"Brazil’s industry ministry has launched a number of investigations into the alleged dumping of industrial products by China as Latin America’s largest economy reels from a wave of cheap imported goods. China’s exports grew 7.1 per cent in the first two months of this year, far outpacing growth in imports. “Prolonged declines in China’s export prices may cause trade tensions between China and some major economic powers to rise,” analysts at Nomura said in a research note on Friday. China’s exports to and imports from Brazil both rose by more than a third in the first two months of the year, according to Chinese customs data. The trade tensions create a dilemma for leftwing president Luiz Inácio Lula da Silva, who has sought to both nurture relations with Beijing and protect and develop Brazil’s national industries."
segunda-feira, 18 de março de 2024
domingo, 17 de dezembro de 2023
Azerbaijão ganha com a guerra Rússia contra a Ucrânia - Adam Tooze
Someone benefits from Russia’s war
Over at Bloomberg, Marc Champion writes:
Russia’s invasion of Ukraine didn’t play out the way Vladimir Putin hoped, but it’s proving an unimagined boon for his fellow authoritarian leader in neighboring Azerbaijan. President Ilham Aliyev has never been as politically secure as he is today. Aliyev has won big from Russia’s invasion on multiple fronts. In July last year he signed a deal with the European Union to double natural gas exports to the bloc, as it scrambled for new energy sources to fill the void left by Russian supplies lost to sanctions. New infrastructure has to be built to make that possible, but increased sales and prices together raised revenue from the ex-Soviet nation’s oil and gas sectors from $19.5 billion in 2021, to $35 billion in 2022. Those fossil fuels accounted for more than 92% of Azerbaijan’s exports and over half the state budget.
 |
A distracted Russia, the traditional security provider for Azerbaijan’s arch-rival Armenia, also gave Aliyev the space to overrun the ethnic-Armenian controlled enclave of Nagorno-Karabakh, ending 30 years of war and humiliation with precisely the kind of short and glorious military victory Putin aimed to achieve in Ukraine. From this already high base, things are looking up for Aliyev. Azerbaijan just locked up the right to hold the next global summit on climate change, COP-29.
domingo, 13 de agosto de 2023
China: será o centro da próxima crise na economia mundial? - Adam Tooze
Whither China?
With the inflation (or should we say price shock) drama in the West largely played out, there is no story more important in the world economy right now than the question of China’s future.
The mood on China has shifted spectacularly in the last 18 months. Whereas once the prevailing impression was one of awe, now what prevails is a negative story. This is assembled out of data, official news from Beijing, quotations from off the record interviews with interlocutors in China and more or less commonplace assumptions about economic and political development. This may be bricolage. But it is the best we can do. There is not other way of forming a view. But in such moments it is a good idea to check our prejudices.
On the podcast, Cam and I took on the challenge of making sense of China’s current situation.
China's Economic Crisis Ones and Tooze |
In this mini-series of newsletters I want to review the main lines of interpretation in Western public debate about China. Six lines of interpretation immediately come to mind which will form the first installments in the series.
(1) Part I - Regime impasse
(2) Part II - Balance sheet recession
(3) Part III - Keynesian structuralist
(4) Part IV - Dual-circulation, Siege economy
(5) Part V - Zero COVID in hindsight
(6) Part VI - One China or many Chinas? Regional economies and debt crises
To make sure you get all the parts of the mini-series, sign up here and consider supporting the Chartbook Newsletter project.
***
The news out of China is not good. Growth has slowed dramatically in recent years. Under the impact of zero-COVID it was sometimes brought to a halt. The recovery since the abrupt end of zero-COVID has seemingly run out of steam. The housing market is in crisis. China has been spared the inflation that afflicted the rest of the world. Instead seems to teeter on the edge of deflation.
Reading the business-cycle is a difficult business at the best of time. Though one measure of inflation - CPI - moved into deflation this month, China’s core inflation actually appears to have bottomed out and ticked up slightly.
In recent months the export numbers have turned downwards. But this is against the backdrop of world historic export records in 2022. It was always a mistake to read those exports and the resulting giant trade surplus as signs of economic health. They were rather the opposite a symptom of sluggish domestic demand.
For all the negative talk we should bear in mind that most economists both inside and outside China expect its economy to grow at 5 percent per annum. Whatever the fundamentals, it is a long way from Japan-style stagnation.
 |
Source: FT
But, beyond the mood swings of the media cycle, what is going on is clearly very dramatic. We are witnessing a gearshift in what has been the most dramatic trajectory in economic history. The question is how to interpret it.
***
The most obvious line for many Western interpreters to take is that China’s problems are basically political. Specifically they are to do with the unpredictable and ideologically motivated turns taken by Xi’s government, which themselves reflect the irredeemably authoritarian quality of the Chinese regime. Xi’s regime may undertake efforts to revive the economy with stimulus measures, but they lack conviction.
This interpretation is common place in the West but it has been presented in quintessential form in recent weeks in essays in the twin flagship publications of American liberalism, one by Li Yuan in the New York Times and the other by Adam Posen in Foreign Affairs. The two pieces differ in style, in their sources and in the point they are trying to make. But they deliver a common message. The problems of China’s economy are political and though they center on Xi they go beyond him and concern the entire system.
On the basis of her no-doubt excellent contacts in the Chinese business class Li Yuan paints a picture of a resentful stand off between “business owners” and the regime, an impasse which is resistant to any recent efforts by the party to raise spirits.
