The Global Political Economy of Israel

Nitzan, Jonathan; Bichler, Shimshon Book The Global Political Economy of Israel Provided in Cooperation with: The Bichler & Nitzan Archives Suggested Citation: Nitzan, Jonathan; Bichler, Shimshon (2002) : The Global Political Economy of Israel, ISBN 0-7453-1676-X, Pluto Press, London, http://bnarchives.yorku.ca/8/ This Version is available at: https://hdl.handle.net/10419/157972 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc-nd/4.0/ The Global Political Economy of Israel Jonathan Nitzan and Shimshon Bichler Pluto PPress LONDON • STERLING, VIRGINIA Bichler 00 prelims 20/1/06 1:09 PM Page iii First published 2002 by Pluto Press 345 Archway Road, London N6 5AA and 22883 Quicksilver Drive, Sterling, VA 20166–2012, USA www.plutobooks.com Copyright © Jonathan Nitzan and Shimshon Bichler 2002 The right of Jonathan Nitzan and Shimshon Bichler to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7453 1676 X hardback ISBN 0 7453 1675 1 paperback Library of Congress Cataloguing in Publication Data A catalogue record for this book is available 10987654321 Designed and produced for Pluto Press by Chase Publishing Services, Fortescue, Sidmouth EX10 9QG Typeset from disk by Stanford DTP Services, Towcester Printed in the European Union by Antony Rowe Ltd, Chippenham, England Bichler 00 prelims 20/1/06 1:09 PM Page iv To Geneviève and Elvire, with love, from Jonathan To Dassi, with love, from Shimshon Bichler 00 prelims 20/1/06 1:09 PM Page v Bichler 00 prelims 20/1/06 1:09 PM Page vi Contents List of Figures xi List of Tables xiii Acknowledgements xiv 1 Introduction 1 The Conventional Wisdom 3 Statism 4 The ‘Unique Case’ of Israel 6 ‘Classless’ Capitalism 7 Toward a Global Political Economy of Israel 8 Capital and Differential Accumulation 10 Regimes of Differential Accumulation 14 The Rise and Consolidation of Israel’s Ruling Class 16 Accumulation Through Crisis 20 The Middle East and the Weapondollar–Petrodollar Coalition 24 From Foreign Investment to Global Accumulation 27 2 Capital and Power: Breaking the Dualism of ‘Economics’ and ‘Politics’ 31 Capital Accumulation: Production or Power? 31 Accumulation of What? 36 Differential Accumulation 37 Accumulation Crisis or Differential Accumulation Boom? 41 Regimes of Differential Accumulation 47 Breadth and Depth 49 Green-Field 52 Mergers and Acquisitions 53 Breaking the Envelope 57 Amalgamation and Globalisation 60 Cost Cutting 65 Stagflation 66 Differential Accumulation: An Historical Outline 72 The Global View 74 The Middle East 76 Israel 78 Back to Depth? 81 Data Appendix 82 Bichler 00 prelims 20/1/06 1:09 PM Page vii 3 The History of Israel’s Power Structure 84 Transnational Dominant Capital 84 Centralisation 85 Transnationalisation 88 Restructuring 90 The Pre-Independence Sectors 91 The State Cocoon 96 Land 96 Capital 97 Labour 101 State Capitalism and Corporate Centralisation 102 The Socio-Ideological Basis 105 The ‘Class Struggle’ 105 The Dynasties 108 The Dual Political Economy 117 The Business Sector 117 The Bifurcation of Labour 120 From Breadth to Depth: War Profits and Inflationary Finance 122 Finance 125 Armament 128 Accumulating Through Crisis 132 From Dominant Party to Dominant Capital 133 4 The Making of Stagflation 137 Demand Side: Money 139 Theory 139 Evidence? 141 Demand Side: Government Policy 143 The Ghost in the Deficit 144 Do Deficits Cause Inflation? 147 ‘Policy Errors’? 149 Demand Side: Wages 153 Demonising Workers 153 The Histadrut Contra Workers 154 Do Wages Cause Inflation? 156 A Disaggregate Perspective 158 Supply Shocks: The Emperor’s New Clothes 160 Sorting Out the Blame 161 Shocks? What Shocks? 162 Greek Symbols and the Naked Truth 165 Inflation and Accumulation 170 The Analytical Framework 171 The Israeli Case: A Bird’s-Eye View 174 Armament and Finance 177 viii THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 00 prelims 20/1/06 1:09 PM Page viii Wage Income and Capital Gains 182 Redistribution 183 Hype 184 From Capital Accumulation to Inflation 186 From Conflict Inflation to Accumulation 187 The End of Inflation 192 Crescendo 192 Collapse 193 From Price Inflation to Wage Compression 195 5 The Weapondollar–Petrodollar Coalition 198 Enigmas 198 The Military Bias 202 Imperialism 203 Military Spending 206 The U.S. Arma-Core 208 The ‘Angry Elements’ 208 Corporate Restructuring and ‘Military Keynesianism’ 210 Arms Exports 213 Arms Exports and Corporate Profit 214 Commercialising Arms Exports: From Aid to Sales 216 Global Redistribution and the Rise of the Middle East 217 Middle East Oil and the Petro-Core 219 The ‘Demise Thesis’ 219 Whither the Oil Companies? 220 Politicising Oil: From ‘Free Flow’ to ‘Limited Flow’ 224 The Weapondollar–Petrodollar Coalition and Middle East ‘Energy Conflicts’ 228 From Crisis to Prices 229 From Oil Revenues to Arms Imports 233 From Differential Accumulation to ‘Energy Conflicts’ 235 The 1967 Arab–Israeli War 239 Making America ‘Aware of the Issue’ 239 Subcontracting 241 Breaking Nasser’s Bones Asunder 242 The 1973 Arab–Israeli War 244 The Realist View 244 The Coalition’s View 245 The U.S. ‘National Interest’: What Price Stability? 247 The 1979 Iranian Revolution and the 1980–88 Iran–Iraq War 250 The Hostage Crisis 250 The ‘Sting’ 251 The Network 252 Nourishing the Conflict 255 The Oil-Arms Bust 256 CONTENTS ix Bichler 00 prelims 20/1/06 1:09 PM Page ix xTHE GLOBAL POLITICAL ECONOMY OF ISRAEL The 1990–91 Gulf War 259 Warming Up 260 ‘Danger Zone’ 262 Back on Top 264 The Demise of the Weapondollar–Petrodollar Coalition 266 The New Breadth Order 266 The Last Supper (Almost) 268 6 From Foreign Investors to Transnational Ownership 274 The ‘Dependency’ 275 Zionist Donors-Investors 278 Corporate Cold Warriors 280 The Godfathers 283 The Autumn of the Patriarch 288 Toward Transnationalism 294 The Technodollar–Mergerdollar Coalition 294 Israel ‘Opens Up’ 296 The Brodet Report 297 The Principal Groups 300 Taxes, Death and Bank Hapoalim 300 ‘Releasing Value’ 302 Mickey Mouse Takes Over Koor 303 The Recanatis Face the Raiders 305 The Big Asset Swap 307 ‘High Technology’ and Domestic Power 309 ‘New Economy’ or Leveraged Hype? 311 Newspapers and Criminals 315 The Russian Connection 318 The ‘Fishman State’? 327 The Politics of Communication Profits 330 Transnationalism and Israeli Technology 336 Why Invest in Israel? 336 Competition, Power and Waste 338 Israel’s Silicon Wady: The Big ‘Sale’ 343 End of the Road? 346 Global Accumulation, Domestic Depletion 348 At a Crossroads 353 References 358 Index 372 Bichler 00 prelims 20/1/06 1:09 PM Page x For Israel’s ruling class, or at least the bulk of it, the shift from Zionist nationalism to openness and regional integration is far from a challenge; indeed, given the changing nature of capitalism, globally and locally, the reorientation is rather necessary. Until the late 1980s, Israeli capitalism operated in the broader context of superpower confrontation, and under local conditions of war economy and stagflation (combined stagnation and inflation). These circumstances mandated a strong nationalist ideology, an emphasis on ethnicity, and colonial occupation. In time, though, that mode of accumulation ran into insurmountable barriers. The end of the Cold War, the progressive globalisation of trade and investment, the gradual loss of control over the stagflationary process at home, and, finally, the Palestinian uprising, have together driven Israel toward an alternative regime. The hallmark of this regime is transnational accumulation, with local capital increasingly integrated into the global circuits of ownership. This latter process is inconsistent with a war economy; hence, the attacks on the nationalist consensus and its associated features, the demise of collectivism in favour of individualism, the decline of the welfare state in lieu of sound finance, and the disintegration of organised labour in the face of rising business power. The purpose of this book is to situate this latest transition as part of Israel’s century-long evolution as a capitalist society. We seek to tell what has happened, as well as why, trying to interweave the processes of accumulation, class and globalisation into one single story. In writing this story, we attempted, as much as possible, to avoid unnecessary jargon and explain the terms we use. However, the issues we deal with are often not simple, and therefore warrant more than a short introduction. The present chapter aims to give a systematic presentation of the main questions and themes of the book, concentrating specifically on why we think these questions and themes are important, and on the broader framework which ties them into a coherent whole. The Conventional Wisdom Until recently, most of those writing on Israeli society seemed to share the following three assumptions: (1) that their subject matter was best analysed within a ‘statist’ frame of reference; (2) that the historical development of Israel was predetermined by ‘unique’ circumstances; and (3) that as a consequence of these unique circumstances, Israel has evolved into a ‘special case’ of classless society, a society in which the process of accumulation and the role of elites could be safely ignored. Over the past decade, the rise of neoliberalism made many writers uneasy with this model, although few if any have been able to transcend it. Let us look more closely at these conventional beliefs and what they mean. INTRODUCTION 3 Bichler 01 chaps 20/1/06 1:15 PM Page 3 Statism The ‘statist’, or ‘realist’ approach has grown increasingly fashionable since the 1970s.1The basic unit of analysis here is the nation state, whose actions are dominated by an amorphous group of ‘central-decision makers’, ‘state officials’, or ‘rulemakers’. This group is supposedly driven by the ‘national interest’, seeking to achieve broad macroeconomic goals, such as growth and a favourable balance of payments, or macropolitical aims, like military prowess and social stability (see for instance Arian 1989). These broad ends are perceived as independent of the particular interests of various societal groups, and are often emphasised precisely for their universal nature. The aims of the state are formulated in aggregate terms – a habit of thinking which emerged and consolidated with the postwar Keynesian paradigm (Tsuru 1968). Within this aggregate framework, practitioners habitually subdivide society into two systems of ‘economics’ and ‘politics’. In the Israeli context, it is customarily to assume that the economic system would guarantee universal welfare – that is, if only the system were allowed to function ‘efficiently’. The political system undermines that efficiency when it seeks to achieve additional goals, such as ‘national security’ – but then fails to find the optimal rate of substitution between security and economic growth along the nation’s production-possibilities frontier.2With its foundations deeply embedded in the neoclassical paradigm of economics, this focus on ‘aggregate welfare’ enables the writer to remain within the boundaries of the national consensus (Robinson 1962: 117–18), and has driven many Israeli academics to accept the supremacy of the political echelon. Thus, Eitan Berglas, an economics professor who later became chairman of Bank Hapoalim, asserts that ‘the central problem of the economic policy in Israel is choosing the right point on the curve [production-possibilities frontier]’, yet he immediately adds that this choice must be determined by ‘security considerations’ which are ‘beyond the domain of this article’ (1970: 194). That 4THE GLOBAL POLITICAL ECONOMY OF ISRAEL 1 Cf. Tilly and Ardant (1975); Krasner (1978a); and Skocpol (1985). ‘Statism’ remains particularly popular in the study of International Relations, not only because of its universal character, but also since its analytical units and research categories correspond closely to official bureaucratic structures. For an extreme application of this approach to Israeli, see Migdal (1989) and Barnett (1992). 2 The production-possibilities frontier is a hypothetical curve describing the trade-off between different types of goods and services – in this case, ‘security’ and ‘investment’ – which can be produced when the economy operates at full employment and maximum efficiency. Since all productive resources are assumed to be fully and efficiently utilised, an increase in one type of output (for instance, security) necessitates a decrease in the other (investment), and vice versa, and it is up to society to decide which combination of the two is ‘optimal’. The ‘misallocation’ arises when the politicians’ choice differs from the ‘optimal’ one. The only problem is that, so far, nobody has been able to either draw this frontier for any actual economy, or to explain how an ‘optimal’ choice can ever be made in a conflict-ridden society, where the loss of one is the gain of another. Bichler 01 chaps 20/1/06 1:15 PM Page 4 particular paper was written at a sensitive period, right at the end of the Israel–Egyptian war of attrition – although time has done little to change the author’s basic presumption. Thirteen years later, after the 1982 Israeli entanglement in Lebanon, we can still find Berglas claiming that ‘the purpose of military expenditures [in Israel] is both to deter potential enemies from starting a war and to achieve superiority once a war has started’, and that ‘it is thus difficult even in retrospect to assess the success or failure of a military expenditure program’ (Berglas 1983: 16). Likewise, Hasid and Lesser, while working as senior economists at the Ministry of Defence, asserted that although ‘Israeli society is democratic, free, peace-seeking and striving for a standard and quality of life much like the progressive Western states, Israel is coerced into a permanent state of war’. In this context, they explained, ‘the allocation of resources for security involves national risks which are very difficult to assess in any objective way’ (Hasid and Lesser 1981: 243). These assertions may be all true of course, but then there arises the simple question: if the size of the military budget, decisions about the occupied territories, the fate of the settlements, and the dependency on the United States are all determined by autonomous state officials, uncompromising Arab regimes and built-in ideological inclinations, why the scientific pretensions of rational economism? The total subjugation of the economy to the state is manifest in Ezra Sadan (1985: 119), an economics professor and General Director of the Finance Ministry at the time: ‘In Israel’, he asserts, ‘economic goals arise naturally from the general goal of the survival of the state.’ Indeed, ‘planning for survival includes economic growth, and even when this is not an objective in and of itself, it is a means for making possible the establishment of the defence system required for future wars’. (Sadan, previously a member of the far-right HaTehia, or Revival Party, has since converted to advocating peaceful regional integration.) The Hobbesian view of ‘survivalism’ has been so thoroughly accepted in Israeli political literature, that some researchers have decided to skip the analysis altogether and turn directly to policy implications. Kleiman (1992), for example, although writing after George Bush’s declaration of a ‘New World Order’, still has little doubt about the militaristic course of Israeli society. For him, the main issue remains the benefit for the ‘state’, and the principal question is ‘how can Israel best respond to mounting challenges in the global weapon market and how should it preserve its position and competitive advantage?’ (p. 326). The answer is succinctly summarised in Kleiman’s own words: ‘In order for the Israeli arms industry not to perish, it should continue with its tradition of domestic dexterity and external cunning.’ In his opinion, the key is a proper reading of the world armament market, leading to a most revealing conclusion, namely, that ‘those who foresee the future and respond adequately will get the juiciest market share’ (p. 336). The substitution of advice for serious research is typical of an academic community locked into a rigid consensus. Perhaps the clearest expression of this consensus is the repeated use – often unconscious – of terms such as ‘we’, ‘us’ INTRODUCTION 5 Bichler 01 chaps 20/1/06 1:15 PM Page 5 and ‘ours’, usually coupled with a need for ‘sacrifice’.3Writing shortly after the 1967 War, Yair Aharoni for example describes how ‘we are required, and justly so, to demonstrate resilience and hold out against political and economic pressures’, while ‘our young are called for a long reserve service and bloodletting’ (1969: 157). Although hinting that the Labour government of Golda Meir should re-evaluate its priorities, Aharoni is careful to add that this is ‘not to doubt the need to devote whatever is necessary in order to assure our very survival’ (p. 160). And once defence cuts are put out of the question, a ‘belttightening’ economist (with tenure) can step in to announce that ‘if we want to enjoy this kind of growth in the future, we must begin immediately by rapidly reducing the standard of living’ (Berglas 1970: 195). The only question is who are these ‘we’ whose belt the economists are so eager to tighten. The ‘Unique Case’ of Israel The adoption of statism by Israeli academics was greatly facilitated by the view of Israel as sui generis, or a ‘special case’. The first reason for this uniqueness is exogenous. Unlike many other democracies, goes the argument, Israel has been in a constant state of war forced onto her by hostile, uncompromising neighbours. Thus, ‘Insofar as Israel is concerned’, writes Mintz (1984: 104), ‘one cannot apply the concept of military-industrial complex to this Western-style democracy in the sense of a conspiracy by heads of the political, defense and economic establishment solely for the sake of furthering their own interests. After all, Israel’s very survival has been threatened for many years.’ Following a similar vein, Peri (1983: 1) writes that ‘Since its establishment, and in fact even prior to 1948 Israel has been in a state of war’ and that ‘the all-encompassing nature of war in Israel and the centrality of security to national existence have created a situation whereby numerous spheres, which in parliamentary democracies are considered “civil”, fall within the security ambit and are enveloped in secrecy’. And so, ‘Beyond the ideological and political disagreements prevailing in the Israeli public’, write Horowitz and Lissak (1988: 28), ‘there was always a broad consensus regarding the threat for survival embedded in the Israeli–Arab dispute’ (for a similar line, see also Horowitz and Lissak 1989, Ch. 6). The consequence was that Israel became a unique case. ‘Unfortunately’, writes Ben Dor (1977: 431), ‘in the current state of the theoretical literature, Israel constitutes such an exceptional case of a “nation in arms” (a “barrack democracy”), that it is almost impossible to compare it to any other similar case’. And, ‘In spite of the many references to Israel and the IDF in comparative works on civil–military relations, none of the existing conceptual frameworks in the field appear fully applicable to the case of Israel’ (Horowitz 1982: 96). 6THE GLOBAL POLITICAL ECONOMY OF ISRAEL 3 On the concept of ‘we’, see Zamiatin (1924), and more recently, Barnet (1972: 7). Bichler 01 chaps 20/1/06 1:15 PM Page 6 The second, and perhaps more important reason for the uniqueness of Israel stems from its own ‘primordial sin’. The East European ‘founding fathers’, goes the argument, instituted an authoritarian ‘socialist’ culture, and it is this culture, at least according to the vast majority of Israeli social scientists, which lies at the root of ‘Israel’s malaise’. Beginning in the 1920s, the political system seized control of the economy, first through the Labour Party and the Histadrut (federation of labour unions), who then transferred their power to the government of the newly born state. The result was the institutionalisation of an authoritarian/statist culture. Shapiro (1975: 207–8), for example, believes that contrary to the basic individualistic-liberal principles of Western society, Israel has failed to maintain the necessary separation between economics and politics, and allowed the public-political domain to impinge upon the private-economic sphere (see also Shapiro 1977; Arian 1989; and Aharoni 1991). The consequences for Israeli society were detrimental. The petrifying of political dominance since the British Mandate era has created grave ‘distortions’, mostly associated with the evils of a ‘socialist tradition’ and excessive ‘government intervention’ (Halevi and Klinov-Malul 1968: 4). ‘The socialist ideology’, writes Ben-Porath (1986: 14), ‘included a distrust of the market, a view of profits as mere rewards to parasitism, and (paradoxically) a view of services as unproductive.’ And the curse lingers: ‘The founding fathers of the state, and more precisely of the its labour movement’, reiterates Kleiman (1996: 206), ‘were disposed toward direct intervention and planning’, policies which unfortunately ‘continued well after their practical causes were long gone’. The model, then, is fairly simple. Most broadly, it argues that a socialist tradition inevitably gives rise to a statist bureaucracy, which in turn depresses the spirit of private enterprise, draining society of its vitality, and ends up in chronic stagnation. From the new-right perspective of Sharkansky (1987: 5), ‘the predominance of the government in Israel’s economy makes it the most socialist country outside the Eastern Bloc. Along with a government budget that exceeds gross national product, there are numerous detailed controls on the activities of government officials, private-sector companies, and individual citizens…. It is Israel’s fate to suffer the worst from the centrally controlled east and the democratic west.’ ‘Classless’ Capitalism In short, Israel – at least until recently – was like no other capitalist society. Its history was the result of ‘the trilateral relationship between the settlement movement, the pioneering elite which exercised its control through the political parties and the bureaucratic stratum which recognised its hegemony’ (Shapiro 1984: 45). It was ‘a party state in which almost everything is determined by political parties’ (Goldberg 1992: 16). According to Arian (1985), power, and INTRODUCTION 7 Bichler 01 chaps 20/1/06 1:15 PM Page 7 hence the historical course of Israeli society, lay within the formal political sphere, in the hands of the political elites. The 1990s seemed to have finally broken this mould. There is now a growing ‘new literature’ dealing with topics which until recently were off limit for academics wishing to keep their jobs. Many writers have finally discovered the wonders of political economy, and more and more of them speak freely about ‘the politics of business groups’, the ‘military-industrial complex’ and ‘postZionism’. Yet this seemingly refreshing break from past practice is more apparent than real. A closer examination of such literature suggests it is mostly ‘new wine into old bottles’, as a recent review aptly put it, and that ‘many of the so-called new works do not present anything very new’ (Lochery 2000: 209). Israel, it turns out, is still run by omnipotent state officials, whose fight for ‘survival’ – against foreign ‘enemies’ and domestic ‘actors’ – continues to dominate the country’s history. Over the years, this convention about the primacy of politics and ‘decision makers’ served not only to separate the study of politics and economics, but also to divert attention from the class structure of Israel. Indeed, since control was in the hands of politicians and former army officers, and since these did not generally come from a capitalist background, class conflict was obviously irrelevant to the Israeli case. Israel, so it seemed, was a classless society in which the process of capital accumulation, the growth and consolidation of a ruling class, the ownership of resources, the distribution of income, the control of economic power, the methods of persuasion and legitimation, and the means of violence could all be safely ignored. Paradoxically, the few analyses of ‘class struggle’ which do exist pertain mostly to the pre-independence era – a period in which the society was hardly industrialised, in which there was barely any accumulation of capital or a meaningful working class, in which the most organised groups were the agricultural cooperatives, and in which the army and the police were those of a colonial power (Giladi 1973; Yatziv 1979). Since the 1970s, however, when these characteristics were long gone, replaced by a highly concentrated business structure, international economic integration, a developed industrial system of mass production, and an urban amalgamation of wage earners – there hasn’t been even a single study about the Israeli ruling class or the process of accumulation, let alone the connection between them. Toward a Global Political Economy of Israel This book tries to offer an alternative. Although our story is by no means comprehensive, it deals with the three most essential processes which so far have been largely neglected: (1) capital accumulation; (2) ruling class formation; and (3) globalisation. Furthermore, it treats these not as separate phenomena, but rather as the integrated dimensions which together make the global political economy of Israel. 8THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 8 What do we mean by this term, ‘global political economy’? The word ‘global’ here has two related connotations – one theoretical, the other geographical. First, it implies a universal approach. Our book is historical and therefore deals with much which is uniquely Israeli. Yet underlying the historical details, there are also more general processes and forces similar to those which have shaped other societies, and which suggest that Israel is in fact far from ‘special’. The second meaning of global is spatial. The concept of ‘globalisation’ is commonly used in reference to the recent neoliberal phase of capitalist integration and interconnection on a world scale. But then Israel was always regionally and globally ‘integrated’. We use inverted commas here since integration does not have to be ‘positive’ in the sense of trade, investment and ownership; societies could also integrate through conflict and war, and, as this book will amply demonstrate, Israel’s outward interactions took both forms. For most countries, and especially smaller ones such as Israel, this global embeddedness defines the ‘boundaries of the possible’, and therefore should not only be recognised, but made the basis for the entire analysis. Our interpretation of ‘political economy’ is also unconventional. As noted earlier, most writers prefer to treat its two components – ‘politics’ and ‘economics’ – as independent disciplines. Political economists tend to reject this separation; politics and economics, they argue, are inherently connected, and it is precisely the relationship between them which matters the most (see for instance, Caporaso and Levine 1992). In contrast to both of these views, our own aim is to transcend this divide in the first place. Politics and economics, we argue, are neither ‘independent’ nor ‘connected’ spheres of social life, but rather a consequence of a misleading dichotomy which has been imposed on what is essentially a holistic process, the process of social change. The way to ‘unify’ the political economy of capitalism begins by focusing on its central process: the accumulation of capital. Our argument in this book is that capital is a power institution, and that power is both the means and end of accumulation. Because capital is a form of power, it should be understood in relative rather than absolute terms, hence our focus on what we call differential accumulation. Capitalists, we submit, are driven not to maximise profit as such, but to ‘beat the average’, and by so doing raise their ownership share. Furthermore, their ability to accumulate differentially reflects not ‘economic’ productivity or exploitation per se, but their broader power to restructure society and affect its overall development. The emphasis on differential accumulation suggests a particular research agenda, which focuses not only on ‘capital in general’, but also, and perhaps more so, on ‘dominant capital’; that is, on the largest core corporations situated at the centre. This latter emphasis means that to study differential accumulation is also to study the emergence and formation of a ruling capitalist class. Indeed, the very existence of differential accumulation implies that a group of capitalist owners is able to control and shape more and more of the social process of reproduction. Analysing the origin of this group, the political-economic pattern of its evolution, the means by which it INTRODUCTION 9 Bichler 01 chaps 20/1/06 1:15 PM Page 9 expands, the broader implications of its differential growth, and the limits and contradictions imposed on that growth, is therefore essential to the understanding of differential accumulation and capitalist development more broadly. In sum, the global political economy of Israel is the process of domestic capitalist development, embedded in, and increasingly interconnected with the broader context of regional and global change. The central axis of this process is differential accumulation, which involves the rise and consolidation of Israel’s ruling class, the dominant capital groups under its control, and their relationship, both conflictual and reinforcing, with the changing trajectory of world capitalism. Finally, the analysis of these key processes is significant not only in its own right, but also in helping to bring wider aspects of Israeli history into sharper focus. Capital and Differential Accumulation The theoretical framework of this book, introduced and developed in Chapter 2, is aimed at integrating capital and power. Although capital is the central institution of capitalism, there is surprisingly little agreement on what it means. The form, or ‘shell’ of capital, its existence as monetary wealth, is hardly in doubt. The problem is with the content, the ‘stuff’ which makes capital grow, and on this there is no agreement whatsoever. For example, does capital accumulate because it is ‘productive’, or due to the exploitation of workers? Does capital expand ‘on its own’, or does it need non-capitalist institutions such as the state? What exactly is being accumulated? Does the value of capital represent a material ‘thing’, ‘dead labour’ or perhaps something totally different? What units should we use to measure such accumulation? Despite centuries of debate, none of these questions has a clear answer. Yet they have to have answers. Capital is the essence of capitalism, and unless we can clarify what it means, our theories remain ‘bagel theories’, with a big hole in the middle. Our own view is that capital should