Israel has a comparative advantage in medical care and specifically in treating trauma victims, which comes not only from its advanced human capital, especially in technology and health care, but also from vast experience treating victims of terror and war.  Read the NYTimes article  published yesterday on the subject.  Israel has been treating Haiti’s earthquake victims in its mobile tent hospitals set up in the last week in the impoverished Caribbean nation. 

The Times article discusses the ambivalence Israelis are experiencing, concerned about how they treat Palestinians in Gaza, while offering help to Haitians.  There is a difference.  Rockets have rained down on Israeli towns from Gaza for years, where Hamas was elected to office not long ago and where IDF Staff Sgt. Gilad Shalit, 23 years old, has been held hostage for over 3 1/2 years.  Read the hate for Israel contained in the Hamas Covenant to understand the difference between helping Haitian earthquake victims and maintaining a blockade of the Gaza Strip.  This document has been translated and published at the Yale Law School’s Avalon project, where you can go as well for a fairly full documentary history of the Middle East conflict (1916-2010).

Much news and commentary you hear about the State of Israel has to do with geopolitics and the Arab-Israeli conflict (see my colleague Ben Moscovitch’s blog on this site for a nice selection.)  Settlements, will Abbas run or not, Iran’s plans to wipe Israel off the map, Israel’s thoughts about taking military action against Iran, the Goldstone Report on the war in Gaza, films about the war in Lebanon, and on and on. 

Not that this hyper-news about Israel is not important and interesting.  But, let’s step back and look at Israel from a “rising power” perspective — half highly indebted socialist country/half cutting-edge hi-tech and health sciences capitalist upstart.  Its economy has proven itself resilient to the intifada, to the tech bust of nearly a decade ago, and now to the US-led global meltdown. 

How so?  It’s about policy, stupid.  Sound economic policy, begun in the 1980s with a classic monetary stabilization program that reduced inflation, and deepened only a few years ago, by none other than Benjamin Netanyahu, as finance minister, with his Thatcherite restructuring of the economy (e.g., increasing the labor force participation rate by creating incentives for the religious to work) and his shift to a rules-based fiscal policy.  Israel still has a high government debt burden – above 80% of GDP.  But that is down from above 100% not long ago.  Meanwhile the rest of the world has caught up to Israel’s debt levels (with the U.S. now surging higher). 

On the external front, the country couldn’t look better – $60 billion in foreign exchange reserves, a current account surplus, and ”net external creditor” status, that is, Israel’s claims on foreigners exceed foreigners’ claims on Israel (oh, how the U.S. would love to have that balance sheet!)

So, in spite its modest size, constrained by the country’s small population, the Israeli economy dwarfs those of many of its much poorer and poorly run neighbors.  Have a look at the Fitch press release below referencing a recent report on Israel and its sovereign credit outlook.

Fitch Affirms State of Israel at ‘A’/'A+’; Outlook Stable   
06 Nov 2009 8:22 AM (EST)

---

Fitch Ratings-London-06 November 2009: Fitch Ratings has today affirmed the State of Israel’s Long-term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’ respectively with Stable Outlooks. The Short-term Foreign Currency IDR is affirmed at ‘F1′ and the Country Ceiling at ‘AA-’.

“Israel has fared better than many other small, open economies in the recent global economic and financial downturn, suffering only a mild recession compared to rated peers in Europe and Asia,” says Paul Rawkins, Senior Director in Fitch’s London-based Sovereigns team. “Nonetheless, the downturn has exposed Israel’s key vulnerability to shocks, namely a high public debt ratio that looks set to exceed 80% of GDP in the wake of wider fiscal deficits in 2009-10.”

Fitch says an improved macroeconomic policy framework, coupled with structural reforms since the last recession in 2001-02, laid the foundations for strong growth in 2004-08, in line with the ‘A’ median of 5%, rendering the economy markedly more resilient to shocks. With the exception of Bahrain, China and Poland, Fitch expects Israel to be the only country in the ‘A’ range to escape an outright recession in 2009. This performance is attributed largely to aggressive monetary and exchange rate policies, aided by a relatively trouble-free banking sector and an absence of asset price bubbles. Structurally, Israel’s high-tech manufacturing and services sectors have proved unexpectedly resilient to declining global investment demand, presaging a near record current account surplus in 2009.