Stocks on the mainland and in Hong Kong, where many of China’s biggest private enterprises are listed, fell on Thursday but regained their footing on Friday. Some entrepreneurs rushed to praise the guidelines in official media. But in private, others I interviewed dismissed the party’s pep talk in words that can be best translated as, “Save it for the suckers.” By now it’s obvious that the country’s economic problems are rooted in politics. Restoring confidence would require systemic changes that offer real protection of the entrepreneur class and private ownership. If the party adheres to the political agenda of the country’s paramount leader, Xi Jinping, who has dismantled many of the policies that unleashed China’s economy, its promises on paper will remain just words.
Speaking to her off the record “business-owners” vented their frustrations with the regime.
The stock markets’ reaction was very honest, one tech entrepreneur said. Investors sensed how desperate the party is, he said, and how meaningless the guidelines are. At its core, he said, the issue of confidence is a matter of government credibility. Beijing has lost nearly all its credibility in the past few years, he said. If it really wants to remedy the situation, it can at least apologize for its wrongdoings. He cited a document that the party issued after the Cultural Revolution admitting some of its mistakes under Mao Zedong’s leadership from 1949 to 1976. Other people pointed to similar steps the party took then, such as rehabilitating persecuted cadres and intellectuals. At the very least, they said, the government should release Ren Zhiqiang and Sun Dawu, outspoken entrepreneurs who are serving 18-year prison sentences after their arrests in the recent crackdown. Or, another entrepreneur told me, the government could return the fines it imposed on his company, which he believed served as punishment for not toeing the party line and as revenue for an overextended local government. He said he felt that he had been robbed. None of the business owners I talked to expects the government to take any of these steps. They all spoke on condition of anonymity for fear of punishment by the authorities.
It is hard to know how seriously to take such spleen from aggrieved business people. Are they representative of opinion at large or is there selection bias at work, in that those who are most upset are also most likely to talk to a Western journalist. And how far are the grumpy views of frustrated managers, anywhere indicative of what actually gets done in business? In any case, Li Yuan uses these quotes to suggest that any bond of trust between the regime and vocal segments of business opinion has snapped. Though the regime in the summer of 2023 is trying to curry favor with business, everyone remembers the rollercoaster of recent years.
In 2021, a commentary headlined, “Everyone can feel it, a profound transformation is underway!” was reposted on many of the most important official media websites. Praising the suppression of the private sector and the policy proposal known as “common prosperity,” the commentary said, “This is a return from capital groups to the masses, and a transformation from a capital-centered approach to a people-centered approach.”
In the spring of 2023 the regime reversed course and turned back to private business:
“We have always regarded private enterprises and entrepreneurs as part of our own,” Mr. Xi said in March, repeating himself from 2018. The head of the National Development and Reform Commission, the country’s economic planning agency, held a series of meetings with business leaders, pledging support. Then came the 31-point guidelines. Most Chinese businesspeople support the government and willingly follow what it says. Still, the comments from some entrepreneurs on state media read more like pledges of loyalty to the party than authentic expressions of confidence. Ben Qiu, a lawyer who practices law in Hong Kong and the United States, summed up the executives’ comments in a social media comment: “The emperor’s clothes look fabulous.” … No matter how many supportive words the party offers now, it will be hard for the private sector to feel confident.
Effectively, Li Yuan suggest that China is experiencing something akin to a “capital strike” spreading through the business community. And this matters, because of the overall weight of the private sector in China’s modern economy.
The private sector … contribute(s) more than 50 percent of the country’s tax revenues, 60 percent of economic output and 80 percent of urban employment, according to none other than Mr. Xi in 2018.
If Li Yuan had wanted data to back up her argument she could have turned to the output of the Peterson Institute for International Economics in Washington DC, whose team tracks the balance of public and private sectors in the Chinese economy.
 |
The data show a lurch towards the priority of state investment during the initial shock of COVID and no substantial recovery by the private sector since. So far at least the pessimism of Li Yuan’s informants is born out.
The head of the Peterson Institute is Adam Posen who has emerged in recent months as perhaps the leading public critic of the Biden administration’s industrial policy. His latest piece on China in Foreign Affairs has to be read in this context. Posen is worried that America’s aggressive trade and industrial policies are based on a fundamental misdiagnosis of China’s situation and the Biden team are thus missing a historic opportunity to wrong-foot and undermine the authoritarian regime of the CCP.
For Posen, Xi’s China has reached a tipping point, which unlike Li Yuan he traces less to China’s national history, than the general logic of authoritarian regimes. According to Posen, all authoritarian regimes suffer from a severe case of what is called “original sin”. The lack of credible legal constraints on action by the sovereign makes it hard to sustain a high-functioning economic regime. Since the reform period of the 1980s, the CCP has, in fact, been unusual in holding out for a relatively long time against the temptations of arbitrary rule. But in Xi’s third term the regime is finally succumbing to this universal temptation and - this is the crucial point - broader Chinese society is now waking up to this reality.
Riffing on the famous Martin Niemöller poem - “first they came for the socialists” - Posen describes the unraveling of the bargain between the majority of Chinese and the regime. Most Chinese, Posen claims, live with an understanding that is summarized by the motto “no politics, no problems”. If you pursue your private interest at a distance from politics you could count on remaining unmolested. When Xi wielded his power versus corrupt officials at the top of a party to which 7 percent of the population belong, the rest of China was not displeased. When Xi came down on the tech oligarchs after 2020, the rest of society shrugged. But the extreme policy of zero-COVID in 2022 extended this domineering, capricious logic to the entire society.