be understood as power over cooperation. Capital, we argue, is neither a material entity, nor a productive process, but rather the very ability of absentee owners to control, shape and restructure society more broadly. Although capital is by no means the only form of power, it has gradually become the most effective, flexible, and potentially most encompassing form of power. As an abstract financial magnitude, capital stands for the discounted value of future earning capacity. Such earnings are the consequence not of productivity as such, but of the control of productivity, which is in turn based not only on business arrangements, but on the entire spectrum of power institutions. To study accumulation therefore is to study the commodification of power. From this perspective, every power arrangement which systematically affects the flow of profit is a potential facet of capital. This covers institutions and processes as diverse as military spending and managed stagflation in Israel, 10 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 10 apartheid laws and democratisation in South Africa, the pendulum of inflation and corporate amalgamation in the United States, organised crime in Russia and IMF bailouts in Asia, or ‘energy conflicts’ and ‘peace dividends’ in the Middle East; it also covers more universal processes, such as the molding of consumer wants and preferences, patent laws, protectionism and the systematic use of violence. All of these bear on profit; and once their impact is ‘discounted’ by investors, they become capital. This ‘encompassing process’ – the transformation by which capital increasingly ‘commodifies’ and therefore subsumes other forms of power – is perhaps the broader meaning of capitalist development. Examining this development requires that we place power at the centre of analysis, and that we do so from the very start. Once that is accepted, many ‘political’ and ‘economic’ phenomena anchored in accumulation no longer appear qualitatively different. The commdification of power manifests itself through differential accumulation. Although capitalists exert their power over society, they measure it relative to other owners. Under modern conditions, capitalists are impelled not to maximise profit as such, but to ‘beat the average’; they measure their differential accumulation as the difference between the growth rate of their own assets, and that of the average. This differential drive enables us to relate accumulation to the dynamic re-shaping of society: in order to accumulate differentially, leading capitalists have to constantly re-structure the underlying power institutions on which their relative profitability relies. Differential accumulation thus acts as a central axis for our story. In looking at phenomena such as stagflation, militarisation, corporate concentration, global finance, international conflict, or regional reconciliation, our aim is to articulate, both theoretically and historically, how qualitative power institutions are increasingly quantified into relative asset prices. In its most simple form, the value of capital depends on two magnitudes: (1) the expected flow of future profit (or business income more generally), and (2) the normal rate of return used to discount this flow into present value. To beat the average, capitalists need to make their own profit grow faster than the normal, so that any understanding of differential accumulation requires an explanation of both. The first, most obvious question, therefore, is where does the normal rate of return come from? The answer, it turns out, is anything but simple. Profit theory is perhaps one of the most unsettled branches of political economy. The basic problem is the apparent asymmetry between workers and capitalists – the former work for their wages, whereas the latter do no toil for their profit. Early mainstream thinkers offered a plethora of explanations for why the capitalist deserves compensation – ranging from Nassau Senior’s ‘abstinence’, through Alfred Marshall’s ‘waiting’, to Frank Knight’s ‘uncertainty’ – but these have done little to calm the water. It was only with the work of John Bates Clark in The Distribution of Wealth (1899) that the issue seemed finally resolved. Clark made the income of capitalists a function of the proINTRODUCTION 11 Bichler 01 chaps 20/1/06 1:15 PM Page 11 ductivity of their capital. And since capital, much like labour and land, was productive and therefore necessary, the income of its owner was clearly desirable and natural. The theory offered robust ideological support for capitalism, and quickly became the conventional wisdom. Its logic, though, remained fatally flawed. The main problem was that in order to quantify the productivity of capital, we needed first to quantify capital itself. And yet, surprising as it may seem, this couldn’t be done. The problem was fully exposed in a major debate among economists, known as the ‘Cambridge Controversies’. As we’ll see in Chapter 2, the debate showed that capital was not a ‘material thing’ with a definite ‘physical quantity’, and that it therefore couldn’t have a clearly measurable productivity. But then, if capital wasn’t productive, how could we treat its profit as being ‘normal’? Marx never tried to reason profit by the productivity of capital. On the contrary, profit, he argued, came through capitalist exploitation, which forced workers, the sole creators of the product, to accept only a portion of what they made. Yet, although Marx properly placed capitalist power at the very centre of his theory, his treatment of such power was incomplete, and ultimately inconsistent. Indeed, while he was the first to emphasise broader power processes, such as the concentration and centralisation of capital and the growing role of the state, these never found their way into the analytical formulation of his Labour Theory of Value – and nor could they; the latter theory depended crucially on the assumptions of free competition and the unfettered flow of capital and labour, and these assumptions would be quickly violated if power were allowed into the picture. In the final analysis, profit (or ‘surplus value’) in Marx’s scheme was determined as a residual between the total output of labour and the ‘socially necessary’ cost of reproducing its labour power – an ingenious but dangerously circular concept. The twentieth century rise of big business and big government brought a fuller recognition of the interplay between profit and power. New analyses of imperialism, ‘imperfect competition’, and the actual behaviour of modern firms served to cast doubts on the competitive model underlying the work of both Marx and the neoclassicists. By the middle of the century, these doubts gave rise to an alternative, ‘neo-Marxist’ school of Monopoly Capital, led by writers such Michal Kalecki, Josef Steindl, Paul Baran and Paul Sweezy. One of the principal claims of this school was that distribution was mostly a consequence of power, and hence potentially ‘separate’ from production as such. The result was to make normal prices, and therefore the ordinary flow of profit, theoretically indeterminate. The actual flow of profit of course remained both real and definite, but the theorist could no longer easily predict its magnitude. This indeterminacy may be true in a strictly quantitative sense. In our opinion, though, the key challenge is not to find the quantitative determinants of profit, but rather to build a bridge between the quantitative and the 12 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 12 The collapse of the statist model, which came during the 1970s, coincided with a massive shift, globally as well as in Israel, from a differential accumulation regime based on breadth, to one relying on depth. At home, the main drivers of the early breadth boom – population growth and foreign aid – had dried up. Moreover, by the early 1970s, the statist cocoon had already produced a core of very large dominant capital groups, whose magnitude relative to the small Israeli market was becoming self-limiting. If the latter’s differential accumulation were to continue (which it did), the underlying regime had to change – away from relying on growth and merger which had subsided, and toward higher profit margins through redistribution, conflict and stagflation. The transition was greatly facilitated by the global intensification of stagflation (which, as we explain later, was itself propagated by growing conflict in the Middle East). Domestically, the result was a new order of ‘accumulationthrough-crisis’, with differential accumulation depending increasingly on the twin engines of rising military spending and inflationary finance. The essence of this new depth phase was a mutual transformation of both state and capital. On the surface, the state apparatus seemed to have ‘lost its autonomy’. It got deeper and deeper into external conflict and an escalating arms race; it grew increasingly dependent on the United States; and it stood paralysed in the face of domestic recession and sprawling inflation. Under the surface, though, the real transformation was not the decline of the state, but its further ‘commodification’ as an integral facet of accumulation. And indeed, the dominant capital groups, all of which were by now operating as capitalist enterprises regardless of their formal ownership, had little to complain about. On the contrary, their profitability soared – absolutely, as well as relatively to smaller firms, who were typically hit hard by the stagflationary crisis. Israeli economists tend to ignore this differential accumulation-throughcrisis. A few acknowledge the redistributional process, although most deny it was purposeful, preferring to explain it as coincidental, or better still, as a ‘policy mistake’. And they could be right. After all, mistakes do happen all the time. The only question is why were the ‘errors’ so systematic in their impact, and how could they last for more than a decade? The answer, we think, should begin with the very concept of ‘state policy’ here. In our view, if there was indeed a conscious foreign and domestic policy during that period, it was certainly no longer ‘statist’; instead, it was the policy of dominant capital, to which the state apparatus became increasingly subservient. And indeed, by the 1970s, the disparate elites of Israel’s ‘ancient regime’ had already been amalgamated into a single ruling class, whose end and tail were no longer easy to disentangle. Moreover, as we discuss in Chapter 5, the interests of this class were growing increasingly tied with those of large oil and armament firms based in the United States, whose own fortunes were in turn dependent on the continuation of conflict in the region as a whole. These latter corporations and their Israeli satellites not only benefited systematically from a regime of regional instability and militarised stagflation, but also managed to have their INTRODUCTION 19 Bichler 01 chaps 20/1/06 1:15 PM Page 19 governments in Washington and Jerusalem sustain and support this regime against the wider interests of their underlying populations. Their ability to do so points out the extent to which their rule became state rule. In this broader context, the 1977 dethroning of the Labour Party by the right-wing Likud bloc appears far from the ‘political earthquake’ observers often make it look like. Being increasingly subsumed by dominant capital, successive Labour governments found it increasingly difficult to deliver what their socialist rhetoric promised, and therefore grew vulnerable to new ‘populist’ competitors. More importantly, dominant capital itself was now interested not in a strong government, but a large one – which, paradoxically, was much easier to have with the ‘liberal’ Likud than the ‘statist’ Labour. The Likud’s combination of right-wing foreign policy and hands-off economic policy, similar to the menu offered by the Reagan Administration in Washington, helped consolidate the new depth regime, securing higher military procurement and rising debt loads, as well as financial ‘deregulation’, a carte blanche for stock market rigging, and further stagflation. Accumulation Through Crisis At first sight, these external hallmarks of depth look highly perplexing. How could large firms benefit from raising their prices faster than the average rate of inflation? Won’t this ‘price them out of the market’? Can accumulation really thrive on stagflation and crisis? Aren’t capitalists interested in the growth and tranquillity offered by ‘business as usual’? Why should businessmen prefer war to peace? Do they have a say in this anyway? Surprisingly, these questions are not very difficult to answer, provided of course one is willing to first dispense with some basic preconceptions. The first of these preconceptions is the myth of the ‘aggregate’, which by the end of the twentieth century has been perfected to a point of concealing the most fundamental tension of political economy – the contradiction between well-being and power. Take a standard concept such as the ‘average standard of living’. Academic and popular media love to use this term, but what does it really tell us? To begin with, emphasising an average necessarily de-emphasises its distribution. For instance, if the standard of living of the poor fell, but that of the rich rose by much more (as was the case in both the United States and Israel over the past decade), the overall average could well go higher. Focusing on that average would clearly distort the picture of what actually happened to the vast majority of the population. The more fundamental problem, however, is the implicit assumption that well-being is the main engine of capitalism. The standard of living is of course very important to most people, but then capitalism isn’t run by ‘most people’, but by a relatively small number of very large capitalists. For them, the main goal is not well-being, but power. What they are after is neither the size of the pie, nor the ‘absolute’ magnitude of their 20 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 20 own income, but rather their distributive share. The latter can of course be augmented through overall growth, but it doesn’t have too. Sometimes, a shrinking pie works much better, for example, when the large capitalists gain much of what the rest of society loses. In short, differential accumulation for dominant capital neither requires nor implies prosperity for all. During breadth periods, when dominant capital accumulates differentially through overall growth, the two appear mutually reinforcing. But during depth, when differential accumulation thrives on crisis and overall contraction, the aggregate myth breaks down. The second misconception concerns the issue of ‘instability’. The conventional view is that stability is good for business, and that there is nothing capitalists hate more than volatility and uncertainty. The usual reason given for this is twofold. In the short run, instability raises interest rates and risk premiums, and hence undermines asset prices, while in the longer run it jeopardises capitalist institutions and possibly the accumulation process itself. These observations, although correct, are incomplete and therefore misleading. Instability does raise interest rates and risk perceptions; yet, if these come together with even faster increases in expected profit – as was the case for instance in Israel during the early 1980s and in Latin America during the early 1990s – the overall impact on asset prices will be positive, not negative. Furthermore, those who benefit from instability are often different from those who foot up the bill. The link between crisis and accumulation was well expressed by a contemporary of Marx, J.P. Dunning, in a passage worth quoting: Capital is said by a Quarterly Reviewer to fly turbulence and strife, and to be timid, which is very true; but this is very incompletely stating the question. Capital eschews no profit, or very small profit, just as Nature was formerly said to abhor a vacuum. With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent, and there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged. If turbulence and strife will bring a profit, it will freely encourage both. (cited in Marx 1909, Vol. I: 834) This logic of public pain for private gain is evidently still in place. During the 1970s and early 1980s, for example, the oil companies and OPEC countries benefited greatly from a twelvefold increase in petroleum prices, while the rest of the world suffered the macro consequences of deep stagflation and monetary volatility. Of course, no dominant group can benefit from endless crisis and instability, but that is beside the point here since most capitalist crises eventually get ‘resolved’ (otherwise, capitalism would have been long gone by now). Similarly, although crises are not necessarily ‘premeditated’, that in itself is secondary. The key question is who benefit from a crisis, the extent to which INTRODUCTION 21 Bichler 01 chaps 20/1/06 1:15 PM Page 21 they can and cannot affect its trajectory, and the broader conditions and contradictions within which they operate to enhance their interests. Perhaps the best way to address such questions is to begin from the neoclassical ideology created to conceal them in the first place. The intellectual edifice of this ideology, conceived by the profession’s grand priests, built and rebuilt by its numerous foot soldiers, financed by dominant capital and tax money, implemented as policy by state organs, and distributed for public consumption by the various media, is certainly impressive. It is also impenetrable. Most outsiders cannot decipher its complicated sign language and mysterious rituals, and even those who can are often left excluded by its professional barriers to entry. The reason, though, is not that the study of economics is somehow more difficult than other social subjects, but rather that it is deliberately made to look that way. Moreover, by depicting the economy as if it were ‘natural’, and therefore subject to ‘objective’ scientific inquiry, economists have effectively managed not only to stifle meaningful public discussion, but also to eliminate the need for such discussion in the first place. After all, laws of nature can be discovered, but they can never be changed; so what is the point of debating them? The fallacious application of this logic to society, which Marx called ‘fetishism’, is one of the greatest powers of capitalism: the power to control the minds of it subjects. Yet, this ideology seems omnipotent mostly from the outside. From the inside, it looks more like a house of cards, built on logical contradictions and pseudo-facts. For this reason, it is important to engage with neoclassical ideology on its own turf. The stagflation of the 1970s and 1980s provides plenty of opportunity for such an exercise, which we take on in Chapter 4. According to received dogma, in Israel as elsewhere, inflation is the consequence of ‘excess demand’, or its mirror image, ‘deficient supply’. Since this belief is generally accepted as an article of faith, the main task for the believer is to find the exact mechanism by which the excess or deficiency are translated into rising prices. This, though, is far trickier than it seems. At the most general level, both explanations (excess and deficiency) are reducible to the notion that when ‘too much money’ chases ‘too few commodities’, the result is extra ‘liquidity’ (relative to what is needed to buy and sell commodities at stable prices), and therefore inflation. The logic sounds intuitive enough, only that reality refuses to obey. For this causal chain to make any sense, liquidity must rise before inflation; and yet in Israel the sequence was always the reverse, with inflation leading and liquidity trailing! As it turns out, such mismatch between universal theory and worldly facts is prevalent throughout the neoclassical treatment of inflation. To take another example, consider the government, which Israeli economists, like their counterparts the world over, love to blame for the disease. The usual suspect here is the budget deficit. Public spending, goes the argument, tends to be wasteful, in that it creates demand without a corresponding supply. This means excess; and excess, as every child knows, leads to inflation. But then here too 22 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 22 the treacherous facts spoil the show. The Israeli deficit as a whole shows a changing relationship with inflation, sometimes positive, sometimes negative, and many of its individual components actually move in the opposite direction. The economists are not entirely in the wrong, however. A selected number of budget items – specifically, business subsidies and interest on the public debt – show a systematically tight positive correlation with inflation. Isn’t this, then, the Holy Grail? A proof, however partial, that government spending is inflationary after all? Not really. The reason why these budget items rose and fell with inflation is in fact very simple: until recently they were indexed to inflation. In other words, the Israeli government acted here merely as an intermediary, translating higher inflation into higher corporate profit. Another inflationary villain on the demand side are the workers, whose ‘excessive’ wages are usually seen as a source of wild and highly inflationary spending sprees. The most effective way to combat this danger is by raising unemployment. There is nothing like a good dose of layoffs to cool off workers’ militancy; and with employees having less to spend, inflation has nowhere to go but down. The belief in this medicine gained much of its legitimacy during the late 1950s from the so-called Phillips Curve, which showed that inflation and unemployment were negatively correlated. The problem, though, was that the relationship not only broke down almost as soon as it was discovered, but also went into reverse; in many countries, Israel included, inflation and unemployment since the 1960s have become positively correlated! The inversion of the Phillips Curve created a serious theoretical challenge. Recall the underlying neoclassical maxim, stipulated by supply and demand analysis, that prices rise as a consequence of ‘shortage’. But if so, how could inflation occur when the economy is stagnating with unused resources and unemployed workers? Does this mean that neoclassical analysis was fundamentally wrong? Not at all, argued its adherents. Inflation in the midst of stagnation was still a consequence of shortage; only that the reason now was not excess demand, but deficient supply. The latter was created when ‘unjustified’ wage increases pushed cost beyond what it ‘should’ be, forcing firms to simultaneously ‘restrict’ supply and jack up prices. This line of reasoning also opened the door for bringing in new villains, such as the oil sheiks of the Middle East and the weather gods, who, by making energy and food more expensive, helped feed the stagflation demon. Most importantly, the lining-up of these culprits helped exonerate capitalists, who were excused from the list on technical grounds. Unlike workers or oil sheiks, whom the theory classified as ‘price makers’, capitalists were declared ‘price takers’; competition, argued the neoclassicists, made them practically powerless, and therefore innocent of ‘cost-push’ stagflation. Fascinating theory, only that the evidence (or lack thereof) again failed to cooperate, leaving stagflation, as one neoclassical priest put it, as ‘mysterious’ as ever. But then, neoclassicists were never too concerned with evidence. After all, their real mission was always to INTRODUCTION 23 Bichler 01 chaps 20/1/06 1:15 PM Page 23 conceal reality, not to reveal it; and so the facts, which usually made their job more difficult, could always be dispensed with when necessary. Clearly, there is a lot to uncover in what the neoclassicists seek to hide. Our own premise is that inflation is neither a punishment for some social ‘excess’, nor a consequence of policy ‘mistake’, and it is certainly not the result of some ‘autonomous’ decision or ‘external shock’. Inflation is not an alien macroeconomic phenomenon, but rather a central aspect of capitalist development in general, and of differential accumulation in particular. Moreover, contrary to the basic tenet of neoclassical logic, inflation tends to appear as stagflation – that is, together with slack. This hypothesis is examined in Chapter 4 against the rise and decline of Israeli inflation – from the relatively inflationless growth of the 1950s; through the heightened stagflation of the 1970s and 1980s; to the disinflation and renewed growth of the 1990s. The argument, based on our notion of differential accumulation regimes, is that during the 1970s and 1980s, after the breadth sources of population growth and capital inflow dried up, Israeli dominant capital pushed toward an alternative depth regime, based on stagflationary redistribution. The process worked mainly through the twin engines of militarisation and financial manipulation. Dominant capital became the main beneficiary of domestic military procurement, chiefly through its ability to raise armament prices faster than the overall rate of inflation. A similar process occurred in the realm of finance, where the large firms, supported openly by the government, manipulated stock prices so as to effectively ‘print’ their own profits. These two processes not only fuelled an inflationary spiral, but also sent the economy into deep recession and heightened instability. And yet, since the higher profits went primarily to dominant capital, whereas the cutbacks were suffered mainly in the rest of the business sector, the result was an unprecedented surge of differential accumulation. In short, stagflation, which to the macroeconomists appeared as an alienated riddle, was in fact a mechanism for a massive restructuring of power. This restructuring involved diverse processes, such as growing income inequality and heightened social tensions; the decline of the Labour Party and the rise of clericalism; the militarisation of production and the rise of finance; the intensification of the Middle East conflict; and the growing dependency of Israel on U.S. assistance. Most importantly, it was itself part of a broader depth regime, affecting the nature of global differential accumulation. The Middle East and the Weapondollar–Petrodollar Coalition Since the early 1970s, dominant capital groups in the developed countries shifted their emphasis from growth and amalgamation to stagflation and redistribution. The epicentre of this new depth phase was the Middle East, where Israel played an important role. So far, though, there has been no attempt to situate the political economy of Israel within this broader development. There 24 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 24 are two basic reasons for this. The first one is methodological. The political economy of the Middle East, much like that of Israel, is usually examined from a ‘system’ perspective, which customarily separates politics from economics, and domestic from international developments. These different ‘systems’ supposedly interact with one another, although in practice they are rarely integrated into a grand historical narrative. The second reason is political. Such grand narrative, at least from a political-economy viewpoint, would have to deal with capital accumulation, which is precisely what most writers on the subject seek to avoid. Chapter 5, which focuses on the post-war history of the Middle East, tries to fill this void. The purpose is to understand this history not as a collection of ‘systems’ and ‘levels of analysis’, but rather as part of the broader evolution of global accumulation. Since the 1940s, the region’s role in world accumulation was intimately linked to oil exports. From the 1960s onwards, this significance was further augmented by a newer flow of arms imports. The interaction of these two flows, and most importantly the profits associated with them, form the heart of our story. Most works on the subject, written largely from a Western perspective, emphasise the tension between cheap energy on the one hand, and the conflict over access to such energy on the other. According to this framework, the industrialised economies have an interest in freely flowing, cheap oil. To secure this interest, however, they need to engage in international and regional realpolitik, which is often conflictual and sometimes destabilising. The result is an ‘access vs. price’ trade-off, in which occasional armed conflicts and periodic energy crises are seen as the necessary cost of enjoying continued access to cheap oil. The major drawback of this framework is its emphasis on aggregate, statist categories. The very notion that policies, events and processes are subservient to the so-called ‘national interest’ already precludes alternative explanations based on conflict and friction within societies, as well as cooperation and alliance cutting across different nations. In fact, in this context even the interest of the ‘capitalist class’ is potentially too broad as a basic unit of analysis, since it conceals crucial intra-capitalist struggles. The problem is easy to illustrate against the backdrop of the 1970s and 1980s. During that period, Middle East conflicts and energy crises aggravated the processes of stagflation and monetary instability around the world, intensified the global arms race, and further undermined the ability of most developing countries to improve their meagre incomes. Clearly, these developments were detrimental to much of the world’s population. They were also harmful to most firms, including many large ones, who suffered from the rising cost of energy, recession, soaring interest rates, and currency turmoil. And yet not everyone took a hit. The most publicised winners were of course the OPEC countries, but they weren’t alone. The other winners were the large oil companies, military contractors, infrastructure companies and key financial institutions. For this group, which we label the Weapondollar–Petrodollar Coalition, the process spelled a massive differential accumulation bonanza. Of course, this coalition INTRODUCTION 25 Bichler 01 chaps 20/1/06 1:15 PM Page 25 wasn’t omnipotent to shape history as it pleased. At the same time, neither was it a lucky private bystander, who just happened to jump on a bandwagon driven by state officials. Instead, what seems to emerge from the broader contours and key details of this history is a radically different picture, in which the very distinction between ‘state’ and ‘capital’, ‘government policy’ and ‘private action’, ‘international relations’ and ‘global business’, is difficult and often impossible to pin down. Perhaps the most remarkable illustration of this growing symbiosis is the dual process, involving the commercialisation of arms exports on the one hand, and the politicisation of oil on the other. Since the 1960s, the