Ariel Sharon, the winner of Israeli leadership election will have to grapple with an economy battered by the deadly Israeli-Palestinian unrest and the rout of the hi-tech sector, the nation's economic powerhouse.
During Prime Minister Ehud Barak's first 14 months in power the economy thrived, with annual growth hitting a blistering nine percent in the third quarter of the year while once-rampant inflation was brought under control.
The main engine for growth was the booming hi-tech sector which attracted record levels of foreign investment last year and exported $15 billion of electronics and software, cementing Israel's place at the forefront of the "new world economy" with around 100 companies quoted on the Nasdaq stock exchange.
But, within a matter of months, the picture has changed dramatically. Economic growth has been eaten away by the Palestinian intifada or uprising, while the hi-tech sector has been hammered by the collapse of the Nasdaq and signs the US economy is running out of steam.
Although the growth rate for 2000 as a whole was 5.9 percent, the highest level in several years, the economy actually contracted in the last quarter. And last week US investment house Merrill Lynch downgraded its investment rating on Israel because of concern about a likely victory by right-winger Ariel Sharon over Barak in the February 6 leadership election.
"What prompts the downgrade is a concern that an election victory could damage sentiment towards the market," the report said. "While a near-term Nasdaq bounce and lower interest rates are positives, we are bothered by the potential for politics to depress market sentiments," it said.
Sharon has said little about his economic strategy, speaking vaguely of further privatizations and lower interest rates. But during stints in various economic ministries under right-wing governments the 72-year-old former general carved out a reputation as a determined interventionist who frequently overspent his budget.
Barak's own economic programs are also in disarray. "We have had to revise downwards our projections for this year," a senior finance ministry official said. Private economists who had tipped a growth rate of 4.5 percent for 2001 are now saying it may not even reach three percent.
Israeli Manufacturers Association chief Oded Tira was even more gloomy, predicting a rate of 1.9 percent. "We are going to return to the disappointing rates prevailing at the start of 1999 in the absence of either a dramatic deterioration in the military situation or the signing of a peace accord, which would upset all forecasts," he said.
Tourists are staying away in droves because of the intifada, with the number of visitor arrivals in the third quarter of the year plummeting by more than 50 percent to around 400,000 over the year.
The closure slapped by the army on the Palestinian territories has also taken its toll on the Jewish state, preventing some 120,000 workers from the West Bank and Gaza Strip going to their jobs in the Israeli construction and agriculture industries.
On the social front, the brakes on economic growth have sent unemployment up to 9.2 percent and Barak has been unable to fulfill his earlier promises of creating 300,000 new jobs in four years.
Plans for fiscal reform, including taxing stock exchange trading profits while reducing the tax burden on the middle classes, have been put on the back burner.
In a recent opinion poll, 50 percent said the economic situation was worse than in May 1999, when Barak won power in a landslide election win over Benjamin Netanyahu. Only 11 percent thought there had been an improvement.
The shekel came under pressure at the start of the intifada, but is now stable at around four shekels to the dollar, but the Tel Aviv bourse has taken a drubbing, thanks largely to events on Wall Street.
"As long as there's no escalation in the violence, the Israeli economy will follow events on Nasdaq," said Yossi Moualem, an economist with investment company Ofek. — (AFP, Jerusalem)
by Jean-Luc Renaudie
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