Certainly the fiasco of COVID policy in 2022 delivered a severe shock to the authority of the CCP regime. But it is remarkable that Posen attributes so much significance to this one moment, as opposed to longer term factors stressed by critical analysts like Michael Pettis. After all, but for the total mishandling of the pandemic by the West, which massively amplified the second and third waves, China’s regime might well have emerged triumphant from the crisis. Beijing’s policy was not capricious as such, but lackadaisical when it came to vaccination and ineffective against highly-infections variants.
In any case not only stresses the historical importance of the COVID shock, he claims that we can see an immediate impact of the new insecurity in the macroeconomic numbers. “In China’s case, the virus is not the main cause of the country’s economic long COVID: the chief culprit is the general public’s immune response to extreme intervention, which has produced a less dynamic economy.” The immediate reflection of this new anxiety appears for Posen in the dramatic surge in household bank deposits.
 |
On top of Li Yuan’s investment strike, Posen thus sees a comprehensive defensive retreat by Chinese society that is driven not by economic circumstances but ultimately by fear of the regime.
Since Deng Xiaoping began the “reform and opening” of China’s economy in the late 1970s, the leadership of the Chinese Communist Party deliberately resisted the impulse to interfere in the private sector for far longer than most authoritarian regimes have. But under Xi, and especially since the pandemic began, the CCP has reverted toward the authoritarian mean. …. What remains today is widespread fear not seen since the days of Mao—fear of losing one’s property or livelihood, whether temporarily or forever, without warning and without appeal. … The COVID response … made clear that the CCP was the ultimate decision-maker about people’s ability to earn a living or access their assets—and that it would make decisions in a seemingly arbitrary way as the party leadership’s priorities shifted.
SAME OLD STORY
After defying temptation for decades, China’s political economy under Xi has finally succumbed to a familiar pattern among autocratic regimes. They tend to start out on a “no politics, no problem” compact that promises business as usual for those who keep their heads down. But by their second or, more commonly, third term in office, rulers increasingly disregard commercial concerns and pursue interventionist policies whenever it suits their short-term goals. … Over varying periods, Hugo Chávez and Nicolás Maduro in Venezuela, Recep Tayyip Erdogan in Turkey, Viktor Orban in Hungary, and Vladimir Putin in Russia have all turned down this well-worn road.
Li Yuan avoids this kind of comparative historical rumination. But she makes a similar point by citing as a witness sociologist Sun Liping, who in recent essays has highlighted the sense of uncertainty afflicting Chinese society. Sun Liping is a well-known public intellectual who recently retired from Tsinghuawhere he taught sociology.
“Why are many people saving money and cutting back on spending? Why are ambitious entrepreneurs reluctant to make long-term planning and investment?” Sun Liping, a sociology professor at Tsinghua University wrote in an article last month. “It’s because they feel uneasy.” He said that for China to get out of its slump, the government needs to create a business environment that can provide reassurance. … “Private enterprises don’t need support. They need a normal social environment” regulated by the rule of law.
Whereas Sun Liping calls for a reaffirmation of law, Posen points out the regime seems to be headed in the opposite direction, responding to emergency by demanding more discretion.
In March, China’s parliament, the National People’s Congress, amended its legislative procedures to make it easier, not harder, to pass emergency legislation. Such legislation now requires the approval of only the Congress’s Standing Committee, which is made up of a minority of senior party loyalists.
Posen thus sees a spiraling breakdown of trust. The lack of trust undermines the credibility of policy. Businesses and householders no longer believe that stimulus means stimulus and that it will not be countermanded by some dramatic intervention of a punitive kind. This lack of credibility makes markets less responsive to policy. Less responsiveness to policy increases volatility as policy becomes less effective. Greater volatility increases the need to intervene. As Posen puts it:
Once an autocratic regime has lost the confidence of the average household and business, it is difficult to win back. A return to good economic performance alone is not enough, as it does not obviate the risk of future interruptions or expropriations. The autocrat’s Achilles’ heel is an inherent lack of credible self-restraint. To seriously commit to such restraint would be to admit to the potential for abuses of power. Such commitment problems are precisely why more democratic countries enact constitutions and why their legislatures exert oversight on budgets.
With Xi having undone the fragile equilibrium that allowed China for decades to avoid the usual fate of authoritarian regimes, China is now embarked on a road back to stagnation and serfdom. It is a vision worthy of Hayek.
You might think that this is all a little overdone and that to compare contemporary China with Venezuela is far-fetched. Indeed one imagines that Posen himself does not mean the point to be taken literally. What he is trying to do with this jarring comparison is to correct the blindspots of Western observers. He wants them to radically revise their outlook for China in a negative direction.
Many outside observers have overlooked the significance of this change (the breakdown of trust and “Long-covid”). But its practical effects on economic policy will not go unnoticed among households and businesses, who will be left still more exposed to the party’s edicts. The upshot is that economic long COVID is more than a momentary drag on growth. It will likely plague the Chinese economy for years. More optimistic forecasts have not yet factored in this lasting change. To the extent that Western forecasters and international organizations have cast doubt on China’s growth prospects for this year or the next, they have fixated on easily observable problems such as chief executives’ fears about the private high-tech sector and financial fragility in the real estate market. These sector-specific stories are important, but they matter far less to medium-term growth than the economic long COVID afflicting consumers and small businesses
The analysts of China that Posen most wants to reach are decision-makers in Washington. Posen is alarmed by the move to protectionism and confrontation towards China. He thinks this is dangerous, because increasing the risk of war, self-harming, because inefficient, and counter-productive, because it strengthens Xi’s regime.