international arms trade was gradually ‘privatised’, turning from a foreign policy instrument into a counter-cyclical, life-support mechanism for the leading arms contractors. Military exports, which after the Second World War were financed mostly through grants and aid, were now increasingly paid for by their recipients. By contrast, the oil business, traditionally the stronghold of private interests, became subject to increasing political control. Oil producing countries gradually nationalised their oil reserves, while many industrialised countries moved to regulate the distribution, taxation and price of petroleum products. These two processes were intimately connected. The commercialisation of arms exports required that buyers had the money to pay for their purchases, and it is therefore not surprising that the major boost for this transition occurred during the early 1970s, when the Middle East took over from South East Asia as the world’s leading market for imported weaponry. Now, the main reason why Middle East countries could pay for these weapons was the politicisation of oil, which enabled a twelvefold increase in oil prices, therefore massively boosting their revenues. The process also worked in reverse, from armament to oil. Indeed, the primary factor behind the rise of petroleum prices during the 1970s and early 1980s was the heightened regional conflict, which military imports helped sustain. And so emerged a cycle of Middle East ‘Energy Conflicts’, sustained by a new political realignment between the Weapondollar–Petrodollar Coalition, OPEC and key government officials in the Western countries. The cycle created havoc in the region, and helped destabilise the global economy. But it also provided the necessary fuel for the depth phase of differential accumulation, while enriching the key oil and armament interests which propagated it in the first place. Like any other broad narrative, our emphasis here on accumulation in general and the Weapondollar–Petrodollar Coalition in particular, is of course contestable. Clearly, there could be other explanations for the region’s history. What seems less open to dispute, is the robustness of our story. As it turns out, the differential financial performance of this coalition, examined in Chapter 5, was not only affected by the region’s ‘energy conflicts’, but also seems to have anticipated them with remarkable accuracy. Every time the differential accumulation of this coalition (particularly the large oil companies) became negative, there followed an ‘energy conflict’; once the conflict was under way, differen26 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 26 tial accumulation was restored into positive territory; and, finally, no energy conflict occurred without a prior differential accumulation crisis. These statistical findings are further corroborated by the foreign policy backdrop during that period, particularly that of the United States. Although U.S. public officials swore allegiance to the national interest, their actual policies toward the Middle East proved much more ambivalent. The ambiguity remained latent as long as the so-called national interest coincided with the differential interests of the Weapondollar–Petrodollar Coalition. But when the two collided, the policy stance almost invariably tilted in favour of the coalition. The result was that, during the 1970s and 1980s, the United States ended up promoting both instability and high oil prices, exactly the opposite of its openly publicised aims. The Israeli elite, which endeavoured relentlessly since the early 1960s to become a U.S. satellite in the region, assumed a central role in this process, both by participating in the regional conflict, and by helping the Americans with various clandestine operations around the world. In return for these services, Israel was allowed to run a closed war economy, protected by high trade barriers, and bolstered by massive economic and military assistance. It was within this context of regional conflict and U.S. support that Israel’s dominant capital was able to enjoy close to two decades of depth-driven differential accumulation. At the same time, these developments also set in motion a process of transnationalisation, which eventually ‘denationalised’ Israeli capital, integrating it into the larger process of global accumulation. From Foreign Investment to Global Accumulation Ever since its independence in 1948, and in fact from the early days of Jewish settlement in Palestine, Israel was dependent on foreign capital and assistance. This dependency and its impact on the country’s autonomy have been the subject of numerous learned studies. Most economists agree that foreign funds were essential during the early years, when subsistence standards of living prevented sufficient savings. During the 1950s and 1960s, however, rapid economic growth significantly raised income levels, which should have both increased savings and reduced external dependency. This, though, hasn’t happened, at least not until recently. And the reason, according to the experts, is simple. Savings did grow, but government profligacy, together with a greedy population unwilling to live by its own means, made spending grow even faster. This, in any case, is the official story. The facts, though, tell a rather different story. If the trade deficit and corresponding capital inflow are indeed caused by ‘excessive’ spending, we should expect their size to be positively correlated with economic growth – either because growth generates excess imports and a need for more foreign currency; or because rising capital inflow allows for faster growth, and therefore a greater appetite for imports. In Israel, however, neither explanation seems persuasive, simply because, over the past half century, the relative size of the trade deficit INTRODUCTION 27 Bichler 01 chaps 20/1/06 1:15 PM Page 27 was negatively correlated with growth. When the economy accelerated, excess imports, instead of rising, actually declined, and when the economy slowed down, excess imports began to soar. In other words, whether or not there was indeed a ‘need’ for more foreign capital, it had little to do with the country’s shifting macroeconomic conditions. The secret of capital flow lies elsewhere, in Israel’s development as a capitalist society. The crucial aspects of this process, examined in Chapter 6, relate not to the country’s consumption, saving or productive capacity, but to its ruling class and its progressive integration into the global political economy. A large part of the foreign inflow, particularly during the pre-independence period and the early years of the state, came as donations from the Jewish Diaspora. Contrary to popular perceptions, though, most big donors saw their contributions as political investments, on which many of them have since reaped enormous returns in the form of tax exemptions, special privileges, exclusive business rights, and privatised state assets at bargain prices. From the 1950s, the Israeli elite also began a parallel love affair with intergovernmental transfers, initially from Germany in compensation for the Holocaust, and subsequently from the United States in return for various security and insecurity services mentioned earlier. The so-called economic part of this aid quickly became a target for the dominant capital groups, who fought viciously over its allocation. Eventually, most of this aid found its roundabout ways down to their bottom lines. Unlike economic assistance, military aid couldn’t be pocketed by the domestic groups, at least not directly. The main reason was that the money itself never left the United States. Instead, it was transferred straight from the bank account of the U.S. government to the bank accounts of U.S. military contractors, who then shipped their hardware to Israel. The arrangement did not leave the Israeli groups empty-handed, however. The first impact of this aid, indirect but enormously powerful, was to boost local military procurement, which started rising in tandem with U.S. shipments and the consequent regional arms race. And there was more. Since the Israeli army retained the right to pick and choose its American weapons, each U.S. supplier had to hire its own local retainers to plead its case and hopefully share the spoils. Over the years, many of Israel’s retired IDF generals and chiefs-of-staff, big businessmen and leading politicians – including ministers, prime ministers and state presidents – have been integrated as middlemen into this mechanism. In addition, numerous contracts were conditioned on re-purchase agreements from large Israeli contractors, creating yet another access to the precious flow of greenbacks. And so, while on the surface the inflow of capital looked largely a matter of philanthropy, humanitarian aid or foreign policy, under the surface it helped create and sustain a complicated international infrastructure of private accumulation. From the late 1980s this pattern began to change. Differential accumulation in the developed countries was once more shifting from depth to breadth, and the superpower and regional conflicts which earlier linked Israeli and U.S. capitalist groups were coming to a close. Instead of disintegrating, however, 28 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 28 To follow Veblen, the ultimate source of capitalist earning power rests with strategic business ‘sabotage’. For the absentee owner, the modern investor of funds, profit derives not from their contributions to production, but from their ability to limit such production below its full potential. Under certain circumstances, the limitation remains latent. For instance, when rapid population growth far exceeds the pace of technical change, as was the case in the United States until the mid-nineteenth century, high profits could be earned merely through the threat of unemployment. Capitalism, however, tends to accelerate technical change and hence the spectre of excess capacity, and that can be offset only through active ‘sabotage’. Under these latter circumstances, a certain degree of stagnation is not a menace, but a prerequisite for profit. The evidence for this is so obvious that we tend not to see it. Thus, in the United States, ‘business as usual’ during the twentieth century meant a rising income share for capital, going hand in hand with much unused capacity and an average unemployment rate of 7 per cent. Over time, the means of achieving such sabotage have changed a great deal. During the ‘competitive’ nineteenth century, these means were mostly ‘structural’, confined largely to the impersonal and seemingly automatic mechanism of boom and bust. Other, more ‘direct’ methods were of course practised extensively, but their role was relatively secondary. It was only since the late nineteenth century, with the emergence of ‘big business’ and ‘big government’, that these mechanisms assumed the centre-stage, creating an increasingly complex and more deliberate system of sabotage. In the twentieth century, these means further expanded to rely on the broader political realm of the state, including aspects of policing, propaganda, taxation, tariffs, subsidies, patent laws and intellectual property rights, as well as on international institutions such as trade zones, regional investment agreements and global, government-backed corporate alliances. Moreover, the object of sabotage – the process of ‘production’ – has long transcended the factory. Focusing on the plant, mill and workshop was perhaps adequate in Marx’s time. But in our age, with capitalist society having become highly integrated and complex, it is clear that what was previously called ‘production’ now encompasses the entire spectrum of human activity, including science and ideology, culture and leisure, consumption and waste, formal politics and international relations. Nowadays, the power to strategically limit production is the power to control the social process as a whole. Finally and crucially, power is not only the means of accumulation, but also its most fundamental aim. In this sense, large-scale business enterprise is driven by the same principal force which animated all previous power civilisations – namely, the quest to control nature and people. Indeed, according to Lewis Mumford (1967; 1970), the first ‘machine’ was not at all tangible, but social; made not of physical components, but of human parts. This was the ‘mega-machine’ of the ancient delta civilisations, the giant social organisation needed to build the pyramids, palaces and public works. Building CAPITAL AND POWER 35 Bichler 01 chaps 20/1/06 1:15 PM Page 35 things, however, was only a means to an end. The real purpose was to exert power. In assembling and commanding the mega-machine, Mumford tells us, the king was asserting his absolute power, mimicking the cosmic order in a vain quest for God-like immortality. Modern capital accumulation is in many ways similar to a mega-machine. The leading capitalists of today, much like their royal predecessors, try to mechanise and automate society. Much like the sun kings, they try to have it march to their own command. And perhaps, deep down inside, they too hope that supremacy will make them live forever. Accumulation of What? Coming back to earth, the question is how to measure accumulation? If capital is not a ‘tangible’ thing, what is it? Surely, the mere augmentation of money values tells us little about power, particularly in the presence of inflation or deflation. So what exactly is being accumulated, and how does it get quantified? To reiterate, in its form, modern capital is finance, and only finance. Its magnitude is the discounted value of expected earnings, and earnings are a matter of power – the power of capitalists, operating against opposition, to strategically shape the societal process to their own ends. From this viewpoint, the accumulation of capital represents neither material wealth, nor a productive amalgamate of ‘dead labour’, but rather the commodification of power. Capitalists accumulate not things carried over from the past, but vendible power titles projected into the future. In this sense, their capitalised profit represents a claim not for a share of the output, but for a share of control over the social process. Now, whereas capitalist power is exerted over society, it is measured relative to the power of other owners. At first sight, this assertion may look strange. After all, isn’t the goal of accumulators to get as much money as possible? Don’t they try to ‘maximise’ profit? And given the ‘absolute’ nature of their aim, how does relative power come into the picture? The answer has to do with assessing ‘success’ and ‘failure’. In the shifting sands of capitalism, nothing seems permanent. ‘All that is solid melts into air, all that is holy is profaned’, observe Marx and Engels in their Communist Manifesto. In this context of chaos and flux, capitalists must have a benchmark. In order to act, they need a yardstick, a clear gauge to tell them whether they do well or fall behind. According to most economists, including many Marxists, this benchmark is the price level. If you divide the dollar value of profit by the price index, you bring it down to earth; you turn it from ‘nominal’ profit, to ‘real’ profit. But there is a catch here. Consciously or not, this procedure makes hedonic pleasure the ultimate purpose of profit. Capitalists, it effectively says, are never satiated, and regardless of how much they consume (or save for future consumption), they are relentlessly driven to ‘maximise’ their profits in order to augment their utility further and further. 36 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 36 The problem with this logic is twofold. First, capitalists are of course concerned with consumption, but beyond a certain level of wealth their consumption is only marginally affected by their rate of accumulation. Moreover, profit-induced consumption is usually conspicuous – that is, aimed at establishing a differential status. This is highly important, because once we move into the realm of conspicuous consumption, the notion of ‘real profit’ assumes an entirely different meaning: higher prices, which from a utilitarian perspective imply a lower real income, for the conspicuous consumer often mean the exact opposite, since they bestow a higher differential status. The second difficulty is that, despite endless academic debates, the precise meaning of ‘profit maximisation’ is still unclear. Capitalists may of course wish to earn ‘as much as possible’, but since the maximum attainable profit is forever unknown, the principle remains problematic in theory and irrelevant in practice.9 Differential Accumulation In reality, accumulators have long abandoned Archimedean absolutes in favour of Newtonian relatives. Modern capitalists benchmark their accumulation not against a price index, but against its own mean. They seek not to maximise profit, but to beat the average. Their yardstick is the ‘normal rate of return’, their goal – to exceed it. A 5 per cent profit growth during recession is success; a 15 per cent when others make 30 is failure. In short, the real issue is not absolute accumulation, but differential accumulation. Unlike the elusive ‘maximum’, reference to the ‘normal’ and ‘average’ is everywhere. Large companies gauge their performance relative to listings published by periodicals such as Fortune, Business Week,Far Eastern Economic Review,Euromoney or Forbes; fund mangers are hired and fired based on whether CAPITAL AND POWER 37 9 Conventional theory celebrates the iron law of profit maximisation, although it is not very clear why. For one, the concept holds little water in the real world. As Hall and Hitch (1939) showed more than half a century ago, few if any capitalists know what maximum profit means or how to achieve it, and as many studies before and since have suggested they instead use ‘markup pricing’ to achieve a ‘target rate of return’ (for instance, Brown 1924; Kaplan et al. 1958; and Blair 1972). The marginalists could not accept this heresy. Led by Machlup (1946), they lashed back, arguing that regardless of what businessmen said, in the end markup formulae were nothing more than realworld techniques for maximising profit – although they themselves were still unable to show exactly what that ‘maximum’ was (Robinson 1966: 78–9). Of course, many theorists cannot be bothered by such earthly debates, only that the situation is hardly better in the higher world of textbooks. As it turns out, maximum profit is indeed ‘workable’ in the extreme cases of perfect competition and monopoly. But then what about the entire range of ‘imperfections’ between these (non-existing) ideal types? The problem, first identified by Cournot (1838), is one of oligopolistic interdependence, which in its ‘unrestricted’ form makes maximum profit indeterminate, even in the mind of the economist. Of course, game theory has solved this problem a million times over, but only by assuming certain predetermined rules. Sadly, though, real firms are free to ignore such rules, so the enigma of maximum profit remains. Bichler 01 chaps 20/1/06 1:15 PM Page 37 they exceed or fall short of their relevant benchmark; and stock performance is meaningless unless compared to aggregate or sector indices. In fact, the notion of normality as a benchmark for competitive achievements has been so thoroughly accepted in capitalist society, that it now dominates numerous non-business spheres, such as education, sports, the arts, and even foreign relations, where GDP per capita, growth rates and alike are constantly contrasted with regional or global averages. The connection between differential accumulation and power should now become clearer. To accumulate differentially is to increase your share of total profit and capitalisation. And to increase your distributive share of these magnitudes is to increase your relative power to shape the process of social change. The source of such power is the ability of owners to strategically limit, or ‘sabotage’ the process of social reproduction. This sabotage is carried out in two ways, differential and universal. At the disaggregate level, it is exercised through the differential practices of dominant firms or coalitions of firms. The aim of these practices is to redistribute the pie, but that almost always involves restricting its size, particularly by limiting the slices of others.10 Now, given that these differential practices are carried out by all dominant groups, their aggregate consequence is a certain ‘average level of sabotage’ spread across society, along with a corresponding ‘normal rate of return’. Clearly, this ‘normal rate of return’ is the manifestation not of productive contributions under perfect competition as the neoclassicists argue, but of sabotage and a complex structure of power. Indeed, the very existence of this ‘normal’ enables even the most insignificant actors to exercise their ‘natural right’ for universal sabotage. Since individual capitalists, however small, can always earn the normal rate of return by simply owning a diversified portfolio, they have no reason to produce at less than that rate. But in accepting the normal rate of return as a minimum yardstick below which production should not be extended, they effectively propagate sabotage – even when they themselves do not have the differential power to back it up. Sabotage becomes invisible, ‘business as usual’ as they say. In this framework, if we take the total dollar value of capitalisation as a ‘map’ of capitalist power as a whole, any given fraction of this capitalisation represents a corresponding, undifferentiated part of that overall power. Individual capitalists, or groups of capitalists, constantly try to increase and secure these claims through particular power realignments, organisations and institutions, so the contents of their power are always qualitatively unique. But because this power is exercised over society as a whole, its form can be quantified into universal monetary units, claims on the entire process of social restructuring. 38 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 10 Think of the consequences of General Motors raising its output. If other companies, such as Ford, DaimlerChrysler, Toyota and Honda, do the same, GM’s profit may not increase differentially, and may even contract absolutely due to overall glut. On the other hand, if GM is able to increase its own slice by reducing that of its competitors, its earnings are likely to rise both absolutely and relatively. Bichler 01 chaps 20/1/06 1:15 PM Page 38 This then is perhaps the central ‘link’ between quality and quantity in accumulation – between the qualitatively different social conditions and processes of power on the one hand, and the identical units in which this power is measured on the other. Notably, the link itself, the ‘conversion’ of power as a quality to power as a quantity, is not an objective process. First, capitalisation itself, although treated as an objective quantity, is at least partly based on the sanctity of profit and its surrounding rituals. Second, the magnitude of capitalisation, although readily observable, can never be ‘inferred’, so to speak, by simply observing the social scene. For instance, the fact that a certain corporation has been granted a patent cannot, in itself, tell us much about its differential accumulation. Similarly with things such as favourable government policies, the introduction of new production techniques, or the acquisition of a competitor. These arrangements all affect the qualitative nature of power, but their ‘translation’ into quantitative units of differential accumulation is inherently speculative. The way to understand this link is actually in reverse, moving from the quantitative process of differential accumulation to the qualitative institutions, organisations and processes on which it stands; from observing the numerical ups and downs of differential accumulation, to speculating about their social causes. Of course, any such attempt to bridge the gap between quantities and qualities involves a certain quantum leap, whose persuasiveness depends less on the rigour of science and more on our ability to tell a compelling story. But then, capitalism does try to quantify social relations, so it is crucial to try to understand how – even if the ‘evidence’ is forever circumstantial.11 Let’s begin then with a simple, working definition of accumulation: 1. The ‘differential power of capital’ (DPK) possessed by a particular group of owners should be measured relatively, by comparing the group’s combined capitalisation to that of the average capital unit. If this average is $5 million, a capital worth $5 billion represents a DPK of 1,000. It means that as a group, the owners of that capital are 1,000 times more powerful than the owners of an average capital. 2. With this definition, the pace of ‘differential accumulation’ (DA) is given by the rate of change of DPK; that is, by the rate of growth of the group’s capitalisation less the rate of growth of the average capitalisation. Positive, zero or negative rates of DA imply rising, unchanging or falling differential power, respectively.12 CAPITAL AND POWER 39 11 In this sense, our logic here is similar to Kalecki’s ‘degree of monopoly’ (1943a), which measures the consequence for relative profit margins of monopolistic institutions and forces (and which we use later in Chapter 6). Our own notion here, though, differs from Kalecki’s in that it reflects not on the narrow question of monopoly versus competition, but on the entire dynamics of power under capitalism. 12 Strictly speaking, differential accumulation requires not a positive rate of growth, but a positive difference between rates of growth. A dominant group can therefore accumulate differentially even with its own capitalisation falling, provided that the average declines even faster. This understanding is assumed throughout. Bichler 01 chaps 20/1/06 1:15 PM Page 39 3. Strictly speaking, only capitalists with a positive DA are said to ‘accumulate’. The study of accumulation should therefore have them at its centre. The next question, then, is who are these ‘differential accumulators’ and how should they be classified? Our own preference is to focus not on the individual owner, but on a group of owners. The reason is that the vendibility of capital creates centrifugal as well as centripetal forces, thus limiting the power of any single capitalist. In counteracting the centrifugal forces, the elementary solution is the corporation, and, eventually, the corporate coalition. Notwithstanding the long debate on the separation of corporate ownership and control, we concur with Veblen that the corporation, regardless of who runs it, was historically necessary for the survival of capitalism. Without this institution, which for Marx signalled the immanent ‘abolition of capital as private property within the framework of capitalist production itself’ (1909, Vol. III: 516), the centrifugal forces of competition and excess capacity would have probably killed the bourgeois order long ago. During the twentieth century, the corporation emerged as the basis for integrating accumulation and state; it became the entity around which both class consciousness and political power could be built. Any analysis of modern capitalism must therefore have the corporation as a central building block. The underlying purpose of coalescing individual capitalists into a corporation, and corporations into corporate alliances, is exclusion. In noncapitalist systems, exclusion is usually embedded in relatively rigid customs, such as those preventing serfs from growing into kings, slaves from turning into masters, and untouchables from becoming Brahmins. Capitalism does not have similar customs. Commodification makes upward mobility possible, and in principle there is nothing to prevent a son of a wandering vendor of quack medicine from assembling the Standard Oil of New Jersey, or a university dropout from starting Microsoft. This, though, does not imply that capitalism has done away with exclusion. Far from it. Indeed, for John D. Rockefeller or Bill Gates to have acquired their own power, others had to give it up. Because of the constant threat of ‘equal opportunity’, such exclusion requires relentless formation and reformation of ‘distributional coalitions’, to use the language of Olson (1965; 1982). Moreover, as in other systems, the process of exclusion is inextricably bound up with state institutions, only that now, due to the ‘liberal’ appearance of capital, the symbiosis becomes invisible. The difference therefore is largely one of form: whereas in other power systems, exclusion is largely static, built into the social code and resulting in relatively stable groupings, under capitalism it must be dynamically recreated through ever shifting alliances. The upshot is that the accumulation of capital in general depends on the accumulation of capital at the centre. It is ‘dominant capital’, the largest and most profitable corporate coalitions at the core of the social process, which are crucial. The periphery of capital, the many capitals outside the core, are in fact 40 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 40 a constant threat to the viability of capitalist development as a whole. Subject to the strong centrifugal forces of competition, their behaviour is forever undermining the collusive essence of business ‘sabotage’, without which accumulation is impossible. Only to the extent that dominant capital is able to retain and augment its exclusive power against these lesser capitals, keeping them ‘out of the loop’, can the capitalisation process can be sustained. Note, however, that there is no assumption here that the same group of capitalists will dominate the process throughout. On the contrary, the very essence of differential accumulation is an intra-capitalist struggle simultaneously to restructure the pattern of social reproduction as well as the grid of power. As an organised and often conscious power process, it involves purposeful action against opposition, so its outcome cannot possibly be automatic. The important point here is rather the progressive differential growth of big business as a whole, regardless of its shifting composition. As George Orwell aptly put it, ‘A ruling group is a ruling group so long as it can nominate its successors…. Who wields power is not important, provided that the hierarchical structure remains always the same’ (1948: 211, original emphasis). Now, this is all very interesting, you may say, but so what? True, leading capitalists seek power, not utility. It’s also true that investors try to beat the average rather than maximise profit. And yes, politics, culture, science and force are all crucial for understanding modern capitalism. But how does this change our concrete analysis of the world? Does it give us new analytical tools? And will it shed new light on the global political economy of Israel? The answers to these questions are all positive. As we shall see throughout the book, capitalism, when viewed through the spectacles of differential accumulation, looks quite different, and sometimes very different, from the way it is portrayed by conservative and even Marxist writers. Let’s turn to see how. Accumulation Crisis or Differential Accumulation Boom? Our exploration begins not with Israel, but with the United States. The reason is threefold. First, the United States has been the epicentre of twentieth century capitalism, so its experience is crucial for understanding the world in which Israel has developed. Second, U.S. differential accumulation directly affected the history of the Middle East and of Israel itself. And third, the U.S. accumulation ‘model’ has been replicated in many countries, including Israel, so it’s worth studying more closely. It is therefore only at the end of the chapter, after having examined the broader forces at work, that we can tie the knots together, positioning Israel’s specific experience within the Middle East and the global political economy at large. As noted, differential accumulation is the rate at which the capitalised income of ‘dominant capital’ expands relative to the economy’s average. Because this income includes both profit and interest, the proper capitalising aggregate is CAPITAL AND POWER 41 Bichler 01 chaps 20/1/06 1:15 PM Page 41 that of total assets. Given the forward-looking nature of capital, this could be measured by the market value of all outstanding equity and debt. However, this measure is often ‘contaminated’ by investors’ ‘hype’ – that is, by swings of optimism and pessimism which respond more to the prospects of capital gain and loss than to a cool-headed assessment of future earnings and the likely course of the ‘normal rate of return’ (Nitzan 1995; 1996). Moreover, historical data for market value are often unavailable. The alternative, then, is to use ‘book value’ as reported in the financial statements. The latter is a somewhat ‘lagging’ indicator for capitalisation, reflecting earning expectations prevailing when the assets were first recorded. However, given that differential accumulation is about relative rather than absolute values, this shouldn’t be much of a concern, particularly over the longer term. Applying this definition to the United States, Figure 2.1 provides capitalisation indicators for a ‘typical’ corporation of the ‘dominant capital’ group, as well as for the average corporation in the economy. ‘Dominant capital’ is provisionally defined here as equivalent to the 500 largest U.S.