Israel’s high public debt ratio remains the key constraint on its sovereign ratings. The adoption of rules-based fiscal policy in the wake of the last recession has served Israel well; limits on the growth of public expenditure and a ceiling on the state (i.e. central government) deficit facilitated a contraction in general government debt to 78% of GDP at end-2008 from a peak of 100% in 2003. Even so, this ratio remains high relative to the peer group median of 37%, although it is not the most extreme (’A-’ rated Greece exceeds 100% of GDP). Moreover, considering the mildness of its recession and an absence of financial sector-related support, the current external shock has taken a heavy toll on the public finances, chiefly on the revenue side. Fitch expects Israel’s general government deficit to widen to 6%-7% of GDP in 2009-10, on a par with rated peers Malaysia and the Czech Republic, which have experienced much steeper recessions, while pushing general government debt up to over 84% of GDP by end-2010.

While Israel’s experience with fiscal rules has been mixed, the current framework has entrenched fiscal discipline and together with signs of a strong economic recovery, suggests Israel’s powerful public debt dynamics could reassert themselves by 2011, forestalling any further deterioration in the public debt/GDP ratio. The government envisages a sharp narrowing in the state deficit to 3% of GDP in 2011 (from 6% in 2009), but still hopes to adhere to tax cuts over the medium term. Fitch expects some revision to the fiscal rules, with greater prominence being given to the Maastricht public debt/GDP ratio of 60% of GDP. From a rating standpoint, a positive rating action would require a decline in the debt/GDP ratio to a level nearer to the ‘A’ median. Conversely, a prolonged rise in the debt/GDP ratio and/or sustained fiscal easing would prompt a negative rating action.

Externally, the Government of Israel became a net external creditor for the first time in 2008, although it still falls short of ‘A’ norms on this measure. Burgeoning international reserves - these have more than doubled to USD60bn since end-2007 - have been the key factor behind this status change for the sovereign, facilitated by a strong current account surplus and buoyant net capital inflows. The economy as a whole also passed a new milestone in 2008, registering a surplus of external financial assets over liabilities for the first time. Israel expects its standing on the international stage to be further enhanced by OECD membership in the near future.

Contact: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239; Richard Fox, +44 (0) 20 7417 4357

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:  peter.fitzpatrick at fitchratings.com.

Additional information is available on www.fitchratings.com.

Sovereign risk in Turkey was once talked about in the same breath as Brazil’s.  Not so anymore.  One is going hat in hand to the IMF, likely to get $45 billion in the coming weeks; the other is largely self-financing.  What went wrong in Turkey?  Always keep your eye on the current account deficit, folks, even when Wall St. analysts tell you its nothing to worry about because it’s financed by FDI, or some such Bernanke-esque bunk.  Current account deficits mean borrowing from abroad.  And that means vulnerability.  Turkey went into the global crisis with a 5-6% current account deficit, while Brazil went in with small surpluses.  Keep your eye on America as well and its sovereign credit risk — current account deficits there have been nearly halved to 2-3% from 5-7% a couple of years ago, largely due to the US recession.  But the U.S. still can’t kick its foreign borrowing habit, Obama’s protectionism notwithstanding.  Likewise, watch out for “twin deficits.”  That’s when government deficits move in tandem with current account deficits (the former often driving the latter).  The US has these, as does Turkey (where government deficits are in the range of 5-7% of GDP, versus Brazil’s 3-4%).  Turkey’s overall government debt burden remains modest at under 50%, versus Brazil’s near-70%; however, Brazil’s government debt burden is headed down, while Turkey’s is rising.  Hence, Fitch moved Brazil up to investment grade not long ago, while Turkey languishes at BB-.  They both were BB- only a few years ago.  Sometimes the rating agencies get it right, even though it often takes them some time to do so.

So, the Turkish prime minister shows up hat in hand at the IMF’s doorstep, while President Lula’s Brazil is considered a rising power.  Have a look below at the CreditSuisse report from today on Turkey’s negotiations with the IMF.  Deputy Prime Minister Babacan, whom I met with in the past and perceive as smart and wily, is thankfully in charge of these negotations.