Western officials should adjust their expectations downward, but they should not celebrate too much. Neither should they expect economic long COVID to weaken Xi’s hold on power in the near future. … The perverse reality is that local party bosses and officials can often extract yet more loyalty from a suffering populace, at least for a while. In an unstable economic environment, the rewards of being on their good side … go up, and safe alternatives to seeking state patronage or employment are fewer.
Faced with this situation, what Posen takes encouragement from is that some Chinese rather than turning to the regime for reassurance are opting for self-insurance i.e. are trying to opt out of the future as defined for them by Xi and the regime in Beijing.
If CCP policies continue to diminish people’s long-term economic opportunities and stability, discontent with the party will grow. Among those of means, some are already self-insuring. In the face of insecurity, they are moving savings abroad, offshoring business production and investment, and even emigrating to less uncertain markets. Over time, such exits will look more and more appealing to wider slices of Chinese society.
This is the opportunity that America’s present policy of confrontation is missing.
Washington should think in terms of suction, not sanctions. … The United States should welcome those (Chinese) savings, along with Chinese businesses, investors, students, and workers who leave in search of greener pastures. … Removing most barriers to Chinese talent and capital would not undermine U.S. prosperity or national security. It would, however, make it harder for Beijing to maintain a growing economy that is simultaneously stable, self-reliant, and under tight party control. Compared with the United States’ current economic strategy toward China, which is more confrontational, restrictive, and punitive, the new approach would lower the risk of a dangerous escalation between Washington and Beijing, and it would prove less divisive among U.S. allies and developing economies. This approach would require communicating that Chinese people, savings, technology, and brands are welcome in the United States; the opposite of containment efforts that overtly exclude them. … If Washington goes its own way instead—perhaps because the next U.S. administration opts for continued confrontation or for greater economic isolationism—it should at the very least allow other countries to provide off-ramps for Chinese people and commerce, rather than pressuring them to adopt the containment barriers that the United States is installing.
What Posen wants to offer is the opportunity for individual Chinese and their families to vote with their feet. His suggestion that the West should open “off ramps” for Chinese seeking to opt out of the Cold War is telling - off ramps being a phrase more commonly invoked nowadays in Washington to discuss possible peace terms with Putin.
***
Thus, two pieces that are supposedly about the limit topic of disillusionment in business circles in China and China’s current economic difficulties, spiral into readings of world history.
The most radical assumption of all is encapsulated in the subtitle of Posen’s Foreign Affairs article, which boldly declares that what we are witnessing in China is the “Same old story”. One should linger over this apparently casual remark. Though passing for social scientific common sense, it is a staggering claim to make. One is tempted to say - paraphrasing Samuel Johnson - that when an analyst says about China, with a bored shrug, that is the same old story, they are probably done with intellectual life.
If it were true that anything about Venezuela or Turkey’s complex histories clearly anticipated that of China it should surely count, not as a confirmation of the some obvious piece of wisdom, but as a staggering and profoundly counter-intuitive discovery. These kind of comparisons again and again reveal the failure to grasp the sheer scale of the Chinese projects. This China that we are casually generalizing about, is a state whose population is the same as that of North America, South. America and all of Europe put together, under almost 80 years of uniquely transformative rule by a historically unique and still dynamic political party that directly inherits the DNA of the revolutionary era and self-consciously orientates itself towards avoiding the fate of the only regime to which it can, at a pinch, be meaningfully compared, namely the Soviet Union.
As Robert Harding put it very nicely in the FT a few days ago:
China’s economy defies analogies. Just as its growth over the past four decades was unprecedented, its current difficulties — and it certainly has a problem, if not quite a crisis — are unique. It is not Japan in 1990, Korea in 1997 or the US in 2008. (AT: let alone Venezuela, Turkey or Russia)
It may be true that parts of Chinese society are for a variety of reasons suffering a crisis of confidence, but precision is called for. Adam Posen and Li Yuan talk in general terms about “confidence” and credibility, but their narratives and evidence actually pertain to three different groups. Households are the center of the Posen story. Presumably the households that count are actually the affluent upper 25 percent or so, concentrated in Tier 1 cities, who are responsible for most spending and saving. Secondly, there are the corporate chieftains who not only toe the line, but whose businesses also have really big investment budgets that are easy for the regime to inspect. And then, the third group, the nameless group of “business owners” who are Li Yuan’s interlocutors. Presumably they are not so large that they must be seen to conform, but they are significant enough to attract the attention of a New York Times correspondent and be worth quoting.
Across these basic sociological divisions run questions of party membership, connection to provincial cliques and institutional connections to banks and other sources of funding. Those matter because what we in the end want to know is which of these groups is spending how much on consumption and investment and why. What kinds of things they are buying? What kinds of projects they are undertaking and how far this shows up in the macro data? If business confidence is shaken, what is the balance between large privates who are toeing the line and the mass of smaller private firms, where proprietorial dissatisfaction - expressed so graphically to Li Yuan - rules the roost?
