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Economy of the Occupation 16: Privatization of Israel’s Refineries, January 2008.

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1.      Introduction

Like many other countries in the world, Israel has embarked on a rapid and wide-scale privatization process for over a decade. This paper will explore the consequences of transferring state owned assets to private ownership by focusing on one example - that of Israel's oil refineries. Additionally, it will trace the ways in which Israel ’s occupation of Palestine affects Israeli economic policy.

The current economic situation in Israel is layered. On the surface, the economy is prosperous, with improvements in the macroeconomic indicators, in per-capita GDP, low inflation and a balanced government budget. Despite appearances, however, the reality is quite bleak. Israel’s welfare system has been largely dismantled and the government’s responsibilities vis-à-vis its Israeli citizens and Palestinian subjects has dramatically changed in the past few decades.

Israel used to be one of the world’s most developed welfare states, with substantial government investment in public services such as health , education and welfare. [i] Today, however, that welfare state only continues to exist in the illegal settlements in the West Bank, where settlers receive many forms of subsidized goods and government services. [ii]

Since Israel’s occupation of the Palestinian Territories in 1967, occupation has become a serious drain on the Israeli economy. More than two-thirds of the occupation’s expense comes from military spending , aimed at keeping the Palestinians under control and suppressing their revolt. [iii] The Israeli government spends approximately $9.3 billion every year to maintain the occupation (calculation updated for 2007).* [iv] US aid to Israel has dropped to about $2.2 billion annually. It can therefore no longer cover the cost of occupation. [v]

The occupation costs about 13% of the government’s total annual budget. [vi] At the current rate of increase of the Israeli budget (1.7% annually) and the rate of increase in occupation costs (about 8% annually), the cost of the occupation will reach 50% of the total Israeli budget by 2030. This scenario is highly unlikely, however, as no modern economy can sustain such an expense.

How, then, does Israel plan to fund the occupation? There are three options available to the government. The first is to use expanding fiscal measures, such as printing money, going into debt or increasing taxes. These measures are currently very unpopular among mainstream economists. Israel could face serious sanctions from international trade organizations, the IMF and from foreign governments and investors if it uses such measures. Additionally, government economists have been trained in Israeli and foreign universities to reject such policies.

The second option is to generate sufficient economic growth so that the government’s revenues increase fast enough to cover the mounting costs of occupation. However, over the past 40 years, the Israeli economy grew at an average of 2.4% annually while the settler population grows at an astounding rate of 8% annually. Keeping these statistics in mind, it seems highly unlikely that Israel could now generate enough economic growth to cover the cost of occupation.

The third option for funding the occupation and the one currently being adopted by the Israeli government is to gradually cut government expenditures and privatize government-owned assets. The cut in government expenditures is evident in Israel ’s 2007 budget in which the government approved cuts of about 9% [vii] to most ministries, including welfare, education and health. However, the approved defense budget is the largest in Israel’s history: an indication that the trend of shifting resources from public services to the occupation is reaching a peak. As for privatization, the government sold assets worth over $1 billion in 2006. [viii] By doing so , the government was able to stave off a financial crisis so that it can continue to maintain the occupation – at least for now. However , privatization isn’t a sustainable solution since there are a finite number of government assets. Furthermore, the government can rarely get a fair price for its assets (as this paper will try to demonstrate). [ix] When the government runs out of assets to liquidate, it will be forced to find other sources of funding to continue its military campaign against the Palestinians.

This article focuses on the latter method of financing the occupation: privatizing government holdings. It demonstrates the ways in which privatization hurts the government, Israeli citizens as well as Palestinians. By examining a specific case of privatization – the sale of Israel’s oil refineries – the article will demonstrate that when Israel relinquishes its assets to private companies – it loses money and power – thus jeopardizing its ability to administer basic human services such as energy, food, health care , etc…

Businesses which have purchased government assets (thus providing money to Israel ) or which have provided services to the occupation industry bear some responsibility for the occupation. As the privatization of government assets continues, more of Israel’s economy becomes private – thereby increasing the economic power and political clout of private businesses, and ultimately their responsibility for crimes committed by Israeli forces.

To download the whole bulletin on pdf,  click here.