-based industrial companies, listed annually since 1954 by Fortune. This group is limited to publicly traded companies with 50 per cent or more of their sales coming from 42 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Fortune 500 Manufacturing and Mining All Corporations 1954=100 1993 average ($ million) Fortune 500: 4,740 Manufacturing and Mining: 13 All Corporations: 5.5 1954 average ($ million) Fortune 500: 274 Manufacturing and Mining: 1.5 All Corporations: 1.1 index Figure 2.1 Average Firm Size in the U.S.A. (assets per firm) SOURCE: Fortune; U.S. Internal Revenue Service. Bichler 01 chaps 20/1/06 1:15 PM Page 42 manufacturing and/or mining. Diversified companies, those relying more heavily on other lines of activity, and private firms are excluded. (Since 1994, the Fortune 500 coverage has been expanded to the entire universe of publicly traded companies. For consistency, our series ends in 1993.) Based on these data, the average capitalised income of ‘dominant capital’ is given by the total assets of the Fortune list divided by 500. Two proxies for the economy’s average are given by dividing total corporate assets by the number of corporate tax returns – first for the economy as a whole, and then for the combined mining and manufacturing sector, both using data from the U.S. Internal Revenue Service (for ease of comparison, all series are rebased with 1954=100). Figure 2.2 charts two alternative measures for the differential power of capital (DPK) possessed by an average Fortune 500 company – one based on comparison with the average U.S. corporation, the other on comparison with the manufacturing and mining average. With a logarithmic scale, the slopes of the two DPK series indicate the difference between the rate of accumulation of a typical company in the ‘dominant capital’ group, and the average rate of CAPITAL AND POWER 43 Figure 2.2 Differential Accumulation in the U.S.A. SOURCE: Fortune; U.S. Internal Revenue Service. 100 1,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 DPK Ratio of Total Assets per Firm: Fortune 500 Average / Manufacturing & Mining Average DPK Ratio of Total Assets per Firm: Fortune 500 Average / U.S. Average log scale Trend growth rate: DA = 3.8% per annum Trend growth rate: DA = 2% per annum Bichler 01 chaps 20/1/06 1:15 PM Page 43 accumulation in the broader corporate universe. These slopes therefore provide proxies for the rate of differential accumulation (DA) by U.S. ‘dominant capital’. What do the figures tell us? Most generally, they suggest that U.S. differential accumulation has proceeded more or less uninterruptedly for the past half century, and possibly longer. Relative to the manufacturing and mining average, differential accumulation by U.S. ‘dominant capital’ has averaged 2 per cent annually (the slope of the trend line). The broader comparison against the economy’s average suggests a far faster rate, averaging 3.8 per cent. In fact, even this higher rate may well understate the pace of differential accumulation. There are two reasons for this. First, our Fortune 500 proxy for ‘dominant capital’ is heavily biased toward manufacturing and mining which have tended to decline vis-à-vis the tertiary sector. As a result, the generally faster-growing service-oriented companies are excluded from our ‘dominant capital’ proxy but included in the economy’s average. Also, over the years, some Fortune 500 firms became ‘too’ diversified and dropped from the list, although conceptually and practically they remained an integral part of ‘dominant capital’. For these reasons, an alternative proxy for ‘dominant capital’, based solely on size and with no sectoral restrictions is likely to show an even faster rate of differential accumulation. Seen as a power process, U.S. accumulation appears to have been on a sustainable keel throughout much of the postwar era. This conclusion is hardly intuitive. Indeed, according to the analysis of the Regulation and Social Structures of Accumulation (SSA) schools, the United States has experienced an accumulation crisis during that very period, particularly since the late 1960s.13 How is this difference possible? In our view, the reason is rooted in the troubled definition of capital. The conventional wisdom which focuses on profit (rather than capital income as a whole) indeed suggests a crisis. Figure 2.3 shows that net profit as a share of national income has been on a downtrend; and given that profit is seen both as the principal source of investment finance as well as its major inspiration, it is only natural that accumulation (measured in material rather than power terms) should follow a similar downward path, as the figure patently confirms. This notion of accumulation crisis lies in sharp contrast to the evidence based on differential accumulation. As illustrated in Figure 2.4, unlike profit, total capital income, measured as the share of profit and interest in national income, has in fact trended up since the end of the Second World War, reaching a record high during the 1980s. These data show no sign of lingering crisis; if anything, they indicate that capital income has grown increasingly abundant. From a conventional viewpoint, this evidence presents a serious theoretical inconsistency: if capital income has indeed risen, why did it not fuel a ‘real’ investment boom? From a Veblenian viewpoint, on the other hand, the two developments are consistent: capital income depends not on the growth of 44 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 13 For instance, see Aglietta (1979), and Kotz et al. (1994). Bichler 01 chaps 20/1/06 1:15 PM Page 44 What are the implications of this taxonomy? In addressing this question, it is important to distinguish the case of an individual large corporation from the broader analysis of dominant capital as a group. A single firm may successfully combine different facets of breadth and depth. Not so for dominant capital as a whole. If we look at breadth and depth not as corporate strategies, but as overall social regimes, it quickly becomes apparent that broader conditions which are conducive to one often undermine the other. For the sake of brevity, we group our arguments here into eight related propositions: •Proposition 1. Understood as broad regimes, breadth and depth tend to move counter-cyclically to one another. Breadth presupposes some measure of economic growth as well as relative political-economic stability. Depth, on the other hand, commonly implies political restrictions, social conflict, and stagflation. Although strictly speaking the two regimes are not mutually exclusive, they tend to ‘negate’ one another, with more breadth associated with less depth, and vice versa. •Proposition 2. Of the two regimes, breadth is the path of least resistance. There are two reasons for this. First, it is usually more straightforward and less conflictual to expand one’s organisation than it is to engage in collusive increases in prices or in struggles over input prices. Although both methods are political in the wide sense of the term, depth commonly depends on complex state and social realignments which aren’t necessary for breadth. Second, breadth is relatively more stable and hence easier to extend and sustain, whereas depth, with its heightened social antagonism, is more vulnerable to backlash and quicker to spin out of control. •Proposition 3. Over the longer haul, mergers and acquisitions tend to rise relative to green-field investment. While both routes can contribute to differential accumulation, as capitalism spreads geographically and dominant capital grows in importance, so does the threat of excess capacity. Mergers and acquisitions alleviate the problem whereas green-field aggravates it. The broader consequence of this shift is for chronic stagnation to gradually substitute for cyclical instability. •Proposition 4. The relative growth of mergers and acquisitions is likely to oscillate around its uptrend. Corporate amalgamation involves major social restructuring and hence is bound to run into roadblocks. The result is a wave-like pattern, with long periods of acceleration followed by shorter downturns. •Proposition 5. The underlying logic of mergers and acquisitions implies progressive ‘spatial’ unification, and, eventually, globalisation. For amalgamation to run ahead of overall growth, dominant capital must successively break its ‘envelopes’, spreading from the industry, to the sector, to the national economy, and ultimately to the world as a whole. In this sense, differential accumulation is a prime mover of spatial integration and globalisation. CAPITAL AND POWER 51 Bichler 01 chaps 20/1/06 1:15 PM Page 51 •Proposition 6. Cost cutting is not a real alternative to an amalgamation lull. The pressure to reduce cost is ever present, but its effect is more to meet than beat the average. The principal reason is that productivity improvements are neither inherently related to corporate size, nor easy to protect. Similarly, reductions in input prices are seldom proprietary and often spill over to other firms. •Proposition 7. A much more potent response to declining mergers and acquisitions is inflationary increases in profit margins. This is often facilitated by previous corporate centralisation, and although the process is inherently unstable and short-lived, it can generate very large differential gains. By its nature, though, such inflation is possible only through a vigilant limitation of production, with the result being that inflation appears as stagflation. •Proposition 8. Over the longer term, differential accumulation depends primarily on mergers and acquisitions. In the shorter term, it can benefit from sharp stagflationary crises. The main engine of differential accumulation is corporate amalgamation, which thrives on overall growth and the successive break-up of ownership ‘envelopes’. Occasional discontinuities in the process, however, push dominant capital toward an alternative regime of stagflationary redistribution. The result is a pendulum-like oscillation between long periods of relative political-economic stability accompanied by economic growth and low inflation, and shorter periods of heightened social conflict, stagnation, and inflation. Let us now look more closely at the broader significance of these various propositions, focusing first on the United States and the global political economy, and later on the Middle East and Israel. Green-Field Employment growth is a double-edged sword for dominant capital, directly augmenting external breadth (differential employment per firm), while indirectly threatening external depth (differential pricing power). Consider first the direct impact. In general, overall employment growth augments the differential breadth of dominant capital, but the reason is largely due to the way it affects smaller firms. Large companies react to overall growth mainly by increasing their employment ranks. Smaller companies, on the other hand, respond by growing in number (through the birth of new firms), as well as in size (by hiring more workers). This is important since newborn firms, by their very nature, tend to be smaller than the average. The implication is that, even if green-field growth is spread proportionately between dominant capital and the rest of the business universe, as long as some of this growth results in the birth of smaller firms, the net impact is to reduce average employment per 52 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 52 firm, thus augmenting the differential breadth of dominant capital. U.S. data, for instance, show that over the past 75 years, the number of corporations has risen 3.6 times faster than overall employment, causing average employment per firm to drop by 72 per cent.19 Since the size of large firms in terms of employment has increased over the same period, we can safely conclude that overall employment growth worked to directly boost the differential breadth of dominant capital. In contrast to this direct impact, the indirect effect, operating through depth, is more complex and harder to assess. On the one hand, the multiplicity of small firms keeps their own profit per employee low, partly by precluding cooperation and pricing discretion, and partly by undermining collective political action. This bears positively on the differential depth of dominant capital. On the other hand, unruly growth in the number of small firms can quickly degenerate into excess capacity, threatening to unravel cooperation within dominant capital itself. In addition, rapid green-field growth often works to dilute the ‘coordinating’ impact of direct government involvement in allocation and pricing, which in turn further aggravates the spectre of glut. The balance between these conflicting forces is difficult if not impossible to determine. In sum, although green-field growth is tempting, particular in the presence of ‘non-capitalist’, ‘proletarianisation-ready’ populations in and outside one’s own society, such growth is not necessarily a panacea for dominant capital. The process boosts its differential breadth, but it also has an indeterminate, and possibly negative effect on differential depth. The main way of counteracting this latter threat is through corporate amalgamation, to which we turn now. Mergers and Acquisitions Our discussion in this section begins with Figure 2.5. In this chart we plot a ‘buy-to-build’ indicator for the United States, expressing the dollar value of mergers and acquisitions as a per cent of the dollar value of gross fixed investment. In terms of our own categories, this index corresponds roughly to the ratio between internal and external breadth. (The data sources and method of computing this index are described in the Data Appendix to the chapter.) The chart illustrates two important processes, one secular, the other cyclical. First, it shows that, over the longer haul, U.S. mergers and acquisitions have indeed grown more and more important relative to green-field investment (Proposition 3). At the end of the nineteenth century, money put into amalgamation amounted to less than 1 per cent of green-field investment. A century CAPITAL AND POWER 53 19 See Nitzan (2001: 10–12). Bichler 01 chaps 20/1/06 1:15 PM Page 53 later, the ratio was approaching 200 per cent, and rising. The trend growth rate indicated in the chart suggests that, year in, year out, mergers and acquisitions grew roughly 3 percentage points faster than new capacity. Now, whereas employment associated with new capacity is added by small and large firms alike, amalgamation, almost by definition, increases mostly the employment ranks of dominant capital. The net effect of this trend, therefore, is a massive contribution to the differential accumulation of large firms.20 The reasons for this tendency are not at all obvious. Why do firms decide to merge with, or take over other firms? Why has their urge to merge grown stronger over time? And what does it mean for the broader political economy? 54 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 0 1 10 100 1,000 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 trend growth rate: 2.9% per annum Buy-to-Build Indicator* (mergers & acquisitions as a % of gross fixed capital formation) 1998: 190% 1895 0.6% log scale Figure 2.5 U.S. Accumulation: Internal vs. External Breadth * Based on splicing of separate series. SOURCE: See Data Appendix. 20 The effect on relative employment growth is probably somewhat smaller than implied by the dollar figures. For one, amalgamated companies often end up shedding some workers, and two, merger and acquisition data include divestitures which reduce rather than raise employment. Correcting for these qualifications, though, would not likely alter the overall trend. Bichler 01 chaps 20/1/06 1:15 PM Page 54 Needless to say, corporate amalgamation is a real headache for mainstream economics, whose models commonly rely on the assumption of atomistic competition. Alfred Marshall (1920) tried to solve the problem by arguing that firms, however large, are like trees in the forest: eventually they lose their vitality and die out in competition with younger, more vigorous successors. On its own, though, the forest analogy was not entirely persuasive, if only because incorporation made firms potentially perpetual. For the sceptics, therefore, Marshall had to offer an additional explanation. Even if large firms failed to die, he said, and instead grew into a corporate caste, the attendant social costs were still tolerable – first because such a caste tended to be benevolent and, second, since the costs were outweighed by the greater efficiency of large-scale business enterprise. The rigorous spin on this latter argument was put by Ronald Coase (1937), who, in a Nobel-winning argument, stated that the size of firms was largely a matter of transaction costs. Inter-firm transactions, he asserted, were the most efficient since they were subject to market discipline. Such transactions, however, were not free, and therefore made sense only if their efficiency gains exceeded the extra cost of carrying them through. Otherwise, they were better internalised as intra-firm activity. Using such calculus, one could then determine the proper ‘boundary’ of the firm, which according to Coase was set at the point where ‘the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organizing in another firm’ (p. 96). The ideological leverage of this theory proved immense. It implied that if companies such as General Electric, Cisco and AOL-Time Warner (or like IDB and Clal in Israel) decided to ‘internalise’ their dealings with other firms by swallowing them up, then that must be socially efficient, and that their resulting size – no matter how big – was necessarily ‘optimal’. In this way, the nonexistence of perfect competition was no longer an embarrassment for neoclassical theory. To the contrary, it was the market itself which determined the right ‘balance’ between the benefits of competition and corporate size, and what’s more, the whole thing was achieved automatically, according to the eternal principles of marginalism. The argument is hard to refute, although that is by no means a blessing. The problem is that marginal transaction costs – much like marginal productivity and marginal utility – are unobservable, so reality can never be shown as being at odds with the theory. For instance, one can use transaction costs to claim that the historical emergence of ‘internalised’ command economies such as Nazi Germany or the Soviet Union means they were more efficient than their market predecessors. The obvious counter-argument, which may well be true, is that that these systems were imposed ‘from above’, driven by a quest for power rather than efficiency. But then, can we not say the exact same thing about the development of oligopolistic capitalism? Hasn’t big business in the United CAPITAL AND POWER 55 Bichler 01 chaps 20/1/06 1:15 PM Page 55 States, Japan, South Africa and Israel – indeed, in all capitalist countries for that matter – evolved largely as a vehicle of power? In fact, if it were only for efficiency, corporations should have become smaller, not larger. According to Coase’s theory, technical progress, particularly in information and communication, reduces transaction costs, making the market look increasingly appealing and large corporations ever more cumbersome. And indeed, using this very logic Fukuyama (1999) recently announced the ‘death of the hierarchy’, while advocates of the ‘E-Lance Economy’ (as in freelance) argue that today’s corporate behemoths are anomalous, and will soon be replaced by small, ‘virtual’ firms (Malone and Laubacher 1998). So far, though, these predictions seem hopelessly misplaced: amalgamation has not only continued, but accelerated, including in the socalled high-technology sector, where transaction costs supposedly fell the most. How can that be true? Why do firms give up the benefit of market transaction in pursuit of further, presumably more expensive internalisation? Are they not interested in lower cost? The riddle can be solved by using Veblen’s distinction between ‘industry’ and ‘business’. Improved technology can certainly reduce the minimum efficient scale of production (MES), and indeed today’s largest establishments (plants, head offices, etc.) are often smaller than they were a hundred years ago. Firms, on the other hand, are business units, and since they can own many establishments, their boundary need not depend on production as such. The real issue with corporate size is not efficiency but differential profit, and the key question therefore is whether amalgamation helps firms beat the average, and if so, how? The conventional wisdom here is that mergers and acquisitions are a disciplinary form of ‘corporate control’. According to writers such as Manne (1965), Jensen and Ruback (1983) and Jensen (1987), managers are often subject to conflicting loyalties which may compromise their commitment to profit maximisation. The threat of takeover puts them back in line, forcing them not only to improve efficiency, but also to translate such efficiency into higher profit and rising shareholders’ value. The logic of the argument, though, is problematic. Mergers may indeed be driven by profit, but that in itself has little to do with productivity gains. To begin with, there is not much evidence that mergers are either prompted by inefficiency, or that they make the combined firms more efficient (Ravenscraft and Scherer 1987; Caves 1989; Bhagat et al.1990). Indeed, as we argue below, the latent function of mergers in this regard is not to boost efficiency, but to tame it, by keeping a lid on overall capacity growth. Moreover, there is no clear indication that a merger per se makes the amalgamated firms more profitable than they were separately, although here the issue is somewhat more complicated. First, there is a serious methodological difficulty. Most attempts to test the effect of mergers on profitability are based on comparing the performance of merged and non-merged companies (for instance, Ravenscraft 1987; Ravenscraft and Scherer 1989; and Scherer and Ross 1990, Ch. 5). While this method may 56 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 56 offer some insight in the case of individual firms, it is misleading when applied to dominant capital as a whole. Looking at the amalgamation process in its entirety, the issue is not how it compares with ‘doing nothing’ (that is, with not amalgamating), but rather how it contrasts with the alternative strategy of green-field investment. Unfortunately, such a comparison is impossible to make, since the very purpose of mergers and acquisitions is to avoid creating new capacity. In other words, amalgamation removes the main evidence against which we can assess its success. Perhaps a better, albeit unscientific way to tackle the issue, is to answer the following hypothetical question: What would have happened to the profitability of dominant capital in the United States, if instead of splitting its investment one-third for green-field and two-thirds for mergers and acquisitions, it were to plow it all back into new capacity? As Veblen correctly predicted, such a ‘free run of production’ is not going to happen, so we cannot know for sure. But then the very fact it has not happened, together with the century-long tendency of moving in the opposite direction, from green-field to amalgamation, already suggest what the answer may be…. The second important point concerns the meaning of ‘profitability’ in this context. Conventional measures such as earnings-to-price ratio, return on equity, or profit margin on sales, relevant as they may be for investors, are too narrow as indicators of capitalist power when such power is vested in and exercised by corporations rather than individuals. A more appropriate measure for this power is the distribution and differential growth of corporate profit, and from this perspective mergers and acquisitions make a very big difference. By fusing previously distinct earning streams, amalgamation contributes to the organised power of dominant capital, regardless of whether or not it augments the more conventional rates of return. In our view, this ‘earning fusion’, common to all mergers, is also their ultimate reason. And indeed, by gradually shifting its emphasis from building to buying, from competing to colluding, and from private to state-backed coalitions, corporate capitalism in the United States and elsewhere has been able not only to lessen the destabilising impact of green-field cycles pointed out by Marx, but also to reproduce and consolidate on an ever growing scale. Instead of collapsing under its own weight, capitalism seems to have grown stronger. The broader consequence of this shift has been creeping stagnation (Proposition 3), yet as Veblen suggested earlier in the century, and as we shall see throughout the book, the large accumulators have learned to ‘manage’ this stagnation for their own ends. Breaking the Envelope Now, this general rationale for merger does not in itself explain the concrete historical trajectory of corporate amalgamation. Mergers and acquisitions grow, but not smoothly, and indeed the second feature evident in Figure 2.5 is the CAPITAL AND POWER 57 Bichler 01 chaps 20/1/06 1:15 PM Page 57 cyclical pattern of the series (Proposition 4). Over the past century, we can identify four amalgamation ‘waves’. The first wave, occurring during the transition from the nineteenth to the twentieth century, is commonly referred to as the ‘monopoly’ wave. The second, lasting through much of the 1920s, is known as the ‘oligopoly’ wave. The third, building up during the late 1950s and 1960s, is nicknamed the ‘conglomerate’ wave. The fourth wave, beginning in the early 1980s, does not yet have a popular title, but based on its all-encompassing nature we can safely label it the ‘global’ wave. This wave-like pattern remains something of a mystery. Why do mergers and acquisitions have a pattern at all? Why are they not erratic, or alternatively, why do they not proceed smoothly? So far, most attempts to answer these questions have approached the issue from the micro perspective of the firm, which is precisely why they usually run into a dead end. One of the more famous explanations is based on the work of Tobin and Brainard (1968; 1977). According to this explanation, if green-field capacity is cheaper, a firm will build it from scratch; if existing capacity is cheaper, the firm will buy it from others. Extending this logic to the economy as a whole, we should therefore expect the buy-to-build ratio to be inversely correlated with the ratio of market value to replacement cost, now known as Tobin’s Q: the less expensive existing assets are relative to new ones, the greater the proportion of ‘financial’ to ‘real’ investment, and vice versa. This seems sensible, except that in reality things happen to move in the opposite way. Since the 1950s, the correlation between Tobin’s Q and the buy-to-build ratio in the United States was not negative, but positive.21 In other words, instead of investing in what is cheap, U.S. capitalists systematically overspent on the expensive! This looks anomalous, but only because we are using neoclassical microeconomic logic to explain a complex power process. New capacity may indeed be cheap if you are the only one adding it. But if your competitors all do the same it is a different matter altogether. Under the latter circumstances, the threat of glut and falling profit makes buying existing assets much cheaper than it looks on paper. As we explain below, large firms understand this all too well and act accordingly.22 In short, mergers and acquisitions, although pursued by individual firms, occur within a broader and ever changing politicaleconomic context. It is only when making this restructuring process the centre of our analysis that the general pattern of amalgamation begins to make sense. Seen from a differential accumulation perspective, amalgamation is a power process whose goal is to beat the average and redistribute control. Its main appeal to capitalists is that it contributes directly to differential breadth, yet without undermining and sometimes boosting the potential for differential 58 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 21 See Nitzan (2001, Figure 3, p. 243). 