Above all what we need to know to arbitrate the basic causes of the current malaise is how far depressed private business investment is in fact due to the kind of sectoral issues that Posen so quickly dismisses. Since property is the main store of household wealth in China, is this not likely to be the main driver of uncertainty, rather than views about Xi, the party and the capriciousness of their rule. Li Yuan’s piece is about the latest stimulus package and the stock markets so you would not necessarily expect a long discussion of the real estate crisis. But it is truly remarkable how little space Posen in his Foreign Affairs article devotes to the drama of China’s housing market.
At first glance this is doubly surprising because you might see the real estate slump as the single most important demonstration of the regime’s capriciousness. That is by all accounts how many property developers in China view the so-called “three red lines” policy that was announced in August 2020 at the peak of regime hubris. But before taking that interpretation at face value, ask yourself for a second how subprime mortgage lenders and dealers in MBS, or shareholders in AIG are wont to talk about the 2007-8 financial crisis. When tracking an unfolding economic crisis, who are the reliable informants? Whose opinions do we take at face value and whose do we take with a pinch of salt? Whose opinions matter because whether right or wrong they wield substantial power in the economy? Whose opinions can we discount on account of their powerlessness?
My bet is that Posen steers clear of discussing the housing crisis - overwhelmingly the most important source of uncertainty in the Chinese economy right now - because it causes problems of his argument. He knows that it does not fit his overarching thesis that the regime’s authoritarianism is the main source of risk for the modern Chinese middle class and that this by itself makes Xi’s regime incapable of ensuring sustained economic growth. At a technical level, as Michael Pettis explains, the figures for bank deposits that Posen cites to underpin his case, reflect both an increased rate of savings by worried households and a reallocation away from riskier assets, more closely associated with risks in housing. They are, in other words, an indicator of specific as much as general uncertainty. This is not to deny that the repressive tendencies and the ideological intent of the regime are a source of risk for private business and private individuals. Of course, they are. But the regime also offers advantages and protections. And those are not merely cold comforts. One cannot sensibly generalize about a downward spiral into an increasingly abusive relationship, as Posen’s narrative suggests. Sectoral performance is not a detail. It is all important. What is decisive is whether Beijing gets policy right and this reflects specific issues of policy and political economy that go beyond the simple boundary between public and private. These more complex balances of interests were decisive in the handling of COVID, of the real estate crisis, of the debt crisis, in the economic war with the US. They will be the topic of further installments to come.
domingo, 6 de agosto de 2023
Uma breve história política e econômica de Israel - Adam Tooze
Israel’s national security neoliberalism at a breaking point?
Adam Tooze
Chartbook 231, July 6, 2023
The news about Israel has three faces - the escalating violence of the occupation, the constitutional crisis unleashed by Netanyahu’s far-right government and an economic success story that has made Israel the darling of the tech economy and an attractive partner for international players including the oil-rich Arab world. On the podcast, Cameron Abadi and I attempted to draw some of these facets together. You can listen to our conversation here.
***
In much recent commentary focused on Israel’s domestic constitutional crisis, there are suggestions that an illiberal turn in Israel’s politics might put in jeopardy its flourishing high-tech economy and thus its overall economic strength. This is no doubt an appealing narrative for those who think of globalization and high-tech as forces of liberalization. But how plausible is this scenario in light of Israel’s 75-year history?
If we stand back and draw a sketch map of the evolution of Israel’s political economy, what predominates are macroeconomic forces and fundamental issues of national security strategy not internal politics or culture wars. For the last twenty five years, despite the narrative around the putatively liberal and cosmopolitan culture, Israeli politics and grand strategy have been balancing considerable tension between its growth model, its unresolved security situation and mounting domestic socio-economic pressures. If high-tech worries about Netanyahu’s illiberalism were to be the straw that breaks the camel’s back it would be, to say the least, a surprise.
****
If we review Israel’s 75 years history, we can distinguish four distinct phases each defined by Israel’s insertion into a wider economic and security context:
The phase of construction from the 1940s to 1967
The phase of war and crisis from 1967 to 1985
The moment of the peace process and globalization from 1985 to 2000
The phase of national security neoliberalism or “hawkish neoliberalism” (Krampf) from 2000 to the present.
Each of these phases is associated with its own historical narrative. But rather than treating each as radically distinct, we need to connect them together. This is important to avoid falling into the trap of contemporary clichés, which are heavily invested in the idea that modern Israel and its “high-tech” “entrepreneurial economy” mark a radical break with Israel’s “socialist” past. In fact, a deep continuity connects each phase, a continuity made up of the evolution of Israel’s ruling elite - a deliberately capacious phrase - and its shifting strategies of power and accumulation. Though analysts from different camps put more emphasis on the state (Krampf) or capital (Bichler and Nitzan), they agree in seeing an intelligible and continuous evolution of strategies, rather than a series of dramatic discontinuities. If there are discontinuities they come, above all, from the side of national security rather than issues of liberalism or illiberalism.
***
The first phase, now demonized as the phase of Israeli socialism or even “communism”, is the phase which actually established the state and delivered its period of most rapid growth, by far. Israel’s growth in the 1950s and 1960s was amongst the most rapid in the world and that means it was spectacular. Indeed, for context, even the period of crisis-ridden transition in the 1970s and 1990s had higher growth rates than those which are so enthusiastically celebrated today.
 |
Source: Zeira 2021
In making long-run comparisons it is obviously true that Israelis on average today enjoy a vastly higher standard of living than they did fifty years ago. But levels are not the same as growth rates. As elsewhere, in Israel too, the neoliberal era has been one of relatively disappointing growth. At the very least, if market economics was not actually bad for economic growth it was not positive enough in its effects to offset structural forces of retardation.
