January 26, 2001
Time to Think Again About Aid
Yuval Levin, IASPS Adjunct Fellow in Political Studies
Israeli officials in Washington could hardly contain their glee this week when the Bush Administration confirmed that it would abide by an American-Israeli agreement hammered out by the outgoing Clinton team by which U.S. military aid to Israel is set for the next 8 years, rather than going up for renewal each year. Boaz Raday, Israel’s Economic Affairs Liaison in Washington, told one reporter: “We wanted to prevent renewed debate on aid every year, so that some Administration official won’t say, ‘let’s think about that again.’”
But “let’s think about that again” is exactly what some Administration official should say. Rather than continuing in the footsteps of its predecessors, footsteps which point toward the precipice for the Jewish state, the Bush Administration should take another look at American policy in the Middle East, and American aid policy would be a good place to start.
The time has come to tell the truth about aid. American economic assistance, while well intentioned from the outset, has been a disaster for the Jewish state, and has done harm to American interests as well.
The economic impact of aid should be familiar to anyone who knows the logic of welfare dependency. Each year, Israel receives several billion dollars in ‘free money’ from abroad, the bulk of which is a $3 billion grant from American taxpayers. This infusion of cash acts as a disincentive to self-sufficiency and economic liberalization, and as such has held back the Israeli economy for decades and allowed Israel’s highly statist system to resist reform. Between 1950 and 1973, the pre-aid age for Israel, per capita GDP grew at an average annual rate of 5.59 percent – a very healthy rate for a new nation developing in difficult circumstances. But between 1974 (when sizeable U.S. aid began) and 1999, Israel’s per capita GDP grew at an average annual rate of only 1.51 percent.
The causes of this sharp decline in growth have had much to do with the habits of dependency that have developed around the unearned infusions of funds that flow into Israel by the billions of dollars each year. Under their influence, the Israeli economy has ceased even to strive for self-sufficiency, and the nation has ceased to depend on its own productivity to support its standard of living. The costs – in real terms and in lost potential income – have been enormous.
Aid funds have also allowed Israel to avoid a very necessary liberalization of its state-controlled economy. A cessation of aid would necessarily undermine – indeed it would dismantle – the socialist system, which nourishes the bureaucrats and politicians who now run the country. Aid, therefore, is not only a way to avoid paying the bills, it is a way (in truth the only way) to keep Israel’s socialist system alive, and with it the power and positions of Israel’s elites.
In this way, dependence on aid has both harmed the Israeli economy and put up barriers to repairing the damage. Israel is not only unproductive; it does not strive for productivity. It not only lacks economic freedom, it has no desire for such freedom. It desires only aid, and it constructs its policies accordingly – and not only its economic policies.
Indeed, the perverse incentives created by aid funds have much to do with Israel’s strategic policies and its approach to the peace process. Moving ahead with the peace process meant more and easier access to American funds, and thus played to both the personal and ideological interests of Israel’s leaders, with each confirming the other in a circular cycle of errors. This cycle – by which the desire for aid strengthens the faith in peace process logic and vice versa – has brought the personal interests of Israel’s governing elites into conflict with the interests of the nation as a whole, and they have failed to see it, blinded by the luster of aid funds. The result has been a greatly weakened Israel – both economically and strategically.
Supporters of aid point to Israel’s defense needs and to the fact that most American aid is designated as military assistance. But that military aid package, just like its economic counterpart, takes the form of an annual grant to the Israeli government, with few strings attached. Money is fungible, and thus aid marked for defense is still general economic aid, since each dollar of it allows the government to spend a dollar of its funds elsewhere. Israel could certainly maintain its defense at current levels without aid – what it could not maintain is its inefficient statist economy. Close strategic cooperation between the U.S. and Israel should continue because it helps both nations, but direct financial assistance should cease, because it helps neither one.
Israel’s growing reliance on aid, and the attitudes of dependency and defeatism which have resulted, have led the Jewish state down a dangerous path which in time may prove fatal.
It is no surprise that the Clinton Administration would have suggested staying on this path for eight more years. This ‘last gift’ of the Clinton team for Israel fits nicely with their earlier gifts, including weakening Israel’s bargaining position, yielding to Palestinian obstinacy, handing Arafat the violence card, and other generous contributions which misguided Israeli leaders encouraged and accepted with pleasure.
But the Bush Administration should set a different course. It should take a realistic look at the politics of the region, it should help Israel save itself from its self-inflicted wounds, and it should act to strengthen the only democracy in the Middle East. A fresh look at aid policy would be an excellent start.