Published On: Sun, Oct 19th, 2014

Peace In the Middle East Can Mean a 45% Standard of Living Improvement for Israelis

Igal Tamir, the lead economist of I.P.I – The Israeli Regional Peace Initiative: “After the regional peace agreement, by the year 2025, the living standard of every Israeli citizen will rise by an average of 45%”

Igal Tamir

 

JBN: The presentation of the “Economic future of the state of Israel” plan by I.B.I – The Israeli Regional Peace Initiative at Ha’aretz newspaper’s peace conference (date) caused a stir amid economic circles in Israel, and some lead economists have praised it. What is special about this plan?

Tamir:  This is a daring plan, and is the first to make the connection between ending the conflict, according to a regional understanding, and an all-encompassing peace agreement with all members of the Arab League, which would include a solution to the Palestinian issue and the creation of a Palestinian state alongside Israel, with the economic advantage to the nation and Israeli society that stems from this agreement. The situation is such that the Israeli economy, after the last war in Gaza, needs a new solution and direction.

This plan is unique because that it has a quantitative evaluation that begins by defining growth engines and their contribution to GDP, through the contribution to other sources and to the state’s budget, down to the individual, an evaluation in which one can quantify for the first time the available income one gets, and/or other services. In short, the plan shows a substantial increase in living standard and quality.

There will be far-reaching implications for the Israeli economy in general, and individual households will also feel the economic improvement, both through the growth of available income, which will translate into a rise in the standard of living, and through the improvement in the quality and scope of public services given to citizens, especially in the areas of healthcare and support, education and higher learning; this is the vision that will make Israel a model society.

JBN: And what makes this plan different from all of the other plans suggested so far?

Tamir: This plan is different from all of the other plans suggested thus far in Israel. We concentrated on the presentation of the main positive economic influences foreseen for the Israeli market after a peace agreement, while also analyzing the possible positive influences on households.

Our assumptions were carefully arrived at through the study of the proceedings of households at different historical points and through a rational analysis, because the process of arriving at a peace agreement will happen gradually and will be spread out across many years.

It is important to stress that all of the study’s assumptions refer only to the direct influence of a regional peace agreement on the economy, while isolating the influences of other variables.

In fact, the influence of a peace agreement on the state’s budget will be expressed through two main factors – a rise in the state’s income from taxes that will stem from growth, and through cuts in certain government budgets.

 

JBN: What is your economic model?

Tamir: It is based on a rise in government income through taxes, which is a fulfillment of the expected increase in growth. A regional peace agreement will raise hope and optimism and will impart conditions of stability in the Israeli economy and in the region. The conditions of stability and the lessening of uncertainty have a dramatic positive influence on the rate of growth and on the extent of investments and employment in the economy.

A conservative assumption is that yearly growth rate will be 1.6%. It is possible to calculate and see that across 10 years, the growth gap, which also expresses a rise in the standard of living, can get to 18% overall, which is about 180 billion shekels. According to accepted models, the ratio of growth in government tax income to rise in GDP is 1.2, in other words, a rise of 10% in GDP will bring a rise of 12% in tax income. The government’s tax income today is about 250 billion shekels a year, which means a rise of 18% in GDP will cause a rise of 21.6% in tax income, which is about 54 billions shekels a year.

 

JBN: According to your plans, which will be the main drivers of growth?

Tamir: First of all, an increase in exports. After a regional peace agreement, new markets with countries in this region and with Muslim countries will be open to Israeli export on a large scale, which will include technological export, agricultural, and the exportation of gas. Overall, the GDP of these countries is about 5.2 trillion dollars per year, and the scope of their international trade is about 4.4 trillion dollars.

It is estimated that 10 years after the signing of a regional peace agreement, the additional export to these countries will get to about 20 billion dollars a year (about 0.4% of trade). Furthermore, growth in export to Western countries is expected, also as a result of the improvement in general relations with Israel and also as a result of the discontinuance of economic embargo of Israel, which has been gaining momentum in the last months. The additional export to these countries can be estimated at about 30 billion dollars a year. The resulting rate of growth is estimated at about 8% a year. In terms of contribution to GDP, this is about 27 billion dollars a year, about 95 billion shekels.

 

JBN: and this is enough?

Tamir: the plan includes other drivers of growth, such as a growth in tourism in Israel. From past experience, it seems there is a direct connection between the general security situation and Israel’s geopolitical situation, and the number of tourists arriving into Israel. A regional peace agreement will certainly bring about a substantial growth in incoming tourism, including tourism coming in from countries in this region and Muslim countries. But also substantial growth is expected in general incoming tourism. A careful estimation is that the number of tourists coming into Israel will get to about 8 million tourists a year in 10 years, a growth of 5 million. In greater economic terms, economic activity in this market is expected to grow by about 22 billion dollars a year, about 76 billion shekels.