Again contrary to the familiar narrative, a striking feature of Israel’s early decades was the country’s openness to economic flows of all kinds. As it expelled the Palestinian population, it absorbed a huge influx of Jewish migrants. The expanding settler colonial society sucked in foreign goods and it financed the resulting trade deficit by foreign funding, starting with reparations paid by West Germany. Israel today - in the much-vaunted age of globalization - is, in proportional terms, less open to the world economy than it was in the 1960s, above all because its imports were then much larger as a share of GDP.
 |
Source: Zeira 2021
The imported goods and labour was put to good use. Under the social democratic model, anchored in the Labour party, kibbutz, organized labour movement and state-owned industry, Israel experienced dramatic agricultural and urban development. In addition, one of the defining feature of Israel’s political economy in its first decades was equality. By the 1970s, Israel had one of the lowest Gini coefficients in the world. The share of income going to the top 1 percent was as low as that in Sweden. Today it is almost as high as in the United States.
 |
Source: The Privatization of Israel, 314.
In the 1950s and 1960s labour productivity soared. In the socialist period Israel was truly catching up with the United States. Since the 1980s it has been merely tracking the leading economy of the capitalist West.
***
Growth at the rate of the 1950s and 1960s was not destined to last - not in Israel any more than in any other of the growth miracles that followed World War II. Everywhere, the transition from super fast “catch-up” growth to slower growth from the 1970s onwards was painful. In every case it involved a complex transition of growth strategies within the elites, often with social democrats (e.g. UK Labour) or centrists (Democrats in the USA) paving the way for the neoliberal transition that began in earnest the 1980s. Israel followed this pattern in dramatic form, with a period of stagflation culminating with a hyperinflationary burst and abrupt stabilization in 1985.
But to treat Israel as just another case of a runaway corporatism that needed a rebalancing of capital and labour and strong leadership by a central banker - in Israel’s case the legendary Stanley Fischer - is to miss the woods for the trees. The shock of 1973 did not just happen to Israel. The oil shock was unleashed by the climax of four Arab-Israeli wars, a struggle in which Israel was fighting for its survival. That existential struggle shaped all the parameters of economic policy and the pressure did not start in 1973. As in so many other respects it was the 1967 war that was decisive.
Given the scale of Israel’s victory in 1967, it was clear that the Arab world would react and that Israel must prepare to defend its huge territorial gains. Israel was built on war - in 1948 and 1956. But from 1967 onwards military spending surged to unprecedented levels and after the shock of 1973 it continued at extraordinarily high levels. At its peak defense spending amounted to 30 percent of GDP with half of that coming in the form of defense imports. With that kind of burden, macroeconomic imbalance is more or less inevitable.
 |
Source: Zeira 2021
The 1979 peace agreement with Egypt may not have brought peace to the Middle East in comprehensive sense. It left the fate of the Palestinian people undecided. But as Zeira points out in his excellent survey, The Israeli Economy, there is a world of difference between maintaining an occupation regime over a lightly armed civilian population, however brutal, and fighting all-out war of national survival. The peace deal with Egypt turned Israel’s security problem from an impossible burden to a manageable economic and fiscal problem. It was this security settlement that gave monetary stabilization and central bank leadership a chance. The story is brilliantly told in Krampf’s The Israeli Path to Neoliberalism (2018).
Israel’s economic and financial crisis in the early 1980s was dramatic in its impact. The banking system failed and had to be bailed out. In 1985 Israel had no option but to throw itself on the mercy of the United States to help soften the blow of stabilization. The shock to the government budget and the social and economic model it supported was severe and felt in higher taxation, slashed subsidies and eventually also in much reduced military spending.
 |
Source: Zeira 2021
***
From the mid 1980s onwards, the Labour party - above all through the leadership of Shimon Peres - embraced a threefold policy of domestic transformation, peacemaking and privatized globalization. The degree of Israel’s openness actually declined as it moved away from massive dependence on foreign aid, but in the new era of globalization was that it was private trade and finance not government transfers that dominated Israel’s balance of payments.
In the 1990s the efforts to conclude peace not only with Egypt but to find a resolution of the Palestinian question, went hand in hand with a vision of Israel as the leader of wider Middle Eastern development. A two-state solution, for which a roadmap was established at Oslo (1993), combined with the economic accords of Paris (1994), would open the path to a broader Middle East economic integration, pacification and prosperity. Peres conceived this explicitly on the model of European integration. In 1993, as Europe was set fair to incorporate much of the former Soviet sphere, Peres wrote:
“Ultimately, the Middle East will unite in a common market—after we achieve peace. And the very existence of this common market will foster vital interests in maintaining the peace over the long term” (Peres, 1993, p. 99) (cited in Krampf, The Israeli Path, 219)
As in Europe the precondition for this pacification and stabilization by way of economic integration was US hegemony. What mattered for Israel by the 1990s was no longer simply US government aid, but global capital flows superintended by the United States as the hegemon.