22 In this context, Tobin’s Q turns from a cause to a consequence, with mergers and acquisitions driving up asset prices and therefore the ratio of market value to replacement cost. Bichler 01 chaps 20/1/06 1:15 PM Page 58 depth.23 Thus, everything else remaining the same, it makes more sense to buy than to build. But then everything else does not, and indeed cannot remain the same. The reason is simple: amalgamation transforms the very social conditions and power institutions on which it is based. Three particular transformations need noting here. First, amalgamation is akin to eating the goose that lays the golden egg. By gobbling up takeover targets within a given corporate universe, acquiring firms are depleting the pool of future targets. Unless this pool is somehow replenished, mergers and acquisitions eventually lead to a highly centralised structure in which dominant capital owns everything worth owning. From a certain point onward, the pace of amalgamation therefore has to decelerate. Although further amalgamation within dominant capital itself may be possible (large firms buying each other), the impact on the group’s differential accumulation relative to the average is negligible: by this stage, dominant capital has grown so big, it is the average. Green-field growth, by adding new employment and firms, works to replenish the takeover pool to some extent. But then, and this is the second point worth noting, since green-field growth tends to trail the pace of amalgamation in both employment volume and dollar value, its effect is mostly to slow down the depletion process, not stop it. Indeed, the very process of amalgamation, by directing resources away from green-field investment, has the countervailing impact of reducing growth, and hence hastening the depletion process. Thus, sooner or later, dominant capital is bound to reach its ‘envelope’, namely the boundaries of its own corporate universe, with few or no takeover targets to speak of. Finally, corporate amalgamation is often socially traumatic. It commonly involves massive dislocation as well as significant power realignments; it is restricted by the ability of broader state institutions to accommodate the new corporate formations; and it is capped by the speed at which the underlying corporate bureaucracy can adapt (this last point is due to Penrose 1959). The consequence is that as amalgamation builds up momentum, it also generates higher and higher roadblocks, contradictions and counter-forces.24 Taken together, the depletion of takeover targets, the negative effect on growth associated with lower levels of green-field investment, and the emergence of counter-forces, suggest that corporate amalgamation cannot possibly run smoothly and continuously (Proposition 4). But then, why should amalgamation move in cycles? In other words, why does the uptrend resume after it stumbles? And what does this resumption mean? CAPITAL AND POWER 59 23 Note that the act of merger itself has no effect on depth. Its impact works only indirectly, through increasing corporate centralisation, and even that is merely a facilitating factor. Consolidation makes it easier for firms to collude, but that does not imply that collusion will actually take place, or that it will be effective. 24 The 1933 Glass-Steagall Act, for instance, barred U.S. banks from making industrial investments, a restriction which is only now being relaxed. Similar effects were brought on by the postwar dismantling of the Japanese Zaibatsu, the unbundling of South African holding groups during the 1990s and the recent divestment of Israeli banks of their ‘non-financial’ holdings as detailed in Chapter 6. Bichler 01 chaps 20/1/06 1:15 PM Page 59 From the perspective of dominant capital, amalgamation is simply too important to give up. And while there may be little worth absorbing in their own corporate universe, outside of this universe targets are still plentiful. Of course, to take advantage of this broader pool, dominant capital has to break through its original ‘envelope’, which is precisely what happened as the United States moved from one wave to the other (Proposition 5). The first, ‘monopoly’ wave marked the emergence of modern big business, with giant corporations forming within their own original industries. Once this source of amalgamation was more or less exhausted, further expansion meant that firms had to move outside their industry boundaries. And indeed, the next ‘oligopoly’ wave saw the formation of vertically integrated combines whose control increasingly spanned entire sectors, such as in petroleum, machinery and food products, among others. The next phase opened the whole U.S. corporate universe up for grabs, with firms crossing their original boundaries of specialisation to form large conglomerates with business lines ranging from raw materials, through manufacturing, to services and finance. Finally, once the national scene has been more or less integrated, the main avenue for further expansion is across international borders, hence the recent global merger wave. This process, whereby dominant capital breaks through its successive envelopes, is of course hardly unique to the United States. It occurred in many other countries, and was repeated, almost to the letter, in Israel. The pivotal impact of mergers is to alter not the structure of production per se, but the broader structure of power. The reason is rooted in the double-sided impact of amalgamation. By constantly pushing toward, and eventually breaking through their successive social ‘envelopes’ – from the industry, to the sector, to the nation state, to the world as a whole – mergers create a strong drive toward ‘jurisdictional integration’, to use Olson’s terminology (1982). Yet this very integration pits dominant capital against new rivals under new circumstances, and so creates the need to constantly restructure the wider power institutions of society, including the nature of the state, interstate relations, ideology and violence. These power dynamics of mergers, neglected by those who distinguish ‘accumulation’ from ‘society’, will prove crucial for understanding the evolution of Israel’s political economy. And given Israel’s chronic thirst for foreign capital, the first step toward such understanding is the broader process of globalisation. Amalgamation and Globalisation The gist of capitalist globalisation is the spatial spread of accumulation as power, whose main vehicle is the movement of capital.25 Most analyses of the process 60 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 25 Globalisation of course has other dimensions, but these are secondary for our purpose here. Bichler 01 chaps 20/1/06 1:15 PM Page 60 employment? And if stagflation is indeed so ‘accumulation friendly’, why does it not continue indefinitely? These questions are explored more fully in Chapter 4, but it is important to deal with them briefly here, so as to complete our general framework. The impact on profit of raising prices and lowering volume is of course nonlinear (think about the consequence for profit of moving along a downward-sloping demand curve). But recall that our concern here is not prices, but inflation. Furthermore, we are interested in the impact of inflation not on profit, but on differential profit. These two qualifications make a big difference. In contrast to mergers and acquisitions, which are commonly pursued only by a subset of firms (the larger ones), a strategy of inflationary redistribution can succeed only within a broader inflationary context in which all prices tend to rise. That being said, it is also true that inflation is never uniform and hence never ‘neutral’. Indeed, this is the whole point: inflation exists precisely because it redistributes. Paraphrasing Milton Friedman, we can safely state that ‘Inflation is always and everywhere a redistributional phenomenon.’ The key question is who benefit from such redistribution, and this cannot be answered a priori. The essence of inflation is a comprehensive destabilisation and restructuring of all market relations, and although there is good reason to expect the more powerful groups to come out on top, the identity of such groups cannot be determined up front. It can only be decided in hindsight, based on the distributional outcome. In the case of the United States, this outcome, illustrated in Figure 2.6, leaves little doubt as to who the winners are. The data in the figure contrast two series. The first is the rate of inflation, measured by the annual per cent change of the wholesale price index. The second is the profit-per-employee ratio, computed by dividing profit per employee in the Fortune 500 group of companies by profit per employee for the economy as a whole. The latter index corresponds to our notion of differential depth, its fluctuations measuring the extent to which dominant capital – approximated here by the Fortune 500 – is able to raise its profit per employee faster than the average. As the figure shows, the success of dominant capital here has been tightly and positively correlated with the overall rate of inflation. In other words, higher rates of inflation have played into the hands of the big players, allowing them to raise their profit per unit of organisation faster than their smaller counterparts. (Further analysis reported elsewhere suggests that the link between inflation and differential depth is positively related to firm size: the larger the firm, the greater and more systematic the differential gains from inflation. See Nitzan 1992.) But if the chart shows that dominant capital clearly benefited from inflation, it also suggests that this benefit was always short lived, lasting only as long as the underlying bout of inflation. Indeed, the only way to keep such gains coming is to keep inflation going; and if the gains are to be raised, inflation needs to be accelerated. Although such increases occasionally happen, and often with the desired impact on differential accumulation, they cannot last CAPITAL AND POWER 67 Bichler 01 chaps 20/1/06 1:15 PM Page 67 indefinitely. As illustrated repeatedly throughout history and across the world, including in Israel, inflation is a risky business. It is difficult to ‘manage’ and often degenerates into an uncontrollable spiral whose consequences – for differential accumulation and more broadly for the structure of capitalist power as a whole – are difficult to predict. For this reason, inflation is more of a stop-gap option for dominant capital. In contrast to breadth, whose differential impact is slower to develop, the differential gains from inflation, which has no upper ‘technical’ limit, are potentially huge. These gains, however, come with considerable risks, which under normal circumstances are deemed too high. It is only when the gains from breadth dry up, that dominant capital, seeing its differential accumulation undermined, moves reluctantly toward inflationary redistribution. The connection between inflation and power here cannot be overstated. Mainstream theory, built on the belief in competitive markets, insists that 68 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1950 1960 1970 1980 1990 2000 -15 -10 -5 0 5 10 15 20 25 30 Differential Depth (Profit-per-Employee Ratio: Fortune 500 / economy, left) Inflation (annual per cent change of wholesale prices, right) Figure 2.6 Differential Depth and Inflation in the U.S.A. NOTE: The economy’s profit per employee is computed by dividing corporate profit with inventory valuation adjustment and capital consumption allowance, less taxes, by the number of non-agricultural employees. Fortune’s profit per employee is computed by dividing net profit by the number of employees. SOURCE: Fortune; U.S. Department of Commerce through McGraw-Hill (Online). Bichler 01 chaps 20/1/06 1:15 PM Page 68 inflation and growth should go hand in hand.33 This belief, though, is usually based on a cyclical argument about supply constraints, which, valid or not, is meaningful only in the short term. Over the longer haul, capacity can be increased as needed so material bottlenecks are largely irrelevant. The real key then becomes power. Since production provides no ‘natural’ bottlenecks, these have to be created institutionally, through collusive and other arrangements among the key players. Regardless of their particular form, the purpose of all such arrangements is to keep overall capacity from growing too fast. The emphasis here on overall capacity is crucial; dominant capital may be able to keep its own production stable or even growing, but unless it manages to cap overall growth, coordination is bound to disintegrate into a price war, leading to disinflation or even outright deflation. The upshot is simple: over the longer haul, we should expect inflation and growth to be inversely related. Long-term growth, far from stoking the inflation fire, works to cool it off by undermining collusion. Inflation, on the other hand, requires slack and therefore tends to appear as stagflation. Before testing this proposition, however, it should be noted that the term stagflation has more than one interpretation. The ‘weak’ version, due to Samuelson (1974: 801), views stagflation as inflation together with unemployment and under-capacity utilisation. The ‘moderate’ version, found for instance in Baumol et al. (1986: 83), defines it as inflation combined with slow growth or recession. Finally, the ‘strong’ version, adopted for example by Parkin and Bade (1986: 618), limits stagflation only to instances in which inflation occurs with falling output. For our purpose here, the ‘weak’ version is too broad: twentieth century capitalism has been characterised by some measure of unemployment and unused capacity throughout, so its inflation was invariably stagflationary according to this definition. The ‘strong’ version, on the other hand, is too narrow, since falling overall output is relatively rare. The most useful of the three is the ‘moderate’ version, particularly when understood as a relationship. If growth is positively related to inflation, stagflation is clearly an anomaly. On the other hand, if the relationship is negative, stagflation must be seen as a ‘normal’ phenomenon, intensifying as growth declines and inflation rises, and receding when growth increases and inflation falls. As it turns out, the long-term relationship is almost invariably negative. Indeed, the evidence on this is nothing short of overwhelming (although systematically ignored by most economists). Figures 2.7 and 2.8 illustrate respectively the case of the United States over the past century or so, and of the industrialised countries as a group since the late 1960s. The data contrast inflation and growth, both smoothed as 20-year moving averages to accentuate CAPITAL AND POWER 69 33 Supply-shock explanations, in which stagflation is typically blamed on ‘autonomous’ price increases by labour unions or oil sheiks, are in this sense outside the mainstream, since they acknowledge, if only half-heartedly, the existence of market power. Bichler 01 chaps 20/1/06 1:15 PM Page 69 their long-term pattern. Although neither relationship is very tight, in both cases it is clearly negative. (In Figure 2.7, the relationship seems to have changed since the early 1990s, perhaps due to the impact of greater global integration which we discuss in the next section.) Furthermore, these charts are by no means exceptional. In fact, the negative long-term pattern seems to repeat itself in numerous individual countries, both developed and developing, with one of the tightest negative correlations offered by none other than Israel (see Figure 3.1 below). The negative long-term correlation between growth and inflation also helps explain the post-war schizophrenia of policy makers in capitalist countries. Their stated, eternal purpose is to promote growth and assure price stability. Their unstated commitment, though, has progressively drifted in favour of dif70 THE GLOBAL POLITICAL ECONOMY OF ISRAEL -4 -2 0 2 4 6 8 -2-1012345678910 REAL GDP (annual % change) IMPLICIT PRICE DEFLATOR (annual % change) 1890 1998 Figure 2.7 U.S.A.: Long-Term Inflation and Growth NOTE: Series are shown as 20-year moving averages. The smooth curve running through the observations is drawn freehand for illustration purposes. SOURCE: U.S. Department of Commerce through McGraw-Hill (Online). Bichler 01 chaps 20/1/06 1:15 PM Page 70 ferential accumulation. During breadth periods, the stated and latent goals are consistent, with high growth and low inflation allowing policy makers to do little and claim success. The problem arises when differential accumulation moves into depth, and the macroeconomic scene turns stagflationary. Then the two commitments clash, and the winner is almost invariably dominant capital. Policy is tightened, presumably in order to rein in inflation, but the consequence is exactly the opposite: the economy slows, which is precisely what dominant capital needs in order to keep inflation going! Occasionally, policy tightening claims a big victory – for instance, during the early 1980s, when higher interest rates were eventually followed by disinflation. But was tighter policy here indeed the cause of lower inflation? As illustrated in Figure 2.3, during the early 1980s dominant capital began shifting back to breadth, with a new merger wave gathering momentum. Under these circumstances, both the need for inflation and the ability to coordinate it tend to decline. If this interpretation is correct, the real cause of disinflation was CAPITAL AND POWER 71 1 2 3 4 5 6 7 8 9 01234567 INDUSTRIAL PRODUCTION (annual % change) IMPLICIT PRICE DEFLATOR (annual % change) 1968 2000 1990 trend for 1968–90 Figure 2.8 Industrialised Countries: Long-Term Inflation and Growth NOTE: Series are shown as 20-year moving averages. The trend line represents an OLS regression for the 1968–90 period. SOURCE: IMF through McGraw-Hill (Online). Bichler 01 chaps 20/1/06 1:15 PM Page 71 resumed breadth, with restrictive policy in fact keeping inflation higher than it would have been otherwise. Differential Accumulation: An Historical Outline To recap, our discussion so far suggested that differential accumulation, although never predetermined, does follow certain general patterns, or regimes. We identified four such regimes, of which the more important were internal breadth through mergers and acquisitions, and external depth via stagflation. Internal depth, we argued, was the most potent in the long run, whereas external depth, although equally powerful, was less sustainable. Finally, we claimed that the underlying logic of these two regimes was mutually contradictory, so that more mergers and acquisitions implied less stagflation, and vice versa (Proposition 8). Figure 2.9 illustrates these general patterns with respect to the United States. The chart contrasts our amalgamation index (the buy-to-build indicator), with a composite stagflation proxy, both smoothed for easier comparison. The latter proxy is constructed first by expressing unemployment and inflation as relative per cent deviations from their respective historical means, and then averaging the two series into a combined stagflation index. (The purpose of including both inflation and unemployment is to accentuate the broader crisis aspects of depth, although the pattern would have been similar had we used inflation only.)34 The chart shows that, over the long haul, mergers and acquisitions were indeed the path of least resistance (Proposition 2). Whereas stagflation moved sideways, oscillating around its own stable mean, mergers and acquisitions rose exponentially relative to green-field investment (note the logarithmic scale). It also shows that since the turn of the century, following the initial emergence of big business in the United States, internal breadth and external depth tended to move counter-cyclically. Temporary declines in mergers and acquisitions were invariably ‘compensated’ for by sharp increases in stagflation; and when amalgamation resumed, with dominant capital breaking through its existing envelope and into a broader universe, stagflation promptly abated (Propositions 1 and 8). The very existence of this counter-cyclical pattern is quite remarkable, particularly since, as we have repeatedly emphasised, differential accumulation does not have to happen and can as easily go into reverse. Also significant is the fact that the inverse correlation between breadth and depth has grown tighter over time, perhaps as a consequence of the ascendancy of dominant capital 72 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 34 Inflation fluctuates much more than unemployment, and therefore dominates the combined stagflation index. The correlation coefficient between the combined index and its inflation component, both expressed as five-year moving averages, is 0.93. Bichler 01 chaps 20/1/06 1:15 PM Page 72 and the spread of differential accumulation.35 The progression is clear from the chart. During the last decade of the nineteenth century, when big business was only starting to take its modern shape, the two series still moved in the same direction. By the first decades of the twentieth century, however, with dominant capital having assumed the centre-stage, the relationship turned clearly negative, although still somewhat loose. And from the 1930s onward, as differential accumulation became increasingly entrenched, the negative fit grew tighter and tighter. The progressive move from loose to tighter correlation is not surprising. Differential accumulation, understood as a broad historical process, is relatively CAPITAL AND POWER 73 0.1 1.0 10.0 100.0 1,000.0 10,000.0 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 Amalgamation Index ** (Buy-to-Build Indicator, left) Stagflation Index* (unemployment plus inflation, right) log scale Figure 2.9 Amalgamation and Stagflation in the U.S.A. * Average of standardised unemployment and standardised GDP Deflator Inflation (per cent deviations from mean). ** Mergers and acquisitions as a per cent of gross fixed capital formation. NOTE: Series are shown as 5-year moving averages (the first four observations cover available data only). SOURCE: U.S. Department of Commerce through McGraw-Hill (Online), and sources listed in the Data Appendix. 35 The 30-year moving correlation between the stagflation and amalgamation indices (with the latter expressed as deviations from trend), rose gradually from a negative 0.11 in 1927, to a negative 0.9 in 1998. Bichler 01 chaps 20/1/06 1:15 PM Page 73 new, rising to prominence only at the end of the nineteenth century when corporations grew large enough to administer strategic sabotage. The process first became important in certain sectors in the United States and Europe, from where it subsequently spread domestically and internationally. However, the spread was highly uneven, and so despite high capital mobility, the cyclical regimes in different sectors and countries were initially disjoined and out of step with one another. It was only later, with the gradual proliferation and deepening of business principles, the progressive breaking of sectoral envelopes, and the growing globalisation of ownership, that differential accumulation became the compass of modern capitalism. And it was therefore only toward the middle of the twentieth century, when the combined effect of these processes began to be felt, that breadth and depth grew stylised and more synchronised. Now, since differential accumulation is a process of social transformation, its specific regimes are important for understanding the broader nature of institutional and structural change under capitalism. Perhaps the most important of these changes concerns the pattern of conflict. Although dominant capital always struggles to increase its power relative to other capitalists, in breadth this is done directly, whereas in depth the path is indirect. When expanding through breadth, capitalists fight each other to control existing and new employment. Their inner struggle is commonly associated with overall growth and ongoing institutional change, which in turn partly conceals the conflict between capitalists and society at large. In depth, on the other hand, the inner capitalist struggle is ‘mediated’ through a redistributional conflict between capitalists and the rest of society. Moreover, in contrast to breadth, this process thrives on stagflation, not growth. Obviously, sustaining such accumulationthrough-crisis requires entrenchment, fortified power arrangements, and greater use of force and violence. These distinct features of breadth and depth provide a framework for the global political economy of Israel. They help us periodise the evolution of differential accumulation in the core countries, illuminate the way this accumulation affected developments in the Middle East, and understand the history of Israeli capitalism itself – internally as well as in relation to these broader process. The Global View At the global level, we can identify several broad phases of differential accumulation, whose initially blurred contours gradually sharpen into focus. From the perspective of dominant capital groups in the core industrialised countries, these phases include: (1) a mixture of breadth and depth until the 1910s; (2) a partial breadth regime during the 1920s; (3) the depth regime of the 1930s; (4) the breadth regime between the 1940s and 1960s; (5) the return to depth in the 1970s and early 1980s; and (6) the re-emergence of breadth in the 1980s and 74 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 74 1990s. During the first years of the twenty-first century, the sustainability of breadth was again called into question, although, so far, there are no clear signs of resumed depth. The period from the 1890s until the 1910s was one of rapid and accelerating economic growth, coupled with relatively low inflation and the beginning of corporate transnationalisation, particularly by large U.S.-based companies. Internationally, differential accumulation was still cloaked in ‘statist’ clothes, with American and European companies often seen as imperial agents as well as pursuers of their own interests. Their competitive expansion, however, was largely uncoordinated, and soon led to the creation of massive imbalances of excess capacity. Left unattended, such imbalances would have spelled business ruin, so there was growing pressure to ‘resolve’ the predicament via depth. And indeed, since the mid-1900s, U.S. merger activity has collapsed, followed in the 1910s by war in Europe and the spread of economic crisis and inflation around the world. The 1920s offered a brief break. In the United States, merger activity soared while stagflation subsided sharply. In Europe, however, the reprieve was short and stress signs were soon piling up again. Protectionist walls, both between and within countries, emerged everywhere; stagflation spread through a cascade of crises; and before long the world had fallen into the Great Depression of the 1930s. By that time, the counter-cyclical pattern of breadth and depth had become more apparent, with declining merger activity accompanied by rising stagflation.36 The new depth regime was marked by the massive use of military force, in which the global power impasse was ‘resolved’ through an all-encompassing world war. This use of violence was painted and justified largely in statist terms: it was a war of sovereigns, waged over territory and ideology. But it was also highly significant for differential accumulation. Most importantly, it accelerated the relative ascent of U.S.