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'Unique Situation' : Israel: An Economic Ward of U.S.

July 20, 1987|ROBERT W. GIBSON | Times International Economics Correspondent

JERUSALEM — Everyone knows the United States helps Israel. But few Americans know exactly how much. By any meaningful measure, the Jewish state has become an economic ward of the United States, and leaders in both countries are concerned.

When this year ends, the United States will have given Israel as much aid in inflation-adjusted dollars as all of Western Europe received under the Marshall Plan.

Yet Israel's population of 4.3 million is barely 1 1/2% of postwar Western Europe's, and half that of metropolitan Los Angeles today. Moreover, the Marshall Plan was a self-limiting process, designed to end when the European economy recovered from the devastation inflicted by World War II; the commitment to Israel is open-ended.

25% of All Aid

For the last 11 years, in fact, Israel has received 25% of all the foreign aid appropriated by Congress, making Jerusalem far and away the world's leading recipient of American assistance.

No parallel exists in the history of international capital flow.

"It's a unique situation, there's no doubt about that," said former President Jimmy Carter at his home in Plains, Ga., after a recent visit to Israel. "I don't think it is wholesome for either country . . . but it has become a way of life."

Still, Carter sees American financial support of Israel as something the United States can--and should--afford: "Israel is a small country with democratic principles and is beleaguered by an overwhelming number of Arabs who surround it," he said.

Israeli leaders dislike dependency, too: "Nobody in Israel ever wanted to become dependent on a foreign power," said Amos Rubin, Prime Minister Yitzhak Shamir's economics adviser during a recent interview here, "and, now that we are, nobody has an acceptable way out."

Private Aid Also

And while official American aid--a total of $58.8 billion in 1987 dollars--dominates the picture, the economic connection between the two countries involves far more than that.

For every three dollars Israel receives from the U.S. government, it gets an additional dollar in private American contributions, channeled through such organizations as United Jewish Appeal and Hadassah, as well as through personal purchases of Israel bonds at concessionary interest rates.

This means that every year the United States sends Israel at least $4 billion--$1.8 billion for military spending, $1.2 billion in economic aid and roughly $1 billion from private pockets. That amounts to nearly $1,000 a year for each Israeli, about 20% of the country's average per capita income.

Even those numbers understate the picture, for the Israeli and American economies have intertwined on a fundamental level.

With the blessing of the White House and Congress, Israel's defense industry has intermeshed with the U.S. military-industrial complex, serving not only as major customer, supplier and consultant, but also as a weapons systems researcher and developer. Recently, it was declared eligible to bid for classified American defense contracts on the same basis as a "major non-NATO ally."

As the result of an agreement signed last year by Defense Secretary Caspar W. Weinberger and Israeli Defense Minister Yitzhak Rabin, the Israelis have even received contracts let as part of President Reagan's Strategic Defense Initiative.

"We are trying to integrate into the American military-industrial community," said Nehemiah Hassid, corporate vice president for finance of Israel Aircraft Industries. "We feel this agreement paves the way toward a supportive role in the complex."

Two years ago, Israel won the only free trade area agreement that the United States ever has signed. Though most Israeli exports already enter America duty-free, the pact calls for abolition of all tariffs between the two countries. As such, it constitutes a kind of insurance policy, shielding Jerusalem against any future protectionist trade measures enacted by Congress.

The economic relationship between the United States and Israel also includes these unusual attributes:

-- Since 1985, all U.S. aid has been given as grants, not as repayable loans.

-- Economic grants are paid in cash for "general budgetary support" instead of being earmarked for specific development projects--the usual procedure. Thus, Israel may spend them in any way it chooses, even at cross purposes with American policy. (At present, Israel uses them mainly to pay $1 billion a year on previous loans).

-- Military grants are paid on a "cash flow" basis, meaning they may be committed by Israel before they are appropriated. In effect, this obliges Congress to fulfill long-term contracts Jerusalem signs with American suppliers.

-- Israel is exempted from buy-American rules usually attached to military grants. It is authorized to spend up to $300 million a year on purchases from its own defense industry and on internal research and development projects.

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