With the Gulf War of 1990-1991, the United States had entered the Middle East more decisively than ever before. The oil industry was globalizing, diluting OPEC’s power. This was the moment that the new vision of a globalized Israel, epitomized by Tel-Aviv’s combination of Bauhaus and Silicon Valley, took off. During his first stint as Prime Minister in the 1990s Netanyahu boasted that Israel was on its way to becoming a
‘high-technology “tiger”’. Israel, in his view, was ‘the Silicon Valley of the Eastern Hemisphere’ and ‘one of the great technological and entrepreneurial successes in the world’. Although the panacea didn’t prevent him from losing the elections, his Labour successor, Barak, was equally enthusiastic. Israel, he declared, was evidently ‘different from any other place in the world’, a country of ‘enormous vitality stemming from the richest possible genetic pool’, which helped it become ‘the most powerful of all states lying in a 1,500 km radius from Jerusalem’.
The growth of the new high-tech economy was accompanied by privatization and deregulation. But to think of this as a “triumph of capitalism”, or victory “of the market over the state” is naive. As Bichler and Nitzan show in gloriously seedy detail, Israel’s high-tech sector was anything but a model of “free competition”. The breakthrough of “private business” relied on state-brokered deals between satellite and cable TV groupings that operated in a highly oligopolistic fashion. Israel’s high-tech start-ups, like their American counterparts, benefited in no small degree from spin-offs from the military-industrial complex.
Meanwhile, the single biggest driver of growth was not deregulation or privatization but the ongoing accumulation of human capital. The labour pool was not just a matter of genetics. It was provided with skills by Israel’s high-functioning public education system and the extraordinary endowment of education brought with them by migrants from the former Soviet Union - socialism twice over you might say. And where the labour pool was not attractive enough, the Israeli government was more than willing to help. Overall the level of public subsidy for business decreased in the course of budget cuts after 1985, but for privileged players like chipmaker Intel, Israel rolled out the red carpet.
As the data show, the optimism of the 1990s was more than just hype. Growth recovered to half the rate of the socialist 1950s and 1960s, impressive enough by global standards. But it did not last. The tech sector was hit hard by the bursting of America’s dot.com bubble. Meanwhile, the optimistic vision of globalization was short-lived. Elsewhere this was a matter of growing inequality and the China shock. And Israel experienced that on a dramatic scale. Inequality surged more rapidly than practically anywhere in the world. By 2011 this would trigger mass protests against excessive housing costs and mounting disparities in living standards.
But in the Middle East, the end of 1990s optimism took a more dramatic and violent turn. Within Israel itself, Rabin’s assassination and Netanyahu’s ascent to leadership signaled the rejection of the Two-State model. The collapse of the Palestinian peace process triggered the outbreak of the second Intifada in 2000. And then the wider regional frame was blown to pieces by 9/11 and America’s War on Terror.
***
Since the early 2000s Israel’s elite has been managing profound tension between its economic strategy of globalization and the destabilized security environment. The synthesis of the 1990s, in which peace and globalization went hand in hand, was gone for good. But there was also no way back to the militarized national economy of the founding era. The retreat of the military from the dominant position in Israel’s political economy has proven permanent. The current mood of anxiety around the “people’s army” are indicative of the questions being asked about the viability of the mass conscription model.
There is no doubt a settler colonial logic at work in the exploitation of the occupied territories. The settlements themselves now account for 10 percent of the Jewish population thus constituting a significant slice of the economy, which in sheer size is on a par with the celebrated high-tech sector. Meanwhile the brutal experiments in counter-insurgency and surveillance offer new opportunities for military-industrial growth in privatized security and in the technologies of repression. To add to the. bitter irony, the system is fed with outside flows of funding for the Palestinian Authority.
These are logics that are compelling at a micro level, for particular actors. But at the broader, strategic level they do not add up. The collapse of the 1990s two-state vision left Israel with a contradiction between its world economic integration and its unresolved domestic security situation. As astute observers like Assaf Adivnoted already in 2007: “(Israel) is torn, in other words, between the refugee camps of Nablus and the cafés of Tel Aviv. With no leadership to resolve these oppositions and close social gaps, Israel today is just plain stuck.”
The contradiction between the notionally liberal values of globalized business and the realities of life in Israel has been plainly apparent for decades. Though this tension cannot be resolved it can be managed by a strategy in which, as Krampf argues, Netanyahu has been a pivotal figure and Israel’s high-tech businesses have been willing helpers.
If Israel’s right-wing from the late 1990s onwards saw no realistic prospect of a true Two-State solution, then they needed to be prepared to uphold an apartheid regime if necessary against outside pressure. That would require Israel to secure its independence from its friends as well as its enemies. That meant putting a premium on reducing Israel’s current account deficit and enhancing its resilience in the face of outside shocks. From a country of chronic trade deficits, dependent on external funding, Israel from the mid 1990s onwards turned itself into a country of current account surplus, whilst progressively accumulated an ever larger war chest of foreign reserves.
Israel’s FX reserves in $ millions.
 |
To reiterate the point made earlier, Israel has achieved this turn around in its current account not through a dramatic surge in exports. Today, exports as a share of GDP are lower than at their peaks in the early 2000s or the 1980s. The balance has been closed because imports have fallen, in line with the relative reduction in external assistance and other inter-governmental funding. But the net effect is that Israel’s foreign exchange reserves have surged underpinning a strategy of “self-insurance” not entirely dissimilar to that of Russia or China. Assuming that US sanctions against Israel are not on the cards (the shock Russia has experienced and the scenario that must worry Beijing), a reserve of $200 billion means that Israel can be relaxed about the future of US aid, which currently stands at $ 3 billion per annum. This is the core of what Krampf calls Israel’s calculus of “hawkish neoliberalism”.
