Israel is paying a heavy price for the continued occupation of the Palestinian territories, one that is sorely felt in most households.

The Palestinians, as is well known, are paying a much heavier price, but this fact does not in any way make the price that Israelis are paying any smaller or less significant.

The price that Israelis are now paying is the price of arrogance — arrogance that spread throughout the ranks of the Israeli leadership and the Israeli population in the aftermath of the military victory of the war of 1967.

The Palestinian territories occupied by Israel in 1967 are not rich in the kind of resources that have lured states and nations into drives for conquest over the centuries. For Israel’s leadership and for many rank-and-file Israelis, the main attraction of those territories was political and ideological: the possibility of establishing a “greater Israel” that would encompass most of the territories of the biblical Jewish kingdom, marginalizing the local population.

For the first 20 years, the price of occupation was relatively low, from an Israeli point of view. But since the outbreak of the first Intifada, in 1987, Israel has been paying the price of arrogance.

Political instability

In the 1990s, Israel had five prime ministers, while in each of the previous decades it had only two (and in the 1980s, three). Beginning in 1998, three prime ministers failed to have their budgets approved by the Knesset, due to opposition within the governing coalition to steps taken on the Palestinian issue. The result: new elections.

Finally, [political instability] is evinced by the assassination of Prime Minister Yitzhak Rabin by a right-wing extremist who opposed the Oslo agreements.

Skyrocketing military costs

With the outbreak of the first Intifada, the costs of military occupation increased significantly. The Israeli Defense Force (IDF) has assigned two permanent divisions, with a total of seven brigades, to the West Bank and to the Gaza Strip. Almost every regular combat unit has served time in the Palestinian territories. The full budgetary outlays are unknown, as the Israel defense budget is not made public. However, the yearly budget proposals do contain figures about special budgetary additions to the defense budget due to “events in the territories.”

Between 1987 and 2005, those additions amounted to close to $6.5 billion (U.S.). This figure does not take into account the regular costs incurred for the purpose of controlling the occupied territories.

From 1994 to 2005, the defense ministry’s budget doubled.

Defense expenditures now include a special item — the construction of a security fence between Israel and the Palestinian territories. The length of the green line separating the two is about 350 kilometers [200 miles]. However, the Israeli government decided to include many Jewish settlements within the fence, annexing large chunks of Palestinian territory and lengthening the fence to almost 600 kilometers [375 miles], doubling the budgetary cost.

Fatalities and injuries

The most tragic cost of the Israel occupation and the Palestinian uprising is the cost in human lives and injuries. From September 1987 to November 2004, Israel suffered 1,355 fatalities and 6,709 injured persons, both civilians and military personnel. The figures on the Palestinian side are much higher: 4,661 fatalities and 28,217 injuries.

The value of water

From the Israeli point of view, the economic balance of the occupation was positive up to 1987.

For example, in 1967 Israel gained control over all the water resources west of the Jordan River. Mekorot, Israel’s government water corporation, became the only nonmunicipal water supplier in the Palestinian territories, providing water for domestic, agricultural and industrial consumption to the Israeli settlements at Western levels, while restricting similar uses by Palestinians.

Israeli employers profit

Soon after the 1967 occupation, Israel allowed the entry of Palestinian workers into the Israeli labor market. By the late 1980s, about 100,000 Palestinians, accounting for more than one-third of all employed Palestinians, worked in Israel, primarily in construction and agriculture. Their employers profited from them, as their cost was lower than that of Israeli workers.

The losers were Israeli blue-collar workers, whose bargaining position vis-à-vis Israeli employers was weakened by the entry of low-cost competitors.

The Histadrut, the Israeli Federation of Labor, also benefited from the employment of Palestinians, as employers were required to deduct 1 percent from their paychecks for union dues, which were transferred to the Histadrut — despite the fact that the Histadrut did not offer any protection to Palestinian workers.

Palestinians enrich Israeli treasury

The Israeli treasury also gained from the employment of Palestinians: Israeli employers of Palestinian workers were required to deduct full Social Security taxes from their paychecks (and to add their own contributions); however, Palestinian workers were eligible for only a few of the Israeli social security programs (the main one being work injury compensation).

That part of the deduction which was meant for the rest of the social security programs, to which Palestinians are not entitled, such as child allowances or old age insurance, was deposited with the Israeli treasury. According to one estimate, between 1968 and 1993, the total deduction amounted to $250 million.

The settlements debacle

The one big investment that Israel made in the Palestinian territories was the establishment of about 150 Jewish settlements, with a population presently amounting to more than 200,000. At first, the settlements were placed in strategic locations, such as the Jordan Valley; later on they were created throughout the Palestinian territories, with the aim of establishing de facto Israeli control over the area. The settlements have no intrinsic economic value, and for all practical purposes they serve only as bedroom communities.

Thus, when calculating the investment in them, we took into account the extra costs involved in establishing a settlement in the Palestinian territories, as opposed to housing their residents in existing localities inside Israel’s pre-1967 borders. The extra costs are due, on the one hand, to a need to fortify the settlements, as many of them were erected adjacent to Palestinian towns and villages that did not welcome them, and on the other hand, to the various benefits offered by the Israeli government to would-be settlers, with the aim of increasing the settler population.

According to an estimate made by the Haaretz daily newspaper, the total government over-funding of the settlements between 1967 and 2003 amounted to about U.S. $10 billion. The Adva Center calculated that between 1990 and 1999, the government gave the settlements per capita municipal funding above that given to localities within the green line (the “green line” is the 1949 armistice line, and it is the internationally recognized eastern border of Israel) in the amount of U.S. $500 million.