From CreditSuisse:

Turkey
Berna Bayazitoglu
+44 20 7883 3431
berna.bayazitoglu@credit-suisse.com
Prime Minister Erdogan denounced yesterday the claims in the local media that the IMF has offered a sizable financing package to the Turkish government which it cannot turn down. As we reported in the Emerging Markets Economics Daily yesterday, Erdogan told the Wall Street Journal on Monday (5 October) that the Turkish government has resolved one of the sticking points with the IMF, namely the IMF’s request for an independent tax revenue administration, and added that “he would like to see a new IMF program for Turkey agreed soon.” This was the most upbeat assessment that Erdogan has offered on the subject in a long while. Looking for an explanation for the change in Erdogan’s tone about an IMF agreement, the Turkish media claimed yesterday morning that the IMF might have offered a large financing package to Turkey (amounting to $45bn) which Erdogan cannot turn down. However, at a reception later in the day, Erdogan denounced local media stories that the IMF has made a new offer to Turkey.

Nevertheless, Erdogan’s statements in the Wall Street Journal add strength to the possibility that the government might invite an IMF mission to Turkey soon. As we noted in the Emerging Markets Economics Daily yesterday, speaking at various conferences in the last few days at the IMF/World Bank annual meetings in Istanbul and somewhat in contradiction to Erdogan’s statements in the Wall Street Journal, Deputy Prime Minister Babacan (who is the senior policymaker in charge of policy discussions with the IMF) had said that the discussions on the tax revenue administration and local governments’ spending were still continuing and that the IMF was studying the government’s medium-term economic plan and fiscal program.

The Statistics Office will release the industrial production data for August tomorrow. We forecast that industrial production was down 4.7% yoy in August, slowing from a contraction of 9.1% yoy in July. Our forecast is more optimistic than the consensus forecast (according to Bloomberg) of a 5.2% yoy contraction.

The question is:  Was it the right for the United States to announce its withdrawal from Iraq in order to focus on the war in Afghanistan? 

See this link for a video on the bomb attacks in Iraq.  Attacks in Iraq. Source: NYTimes

Arguments on both sides of the issue are convincing.  Obama got elected by single-mindedly attacking Bush’s policy on Iraq including, until recently, the “surge,” which dramatically reduced internecine violence in that country.  Now, just as he must do on health care reform, the President has to follow through on his election pledges or Moveon.org and others on his left flank will never forgive him.  Yet McCain this time last  year said the job in Iraq wasn’t finished, and the Democrats took his “one hundred years” quote out of context to convince the American people that McCain planned on staying in Iraq for, well, a hundred years.  Now, Iraq may be spinning out of control again, and it may be because of a too-precipitous pullout of American forces.  Barack Obama made the point last year on the campaign trail that, unlike Hillary Clinton, he has good judgment, never supporting an invasion of Iraq, even making a speech to that effect in the Illinois state legislature, where grandstanding on the issue had no policy effect at all.  Putting aside whether we should have invaded Iraq to rid the world of this dictator with bad intentions if not bad weapons, it is a legitimate debate whether we should wind down Iraq, a country central to stability in the Middle East — given its location, ethnicity, and oil wealth, and wind up Afghanistan, arguably a mountainous backwater that has bled imperialists from Russia to Britain to the United States for centuries.  True, instability in Afghanistan triggers instability in nuclear-armed Pakistan.  I said there were good points on both sides of the issue.  I merely wish to get under the teflon a little and question the wisdom of President Obama’s foreign policy choices.

Great op-ed by Aluf Benn, diplomatic editor/correspondent for Haaretz, in today’s NYTimes.  He asks, Where has Obama been on Israel?  Why hasn’t he spoken to Israelis directly, the way he has addressed everyone else from Ghanaians to Egyptians, Europeans to Latin Americans?  For sure, he is really busy, probably busier than any other president since FDR.  As he himself has emphasized, there is the bank bailout, the trillion dollar fiscal stimulus, two wars (one to wind down, one to wind up), a failing state (Pakistan), and health care reform (is that really necessary right now?), not to mention the controversy over the arrest of a Harvard professor who is a friend of his.  Yet he has said he is the one who can untie the Gordian Knot of the Arab-Israeli conflict by the power of his personality and the credibility he has in the Muslim world.  Well, Aluf Benn argues that he is losing credibility with Israelis, a key player in the conflict.  Moreover, he points out something important and elusive to most world leaders.  The difference between playing to American Jews and playing to Israelis.  You don’t have to go on and on about the Holocaust and link it to the Arab-Israeli conflict to placate Israelis.  Just visit Yad Vashem and then deal with the here and now.  American Jews are more interested in politicians reiterating their angst about the Holocaust than are Israelis.  Israelis prefer to hear about a plan to deal with Iran’s emerging nuclear weapons capability, about Hamas rockets in the south and Hezbollah rockets in the north, and about Israel being recognized as a Jewish state by the Muslim world.  Have a read…

Karim Sadjadpour of the Carnegie Endowment was on CNN this morning analyzing the situation in Iran of late (see below).  Which way the Iranian Revolutionary Guard Corps and the paramilitary Basij will turn in this standoff will be critical, as will the staying power of the protestors in the coming days.  Note Sadjadpour’s article that I embedded in an earlier post on Iran as well.  Very good reading on the man with difficult decisions to make, Supreme Leader Khamenei…

From CNN’s American Morning with John Roberts:

John Roberts: Where do you see this ending?

