Landau Report: Middle East upheaval – the impact on Israel

Pinchas Landau, author of The Landau Report, is one of Israel’s leading independent analysts and commentators on economic and financial affairs. Prior to establishing an independent consultancy, he was for many years one of the country’s most prominent financial journalists. In 1996, Pinchas launched The Landau Report, a newsletter and consultancy service addressing the needs of foreign firms and financial institutions active in Israel and the Middle East. What follows is an excerpt from the latest Landau Report:

“The upheaval underway in the Arab world, especially in Egypt, creates wholly new challenges and opportunities for Israel, in both the short and long term. Obviously, any detailed assessment is impossible on the grounds that “it‟s too early to say”. But although that cliché is true, the impression created by the Israeli leadership to date is that its silence and passivity toward what is happening stems not from a decision to remain aloof and watchful, but rather from shock and disorientation. Fundamental tenets of the conceptual structure that has underpinned Israeli military-political thinking for the last three decades are under threat or have already crumbled. There is no sign yet that this change has been internalised, let alone that new thinking is emerging to replace the old concepts that must now be abandoned.

This is most clearly evident in the effort of the Netanyahu government and its allies in the US to persuade the Obama Administration to stand firmly behind ex-President Mubarak. The criticism widely heard in the US regarding the traditional policy of supporting pro-Western autocrats and disregarding the repressive policies they use to remain in power, is largely absent from the Israeli public discourse. The Israeli political-military-intelligence Establishment is now revealed as having been trapped in a conceptual framework wherein the only options available in countries such as Egypt were autocratic secular regimes or fundamentalist Islamist ones. Since the latter are committed to Israel‟s destruction, while the former had moved from overt hostility to grudging acceptance („cold peace‟), Israel‟s choice was obvious and in consequence, for many years all efforts were directed to supporting the Mubarak regime.

The possibility that there exists a democratic secular alternative to secular autocracy and Islamist theocracy does not seem to have been considered. Even now, when it has emerged as real, many – perhaps most – of the Israeli Establishment do not believe in it or its potential to develop a different kind of government in Arab countries. Having assumed that liberals – if they existed at all — were too weak to pull down the reigning autocrats, they now assume that they will be too weak, and probably too wimpish, to prevent the radicals from rising to power. This view has a solid factual base – there is no Arab country with a liberal government or political system; the only one that did exist was Lebanon, and we know what happened there.

This mindset is too deeply entrenched across the Israeli governing and administrative elite – including the Labour party, which is dominated by ex-generals – to expect a government that is weak, divided, riddled with internal contradictions and focused solely on surviving the next day or week, to engage in any new thinking.

But it is not just positive thinking that this government is loth to undertake. Given its personal and ideological composition, it has a natural tendency to see the negative and threatening aspects of what is happening in the Arab world, rather than the positive potential that might be emerging. Fair enough, for the purpose of the discussion. Let’s follow through on what the negative scenario might imply.

The relapse of Egypt into overt hostility, even if not enmity, and certainly a change of policy by a new Egyptian government toward Hamas and the Gaza Strip, has massive implications for Israel’s defence posture. It will surely lead to higher defence spending and more reserve duty, which will have a dramatic impact on Israel’s economy and society – a negative impact, to be precise. To make this point succinctly, let‟s just say that two key elements of that negative impact are that in five years time, the tax burden will be higher and the number of young people serving in the army will be larger.

Yet this government is still dogmatically committed to reducing direct taxes and it continues to support the arrangements whereby ultra-Orthodox young men – a rapidly-growing proportion of each annual cohort of army-age youngsters – are exempt from military service. These are two examples, important ones but by no means the only ones, of why the government is in denial regarding the longer-term implications of the upheaval in the Arab world. It must remain in denial, because as soon as it begins to think and talk about those implications it will implode, both ideologically and politically.

Of course, denial is ultimately a useless response to changing reality. It can only last so long and, given the speed of recent developments, that is unlikely to be very much longer. When denial reverts to being just a river in Africa and the Israeli body politic – and its military-intelligence elite – gets to grips with the new reality, there will begin a process of far-reaching change in Israeli politics and society.

The first signs of this kind of change are already emerging. Not surprisingly, at least to my mind, they are coming in the socio-economic sphere, rather than in the political-military arena – but they will spread.

I suggested above that the protests against price rises in petrol, bread, milk, water and other basic commodities were an Israeli echo of the thunderclap on the Arab street… It is essential to highlight the socio-political aspects of these recent developments:

• The Israeli middle class has woken up to the fact that fiscal policy is now working strongly against it. Direct taxes are being reduced, which generates large benefits for high earners, small benefits for middle-income people and little or no benefit for low-income households. On the other hand, indirect taxes, fees, charges etc. – what the British call „stealth taxes‟ – are rising remorselessly, in number and weight. These fall disproportionately on the middle-class, because they impact spending rather than income.
• The grass-roots protest that started as a Facebook movement was quickly adopted and taken over by the Histadrut, the Manufacturers Association and the Union of Local Authorities. This alliance was able to impose its will on the government — a development with two important consequences: a) for the first time in perhaps 20 years, non-government players are at the cutting edge of policy-making; b) the policies they are pushing are not to the government‟s liking, but it feels it has no option but to accept them.
• This development means that opposition to the government’s socio-economic policy has now moved outside of the Knesset. In a sense, this is hardly surprising. I have been writing for years that there is a consensus among the main parties regarding key elements of economic policy. Now, however, those policies are being challenged by global developments – mainly rising food and energy prices and by a domestic backlash over taxes. The absence of genuine parliamentary opposition has left the way open to non-government entities to fill the vacuum, notably the Histadrut.
• The rapid spread of popular discontent has nevertheless filtered through into the Knesset – and specifically to the Likud faction. Remember that Likud‟s political roots meant that its economic policy had a strong populist bent – until the 1990s, and especially since Netanyahu became leader and imposed his neo-liberal line. It may well be that, in Israel at least, the era of neo-liberal economics is over and both social democratic and populist tendencies are on the rise. If so, there will soon have to be either a radical change of direction in economic policy by this government, or a change of government that achieves that result.
• But, as noted, Kadima has the same economic policy outlook as Likud, and Yisrael Beiteinu and even Labour under Barak are also part of the consensus. A ‘radical change of direction in economic policy’ will therefore mean a redrawing of the political map, either in terms of leadership persona or entire parties.”