-based corporations, as well as the global spread of the normal rate of return. After the war, the world again shifted to breadth. The counter-cyclical regime pattern was sharpened even further, while the inverse correlation between inflation and growth became increasingly apparent. Now, on the surface, it looked as if developments during that period, which lasted until the end of 1960s, should have undermined breadth. For one, superpower rivalry, decoloniCAPITAL AND POWER 75 36 Strictly speaking, and contrary to our stylised characterisation of depth, the Great Depression brought deflation, not inflation. This observation, however, is true only from an aggregate viewpoint. As Gardiner Means (1935) showed in his innovative study of the United States during that period, the nature of the crisis was highly uneven. For smaller firms with little market power the crisis was largely one of sharply falling prices and only a moderate drop in output. The large firms, on the other hand, were able to keep their prices relatively stable, letting their output fall by as much as 80 per cent. In other words, stagflation, although invisible in the aggregates, was already very much present, if only in embryonic form. Bichler 01 chaps 20/1/06 1:15 PM Page 75 sation, and the non-alignment movement, limited the geographical expansion of Western dominant capital. In addition, many developing countries, previously open to foreign investment, adopted ‘import substitution’ policies which favoured domestic over foreign producers. And yet, for much of the 1950s and 1960s, these barriers on breadth were more than compensated for by two powerful counter-forces. The first of these was the post-war ‘baby boom’, which boosted population growth. The second was the post-war rebuilding of Europe and Japan which was in some sense equivalent to the re-proletarianisation of their societies. The result was a powerful breadth engine, particularly for the large U.S. firms which saw their profit soar during that period. The macroeconomic result – anomalous from a conventional viewpoint but consistent with differential accumulation – was rapid economic growth averaging 6 per cent, combined with low inflation of only 3 per cent. This picture was inverted in the 1970s. The German and Japanese miracles were running out of steam, Western rates of population growth dropped sharply, and foreign outlets for investment in periphery countries remained hindered by communist or statist regimes. Faced with rising obstacles to breadth, dominant capital groups in the developed world were again driven toward depth, with the average rate of inflation rising to 8 per cent and economic growth dropping to 3 per cent. And, as before, the new depth regime was accompanied by heightened conflict and violence. This time, though, the conflict was played out mostly in the outlying areas of the developing world, particularly in the Middle East. The Middle East Until the late 1940s, the region was ‘out of sync’ with the global cycle of differential accumulation. Its energy resources were parcelled out by the international oil companies already in the 1920s, but with the world being awash with oil, these companies mostly ‘sat on their concessions’ and produced little. As a result, the Middle East remained relatively isolated, and when Europe slipped into stagflation and conflict during the 1920s and 1930s, Palestine and the rest of the region prospered. After the war, though, the tables turned. The Middle East, which until then was a true ‘outlying area’, suddenly became a centre-stage for the global drama of differential accumulation. Initially, the link was pretty simple, with oil from the region helping sustain the growth underpinnings of global breadth. During the early 1970s, however, when differential accumulation shifted into depth, things became more complicated. The background for this latter shift is illustrated in Figure 2.10. The chart shows a positive long-term correlation between inflation in the industrialised countries on the one hand, and the global arms trade on the other (expressed as a share of world GDP). Conventional economics would probably 76 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 76 1930 to 1966, and hence use the former series (with proper re-basing) as a proxy for the latter ratio. From 1967 onward, we again use value data which this time cover all sectors. Figures for 1967–79 are from W.T. Grimm, reported in Weston (1987, Table 3.3, p. 44). For 1980–83, data are from Securities Data Corporation, comprising transaction of over $1 million only. The last batch, covering the period from 1984 to the present and coming from the same source, consists of transactions of $5 million or more. The latter two data sets are reported regularly in the U.S. Department of Commerce’s Statistical Abstract of the United States (Annual). In constructing our indicator for the ratio of mergers and acquisitions to gross fixed investment, we divided, for each year, the dollar value of mergers and acquisitions by the corresponding dollar value of gross fixed capital formation (taken from the Historical Statistics of the United States (1975) and from various issues of the Statistical Abstract of the United States). For the 1930–66 period, we spliced in the number of deals, linking it with prior and latter value ratios. CAPITAL AND POWER 83 Bichler 01 chaps 20/1/06 1:15 PM Page 83 3 The History of Israel’s Power Structure … races condemned to one hundred years of solitude did not have a second opportunity on earth. – Gabríel Garcia Márquez, One Hundreds Years of Solitude For neoliberal ideologues, the 1990s marked the beginning of a new era in Israeli capitalism. After decades of imperfections, resource misallocation and excessive government intervention, ‘the market’ is finally having its say. The victory is not yet complete. State officials and other interest groups still cling to their perks, but not for long. Their opponent now is the global market itself, and against this white knight of freedom, even Leviathan – the omnipotent Israeli government – seems feeble, its resistance futile. ‘The markets are much smarter than we think,’ explains former Governor of the Bank of Israel, Jacob Frenkel, ‘the secret is to know how to talk to them’. Of course, it was he, Frenkel, a faithful Chicago-trained storm-trooper of neoliberalism, a non-resident Israeli for most of his professional life, who brought this secret home. Retiring to the private sector after eight years at the helm of the central bank, he could proudly announce: ‘we passed power from politicians to the market, the ultimate stick, the judge of bad behaviour’ (Ha’aretz, 2 January 2000). That this type of rhetoric could still sell so many copies at the end of the twentieth century is indeed a victory, but it is certainly no victory of ‘the market’. The market is forever a mechanism, and mechanisms can neither win nor lose. The real victors are always real people. Who, then, are the people for whom neoliberalism is such a triumph? What is their secret? How did they manage to pass power into their market hands? Are they new in the game, or maybe what we see here are the same actors in a different guise? The answers to these questions make up the story of Israel’s ruling class – how it emerged, consolidated and shaped the history of its society. Their story is the subject of the present chapter. Transnational Dominant Capital On the eve of the twenty-first century, power in Israel was best described in two words: absentee ownership. The three principal hallmarks of this ownership 84 Bichler 01 chaps 20/1/06 1:15 PM Page 84 were (1) high corporate centralisation and integration, perhaps the highest the country has ever known; (2) increasing transnationalisation; and (3) incessant restructuring of vendible assets. What did this structure look like? Centralisation The first feature, as indicated, was high corporate centralisation. At the centre of it all was dominant capital, composed of a handful of giant conglomerates, along with several big but more focused companies, and a large but selfliquidating group of government-owned firms on their way to privatisation. Although the main constituents of this core are well known, its structure can only be described in fairly general terms. One reason is that many of its firms were linked through complex and often circular cross-ownership ties, and even when these ties were conceptually straightforward, their origins were often concealed by long ownership chains leading to offshore shell companies. The other reason is that the core was changing so rapidly, that even the most accurate description quickly became outdated. The general contours of the core, though, were clear enough, and are illustrated in Tables 3.1 and 3.2. Table 3.1 lists the principal domestic holdings of the country’s five biggest private groups and the government. Of these, the largest in terms of market capitalisation was Israel Discount Bankholdings (IDB), controlled by the Recanati family, along with the Carasso family, Goldman Sachs and William Davidson. In March 1999, IDB had a net market value of nearly $11 billion, equivalent to roughly 22 per cent of the entire Tel Aviv Stock Market. The group had majority and minority stakes in hundreds of companies spanning the entire business spectrum, from banking, through finance, to high technology, industry, real estate, retail, services and transportation. The second largest group, valued at $3.5 billion (7.4 per cent of the market), was the Ofer group, owned by Ofer brothers. Its holdings included numerous companies in banking, finance, raw materials, high technology, real estate and transportation. The Ofers also had a minority stake in the third largest group, Koor, whose principal owners were the Bronfman and Kolber families, along with the Arison, Nechama and Dankner families, as well as Goldman Sachs (through Bank Hapoalim). Koor, whose value of $2.8 billion accounted for close to 6 per cent of the market, was more focused than the previous two groups, with holdings primarily in high technology, raw materials and real estate. The Dankner group, owned by the Dankner family, ranked fourth, with a value of $1.2 billion (2.6 per cent of the market). It had partial control of Bank Hapoalim, as well as stakes in high technology, chemicals, energy and real estate. It also had a share, through its ownership in Bank Hapoalim, of Koor and Clal (the latter being part of the IDB empire). The fifth ranking group, Arison Holdings, was owned by the Arison and Nechama families, with a value of $1.1 billion (2.3 per cent of the market). Its main assets were Bank Hapoalim (which gave it stakes in HISTORY OF ISRAEL’S POWER STRUCTURE 85 Bichler 01 chaps 20/1/06 1:15 PM Page 85 86 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Table 3.1 Israel’s Dominant Capital, circa 1999 Group MCAP* Principal Holdings (controlling family/ $ billion (majority and minority control) interest) (1999) Israel Discount 10.8 Banking: Discount Bank, Discount Mortgage Bank, Bankholdings (IDB) Industrial Development Bank, Mercantile Discount Bank Recanati family Finance: Ilanot-Batucha, Albar-Mimunit, Visa, Y.L.R. Carasso family Capital Markets Goldman Sachs High technology: Barak, Celcom, ECI Telecom, Elbit, Elron, William Davidson Gilat, Liraz, Nice, R.D.C. Rafael Development, Scitex, Telad, Tevel, United Pan European Communications Industry: American Israel Paper Mills, Gadot Chemical, Granit Hacarmel, Kitan, Klil, Nesher, Ormat, Polgat, Sonol, Tambour Provident funds: Tamar Real estate: Azorim, Property and Building Corp Retail, services & transportation: Clal Insurance, Clal Tours, El-Yam Ships, Supersol, Overseas Shipholding Group, Zannex Securities Ofer 3.5 Banking: Bank Adanim, Bank Tefahot, United Mizrahi Bank Ofer family Finance: Melisron, Almog Beach High technology: Tower Semiconductors Industry: Dead Sea Bromine, Dead Sea Periclase, Dead Sea Works, ICL-Israel Chemical, Koor Industries, Ofer Development, Oil Refineries, Omni, Priclass Provident funds: H.L. Finance Real estate: Elram, Ofer Development Retail, services & transportation: Judea Hotels, Ofer Trading, Royal Caribbean, Tanker Pacific Shipmanagement, Zim Lines, Zodiac Cross-holdings: Koor Koor 2.8 High technology: ECI Telecom, Tadiran, Telrad Bronfman family Machteshim-Agan, Mash’av, Middle East Tubes, United Steel Mills Kolber family Real estate: Koor Properties Bank Hapoalim Retail, services & transportation: Knafaim, Sheraton Moriah Dankner Group 1.2 Banking: Bank Hapoalim Dankner family High technology: Matav Industry: Carmel Chemicals, Dor Chemicals, Dor Energy, Israel Salt Industries Real estate: Dankner Investment Cross-holdings: Koor, Clal (IDB) Arison Holdings 1.1 Banking: Bank Hapoalim Arison family High technology: Biomedical, El-Ar, Eurocom, Euronet Nechama family Gold, Hamlet, Medsim, Mirabilis, Partner, Polaris, Steps, V-CON Real estate: Herouth, Housing and Construction Holdings (Shikun Ubinui), Lime and Stone, Orbond, Or-Yam, Secom, Shikun Ovdim, Solel Boneh Cross-holdings: Clal (IDB), Koor Israeli Government 7.2 Banking: Bank Hapoalim, Bank Igud, Bank Leumi, Discount Bank, Industrial Development Bank High technology: Bezeq, Israeli Aircraft Industry Industry: Ashot, RAFAEL, Israeli Military Industries, Oil Refineries Retail, services & transportation: Coal Supply Company, El-Al, Israel Electric Corporation, Mekorot, Shekem * Market capitalisation comprises only domestic holdings, and includes the total value of majority holdings (including what is held by minority owners and the public) and the pro-rated value of minority holdings. SOURCE: Authors’ archive; Dun & Bradstreet Israel, Israel’s Largest Enterprises 1999; Standard & Poor’s Israel’s Leading Public Companies (http://www.standardpoor.co.il/bankhapoalim/); the U.S. Securities and Exchange Commission (http://www.sec.gov/); Moody’s (Online); and Abramov and Zuk (1999). Bichler 01 chaps 20/1/06 1:15 PM Page 86 Koor and IDB), ‘high-technology’ companies, and a wide array of real estate and construction firms. The sixth group in Table 3.1 is the government, with holdings in many sectors, including banking, telecommunication, military production, energy, infrastructure and transportation. The government’s stake in publicly traded companies was valued at $7.2 billion, or 14.8 per cent of the market (some of the companies listed in the table were not publicly traded when these lines were written). Although the value of its holdings ranked the government second only to IDB, we placed it at the end of the list since it operated mostly as a ‘night watchman’, with many of its assets destined for privatisation. Of the 652 companies listed on the Tel Aviv Stock Exchange in March 1999, 82 were wholly or partly controlled by these five private groups (92 with the government). The relative value of these companies, however, was far larger than their relative number; together, they accounted for as much as 41 per cent of the market’s overall capitalisation (55 per cent with the government). The remaining half of the market was also highly concentrated. According to analysis published by the Tel Aviv Stock Exchange, the next five groups, following the top five and the government, accounted for another 7 per cent of the market (Abramov and Zuk 1999). These groups included the Fishman family (1.8 per cent of market capitalisation); Migdal, owned by the Italian Generali group (1.6 per cent); the Tshuva family (1.3 per cent); Elco, owned by the Zelkind family (1.3 per cent); and the Land Development Company (Hachsharat Hayishuv), controlled by Nimrodi (1 per cent). Altogether, 34 ownership groups controlled up to 77 per cent of the market value, with much of the rest held by several large firms – specifically Teva (widely held, mainly by U.S. investors), Blue Square (a cooperative on its way to privatisation), Osem (controlled by Nestlé and the Propper family), Elite (owned by the Federman family), Harel Investment, Delta, and Agis. Table 3.2 provides selected summary indicators on the aggregate power of the five largest groups and the government. Data include the number of firms controlled (through majority or minority stakes), along with their combined sales, net profit, and employees, and are broken down by different corporate segments. (Note that the different segments are not mutually exclusive – for instance, conglomerates have stakes in industrial or service companies, while some companies listed abroad are included in other segments.) The picture, however cursory, is highly revealing. It shows that, together, these groups dominated much of the conglomerate, banking, finance and industrial segments. Their stranglehold over the service sector appeared somewhat looser, but this is only because their power here was shared with several large retailers, such as Tnuva and Blue Square. An increasing number of Israeli companies, primarily in the ‘high-technology’ sector, are listed in the United States and Europe. Yet, as the bottom row of Table 3.2 shows, here too, despite the much bigger pool of investors, the presence of the leading Israeli groups is significant. HISTORY OF ISRAEL’S POWER STRUCTURE 87 Bichler 01 chaps 20/1/06 1:15 PM Page 87 Transnationalisation The second hallmark of the Israeli power structure was its increasing transnationalisation. By 1998, foreign ownership had risen to 14.4 per cent of the Tel Aviv market, up from 3 per cent only five years earlier (Bank of Israel. Monetary Department 1998: Table 3-4, p. 85). In less than a decade, Israel has been invaded by hordes of foreign investors, both private and institutional, conservative and adventurous, respectable and criminal, who were all lured by the prospects of peace and the smell of peace dividends. This invasion – which Israel’s dominant capital welcomed wholeheartedly – has fundamentally altered the nature of power. To begin with, many of Israel’s leading domestic firms were by now controlled, partly or wholly, by foreigners. At the end of the century, the list included, with foreign owners/partners in parentheses, companies such as Barak (Sprint, Deutsche Telekom and France’s Télécom), Cellcom (Bell South), Class Data, InfoGear and Scoia Fund (Cisco), Coca Cola (Coca Cola), Cromatis and 88 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Table 3.2 Control Indicators by the Five Largest Groups and the Government, 1998 SEGMENTS NUMBER SALES ($BN)NET PROFIT ($M)EMPLOYEES (No. of top firms) (% of segment) (% of segment) (% of segment) (% of segment) Top 5 Top 5 Top 5 Top 5 Top 5 Top 5 Top 5 Top 5 & Gov’t & Gov’t & Gov’t & Gov’t Conglomerates (17) 12 13 9.2 9.5 619 621 (70%) (76%) (79%) (82%) (89%) (90%) Commercial banks (19) 10 13 375 609 26,103 39,876 (53%) (68%) (56%) (91%) (60%) (92%) Mortgage banks (9) 3 4 942 1,295 (33%) (44%) (48%) (66%) Provident funds (10) 6 10 (60%) (100%) Industrial (100) 30 31 11.4 15.4 226 301 56,320 86,495 (30%) (31%) (38%) (52%) (33%) (45%) (32%) (50%) Service (100) 17 22 5.4 8.9 47 278 16,407 30,742 (17%) (22%) (22%) (36%) (12%) (70%) (15%) (29%) Listed abroad (94) 23 23 8.1 8.1 157 157 (24%) (24%) (51.9%) (51.9%) (23%) (23%) NOTE: The Top 5 groups comprise IDB, Ofer, Koor, Dankner, and Arison. All companies under direct or partial ownership of the Top 5 and/or the government are counted, and their data are measured in total, rather than on a pro-rated equity basis. Companies under the joint control of more than one of the Top 5 and the government are counted once. Profit data are based on incomplete reporting and should be interpreted as rough estimates. Analysis for each segment is focused on the largest firms, whose number is indicated in parentheses in the first column. Segments are not mutually exclusive. SOURCE: Computations by the authors bases on data from Dun & Bradstreet Israel, Israel’s Largest Enterprises 1999; K. Abramov and Y. Zuk (1999); Standard & Poor’s Israel’s Leading Public Companies (http://www.standardpoor.co.il/bankhapoalim/); the U.S. Securities and Exchange Commission (http://www.sec.gov/); authors’ archive. Bichler 01 chaps 20/1/06 1:15 PM Page 88 Elron (Lucent), FIBI (Safra family), Dead Sea Magnesium (Volkswagen), Gilat (General Electric and Microsoft), Golden Lines (the Italian state-owned Stet and Southwestern Bell), Indigo, Geotek and Scitex (George Soros), Intel Israel (Intel), Jerusalem Economic Corporation (Bear Stern), Libit (Texas Instruments), Medinol (Boston Scientific), Biosense (Johnson & Johnson), Mirabilis (AOLTime Warner), NDS (NewsCorp), Nicecom (3COM), Orbotech and Opal (Applied Materials), Ornet (Siemens), Osem (Nestlé), Partner (Hutchison Whampoa), Paz (the Liberman family from Australia) and Telrad (Nortel). In addition to these direct foreign holdings, foreigners have also increased their indirect ownership, mainly through diversified portfolio investments by pension, mutual and hedge funds. Some of the most rapidly growing Israeli firms – primarily in high technology – were listed abroad, mainly in New York, and were held almost entirely by foreigners. The most noted of these were the pharmaceutical giant Teva (with 1999 sales of $1.2 billion, net income of $134 million and a market capitalisation in excess of $3.5 billion); Comverse, the world’s leading supplier of cellular voice cells and the first Israeli-based company to make it to the Standard & Poor’s 500 index (with $850 million in sales, $150 in net income and a market capitalisation of over $10 billion); the cellular billing company Amdocs (with $620 million in sales, $97 million in net income and a market capitalisation of over $7 billion); and Check Point Software, inventor of the ‘Firewall’ (with 1999 sales of $215 million, net income of $92 million and a market capitalisation in excess of $4.5 billion) (data in this section from corporate reports and Moody’s). The most important aspect of this process, however, was the transnationalisation of dominant capital itself. By the late 1990s, two of the five top groups – Arison and Koor – were effectively in foreign hands. Arison Investment was founded by the late Ted Arison, an Israeli emigrant who made his fortune in the leisure business, through his 47 per cent controlling share in Carnival Cruise, the world’s largest ocean leisure firm (1999 sales of $3.5 billion, net income of $992 million and market capitalisation of $27 billion). Koor Industries was controlled by Charles Bronfman and his partner Jonathan Kolber. Until 1999, the former was co-chairman and owner (9.5 per cent) of Seagram, a global beverage, entertainment and investment giant, with sales of $15.3 billion and market value of $16 billion. In 2000, Seagram merged with France’s Vivendi in a $34 billion share swap, creating a global entertainment and infrastructure giant with sales in excess of $53 billion, in which Charles Bronfman now had an equity stake of over 3 per cent. Compared to the Bronfmans, Kolbers and Arisons, the Ofer brothers, owners of Israel’s second largest group, look like true ‘sabras’, but the appearance is deceiving. They too made their fortune abroad, and in no other than the leisure industry. As it turns out, their principal asset was a 20 per cent stake in Royal Caribbean Cruises, another leisure giant with 1999 sales of $2.6 billion, net income of $384 million and market value of $9.1 billion. The Ofers shared their ownership in Royal HISTORY OF ISRAEL’S POWER STRUCTURE 89 Bichler 01 chaps 20/1/06 1:15 PM Page 89 Caribbean with Pritzker, a former Israeli contractor who now owned the Hyatt chain, and with Wilhelmsen, a Norwegian shipping firm. In 1997, the Ofers and the Arisons competed over the purchase of a third leisure company, Celebrity Cruises, which the Ofers eventually won and merged into their Royal Caribbean. The sellers of Celebrity were no other than the Recanati family, owners of IDB, who held 50 per cent of Celebrity’s shares through their Overseas Shipholding subsidiary. (And perhaps this is how it was destined to be. After all, capitalism got its first global push in the sixteenth century with the plundering of Caribbean gold, while the United States reached its global economic peak with a bootlegger family in the White House; so it seems only fitting for Israeli transnationalisation to be led by heirs of a famous alcohol smuggler and by cruise ship owners registered in the Caribbean….) Like the Ofers, the Recanatis themselves were no foreigners, having immigrated to Palestine from Greece in 1936. However, over the years, the family not only expanded its foreign business, but also aligned itself with an impressive battery of overseas partners. By the end of the century, these included Goldman Sachs and William Davidson (who had direct stakes in IDB), Bell South and the Safra family (partners in Cellcom), General Electric and Microsoft (partner in Gilat Satellite and General Engineers), Kimberly Clark (in American Israeli Paper Mills), Praxair (Maxima), International Paper and George Soros (Scitex), Shamrock Holdings (Tel-Ad), TCI and UPC (Tevel), and Prudential Securities (YLR), to name only a few (data in this section are from company reports, the U.S. Securities and Exchange Commission, Moody’s, and newspaper clippings). The other facet in the transnationalisation of ownership was outward foreign investment by Israeli dominant capital. Over the past decade, direct outflows have risen to over 1 per cent of GDP, from virtually nothing in the 1980s, with funds primarily earmarked for foreign acquisitions. The forerunner in this movement was Koor, followed closely by the other major groups. Restructuring Together, the two processes of centralisation and transnationalisation made the ownership scene dynamic to an extent never seen before in Israel. And indeed, incessant restructuring was now the third hallmark of the Israeli power structure. What was until a decade ago a very rigid structure, has turned into one of permanent flux. For instance, during the first 50 years of its existence, Koor was under the joint ownership of the Histadrut and Bank Hapoalim. And then, in a matter of ten years, the company was sold and bought several times, first to Shamrock, an investment arm of the Disney family, who then sold it to Bronfman and Kolber, who in turn dismembered it by selling off unwanted assets and buying new ones. Similarly, state assets, once privatised, began rotating between the different actors. The Israel Corporation and Israel Chemical Industries, for instance, were sold to one of Israel’s biggest foreign 90 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 90 investors, Saul Eisenberg. When Eisenberg died in 1997, his family resold the companies to the Ofer brothers, who then proceeded to chop it to pieces, keeping the parts they liked and selling those they didn’t. The investment company Clal, which since its inception in 1962 was held jointly by IDB, Bank Leumi and Bank Hapoalim, was taken over by IDB and merged into its operation through massive reorganisation. All in all, the ownership structure remains as concentrated, complicated and interlinked as before; but now it was also constantly changing. Evidently, then, Israel has changed a great deal, but the nature of this change had little to do with the market fairy tale of Jacob Frenkel and the like. The rigid power of state capitalism is certainly gone, but replacing it we see emerging the even more powerful hand of global capital. What caused this shift? How did a small colonial society turn transnational? Was this a historical coincidence? A consequence of narrow-sighted politicians and a spineless, indifferent public? Or perhaps there is logic to it after all – not inevitable as Marx’s ‘laws of motion’, but nonetheless clear in its pattern? Let us then start at the beginning. The Pre-Independence Sectors Writers on the subject usually describe the Jewish settlement in Palestine of the 1920s in terms of three pluralistic sectors, separated along political and ideological lines: the ‘national sector’, comprising a network of financial organisations established since the turn of the century by German and British Zionists; the ‘Histadrut sector’, which combined the various political and economic organisations of the labour movement; and the private, or ‘civil sector’, a relatively loose political alliance made of citriculturists, importers, merchants, landlords and city mayors. Like other colonial societies of the time, Palestine also had its share of foreign investors and multinational subsidiaries operating alongside and in cooperation with domestic groups. Finally, until Independence in 1948, the whole process was embedded in a vibrant Palestinian society which was itself starting to industrialise (Gozansky 1986). The first to emerge was the national sector. The decline of the Ottoman Empire at the turn of the century had spurred various colonial companies, usually under the auspices of European governments, into investing in Middle Eastern banking, railroads, agriculture and the like. Riding this wave, Jewish organisations in Great Britain and Germany had tried to channel into Palestine capital from Europe and America, along with Jewish labour seeking to escape Europe’s unemployment and pogroms. One of these organisations was the Jewish Colonial Trust, registered in London in 1889. A subsidiary of the Trust, the Anglo-Palestine Company, or APC, which would later become Bank Leumi, had been specifically set up in 1902 in order to finance ‘land redemption’ for HISTORY OF ISRAEL’S POWER STRUCTURE 91 Bichler 01 chaps 20/1/06 1:15 PM Page 91 Jewish settlement.1Another investment group, the Palestine Land Development Company (Hachsharat Hayishuv), was established in 1908. The company, headed by Arthur Ruppin, tried to reproduce in Palestine an East Prussian model of agricultural plantations manned by propertyless peasants. Perhaps the most famous undertaking of this type was Edmund Rothschild’s £5 million vineyard investment on the coastal plain. Until the British conquest of 1918, however, most of these attempts failed, usually for lack of immigrants, who generally preferred the New World to the Holy Land. And yet, while the ventures themselves faltered, their pattern of mixing business with Zionism was clearly a winner. The Jewish Foundation Fund, for example, which would later become the financial arm of the Jewish Agency, was founded in 1921 by venture capitalists, while its partner in many an undertaking, the Palestine Economic Company (PEC), was similarly set up by American and Canadian investors headed by U.S. Supreme Court Justice Louis Brandeis. Patriotism and nationalism had proven profitable around the world, and their Zionist version was scarcely an exception. The twin engines of growth during that period were Jewish capital inflow and British infrastructure spending. Naturally, many groups were fighting for a share of the spoils, and, initially, their struggles were mostly political. The reason was threefold. First, the business infrastructure was undeveloped; accumulation was relatively slow and disjoined, most business units were tiny, capital was hardly vendible, and absentee ownership had yet to emerge. Second, the means of coercion and violence were monopolised by the British Empire. And, finally, many of the more important social formations, such as agriculture cooperatives, credit unions, city councils, and interest groups, were voluntary. In this loose context, formal politics was by far the best vehicle for action, and, indeed, the important organisations of the time were initially set up as pressure groups. The first to grasp the historical opportunity were activists of two small political parties: Hapoel Hatzaier (The Young Worker) headed by Haim Arlosoroff, and Ahdut Ha’avodah (Unity of Labour) headed by David BenGurion and Berl Katznelson. These politicians expected British recognition of Palestine as a Jewish homeland to attract masses of impoverished East European Jews. They also realised that whoever controlled this immigration may well control the political destiny of the country. This realisation led to the establishment in 1920 of a superstructure labour organisation, the Histadrut, and in 1921, of its economic arm, Hevrat Ovdim (Workers’ Company). Ben-Gurion was quite explicit about his intentions: ‘Without a single, general authority combining all the partial bodies of the working class’, he declared, ‘we cannot 92 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 1 On the surface, the redemption seemed to run smoothly since most of the lands belonged to absentee Arab owners. However, the acquired properties were almost never empty, which meant that their direct cultivators, the peasants who lived and worked on them for centuries, had to ‘relocate’. This is how the ‘Palestinian Problem’ started (Laqueur 1972: Ch. 5). Bichler 01 chaps 20/1/06 1:15 PM Page 92 III: 450). On another occasion, the same speaker charged that 90 per cent of the abandoned Palestinian property was going to MAPAI members: ‘The custodian does with these enemy properties as he sees fit, for the good of his own party and friends … the whole country is becoming one politburo.…’ (p. 40). Ideology was also quickly invoked upon suspicion of any deviation from pre-set distributional patterns. For instance, at one point Hamashbir, the symbol of ‘Bolshevism’ in the eyes of the civil sector, broke ranks by leaving the Trade Association through which it cooperated with private merchants since the British Mandate. In theory, this should have increased competition, and yet instead of extending his blessing, Israel Rokakh of the General Zionists jumped to denounce the plot: ‘This bizarre move by Hamasbir symbolizes the sorry state of affairs in which one sector is preferred over another….’ Dov Yossef, the Minister of Rationing, had to calm him down, assuring him that there would be no discrimination in import licences and that ‘free trade’ would continue getting its fair share (p. 1023). The checks and balances between the different sectors were often less than subtle: – Abba Khushi [Mayor of Haifa]: The Jewish Agency is the largest importer of building materials. It gives these to the kibbutzim in lieu of a budget, and they sell them on the black market. We have evidence regarding twenty one cases.… – Dov Yossef [Minister of Rationing]: The owners of Liber as well as those of Z.D. [affiliated with the General Zionists] are already on trial. Another file was opened against Elite [close to Herut]. – Ben-Gurion [Prime Minister]: How could they deal in the black market? Aren’t they millionaires? – Abba Khushi: They made their fortune from such activity already during the time of the English…. – Ben-Gurion: Can Mr. Liber be fined 20,000 Liras? (cited in Segev 1984: 294) Or a similar exchange between private coffee and tobacco importer Eliyahu Elyashar, and Rationing Minister Dov Yossef: – Dov Yossef: I have a list of examples how they [the coffee manufactures and merchants] defraud the public.