Karim Sadjadpour: It’s difficult to say, John. A lot of it depends on what the opposition leaders decide they want to do. Certainly there’s a tremendous sense of outrage in Tehran. Not only in Tehran, throughout the country there’s a tremendous sense of injustice that these young people have. At the same time, it’s a country which endured an eight-year war with Iraq. People are allergic to the prospect of further carnage and bloodshed and violence. But at the moment, I think there’s truly a sense of outrage and I see these protests continuing.

Roberts: The Iranian Revolutionary Guard Corps (IRGC) and the government have told people to stay inside. The IRGC is saying if you put up certain materials on blog sites you could face legal charges. How big of a role is the Revolutionary Guard Corps and this paramilitary organization, the Basij, playing in trying to tamp down these protests?

Sadjadpour: They’re playing a definitive role. But what’s been amazing is they haven’t dissuaded people from going in to the streets. Historically, when the regime has announced that the Basij and the Revolutionary Guard are authorized to use force to shoot people, that will quell the protests. But so far, we haven’t seen the protests really quelled. The other day there were several hundred thousand people in Tehran. And it just gives you an idea of how outraged people feel that they’re willing to go out in to the streets and risk their lives.

Roberts: And this ruling Guardian Council, which has said it will recount certain parts of the election. Of course, Moussavi and his supporters are calling for a new election. How far do you think they will go in that? Are they playing for time here, hoping all of the protests will die down and eventually people will get tired of going out in the streets and accept the results of the election? Or might this actually lead to a new election? Can they resist the will of the people?

Sadjadpour: The Guardian Council is not like our Supreme Court. It’s not an objective entity. It’s essentially under the hegemony of Ayatollah Khamenei, the supreme leader. And I think Khamenei deferred to the Guardian Council simply as a tactical move to buy time. But Khamenei may be faced with a dilemma and it may be one day soon, whether to sacrifice President Ahmadinejad or sacrifice himself. Because it’s really gotten to the point where people are calling for the head of Khamenei. And this is unprecedented in the last 20 years.

Roberts: Khamenei has been supreme leader since 1989. This is, as you suggest, all about his survival as well. Right now he’s hitched his wagon to Ahmadinejad who’s got the loyalty of the Revolutionary Guard Corps and the Basij. Can you foresee any circumstances under which he might, for his own survival, throw Ahmadinejad overboard?

Sadjadpour: I think it’s certainly within the realm of possibilities. And I would argue, John, Ahmadinejad doesn’t necessarily have the loyalty of the Revolutionary Guards and the Basij. I was based in Iran for a couple of years and I spoke to many of these young people within the IRGC and Basij who recognize that this “death to America” culture of 1979 is obsolete today and Iran will never achieve its full potential unless there’s reform made in the political, economic, social realm. So I think we shouldn’t take for granted the fact that all of the regime’s shock troops are necessarily going to side with President Ahmadinejad.

Roberts: What will it take to initiate that huge fracture? As we see now, the Guard Corps and the Basij are on the side of the government.

Sadjadpour: We have to get inside the head of Ayatollah Khamenei…his world view is very clear. When you’re under siege, never compromise. Because if you compromise it’s going to project weakness. If he orders a mayor clampdown, I think we may start to see fissures within the regime’s shock troops.

 

Well, actually, Israel has several points of view.  The one expressed by Netanyahu is just one of them.  Nevertheless, in the “dialogue of civilizations” launched by expert bridge-builder Barack Obama in Cairo earlier this month, when he raised the Arab-Israeli conflict as an obstacle to dialogue, one voice was not heard.  Israel’s.  It’s like negotiating an end to the global financial crisis without inviting China.

