets. "We will overcome it," said Oded Tyrah, a businessman who heads the manufacturers association. "I think we are very strong."
But Shionony, who owns the Piccola Pasta wine bar and restaurant near the seafront, said that, for the moment, lack of tourists and fear instilled by Palestinian bombings have robbed his establishment and dozens like it of their usual volume of business from Israelis as well as foreigners.
"The whole thing is like a snowball," he said, referring to guides, bus drivers, hotel workers and all the others associated with tourism and nightlife. "People just don't want to go out. If you go out, you want a good time. You don't want to die. . . . A business goes under here every other day."
Shionony recently joined about 100 Tel Aviv business owners who petitioned the local government for breaks in tax and utility rates to help weather the storm. No answer has arrived, but they have heard promises of new taxes from the national government, headed by Prime Minister Ariel Sharon.
Sharon's Finance Ministry has revised the budget to deal with the slump and pay for the military effort, particularly the month-long offensive in the West Bank that ended last week. It includes raising by 1 percentage point the 17 percent value-added tax, levying higher taxes on diesel fuel and cigarettes and making cuts in the country's generous social welfare benefits.
The plan has also targeted tax breaks that Israel gives settlers in the Palestinian territories as well as those in the Negev Desert and the northern hills near the Lebanese border.
In the little grocery store run by Yossi Metaiv on Rehov Fishman Street, the costs of the budget plan have hit closer to home. Business has been dragging for more than a year, he said, and it has plunged 20 percent more since Sharon launched the West Bank offensive March 29. A particular blow came when the government imposed a first round of tax increases that pushed the price of the cigarettes that are a large part of his sales from 15 to 16 shekels ($3.08 to $3.28) per pack.
"So now, when people come in to buy cigarettes, they look for cheaper brands," said Metaiv, whose family immigrated to Israel from Turkmenistan 32 years ago.
Nir Gilad, the Finance Ministry's chief financial officer and controller, estimated the conflict with the Palestinians has shaved about 3.5 percent off Israel's projected GDP this year and the global economic slowdown has cut another 1 or 2 percent.
The government has paid for the extra military expenditures by reducing other ministries' budgets and postponing infrastructure improvement, Gilad said. The government income has slumped drastically because of the contraction of economic activity, while government expenditures have soared. Without the roughly $2.8 billion in U.S. aid that flows into government coffers each year, the shortfall would have been even greater.
With no natural resources, Gilad explained, Israel depends on exports, particularly high-tech ones, and on the flood of tourists visiting the Holy Land each year.
In light of that, the U.S. and global slowdown has had a profound effect in Israel. Industrial exports, excluding diamonds, have dropped from an average of $1.75 billion a month in 2000 to about $1.55 billion projected for this year. The computer and software exports that looked so promising several years ago have flattened.
"The high-tech industry was overblown to begin with -- all over the world, not just in Israel," said Stef Wertheimer, chairman of Iscar Ltd., a billion-dollar-a-year metal products company, and one of the country's most successful entrepreneurs. "But we had to take our part of it."
Tourism, which traditionally provides 3.5 percent of the GDP, also has plunged. Arrivals reached unprecedented highs in mid-2000 because of Pope John Paul II's visit, with more than 200,000 tourists per month entering the country during that period. Since then, however, a combination of the Palestinian uprising and the Sept. 11 attacks in the United States has pushed the number down to about 60,000.
As tax revenues from these vital sectors drop, government expenditures have risen. They are slated to reach as much as 57 percent of GDP this year, compared with about 29 percent in the United States. The main reason, Gilad said, is an extensive web of social protections in this traditionally welfare-minded country.
Transfer payments, money that flows from the government to private citizens, have risen 60 percent in the past five years, accounting for up to 9 percent of GDP. Much of the money goes to recent immigrants, many of them elderly, from the former Soviet Union. But other Israelis also benefit.
With unemployment benefits, child-support payments and a variety of other subsidies from national and local authorities, an Israeli couple with two children can get from the government about as much as they could earn from a job paying the minimum wage, Gilad explained.
He noted that the 210,000 Israelis registered as unemployed, a rate of 10 percent, are almost exactly equal to the number of foreign workers, from such places as Thailand and Romania, who have been brought in in recent years to take the place of Palestinians who no longer work in Israel because of restrictions on their movements.
In addition, under a law designed to cushion the country's large families, who are chiefly ultra-Orthodox Jews and Israeli Arabs, parents receive about $27 a month for each of their first four children, then about $175 for every child after that.
<http://www.washingtonpost.com/wp-dyn/articles/A39047-2002May18.html> -- Yoshie
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