… – Elyashar: We are not talking against this particular regulation. – Dov Yossef: I know my own people, and I know your specific concern is only for controls which affect you, and that you have no objection to those controls which hurt others.… (The Knesset Record 1 1950: 690) The Herut Party, headed by Menachem Begin, was terrified of being sidestepped in the distribution process. Its representatives anxiously hammered HISTORY OF ISRAEL’S POWER STRUCTURE 99 Bichler 01 chaps 20/1/06 1:15 PM Page 99 the virtues of ‘liberalism’, ‘civil rights’ and ‘democracy’, particularly regarding the budget and foreign capital, insisting that the legislature rather than the government should run the country, and that allocation be done through ‘public committees’. Their greatest hope was that the U.S. administration of the Cold War would refuse to do business with the Bolsheviks from MAPAI; after all, who, better than Begin and Herut, could represent the ‘free market’ in this part of the world? When the first American loan arrived in 1949, their eyes almost popped: ‘How and in what way will the money be distributed between the economic sectors?’ demanded Herut member Ben Eliezer. ‘What guarantee do we have that it will be properly allocated in the collective sector and how do we know it will go to the private sector? Finally, what guarantee can we give to the “other public” in whose name I have the right to speak … this public demands full participation … and just as it didn’t give up in other areas, it won’t give up in this one.…’ (The Knesset Record 1 1949: 150). The ‘other public’ he referred to were the immigrant masses who came after 1948 from North Africa and the Middle East. Growing corporate concentration and income inequality left most of them with the short end of the stick, giving Begin, who at one point contemplated leaving politics, the opportunity for a big comeback as the leader of the underdog. And, indeed, as this ‘other public’ grew from election to election, the allocation of foreign capital turned into an effective populist weapon. In one of his public speeches, Begin pointed to a man in the audience: ‘Did you receive ten thousand Liras from the government?’ he asked. ‘No, I didn’t’, replied the embarrassed man. ‘Of course you didn’t!’ cried the triumphant Begin, ‘But the Jewish Agency did! It received in your name tens of thousands of Liras, which it went on spending without giving you your fair share.…’ (Almogi 1980: 173–4). Herut politicians and activists, it must be noted, were usually much more fortunate than their voters. Ya’acov Meridor, for instance, for whom Prime Minister Begin would later create a special Economy Ministry, began his illustrious business career during that period, usually with generous financial support from the ‘socialist’ government and in surprisingly close cooperation with the ‘establishment’. Meridor’s brother-in-law and Herut’s future Controller, Yossef Kremerman, received an import concession, which he of course put to good use, setting up, together with Solel Boneh, Hamashbir and the Saharov family from the General Zionists, a national cartel for pressed wood. Another Herut winner was Reuven Hecht, a gun runner for Begin’s paramilitary Irgun Zva’i Leumi, who got the exclusive certificate for grain imports (Almogi 1980: 137). Particularly revealing in this regard were the shifting positions of Herut member Avraham Recanati, whose brother, Leon, founded the Discount Bank. Most of the time Recanati fought fiercely for ‘free trade’ and the ‘small citizen’, usually against the Histadrut and government intervention. When the first U.S. loan arrived, however, his stance quickly changed. Part of the loan was earmarked for the citrus plantations, and Recanati, whose family had recently 100 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 100 taken over the orchard holding group Pardes Syndicate, was suddenly in favour of careful government planning, insisting that the process be centrally controlled by the MAPAI government, and that the money be orderly distributed among the large citriculturists. This preference was not carved in stone, of course. Another part of the loan was put into shipping, a future specialisation of the Discount group, and here Recanati was all for free markets and equal opportunity: I approve the loan legislation, on condition that there is one law for all, and that all companies are treated equally with [government owned] Zim Shipping.… Zim has privileges which private companies don’t.… This is the same monopolist, imperialist approach we know from other areas, and which pushes us down hill. Only if Mr. Remez [Transportation Minister] has the courage to translate talks into deeds for the benefit of private shipping … will there be hope for improvement…. (The Knesset Record 1 1950: 1084) Notably, these concerns for a level playing field were brand new. A year earlier, when the Recanatis were still partners with Zim, Ampal and PEC in IsraelAmerica Line, a joint venture with the exclusive right to commercial sea transport between the two countries, they seemed perfectly happy with the status quo. It was only when the partnership broke up, with Discount setting up its own shipping subsidiary El-Yam, that they rediscovered the evils of monopoly. Labour The most important prize of the time, however, was the labour force itself. The local elites did not have to read Marx, Veblen or Kuznets to know that without this ultimate commodity there was no economic growth, no profit, no capital and, indeed, nothing to rule over. Ben-Gurion hoped to have this labour supplied by Europe’s Jewry, but the Holocaust left his plan in shambles. ‘For thousands of years’, he lamented, ‘we were a nation without a state. Now there is a danger that Israel will be a state without a nation’ (cited in Segev 1984: 97). The substitutes were the Jews of North Africa, the Middle East and the remnants of Eastern Europe. Ben-Gurion viewed them with disdain; ‘human dust’, he called them, comparing them to the black slaves brought to America (p. 157). And yet there was no other choice. As Berl Locker, chairman of the Jewish Agency Executive, told Henry Morgenthau, Roosevelt’s Treasury Secretary: ‘In our opinion the Sephardi and Yemenite Jews will play a considerable part in building our country. We have to bring them over in order to save them, but also to obtain the human material needed for building the country’ (cited in Segev 1984: 172). HISTORY OF ISRAEL’S POWER STRUCTURE 101 Bichler 01 chaps 20/1/06 1:15 PM Page 101 Often penniless, culturally fragmented, and without knowledge of Hebrew, the new immigrants were easy prey for manipulation. The magic word was ‘immigration absorption’, with all key players fighting for a share in the lucrative trade. The most effective, by far, were the various social and cultural organs of MAPAI, although others, including its religious coalition partners and their educational institutions, were in close pursuit. The principal technique of commodifying this Tower of Babel into a standardised, cohesive and obedient labour force was nationalist rhetoric buttressed by common enemies. Indeed, the heating up of the Israeli–Arab conflict during the 1950s was conceived, at least partly, with this very purpose in mind. According to Moshe Sharet, who objected this type of manipulation, Ben-Gurion and his ‘officer junta’, as he called them, believed that only a permanent state of war could turn the immigrant rubble into a ‘new Hebrew man’.8 State Capitalism and Corporate Centralisation The growing contrast between the process of proletarianisation and the consolidation of power is well illustrated by the period’s memoirs. For David Horowitz, then general director of the Finance Ministry, 1951 was a very bleak year: As the immigration wave rose, the economic problems imposed themselves on us with enormous might, forceful enough to break the backs of those in charge of the immigration absorption. Tens of thousands of people were crowded in the ma’abarot [transit camps] and the camps for the ailing. They were grieved by war, tormented with the horrors of the Holocaust and often burdened with large families. Within a short while, 60,000 people, or 10 per cent of the [Jewish] population, were congested into the camps. A similar number stayed in decaying buildings of abandoned Arab towns and villages. The tent and hut camps were damp and cold during the winter and burning hot through the summer. The congestion, filth, and stench exhausted their 102 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 8 In the mind of Ben-Gurion and the officers, wrote Sharet, ‘Israel has no worries, neither international nor economic. The question of peace does not exist. What happens in the region and in the world is irrelevant. In their view, [the state] should see war as the principal and perhaps only means of increasing welfare and keeping the moral tension…. [The retaliatory operations] are the elixir of life…. They help us keep the civil and military tension. Without them, we wouldn’t have a fighting nation, and without a fighting regime we are lost…. For this purpose, we can concoct dangers; indeed, we are obliged to. Give us a war with the Arab countries and all our troubles will be over…. Ben-Gurion himself once uttered that we should take an Arab and pay him a million Liras to finally start a war’ (Sharet 1978: Vol. III, pp. 1021–2). Unaware of Sharet’s yet unpublished Personal Diaries, Aronson and Horowitz (1971) speculated in this very spirit, arguing specifically that the latent function of the retaliatory operations were to both help integrate the immigrant masses and increase their support for Ben-Gurion and his government. Bichler 01 chaps 20/1/06 1:15 PM Page 102 strength and shook their souls.… The ma’abarot … turned into sites of filth, desperation and forced idleness. Family ties began to loosen, the foundations of traditional society to collapse…. (Horowitz 1975: 23–4, 110) Unlike Horowitz, for whom the period was marked by misery and despair, for Harry Recanati, then owner and director of the Discount Bank, it was an epoch of great business success: ‘By 1951, I had good reason for being satisfied with the completed task. The bank left to us by our father had prospered and constituted the base for a first-rate Israeli financial group’ (Recanati 1984: 71). How did this rapid expansion come about? What was it that enabled a small financial institution, established only 15 years earlier by tobacco merchants and realtors, to become the country’s second largest bank and fifth largest industrial conglomerate? How did the owners of this bank, who had no prior experience in finance or manufacturing, all of a sudden become experts in areas such as rubber, paper, energy, shipping, aluminium, insurance, construction, mortgage banking, citrus orchards and electric equipment? Part of their success was of course due to rapid immigration, which, even in the absence of per capita growth, expanded the overall economy, lifting all boats large and small. But then Discount’s own expansion was much faster – indeed, so much faster that, by 1951, the group was already pushing against the national ‘envelope’: ‘I had striven thinking about new initiatives’, wrote Recanati, ‘but in vain. We already had in our group all the subsidiaries appropriate to our basic operations.…’ (1984: 71). Clearly, this type of differential accumulation, experienced also by several other groups, could have occurred only with consistent government backing and through increasing reciprocity and cooperation among the different elites. The dual rise of state capitalism and corporate concentration spelled the end of the pre-Independence sectors. The disintegration was most visible in the civil sector. In the 1951 elections, the Liberal Party, the self-proclaimed representative of the ‘the bourgeoisie’, still managed to win almost 20 per cent of the votes on its laissez-faire ticket of ‘let us live in this country’. But this was a deadcat bounce. By the mid-1950s the big bourgeoisie was already aligning itself with the New Class, its interests rapidly diverging from and often contradicting those of the small economy and rentiers. And once the process was under way, it was only a matter of time before the Liberals were swallowed by Begin’s nationalist Herut, and eventually amalgamated into his populist Likud bloc. The Histadrut sector was also disintegrating, although here, due to MAPAI’s stranglehold over the press, the process was harder to detect. The most visible sign was the emergence of multiple struggles within and between its various organisations: Pinchas Lavon and Moshe Sharet against Ben-Gurion; the ‘old guard’ against the ‘young’; the ‘bloc’ (party machine) against the technocrats; conflicts between MAPAI ministers and the Histadrut’s Executive; between the latter and Hevrat Ovdim; and between the cooperative sector and Hevrat Ovdim companies. HISTORY OF ISRAEL’S POWER STRUCTURE 103 Bichler 01 chaps 20/1/06 1:15 PM Page 103 Underlying these numerous conflicts was the basic contradiction of the Histadrut: an organisation whose mandate was to both accumulate capital and represent workers. Initially, much like in the Soviet Union and Fascist Italy, the contradiction was ‘eliminated’, first by elevating the workers ‘from a class to a nation’ (as Ben-Gurion put it), and then unleashing against them an endless battery of enemies – from citriculturists, through Jewish and Arab capitalists, to cheap Arab labour, oriental feudalism, Arab nationalism, British imperialism and Jewish fascism. The real battle lines were further blurred by the high economic growth associated with the breadth regime. Indeed, in this sense Israel was not alone. After the Second World War, many in the West were tempted to believe that the world had entered a new era of prosperity. They gave it various names – the ‘end of ideology’, the ‘end of capitalism’, ‘post-industrial society’, the ‘welfare state’ – all suggesting a new, conflict-free future. And yet, under the surface, power continued to concentrate. Within the Histadrut, the contradiction of capital accumulation and labour representation was politicised through the struggle between the Executive and local workers’ councils, which until the early 1950s enjoyed considerable autonomy. The Executive’s assault was fully backed by the MAPAI government, which nationalised the councils’ employment offices, used the central bank to undermine their credit unions with high liquidity requirements, and consistently supported employers in labour disputes. For example, when sailors in the merchant fleet launched a big strike in the early 1950s, Ben-Gurion took the opportunity to show the Americans his true loyalties, sending a large police force to crush the ‘communist plot’, as he called it. On another occasion, he tried to have the army settle a railroad labour dispute. And when Hans Moler, owner of the largest textile factory Ata, refused to recognise a strike by an elected union, Ben-Gurion took his side, demanding that the workers surrender, just as he did when workers went on strike in Rotenberg’s Electricity Company in Haifa. The Labour government also moved to nationalise the workers’ education system, effectively eliminating the risk of contending ideologies (the autonomy of religious education, though, was left intact). The effect of these various assaults was accelerated by the emergence of two parallel stratifications: an ethnic stratification between the Ashkenazi who came from Europe before 1948 and the Middle Eastern Sephardi who arrived after, and another, national stratification between Jewish workers and Palestinian labourers from the territories occupied in 1967 (Rosenfeld and Carmi 1979). The pecking order created by these strata and the associated rise of a ‘middle class’ sounded the death knell for workers’ autonomy in Israel. By the middle of the 1950s the sectoral structure was gone, replaced by a statist regime whose control over capital formation, nationalism and militarism helped nourish the embryos of dominant capital. Perhaps the best summary of this capital–state symbiosis can be found in the memoirs of Harry Recanati who headed the Discount group during the 1950s. Ousted from his position by 104 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 104 a family feud, Harry spent the next quarter of a century outside the country, so his reflections remain authentic, uncorrupted by subsequent events: I said to myself that our bank had completely changed. It was no longer the family bank founded by my father. My brothers turned it into an industry, against my will. There were other things that caused me anguish: the flattering advertisement, much of which was created under our own aspiration, the charity organisations and institutions established under our auspices with tax deductible donations, the indiscriminate support of all political parties, left and right, to acquire the friendship of each and every one, and the stock market manoeuvres where share prices were jointly determined in collusion among several banks. Even less cherished was our mangers’ friendship with government officials in Jerusalem. I resented their constant striving for government benefits of every kind, all under the pretext of the national interest. Our group was a private business, not a public institution. It was unjust and undignified to bank on government grants for the benefit of shareholders who were mostly affluent capitalists. I was well aware that my views were uncommon in Israel. This was a country where too many financiers and businessmen enjoyed the allocation of public wealth and were continuously nourished by German payments, U.S. grants and donations from the Jewish Diaspora. (Recanati 1984: 92–3) In Israel, they called this symbiosis the ‘Sapir Method’, named after MAPAI’s Finance Minister of the time. But the principle was hardly original. In 1940s Brazil, for instance, where President Kubitschek called for ‘fifty years of development in five’, a similar arrangement, the entreguista (collaborator) state, was set up, whereby the administration socialised the less profitable investments, supported joint ventures with private enterprise, and subsidised capitalists left and right so as to encourage them to ‘take the initiative’ (Hewlett 1980). Perhaps this, rather than Keynes’s ‘animal spirits’, is the real secret of ‘primitive accumulation’. It is not the setting up of new factories which leads to accumulation, but the setting up of new power institutions, and here the government is often crucial. By creating the institutional context with its various allocation rules, social arrangements, ideological conventions and disciplinary means, it helps generate and regulate profit expectations, which can then be discounted into capital. The Socio-Ideological Basis The ‘Class Struggle’ Growing business and political cooperation among the different elites was accompanied by increasing ideological cohesion, so that, by the 1920s, MAPAI HISTORY OF ISRAEL’S POWER STRUCTURE 105 Bichler 01 chaps 20/1/06 1:15 PM Page 105 activists and Histadrut managers were already closer in their thinking to the private sector than to the workers they represented. This is not commonly recognised, of course. Subsequent historians did a great job of painting this period as an epic class struggle for the ‘conquest of Hebrew work’. How and why this ‘conquest’ – which essentially consisted of displacing poor Arab day workers by propertyless Jewish immigrants – was a ‘class struggle’, is a question best left for terminologists. What does seems clear, though, is that the struggle, regardless of its name, was fought largely on the backs of the workers rather than for them. Take the famous 1927 ‘battle’ for Hebrew work in the orchards of Ness Ziona, a small township on the coastal plane, in which the Histadrut fought the citriculturists to have them employ Jews in lieu of Arabs. In the Zionist mythology, this was a defining moment in the fight between labour and capital. The reality, though, was more of a showoff, a spectacle staged by Ben-Gurion and Katznelson of the Histadrut as part of their effort to gain control over the Jewish Agency. A little earlier, a committee of ‘experts’ set up by the Agency recommended that the organisation cut its funding to the ‘inefficient’ Histadrut, in favour of private enterprise and ‘free’ labour. Unlike today, when most labour leaders would find themselves powerless in the face of similar IMF dictates, Ben-Gurion retaliated swiftly, sending the unemployed of Tel-Aviv to ‘conquer’ Hebrew work at the orchards of Ness Ziona. The ensuing chaos, in which plenty of heads were cracked open by the British police, put the Jewish Agency’s board, many of whom were themselves private investors, in the awkward position of undermining Zionism. They retreated hastily, and the citriculturists were forced to accept the Histadrut as their exclusive supplier of workers (Tevet 1980: 436). Here, as in many similar ‘struggles’, the key issue was the interests not of workers, but of their ‘leaders’. The political power of MAPAI and the Histadrut was dependent entirely on their ability to control the labour force. Without this monopoly over jobs, social services, culture and ideology, they were irrelevant. In this context, the use of proto-Marxist rhetoric seemed entirely appropriate. Keynesianism was still a generation away and the only broad alternative to liberal capitalism was Soviet-style planning. Like the elites of other developing countries of the time, the Jewish labour movement tended to see international inequality as a consequence of class division, and thought that socialism was the most effective way of organising large-scale immigration for nationalist projects. Their actual policies, though, were often closer to the bureaucratic model of imperial Germany, and indeed, some, such as Arlosoroff who preferred the German sociology of Weber, considered Ben-Gurion’s ‘class struggle’ a relic of history (Arlosoroff 1934: Vol. III, pp. 121–32). The view of labour as a means rather than end is also evident in attitudes towards wages. In contrast to issues of employment, where ‘labour leaders’ rarely gave an inch, when it came to income they were surprising flexible, usually downward. Here, their view, much like that of the Jewish Agency and the civil sector, was strictly neoclassical: if wages were to become too high, they 106 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 106 warned, demand for workers would fall, immigration would stop, and the entire Zionist project would be put at risk (Ben-Gurion 1933: 198–211). It is therefore hardly surprising that the memoirs of these ‘labour leaders’ overflow with complaints about the workers’ uncontrollable ‘greed’ and unquenched thirst for various ‘raises’.9Their own incomes, though, usually didn’t fair too badly. For instance, during the 1930s, at the height of the ‘class war’, Ben-Gurion already earned 80 liras (excluding his generous travel expenses), roughly ten times the income of a full-time orchard worker, and one-third of the profit of a large citriculturist.10 In any event, by that time Ben-Gurion had already become a board member of the Jewish Agency, and naturally began emphasising the primacy of statist over labour organisations. Although this ideological shift may seem instrumental, Ben-Gurion himself was probably sincere. After all, since public capital was in his view more efficient than private, it took only a small step to conclude that MAPAI’s nationalism had to be the local manifestation of socialism, and that blocking the General Zionists from Jewish Agency funds was therefore part of the class struggle (Ben-Gurion 1933: 26–9; Gorani 1973: 154–64). Whatever the case, the important point is that this ideological shift was itself part of the changing nature of capitalism. The bourgeois model of the late nineteenth century was giving way to the state cocoon of the early twentieth century, and in this context, with accumulation being promoted, yet hidden, by the government’s warm embrace, it was only fitting for ‘labour leaders’ to start viewing themselves as ‘statesmen’. And indeed, upon his promotion to the Jewish Agency Executive, statesman Ben-Gurion began contemplating broader, cosmological theories. One of these was the ‘theory of political time’. ‘In this game of historical forces’, he observed, ‘there sometimes arises a big historical chance … one big moment in a year when the skies open up and you can get all that you wish.… A [political] movement has to have the sense to capture this moment.…’ (cited in Tevet 1987: 9, 12). ‘They [the Arabs]’, he continued, ‘ignore the internal and external obstacles and the time factor.… Alas and alack if we don’t know how to exploit this time in order to grow and fortify.…’ (cited in Aronson 1994–95: Vol. I, p. 22). In other words, high politics, like modern business, was a matter of ‘timing’, the ability to seize the moment and beat your competitors in the historical bourse. This ability, or ‘vision’, was what differentiated a real statesman from an ordinary politician. The only problem was that, much like in business, the historical cycles kept getting shorter and trickier, the competitors were forever breathing down your neck, and unless you constantly came up with ‘new and HISTORY OF ISRAEL’S POWER STRUCTURE 107 9 See for instance Horowitz (1975: 30–1, 108–9, 247–9), Almogi (1980: 95–6, 149–50, 153–4), Dan (1963, Ch. 35), and Yadlin (1980: Ch. 15). 10 Ben-Gurion’s income is based on Tevet (1980: 354–64) and Greenberg (1988). Other incomes are from Giladi (1973: 79, 181, 195), Horowitz (1944: Ch. 4), the Hebrew Encyclopaedia (Vol. VI, p. 835); and Gozansky (1986: Chs 4–5). Bichler 01 chaps 20/1/06 1:15 PM Page 107 improved’ visions, you in turn became history. And so, during the 1920s, the key was to quickly amalgamate the ‘working class’ parties in order to capture the labour market and the Jewish Agency before the competitors had a chance to organise. Then, in the 1930s and the 1940s, it was necessary to unite the ‘Jewish world’ in order to bring in enough immigrants, before Arab nationalists got their act together and stopped the Jewish colonial project dead in its tracks. In the 1950s it was crucial to have the ‘Jewish genius’ develop nuclear weapons to keep the Arabs states at bay. And in the 1970s and 1980s the call of the day was to import Russian immigrants for the settlements before the end of the Cold War caused Israel to lose its historical tempo. Unfortunately, as the statesmen got older, the race looked more and more like a treadmill, with the epochal jackpot becoming increasingly elusive, and the public, as always, totally oblivious to the grandeur of historical timing. The Dynasties Over the years, the business, political and ideological affinity among the elites was fortified by intricate kinship ties. In contrast to popular belief, most of these elites, including the cadres of the New Class, came from affluent bourgeoisie backgrounds, and even those who didn’t, such as Ben-Gurion, BenZvi, Peres and Lavon, were commonly of petty bourgeois origin. Only a few were working class. The genealogy of Israel’s ruling class rests on a surprisingly small number of family trees – primarily Hacohen, Ruppin, Shertok (later Sharet) and Elyashar – whose thick trunks and multiple branches are intimately interlaced with one another, as well as with many other dominant families. The resulting octopus-like structure makes the spheres of government, business, military, culture and opinion-making so entangled, that ‘state’ and ‘capital’ can longer be clearly separated. One of the key figures of this structure is David Hacohen, a descendant of Russian Jewish wood merchants who became chairman of Solel Bonhe. His father, Mordechai Ben-Hillel Hacohen, was one of Palestine’s biggest importers of construction materials, and a founder of Jewish Haifa. His uncle from his mother’s side, Shmuel Pevsner, married the daughter of Asher Ginzberg, also known as Ahad Ha’am (in Hebrew, ‘one of the people’). Ginzberg himself managed the London office of Russian tea baron Wisotsky, and is considered to be the father of ‘cultural Zionism’, an alternative to the ‘political Zionism’ of Herzel and Nordau. David Hacohen, Ginzberg’s nephew, grew up among the inner circle: During that time, I was very close to the Zionist high echelon in London. There were the family ties with Ahad Ha’am, the personal contacts in his London home and in the Jewish movement offices with Dr. Chaim Weitzman and Nahum Sokolow, and with the entire leadership of the Jewish 108 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 108 great chagrin, Shin’ar was snatched by Nahum Goldmann of the World Jewish Congress to head the country’s Restitution Mission to Germany. Of course, this was hardly the end of the world, since their connections with Shin’ar helped them keep an eye on this crucial process. As Harry Recanati later put it, ‘luck had it that we could follow closely the unfolding of negotiations regarding these reparation payments.