Benjamin Netanyahu is no Barack Obama.  He is no Shimon Peres.  He lacks their diplomatic skill.  I have had extensive meetings with him on a number of occasions, and found him to be a man enthused with his own self-importance.  Just like Barack Obama and Shimon Peres, but a lot less charming.  What a discovery?  Political leaders are vain.  Yet Netanyahu proved an effective leader as Israel’s finance minister, freeing up the economy to realize its potential.  Can he be an effective and visionary prime minister his second time around?  This speech falls short of the mark.

What Netanyahu did in his speech yesterday (see text) was to say, Wait a minute!  Listen to our point of view! 

Obama made efforts to recognize the Arab narrative in his speech in Cairo.  He recognized the Jewish narrative in part by discussing the Holocaust.  Netanyahu gave voice to another part of the Jewish narrative – the claim to the land in Israel.

But the Arab reaction has been sour.  Mubarak is angry, saying that the requirement that Palestinians acknowledge Israel as a Jewish state, a cornerstone of Netanyahu’s speech, “scuttles the chances for peace,” and that no one in Cairo will answer the phone when Netanyahu calls.

It’s not a very radical idea.  Given the Arab insistence on the “right of return” of Palestinian refugees to Israel, an act that would destroy Israel as a Jewish state, it’s not asking a lot.  The Arab Peace Initiative of 2002, which Obama and some Israeli leaders have applauded, called for a just solution to the refugee problem, according to U.N. General Assembly Resolution 194, which many insist calls for a right of return (”Resolves that the refugees wishing to return to their homes and live at peace with their neighbours should be permitted to do so at the earliest practicable date…”)

Arguably, Obama’s conciliatory speech in Cairo opened the door for this sharp Arab reaction to Netanyahu’s speech.  Bush pushed the Arabs to accept Israel’s narrative; Obama is pushing Israel to accept the Arab narrative.  Obama may have inadvertently created huge expectations on the Arab street for Israeli concessions.

There is a deal to be had in the Arab-Israeli conflict.  But both sides have to make concessions.  The deal is:  the dismantling of most West Bank settlements in exchange for Jerusalem.  Israel gets sovereignty over Jerusalem – because no cities, including Berlin, remain divided over the long term – with substantive measures to ensure that Muslim/Palestinian interests in Jerusalem, especially around the holy sites, are overseen by Muslims and Palestinians, much as the Ottomans allowed the French and Russians to oversee their holy sites in centuries past.  In exchange, Israel dismantles most West Bank settlements, forcing tens of thousands, perhaps over a hundred thousand Jewish people to relocate inside Israel behind agreed borders.  As George Bush agreed to, some Israeli settlement blocks, major cities in place for over forty years, generally in and around Jerusalem and very close to the Green Line, perhaps representing some eighty thousand people, will remain as part of Israel.  The Palestinians get a viable, contiguous state in the West Bank with transportation links to Gaza.

That is a deal in which both sides make concessions.  The Arab Peace Initiative demands one-sided concessions from Israel in exchange for the Arabs agreeing not to make war.  It’s like Vito Corleone making you an offer you can’t refuse.

The only problem with the Jerusalem-for-Settlements idea is that Palestinians, Arabs and Muslims will never go for it.  It’s become too emotional a part of their narrative.  Jerusalem is the third holiest city of Islam.

Putting aside such discussions of what is fair, the key question in all of this is, Whose side is time on?  Given demographic realities, it seems that time is on the Arab/Muslim side.  Peres and others on Israel’s left acknowledge this, which has underpinned their efforts to move quickly to a negotiated settlement.  The right in Israel emphasizes their neighbors’ weaknesses – economic and political — and argue that time is on Israel’s side, a potentially risky misconception. 

Netanyahu, spokesman of the right, basically said in his speech, Here is our position; now come to us.  He has adopted the Arab strategy:  stake out a hard line and let others begin concessions.  Netanyahu has stood up to Barack Obama, maybe not the last foreign leader to do so.  Read Jeffrey Goldberg for insight into how Mr. Netanyahu thinks.

Politics in Israel is dysfunctional, leaving that nation bereft of visionary leadership.  It takes so much effort to make and hold coalitions together there, that politicians have little time for policy making.  Political reform is needed, included raising the minimum for parties to be seated in parliament.  The religious parties must be folded into larger groupings.  If things remain as they are, Israeli leaders will miss opportunities, and for tiny Israel with so few friends in the world, this could be an existential threat.

Photo:  Benjamin Netanyahu, Israel’s Prime Minister.   Source:  www.yglesias.thinkprogress.org