***
At the same time as macroeconomic policy has been reinterpreted in national security terms, Netanyahu’s approach to the problem of the occupied territories has been to look not for a political settlement, but for what he calls an “economic peace”.
The idea is that if the Palestinian authority can offer its people better material circumstances, then this will defuse the conflict. As Tariq Dana shows in a fascinating study, this approach was met on the Palestinian side between 2006 and the 2010s by the economic vision of PA Prime Minister Salam Fayyad. It received enthusiastic backing from the Americans and Europeans, notably in the form of US Secretary of State John Kerry’s $4 billion economic plan to boost the Palestinian economy launched at the World Economic Forum in Jordan May 2013. On the side of the Palestinian authority this involved a series of measures to promote private economic development that were loudly applauded by the World Bank. Meanwhile, radical opposition in the refugee camps, notably Jenin, was repressed. And the PA worked with Israel both to establish Export Processing Zones (enclaves within enclaves in the occupied territories) and to promote Palestinian employment in Israel.
 |
As Habbas points out, it is an approach that willfully refuses the inherently political nature of the conflict and the impossibility of actually achieving substantial economic development in the face of disenfranchisement and uncertainty.
These tensions would have been hard enough to manage if Israel had carried through on its commitment to reduce settlements, or even just preserved the status quo of the 1990s. But, instead, Israel’s governments have not just permitted but promoted the expansion of settlements.The result is a progressive fragmentation of the Palestinian territories that inflicts poverty and misery on their 4.5 million Palestinian inhabitants (2.7 million in West Bank and 1.8 million in Gaza). According to UN estimates presented in the spring of 2023, the economic losses inflicted on the Occupied Territories through Israeli restrictions and blockades alone amount to: “25.3 per cent of West Bank gross domestic product (GDP) and the cumulative GDP loss in 2000–2020 is estimated at $50 billion ($45 billion in constant 2015 dollars), which is about three times the West Bank GDP and over 2.5 times the Palestinian GDP in 2020.”
The latest iteration of the policy of “economic peace” consists in a program known as “Shrinking the Conflict”. Proposed in 2018 by philosopher Micah Goodman this starts from the premise that Jewish Israelis do not want to face the demographic implications of a One-State solution, or the security implications of a true Two-State solution. Instead, it recommends the management of “the conflict below the threshold of war, while improving the fabric of life for the Palestinian population.” Proposals to end intrusive security monitoring fail in the face of the violence between insurgent Palestinians, Jewish settlers and Israeli security forces. So what “shrinking the conflict” amounts to are intensified efforts to create parallel, apartheid-style transport infrastructure in which Palestinians, settlers and (Jewish) Israeli society interact as little as possible. It is a surreal logistical answer to an unresolved political problem.
***
As Krampf puts it, Israel’s entire economic model and grand strategy has rested for almost a generation on cognitive dissonance:
What I call the Netanyahu doctrine is based on geographic, institutional, and even mental separation between Israel as a globalized economy and Israel as a state that occupies a territory and engages in a territorial conflict.
There are at least four axes of tension and cognitive dissonance at play here
Between Israel and the Palestinians.
Between Israel’s occupation regime and global liberal norms and active solidarity with Palestine.
Between Israel’s growth strategy and the social balance of Israeli society, as measured in inequality and sensitive indicators and housing costs.
Finally, there are the ideological and cultural differences within the Jewish population of Israel which Netanyahu’s coalition have forced into the open and intersect with global culture wars along lines familiar from the United States, Brazil, Russia, India and Australia.
Under the impression of the 2011 social protests, Kraft speculates that the third axis of tension is the greatest blindspot of Israel’s geoeconomic strategy. It will be undercut by the social tensions it unleashes.
The media coverage being given to the Angst of some liberal Israeli entrepreneurs in the face of the current illiberal turn no doubt reflects real worries in Tel Aviv. But in truth Israel’s political economy has existed in profound tension since the collapse of the peace process in the late 1990s. As far as Netanyahu and his coalition are concerned the constitutional changes they are promoting will actually make those tensions easier to manage, by preventing interference by liberal hangovers in the judiciary.
The bigger question surely is how far the right-wing course pursued by Israel alienates not just tech entrepreneurs but potential partners in the Abraham Accords. The accords seemed to offer Israel the chance of restarting the 1990s vision of a regional growth club, without having to resolve the Palestinian question. A wider economic peace - in Netanyahu’s terms. But as tempting as it may be for Israeli and other strategists to think in those terms, you cant go back to the 1990s. The Occupied Territories are an open wound and the world Israel is navigating today is far more multipolar than that in the 1990s. One aspect of that is the emergence of China as a key player. But another aspect is the heft of Israel’s putative partners in the Middle East. Israel’s is not the only economy in the region to have gone through a developmental spurt in recent decades. Turkey’s economy is almost twice the size of Israel. Saudi Arabia’s is more than three times larger than Israels. Even the economy of the UAE today plays in the same league as Israel.
And if Israel has made itself relatively proof against pressure from Washington, so too have its neighbors. They pursue independent regional foreign policies and entertain relations with both China and Russia, which are far from pleasing to Washington. This offers new opportunities for Israel’s strategists. But also, as the Chinese brokered rapprochement between Saudi Arabia and Iran suggests, new risks. If the last 75 years are anything to go by, it is less the question of Israel’s liberalism that will be decisive, than the way it navigates this forcefield.