Israel’s Soviet Emigres May Open New Era

While the world is focused on the Persian Gulf, and on President Bush, U.S. forces and Saddam Hussein’s Iraq, events are occurring in Israel that may bring a better future to the Middle East.

This year, Israel expects to take in between 100,000 and 200,000 immigrants from the Soviet Union. And the flow could reach 350,000 next year, says Deputy Prime Minister Moshe Nissim, who is also Minister of Trade and Industry. Indeed, Israel’s 4.5 million population will expand by an astounding 25% in the next five years, Nissim predicts.

Moreover, the Soviet emigres are the kind of people economists these days call “excellent human capital”--relatively well-educated and young, with the skills needed for electronic and biochemical industries. Long-term, there’s little doubt the newcomers will give a boost to Israel’s economy.

But short-term they present Israel with the challenge of finding housing and work for them. So Nissim was visiting the United States this week, trying to attract investment from U.S. companies. He was offering loan guarantees and tax breaks, as all countries do when seeking foreign investment. And he had something more to offer, access to the U.S. and European Community markets because Israel has free-trade agreements with both.

Yet Israel has had free-trade agreements and skilled technical people--and a lot of U.S. foreign aid--for decades, but it hasn’t succeeded economically. The economy’s early growth, 9% a year in Israel’s beginnings 40 years ago, has long since slowed to a crawl. Unemployment is now 10%, and the economy has been in a recession for two years.

The problem is that Israel has what amounts to a Socialist economy with lots of government control and regulation of industry. Methods that helped to start a nation in 1948 are now a burden. For example, great power in the early days was given to the national labor federation to dictate policy on employment and on investment and social benefits. At one point it owned whole sectors of Israeli industry.

Networks of subsidies are built into the everyday economy. If you work for some companies, you get free electricity; for others, you get free transportation.

But there’s no free lunch. Israeli taxation is confiscatory, nearly a 70% marginal rate at income of $20,000. It’s an economy that has inspired a lot of tax evasion, and at least the beginnings of tax and bureaucratic reform.

Progress has been slow, however and experts would have Israel go faster. “With human capital like Israel’s, there’s no excuse for the lagging economy,” says Benjamin Zycher, professor of economics at UCLA.

Even Israel’s extraordinary security needs--17% of its economy is devoted to defense, three times the U.S. level--are no excuse for a slow economy, says Steve Hanke, a senior fellow at the Institute for Advanced Political and Strategic Studies in Jerusalem.

“Taiwan and South Korea faced great security threats also, but freed up their economies and are thriving,” says Hanke. “Hong Kong took in many more immigrants than Israel and put them to work with a free-market economy.”

What’s the point? That the Soviet immigrants could force overdue changes in Israel. “Their influx is so massive that subsidies can be canceled and reforms pushed through in the name of absorbing the immigrants,” says Douglas Feith, a partner in the Washington law firm Feith & Zell, a former member of the National Security Council and an expert on Middle East and Soviet affairs.

“The Soviet immigrants have just left the world’s biggest bureaucracy and don’t want that in Israel,” Feith says. “For example, Israel offers immigrants either government housing or an allowance to find their own housing. So many of the Soviet immigrants are taking the allowances, living three families to an apartment and pooling the money to start a business.”

A couple of years of that kind of spirit, aided by foreign investment, could make Israel a highly successful island of technology.

Why does a successful Israel matter to Americans? For one thing, America supports Israel with $3 billion a year in foreign aid. But then, it supports practically the whole Middle East--Egypt and Jordan, with money; Saudi Arabia, with military might. America’s stake in the region, as we see so clearly with troops and tanks in the desert, goes way beyond money.

And that’s why an economically improving, less unstable Middle East would certainly be in the U.S. interest. No, economics alone won’t make the lion lie down with the lamb, but an economically improved Israel could be a model--”a lodestar for the region,” in the words of one expert, as Taiwan, Hong Kong and Singapore are for Asia.

Such visions, of course, look past the present crisis, which must end with U.S. victory. “I don’t know, by fighting or by political means, the U.S. has to win,” Nissim says.

A leading U.S. strategic expert, who prefers to speak anonymously, puts the stakes bluntly: “If Saddam Hussein is allowed to emerge from this crisis with what looks like victory, then the U.S. would be discredited and all bets would be off for Israel. War in the Middle East would be guaranteed, Israel would have to fight for survival.

“But if the U.S. wins, then a new era in the Middle East can begin.”

Maybe a combination of Soviet immigrants and U.S. troops can make it happen.