ISRAEL NEEDS HELP TO KICK THE SUBSIDY HABIT

The Wall Street Journal, Thursday July 17, 1997 Page A22

By E. V. KONTOROVICH

Mr. Kontorovich is a Member of the New York Post's editorial Board and formal Israel correspondent of the Forward.

The U.S. gives Israel $3 billion a year in economic and military aid, making it the largest recipient of American largesse. Israel has been subsidized at similar levels since the signing of the Camp David Accords in 1979. Recently, leaders in both countries have begun to admit that the money debilitates Israel's economy. Many Israeli officials have been quietly signaling, at least to reporters, a willingness to accept reduced aid levels. This year, they had the chance-and refused. Israel will end up with $50 million less in U.S. aid, but this appears to be a one-time cut.

Israel's allocation has long been viewed as a sacrosanct budget item, doggedly defended by Israel's supporters in America, most notably the American Israel Public Affairs Committee, a Jewish lobbying group with vast clout in Congress. So when the $50 million reduction began to gain acceptance in May, many critics of the current levels of funding saw it as the beginning of Israel's gradual weaning from welfare.

These hopes are in vain. It took a series of unique circumstances to make even the $50 million reduction politically viable, and Israel quickly moved to ensure that the cut would not be followed by deeper ones. The idea for the reduction originated with the Clinton administration, which wanted to reward Jordan for making peace with Israel in 1994 and for continuing to cooperate with the peace process. But no one in Washington wanted to increase the foreign-aid budget. So Congress plans to skim $50 million each from Israel and Egypt (the second-largest recipient of U.S. subsidies) to set up a development fund for the Hashemite Kingdom.

But like many welfare cases, Jerusalem seems to feel entitled to its full sum. Intense negotiations between Israeli and American officials and AIPAC ensued. "There was a lot of groping for some mechanism" to accommodate Israel, says AIPAC President Melvin Dow. The mechanism that was agreed upon guarantees that the cut will not serve as any sort of precedent, according to Israel's ambassador, Eliahu Ben Elissar.

The way Israel spins it, the reduction isn't a reduction, but a gift from the government of Israel. "The $50 million Israel gives to the Jordan fund is part of our policy of showing how much we care about Jordan and its development," Mr. Elissar says. Indeed, the cut was structured to make it look like a voluntary Israeli donation. The U.S. will give Israel the full $1.2 billion in economic aid this year, as usual. Then Israel will send back the $50 million to Washington, which will pass it on to Jordan.

This Byzantine scheme demonstrates how desperately Israel is attached to its welfare benefits. Foreign subsidies have become a centerpiece of Israel's economy; perhaps no independent state in modern times has been so dependent on them. With an annual government budget of $55 billion, Israel receives almost $10 billion in free money from friends abroad. America's $3 billion economic and military aid package alone constitutes more than 3% of Israel's gross domestic product. Roughly another $7 billion arrives in the form of U.S. housing loan guarantees, assistance from other nations and donations from Jews around the world. All told, nearly one-seventh of the Jewish state's GDP comes from international alms.

Like most welfare programs, aid to Israel has been inspired by the best intentions. Congress wanted to support a beleaguered democracy and long-time ally: The high level of aid supposedly symbolizes America's unique relationship with the Jewish state. But after nearly two decades of giving, many economists and politicians in Israel and the U.S. have concluded that the subsidies are ruinous for Israel.

The aid creates a two-tiered system of dependency, a sort of socialism on welfare. On one level, Jerusalem finds itself hooked on the regular infusions from the U.S., which props up its bloated socialist policies. At the same time, Israel's citizens remain dependent on their nation's welfare state for the provision of most services, from health to transportation. A report released last year by the Jerusalem-based Institute for Strategic and Political Studies concluded that the aid "prevents reform, causes inflation, fosters waste" and "ruins our competitiveness and efficiency."

The $50 million nonreduction isn't the first false hope for foreign-aid welfare reform. One year ago, newly elected Prime Minister Benjamin Netanyahu, speaking before a joint session of Congress, urged U.S. lawmakers "to begin the long-term process on gradually reducing the level of your generous economic assistance." But when the applause died down, it turned out that what the prime minister meant was that the right time for cuts would be after the end of his term.

Mr. Netanyahu is certainly more market-oriented than his predecessors or opponents. He concedes that outside subsidies stunt the economy, and it is doubtful whether previous prime ministers would have accepted even this year's cut: In contrast, the leader of the opposition Labor Party, Ehud Barak, told me last month that "we need financial support and would prefer to receive it for quite a long time."

Mr. Elissar likens Israel to a "junkie," hooked on foreign aid. If Jerusalem is the junkie, Washington is the pusher. Among addicts, such gestures as Mr. Netanyahu's are called cries for help. That is to say, the addict can't kick the habit himself; nations, like people, need a little nudge.