Israeli settlements also enjoyed generous government financing of the building of public facilities, of special access roads and roads that bypass Palestinian villages, and of industrial zones, as well as generous financing of the operation of schools and health clinics, and finally, generous tax benefits.

[The report projected that expenditures would double following former Prime Minister Ariel Sharon’s disengagement plan from the Gaza Strip and the northern West Bank: each family of settlers to be re-settled inside Israel was entitled to between $350,000 and $750,000. The Israeli Defense Ministry envisioned an expenditure of some $500 million for the relocation in Israel of IDF facilities located in these areas.]

The expected expenditures will certainly amount to several billion U.S. dollars, making the Israeli settlements in occupied Palestinian lands the most expensive civil-military adventure in Israeli history.

Since 1987, worse and worse

The economic losses in the first Intifada, which lasted until 1993, are difficult to isolate, since beginning in 1989 a large wave of Jewish immigrants from the former Soviet Union and from Ethiopia began arriving in Israel, affecting all aspects of the economy.

The second Intifada, which began in September of 2000, had much more damaging economic effects:

• Unemployment, which stood at 6.1 percent in 1987, rose to 8.9 percent in 1989 to 10.7 percent in 2003;

• GDP growth went from a high of 8.0 percent in 2000 (the high-tech bubble) to negative growth of -0.9 percent in 2001 and -0.7 percent in 2002;

• Foreign direct investment dropped from a high of US $5.3 billion in 2000 to $1.7 billion in 2002, then rising;

• Tourist entries decreased from a high of 2.7 million in 2000 to a low of 0.9 million in 2002;

• The deficit rose, from 2.4 percent of GDP in 1999 to 5.7 percent in 2003.

Slashing social programs

The budget cuts’ cumulative effect can probably be compared to the structural changes introduced into Eastern European countries in the aftermath of the collapse of the Soviet Union, or to the structural changes imposed by international financial institutions on countries that had undergone severe financial crises.

The cuts reflected a neoliberal agenda favored by many in the Israeli elite, cutting across both major political parties as well as across a few smaller parties representing the upper middle class.

In this sense, the Intifada may be regarded as an opportunity that presented itself for the implementation of a plan, long in waiting, to downsize the government, cut the budget, lower taxes, privatize government corporations, lower the cost of labor and free capital to invest and expand, with the notion that eventually, the fruits of economic growth would trickle down to the population at large. The budget cuts affected mainly the following areas:

• Israel’s public health system has lost funding, increasingly relying on out-of-pocket payments, thus creating a dividing line between haves and have-nots, and corroding support for the public health system as a whole, especially among the haves.

• The funding of teaching hours in elementary and secondary education has been severely cut, adversely affecting schools in Arab and Jewish working-class towns and neighborhoods.

• Higher education has experienced three major budget cuts, resulting in sharp reductions in funding for research, teaching and facilities such as libraries.

• Housing aid has been severely reduced, making home ownership more and more difficult.

Eroding the social safety net

Israel has a good social safety net, wider than that in the United States, and resembling safety nets in Western European countries. Its programs cover old age pensions, survivors’ benefits, long-term care, general disability, income support, child allowances, paid maternity leave, work injury, accident injury, and unemployment. The budget cuts brought about a serious dilution of the safety net programs.

Excuse for pension theft

The lion’s share of Israel’s workplace pensions were run by the Histadrut, and were financed by special government bonds at a reasonable interest rate. The government had been looking for ways to withdraw its commitment to keep workers’ pensions at a steady level, in favor of directing pension funds to the stock market. For years it claimed that the Histadrut pension funds were running up a huge actuarial deficit, a fact that was easily disputed by specialists.

In 2003, under the cover of emergency measures required by the Intifada, the government made its move: it nationalized some of the Histadrut pension funds, then sold them to commercial insurance companies.

To make the funds attractive for buyers, handling costs were doubled. Finally, the interest rate offered on bonds bought by pension funds was lowered. The bottom line is that retired workers now receive smaller pensions, and future retirees no longer know what kind of pension awaits them upon retirement.

Poverty mounts

The most outstanding result of the economic recession brought on by the Intifada, combined with the fiscal policy pursued by the Israeli government, has been the increase in poverty. The proportion of Israelis under the poverty line — defined as 50 percent of the median salary — grew from 17.6 percent in 2000 to 19.2 percent in 2003. The depth of poverty increased too: in 2000, Israeli poor had on average an income that was 25.6 percent below the poverty line; in 2003 the equivalent figure stood at 30.3 percent.

The most tangible outcome has been the mushrooming of soup kitchens and of “hand-out” societies, previously unknown in Israel except in the Orthodox Jewish communities.

A heavy toll

The continued occupation of Palestinian lands has become a heavy burden for Israeli society. Israel has been paying the price of an arrogance that lured its leaders into believing they could control Palestinian territories while disregarding the collective aspirations of the Palestinian people.

Thus, the arrogance that emerged from the 1967 military victory carries with it a long-term price tag: if Israel desires long-term peace and stability, it will have to begin doing what it refrained from doing up to now: help the Palestinians to create a viable economy.

Shlomo Swirski is academic director of the Adva Center, a nonpartisan Israeli policy center founded in 1991 by activists from the movement for equality for Mizrahi Jews (Jews from Arab and Asian countries), the feminist movement and the movement for equal rights for Arab citizens. This is excerpted from the executive summary of an Adva Center report, which Swirski outlined at the Israeli-Palestinian Jerusalem Initiative for a two-state solution on June 4. The complete summary and report are available at .