Furthermore, there will be an increase in foreign investment in Israel. The signing of a regional peace agreement will draw many companies to Israel that will want to take advantage of the high technological infrastructure and the high human capital present in Israel, as well as its geographic location, which allows easy access to emerging markets in the Middle East. Also, the expected growth in Israel’s credit ranking should help increase foreign investment, including financial investments.

A peace agreement will positively influence other countries in this region and there too substantial economic growth is expected. Foreign investment is expected to grow by about 10 billion dollars a year (about 100% growth) and to add about 2.3 billion dollars to GDP, about 8 billion shekels.

We also took into consideration the decrease in government expenditure in areas connected directly to the confrontational situation existing today:

The signing of a regional peace agreement will allow for a redistribution of government budget while substantially cutting the defense budget and expenses arising from small settlements and financing, which will decrease as a result of the expected rise in Israel’s credit ranking.

 

JBN: and how will the average person in Israel enjoy all of this?

Tamir:   The agreement to end the conflict, according to a regional understanding, would entail a comprehensive peace agreement with all of the countries in the Arab League, which would include a solution to the Palestinian problem and the creation of an independent Palestinian state alongside Israel. It will have far-reaching implications on the Israeli economy in general, and households will feel the economic improvement, both in the shape of growth in available income, which will translate directly to improvements in standards of living and also in improvements in the level and scope of public services offered to citizens. Especially in the areas of healthcare and support, education and higher learning, this vision will make Israel a model society.

The signing of a regional peace agreement will allow for a redistribution of government budget while substantially cutting the defense budget and expenses arising from small settlements and financing, which will decrease as a result of the expected rise in Israel’s credit ranking. We took into consideration:

  1. A decrease in the defense budget
  2. decrease in spending on the settlements
  3. An improvement of Israel’s credit ranking

 

JBN: this sounds great, but you are talking about Israel in the future as a “model society”, how will this happen?

Tamir: After reaching a regional agreement, the government will have access to a budget of 67.4 billion shekels a year that it could use to improve social services to citizens, to lower taxes, and to improve individual households’ standard of living.

 

JBN: do you have concrete examples?

Tamir:  in the study, we chose to present a variety of examples of possible uses to improve services to citizens. This diagram, for example, shows the divisions of additional sources and their uses in the tenth year after the signing of a regional peace agreement:

In comparison to the OECD countries, Israel is currently substantially inferior in its resource allocation towards services for citizens. The conspicuous areas are healthcare services and welfare services. The resources that will become available in the government’s budget will allow for a substantial improvement in these areas, with the goal of arriving at a quality of public service similar to that of advanced Western countries.

In parallel, it will be possible to allocate resources to public education – free education for ages 0-3, the strengthening of academic research and university staff, halting the “brain drain” from Israel and even reversing it, subsidizing students in colleges.

Investment in infrastructure and in the periphery in order to lower housing costs. In the area of internal security – increased regulation of police officers and equipment. In various other areas such as culture, science, sports, environment, and more. In parallel, it will include the decrease of excise tax on gas and purchase tax on new cars.

And notice the main piece of data: after a regional peace agreement is signed, up to year 2025, the standard of living of every Israeli citizen will increase by an average of 45%

 

JBN: last question, how will these developments affect the Jewish nation in the diaspora?

Tamir: Let us take the USA for example; Jewish leaders there are very worried by the fact that 40% of the second generation are distancing themselves from Judaism and even assimilating.

Israel’s transformation, as a result of the economic blessing we spoke about earlier, will make it easier for Israel to maintain universal values that are accepted in the Western world. This will make Israel a model country economically and socially, and youth in the USA and in the rest of the Diaspora will want to identify with it and be proud to belong to this nation.

I am also foreseeing a strong decrease in anti-Semitism which is currently being fueled by poisonous propaganda against Israel, which will disappear along with the main reason for it: the Israeli occupation of the West Bank and Gaza. There a Palestinian state will be created and will enjoy economic and friendly cooperation with Israel.

It sounds Utopian today, but in 10 years, this will be the situation, if of course the leaders of Israel, Palestine and other countries in the region will sign peace agreements. This is our dream and this is why we created I.P.IThe Israeli Regional Peace Initiative.

 

 

 

 

 

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