…’ (1984: 65). And indeed, the subsequent distribution of these payments as subsidised credit gave Israel’s dominant capital, including the Discount group, a major differential boost. Their second choice for the job, at least according to this candidate’s claim, was Herman Hollander, general director of the Ministry of Trade and Industry during the Austerity, and a board member of Discount’s subsidiary Pardes Syndicate (Hollander 1979: 226–7). Hollander refused the offer. He got a far better one from his own family business, the Hollander leather and fur group based in Sweden, complete with a $40,000 salary, roughly 30 times the average Israeli wage. Not that the family business was neglected when Hollander was still serving the public. According to his memoirs, during the 1950s, when Israel was short on foreign exchange, he was sent by Finance Minister Kaplan and Foreign Minister Sharet to cut barter deals with Argentina. Upon his arrival to Buenos Aires, the furrier-cum-director was greeted by a small entourage. One of them was Berl Locker, a long-time functionary of the Jewish Agency and the Hollander Group’s retainer in South America. The second was Benno Gitter, the Hollanders’ local business competitor. Gitter, who in 1947 founded Arpalsa (Argentina-Palestine), a meat-exporting venture intended to tighten trade relations between the two countries, was now worried he might lose his patriotic exclusivity. (Later, Trade and Industry Minister Pinchas Sapir would nominate Gitter as chairman of Clal, a concession-loaded firm with which he hoped to entice foreign investors into Israel.) The third member of the entourage was Israeli ambassador Ya’akov Zur, whose daughter married Aharon Dovrat, son of a small Argentinean leather merchant. (Dovrat himself became a protégé of Sapir, who in the late 1960s nominated him as Gitter’s successor at Clal.) The group’s negotiations with the Argentineans were highly successful. As in the mythical Pareto Optimum, ‘everyone’ came out better off: Israel got itself a stable source of meat; the Rabbis got their Kosher commissions; the haciendas boosted their sales; Eva Peron was promised to have the ‘Jewish Lobby’ plead on her behalf for U.S. aid; Israeli exporters got promises for offsetting orders; and Gitter got to keep his monopoly on meat shipments plus a 1 per cent commission to boot (Hollander 1979: 197). Needless to say, this Pareto Optimum was greatly facilitated by the infinite number of indifference curves, representing Israel’s silent consumers. Upon leaving the government in 1951, Hollander found his way to Migdal, where he bought the equity share of Dov Yossef, former Minister of Rationing, and later Minister of Trade and Industry. His colleagues on the board were by no means strangers. Among others, they included the consul from Bern Shmuel Tolkowsky, his former boss at the Ministry of Trade and Industry Jack Garry, HISTORY OF ISRAEL’S POWER STRUCTURE 115 Bichler 01 chaps 20/1/06 1:15 PM Page 115 Arie Shenkar from Lodjia, and Alfred Foictwanger, whose Yaffet Bank was incidentally employing Hollander’s brother, Yitzhak-Ernst Neventsel, who would later become Israel’s most tolerant State Controller. Hollander also had other going concerns. One of these was a cattle slaughter house in Ethiopia, called Incoda, built in partnership with would-be Economy Minister Ya’akov Meridor, and with Arthur Ben-Nathan, Israel’s future ambassador to France and Germany, and adviser to Defence Minister Shimon Peres. Like many similar highbrow ventures, this deal too had a silent partner – the Israeli government, whose deep pockets helped save it from bankruptcy. During this adventurous epoch, when Ben-Nathan and Meridor were exploring Ethiopia, and Yadlin and Peres were learning in America how to ‘technologise’ society, Gideon Persky, Shimon Peres’ brother, was setting up shop in Geneva. Israel was short of foreign exchange, and Persky’s contribution to the Zionist cause was to found Swiss-Israel Bank, whose commissions were earmarked for the Defence Ministry’s clandestine operations in Europe. The business, though, didn’t go well. Its clandestine aspects were eventually assumed by Tibor Rosenbaum’s infamous Banque de Crédit Internationale, while SwissIsrael itself was taken over, with government assistance of course, by the Central Company for Trade and Investment. The new head of Swiss-Israel was Akiva Persitz, whose daughter married Gershom Schocken, owner of the daily Ha’aretz (curiously, the newspaper was given to Gershom as a wedding gift from his father, who bought it from Dan Tolkowsky’s grandfather). Persky himself, now out of a job, headed back to Israel, where he embarked on a new initiative to produce batteries for the army. The business again faltered, and when Shimon Peres got the defence portfolio, his ministry bought it out from his brother. Eventually, though, military spending started to pick up, and Persky’s company, now known as Tadiran, grew into a thriving electronics conglomerate (later absorbed into Koor). During the 1950s, however, it was still oranges rather than guns that made you money. And so Hollander, our civil-servant-cum-businessman, naturally decided to further expand his citrus portfolio by investing in Netiot Hadarom, a plantation subsidiary of the Discount group. One of his fellow board members in the company was Egyptian-born Avraham Ambash, an old-time Discount investor. Mr Ambash had two daughters. One of them, Suzie, married Abba Eben, who was Israel’s ambassador to the UN and the United States, and Foreign Minister under Golda Meir. His other daughter, Ora, married Chaim Herzog, another long-time board member of the Discount group. Herzog’s father, Yitzhak Herzog, was Palestine’s ‘Chief Rabbi’, a position created by Ben-Gurion as a coalition dowry to the more ‘modern’ religious parties, such as Hamizrahi and Hapoel Hamizrahi. Chaim’s brother, Ya’akov Herzog, also served the public, acting as general director of the Prime Minister’s office under both Ben-Gurion and Eshkol. Herzog himself was head of army intelligence during the 1950s, military attaché to Washington, and Israel’s President in the late 1980s. He was also partner of the Herzog Fox & Neeman law firm, a key political power broker 116 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 116 among the elites, whose clients were mainly heavy business interests, including the Recanatis. Herzog’s partner in the firm, religious-nationalist Yaakov Neeman, was general director of the Finance Ministry in Begin’s government, and Finance Minister under Netanyahu. Herzog’s own sons followed a similar path. One of them, Yitzhak, also a lawyer at Herzog Fox & Neeman, was Government Secretary under Ehud Barak. The other son, Joel, married the daughter of Swiss financier Nessim Gaon and moved to Geneva, from where he managed his father-in-law’s sprawling armament business. And indeed, by the late 1960s, with the post-war breadth regime about to give way to a new depth phase of conflict and inflation, this was the right business at the right time. Soon enough, much of the Israeli elite would be busy producing weapons, peddling arms, and making sure the Arab–Israeli conflict remained alive and kicking. Before turning to examine this next phase, however, it is useful to stop the roller coaster for a moment, and take stock. The Dual Political Economy By the early 1970s, after several decades of relentless differential accumulation, Israel’s statist cocoon was finally shed off, replaced by a powerful bloc of dominant capital towering over the rest of society. The new structure resembled in many ways the ‘dual economy’ of the United States, in which big business and organised labour were seen as bifurcated from the small economy and unorganised workers, each with its own unique organisation and modus operandi (see for instance, Steindl 1945; Averitt 1968; Edwards 1979; and Bowring 1986). Although the Israeli divergence was similar, we prefer to describe it not as a dual economy, but as a dual political economy, since it concerned the entire regime. This dual structure characterised the turbulent depth period of the 1970s and 1980s. At its zenith, during the early 1980s, its corporate formation could be divided into a ‘big economy’ made of several dozen very large firms, surrounded by a ‘small economy’ comprising thousands of minor companies. Within the big economy itself, one could further distinguish between a core of five corporate conglomerates, which we consider as Israel’s dominant capital, and a perimeter of more focused firms, usually monopolies or oligopolies in their respective industries. The Business Sector The five dominant capital groups, whose names should by now ring familiar, were Leumi, Hapoalim, Israel Discount Bankholding (IDB), Koor, and Clal (the latter being controlled by the first three). To recap: Bank Leumi was established in 1902 as the Anglo-Palestine Company, with a mandate to finance colonial HISTORY OF ISRAEL’S POWER STRUCTURE 117 Bichler 01 chaps 20/1/06 1:15 PM Page 117 settlements of the Zionist movement; Bank Hapoalim was formed in 1921 in order to finance cooperative activity in agriculture, construction and industry; IDB began as a private bank in 1936, when capital flight from recession-hit Europe and British preparations for the Second World War fuelled an economic boom in Palestine; Koor was established in 1944 as the industrial subsidiary of Solel Boneh, after war spending had turned the latter into the largest contractor in the Middle East; and Clal was set up in 1962 by Finance Minister Pinchas Sapir as a way of luring foreign investment through tax incentives and subsidies, eventually becoming a ‘gravity centre’, owned by the domestic core groups in partnership with several foreign investors and the government. During the 1950s, there were several other large groups, but these either declined or got absorbed by the five core conglomerates. Intertwined in this structure was a sixth ‘group’ of state-owned firms, although by that time it already functioned more as a storage facility for privatisation targets, than as an accumulationdriven organisation. The five core conglomerates came to dominate almost every significant business activity – from raw materials, through finance, to consumer-good and investment-good industries, services and merchandising, communication and advertising – usually with the backing and cooperation of the government. According to Dan & Bradstreet (1984), the core groups and the government together controlled 14 of the top 20 industrial firms, 28 of the top 50, and nearly half of the top 100 – 23 by Koor, 8 by IDB, 8 by Clal and 9 by the government. A similar picture emerges in the banking sector, where, according to central bank data, Leumi, Hapoalim and IDB together controlled 80 per cent of all assets, employment and branches, and 70 per cent of all net profits (excluding foreign subsidiaries). The core groups also dominated many of the non-industrial sectors, such as fuel and gas, merchandising, construction, insurance, shipping and real estate. Although often fiercely ‘competitive’, at least on paper, the five groups were in fact closely intertwined through formal and informal structures and institutions, including cross-ownership, reciprocal business dealings, family and ideological ties, as well as through strong links to various state organs, the media, and increasingly also to transnational corporations. Their socio-political cohesion was reflected in the very high correlation between their individual performance indices, including sales, value added, subsidies, taxes, executive compensations, and above all, net profits (for detailed analyses, see Rowley et al. 1988; Bichler 1991). The perimeter of the big economy included a collection of lesser private firms, foreign subsidiaries and government-owned companies, who were themselves often associated with the core through various ownership, trade, credit, kinship and other social ties. Some of the private groups (with family owners in parentheses), included Strauss Dairies (Strauss), Pecker Steel (Pecker), the food company Elite (Federmann), Zion Insurance (Tiber), Sahar Insurance (Saharov), Land Development (Nimordi), Delta Textile (Dov Lautman), Caesarea-Glenoit Carpets (Shapira), and the daily Yediot Aharonot (Moses), as 118 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 118 well as remnants of the cooperative-Histadrut sector, such as the food company Tnuva and the wholesaler Hamashbir, whose effective ownership was somewhat ambiguous. The main foreign investors and corporations whose subsidiaries operated in Israel during the time were Eisenberg, Wolfson, Bronfman, Abramson, Rothschild, Azrieli, Maxwell, TRW, GTE, Intel, Motorola, Loral, CDC, IBM and Hewlett Packard. Finally, and as already noted, the government still owned several large firms, such as Israel Aircraft Industries, Israel Shipyards, RAFAEL (military R&D), El-Al Airlines, Israel Chemical Industries and the telephone monopoly Bezeq. Most of these, though, were destined for privatisation, following the earlier dispensation of companies such as Rasko (construction), Paz (energy), Arkia (airline), Shekem (consumer distributor), Oil Refineries, Maritime Bank and the Jerusalem Economic Corporation (real estate). The true face of this cohesive power bloc was usually concealed by a thick conspiracy of silence. Although there was nothing inherently secret about this power, the academia and much of the media went out of their way to obscure its existence, discourage research into its functioning, and make sure the discourse remained focused on more fruitful questions, such as the evils of ‘government intervention’, the greediness of ‘labour unions’ and the merits of ‘free enterprise’. On rare occasions, though, mainly as a consequence of intraelite struggles, the common front would be breached, revealing, if only for a moment, some of the actual mechanisms and institutions which made Israel’s political economy tick. One such occasion, which we examine more closely in Chapter 4, was the redistributional struggle preceding the 1983 stock market crash. After the collapse, the Bejsky Commission nominated to investigate the scandal ‘suddenly’ discovered that the large banks had for years cooperated, and rather tightly, in many of their diversified activities. Among other things, their managers collaborated in manipulating share prices and predetermining their real rates of return, concealing information, window-dressing their financial reports, and transacting illegally in foreign exchange (Bejsky et al. 1986). The report also revealed that the government, having lost its earlier primacy, acted as a silent accomplice to this elaborate scheme. From time to time, some of its officials made feeble attempts to regain the ‘initiative’ – for instance, when, on the eve of the 1984 elections, Likud Industry and Trade Minister Gideon Pat suddenly decided to charge the banks for colluding in setting interest rates – but these ‘challenges’ were few and far between, and commonly ended in nothing. It was only in the early 1990s, when the dual structure was already giving way to transnationalism, that ‘monopoly busting’ again looked fashionable; but then that puts us ahead of our story. In contrast to the big economy which in many ways acted like a single bloc, the small economy continued to behave as a ‘free market’. Consisting of small firms, usually owning a single establishment, it displayed wide business fluctuations, significant inter-company disparities, and little correlation across sectors. Furthermore, unlike in the big economy, where the separation between HISTORY OF ISRAEL’S POWER STRUCTURE 119 Bichler 01 chaps 20/1/06 1:15 PM Page 119 ‘politics’ and ‘economics’ was practically meaningless, here the two were linked mostly indirectly, through loose professional associations and pressure groups. Not surprisingly, this sector remained a bastion of nineteenth century ideals of ‘competition’ and ‘free enterprise’, coupled with suspicion and hostility toward big government and big business. The Bifurcation of Labour The period after the 1967 War saw a parallel duality developing in the labour market. The first to analyse this process was Farjoun (1978; 1980; 1983), who emphasised the unequal exchange between the developed Israeli economy and the underdeveloped Palestinian one. Attempts to create a dual labour market, he argued, began even before Independence in 1948, with the Israeli elite striving for a separate agricultural economy based solely on Jewish labour. However, after the 1967 occupation of the West Bank and Gaza Strip and the concurrent militarisation of the ‘big economy’, the emphasis shifted. From then on, writes Farjoun (1978: 4), there was a growing need ‘for a cheap, mobile labour force, with no social rights; a free labour force in the classical meaning of the term’. This was achieved by the proletarianisation of the Palestinian population, which was rapidly becoming the main labour pool for a growing number of ‘small economy’ sectors, such as agriculture, construction, services, and low-technology civilian manufacturing. At the time of the study, wages in the small economy were only half of those paid in the big economy and, according to Farjoun, the survival of this sector was more or less contingent on the availability of Palestinian workers.11 The other side of this process was that the ‘big economy’, particularly its financial and military branches, came to rely solely on Jewish, unionised workers, with much higher earnings and relatively extensive social security (p. 17). Needless to say, this view did not sit well with Israel’s mainstream economists. For most of them, the occupied territories represented a net burden on Israel – first, because the availability of cheap Palestinian labour reduced the incentive to invest in new technologies; and, second, due to the need to spend heavily on security. Tuma (1989: 594), for instance, estimated in a symposium on the issue that the occupation had reduced Israel’s annual economic growth by roughly 1 per cent between 1967 and 1982, whereas others, such as Eitan Berglas and Ephraim Kleiman, argued that the forced integration between the two economies contributed a mere 2 per cent to Israel’s 120 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 11 This dependency became clear during the first Palestinian Intifada (uprising) of the late 1980s and early 1990s, when repeated closures of the occupied territories paralysed segments of the small economy. The problem was eventually ‘solved’ with the importation of foreign workers, mostly from Eastern Europe and Asia, so that by the second Intifada of the 2000s, labour supply to small business remained ample despite the hostilities. Bichler 01 chaps 20/1/06 1:15 PM Page 120 GDP. According to their computations, the real winners, in terms of their standard of living, were none other than the Palestinians. Now, for the sake of fairness, it must be noted that Israeli economists are not alone in using such peculiar reasoning. On the contrary, many a fine scholar has claimed for example that the United States, particularly the south, ‘lost’ from slavery, or that the British ‘suffered’ from their empire building (for instance, Kennedy 1987). But, then, if occupation and domination are indeed so costly, why don’t the rulers simply give them up? In the case of Israel, the economists’ error is twofold. First, the computed ‘losses’ are based on the dubious neoclassical assumption of ‘equal exchange’. This assumption implies that the productive contribution of Palestinian workers to the Israeli economy was equal, by definition, to their low wages. Now, given that ‘productive contribution’ is both dubious conceptually and unobservable empirically, such assumption cannot be verified. But if we nonetheless want to stick to such calculus, why insist on equal exchange? Emmanuel (1972), for instance, offered an alternative framework of unequal exchange between core and periphery. In this latter scheme, with the Palestinians being paid less than their ‘worth’, the big winner would clearly be Israel. Moreover, the entire calculation is based on holding everything else constant. And yet, without the occupation, which prevented Palestinian industrialisation, forestalled the creation of monetary and fiscal systems, confiscated land and water, hindered technological education, and encouraged emigration of skilled workers, the historical evolution of Palestine (and for that matter of Israel and the Middle East as a whole) would surely look very different. This ‘alternative’ history, of course, will never be known. But, then, how could we possibly compute the net gain or loss? The second, and perhaps more important error is the very use of aggregates. Only in the fictitious world of Pareto can an entire society lose or gain. In the real world of occupation and domination, ‘average’ losses always conceal some differential winners. And, indeed, what the narrow economic interpretations fail to account for is the deeper social impact of the occupation. As Farjoun (1978) perceptively pointed out, the ethnic discrimination against Arabs and in favour of Jewish workers helped the Israeli bourgeoisie divide and conquer labour as a whole. Until the 1960s, the Histadrut was still able to and interested in keeping its key asset – the workers – in relatively good shape. The occupation of 1967, however, changed this for ever. By reintroducing ‘free’ Arab labour into the picture, it broke the Histadrut’s monopoly, helping establish the unquestioned superiority of the big bourgeoisie. This superiority was further hastened by the emergence of a Jewish ‘labour aristocracy’ and a new ‘middle class’. Easily swayed into supporting both militaristic nationalism and ‘free markets’, these groups contributed, unsuspectingly, to the rapid growth of big business. In this way, the ethnic segmentation of the labour market helped consolidate the dual structure of the business sector, while simultaneously bolstering the broader political hegemony of dominant capital. HISTORY OF ISRAEL’S POWER STRUCTURE 121 Bichler 01 chaps 20/1/06 1:15 PM Page 121 Until the early 1970s, standard analysis of Israeli society managed to effectively mask this process. Using macroeconomic and macropolitical spectacles, it portrayed the nation state as inhabited by an amorphous body of ‘private’ and ‘governmental’ agents, subject to the ‘equilibrating’ forces of economics and the ‘distorting’ impact of politics. The key purpose of this aggregate scheme was to maximise ‘societal’ welfare, which in the case of Israel boiled down to a basic trade-off between economic prosperity and national security. By the mid-1970s, however, that macro picture began to melt. First, the ‘prosperity vs. security’ trade-off no longer seemed to work. With depth substituting for breadth, growth plummeted, inflation soared and the external accounts plunged into crisis; and, yet, despite the economic ‘sacrifices’, Israel’s military superiority and sense of security seemed to deteriorate rather than improve. Second and no less importantly, there emerged a problem of disaggregation: while the majority of the population, Jews as well as Arabs, were hard hit by the crisis, dominant capital actually thrived, making a mockery of aggregate notions such as ‘societal welfare’ and the ‘national interest’. From Breadth to Depth: War Profits and Inflationary Finance The transition from breadth to depth was rather dramatic. Until the late 1960s, the economy was growing in leaps and bounds, expanding by 11 per cent annually during the 1950s, and by over 8 per cent during the 1960s. The expansion was driven by two main forces: population growth and foreign aid. The impact of the first force is illustrated in Figure 3.1, which charts the growth of population and productivity (GDP per capita) over the past half century (series are smoothed for ease of comparison). The positive correlation between the two indicators is particularly significant since productivity is generally viewed as a facet of knowledge rather than procreation. And yet there is obviously more here than meets the eye. As Thorstein Veblen pointed out, productivity is largely a matter of societal organisation, and that seems to be greatly affected – in Israel and elsewhere – by the pace of demographic change.12 Fed by continuous immigration, population growth during the early years of the state was remarkably rapid, running at an annual pitch of 4.7 per cent during the 1950s, and 3.5 per cent in the 1960s (for comparison, the population of the industrialised countries during those years grew at an annual rate of only 1.1 per cent). This extremely rapid expansion necessitated massive social changes in the organisation of production, and as the chart clearly illustrates, 122 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 12 The correlation coefficient between the two variables in Figure 3.1 is 0.79. For comparison, in developing Asia, the same coefficient for 1967–96, with both growth series expressed as 10-year moving averages, is 0.85. For the industrialised countries, the correlation coefficient between the growth of industrial production and the growth of population during 1951–97, again expressed as 10-year moving averages, is 0.86 (based on IMF and World Bank data). Bichler 01 chaps 20/1/06 1:15 PM Page 122 the process was indeed accompanied by rapid increases in GDP per capita. The second force boosting the breadth phase in Israel was massive intergovernmental transfers, roughly $500 million, or 2 per cent of GDP, which arrived between 1955 and 1965 from Germany in restitution for the Holocaust. During this period, the annual additions to GDP were almost identical to the yearly capital inflow, although as already noted, the distribution of these funds was highly differential, with the bulk going to the big economy. The broader social impact of this twin engine of population growth and foreign capital inflow was to keep political conflict and class antagonism relatively muted. On the one hand, population growth and green-field expansion served to extend the national ‘envelope’, so as to allow large firms to take over smaller rivals without much fuss, while on the other hand, rising standards of living helped defuse resentment toward corporate concentration and the centralisation of power. By the mid-1960s, however, the breadth process approached its internal limits. Population growth started its long-term descent, and with the ten-year German gratuity coming to a close, the government got cold feet. Fearful of being unable to finance its current account deficit, it pressed on the policy HISTORY OF ISRAEL’S POWER STRUCTURE 123 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 Population (right) annual per cent change correlation coefficient = 0.79 annual per cent change GDP per Capita (left) Figure 3.1 Israeli Population and GDP per Capita NOTE: Series are smoothed as 10-year moving averages. SOURCE: Israel’s Central Bureau of Statistics. Bichler 01 chaps 20/1/06 1:15 PM Page 123 brakes, sending the economy into a deep slump, known in Israel as the Mitun, or recession. This would have probably sounded the death knell for breadth, but then came the 1967 War. Although demographic growth in Israel itself continued to decelerate, the shortfall was more than compensated for by the economic annexation of over 900,000 Palestinians who lived in the newly occupied territories. The ‘merging’ of this population was tantamount to a massive injection of breadth, equivalent to one-third of the overall market. Moreover, the social reorganisation mandated by the merger, the proletarianisation of the agrarian Palestinians, and the rapid incorporation of their cheap labour into Israel’s small economy – up to 140,000 workers, or 14 per cent of the overall labour force – helped rekindle productivity as illustrated in Figure 3.1, causing overall growth to soar. The euphoria, however, proved short lived, and by the mid-1970s, with the integration complete, growth again plummeted. The renewed recession, of course, was part of an emerging global deceleration. As we described in Chapter 2, dominant capital in the Western countries 124 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Figure 3.2 Israeli Stagflation and Differential Accumulation * Based on the GDP implicit price deflator. NOTE: Series are shown as 5-year moving averages. Dominant capital includes Leumi, Hapoalim, IDB, Koor and Clal. Data for 1996–97 are preliminary. SOURCE: Corporate financial statements. Israel’s Central Bureau of Statistics. 1 10 100 1,000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 0.1 1 10 log scale log scale DPK (Dominant Capital Net Profit / Total Capital Income, % right) GDP Growth (left) Inflation* (%, left) Bichler 01 chaps 20/1/06 1:15 PM Page 124 Trading which exported arms, and through Tadiran which became Koor’s principal weapon maker.18 Clal also began growing rapidly during the 1960s. After a few difficult years, in which losses were covered by the government, the group was taken over by Bank Hapoalim (42 per cent) and IDB (33 per cent). From 1969 onward, Clal expanded via mergers and acquisitions, financed largely by subsidised government loans (Aharoni 1976: 299). Similar to the cases of IDB and Koor, the expansion brought Clal into every corner of the economy, with holdings in diverse areas such as textiles, cement, frozen food, paper and rubber. Most significantly, Clal has developed into the ‘gravity centre’ of the big economy – both by virtue of its ownership structure and through a dense network of joint ventures with the other core conglomerates. For instance, it was a joint owner with Discount Investment of the paper monopoly Hadera Paper; it controlled, together with Koor, the cement monopoly Nesher; and, with Elron from the Discount group, it controlled the electronic imaging company, Scitex. Finally, much like the other groups, Clal too was becoming dependent on both the military and finance. For instance, its Urdan subsidiary manufactured land platforms for the army, including Israel’s main battle tank Merkava; its automotive subsidiary supplied armoured vehicles and trucks; while its ECI subsidiary provided military communication gear. (Needless to say, these contracts brought numerous top brass into managerial positions in the companies, including the nomination of former chief-of-staff Zvi Zur as head of Clal Industries.) In the financial branch, Clal entered the insurance sector HISTORY OF ISRAEL’S POWER STRUCTURE 131 18 Tadiran was previously owned jointly by Koor, the U.S.-based GTE, and the Israeli government. In 1969, when Elkana Caspi, former deputy of the army’s Communication Corps, became Tadiran’s manager, the government transferred its shares to GTE, which itself left the partnership in 1987, leaving Koor as the sole owner. The company owed its business success to two clients – the IDF, and the U.S. Defense Department, with which Israel had reciprocal repurchasing agreement. Not surprisingly, this dependency greatly affected the composition and modus operandi of the company’s management. A newspaper article from the mid-1980s provides insight into the murky political–military–business linkages within Tadiran: ‘After the chief executive officer, the strong man in Tadiran is the head of international trading, Itzhak Raviv. Raviv recently moved into arms exports, a change which caused some uproar in the company. The main reason is the pending retirement of Yehoshua Sagee [a former head of military intelligence who was dishonourably discharged after the 1982 Lebanon War]. Sagee was brought to Tadiran for his connections and was put at the helm of a special marketing unit of 16 people. Raviv now wants to replace him with Eli Halakhmi, who served in the army under Sagee and was [also] dishonourably discharged under humiliating circumstances. After leaving the army, Halakhmi was nominated head of police intelligence, but was dismissed after revelations regarding his involvement with companies convicted of criminal offences. Halakhmi was also entangled in the sale of forged Bank-of-Israel certificates; his partner in the central bank was sentenced to six years in prison, though Halakhmi himself was not charged. Halakhmi’s girlfriend during that time was Leah Levi, deputy senior prosecutor at the Tel-Aviv district attorney’s office where the charges were laid. She was forced to resign after being convicted for falsifying receipts…. After leaving the district attorney’s office, Halakhmi brought her to work in Tadiran….’ (Hadashot, 22 March 1985). Bichler 01 chaps 20/1/06 1:15 PM Page 131 where, after taking over many of its mid-size competitors, it became the leading company. Accumulating Through Crisis The interaction between military and finance in Israel was not incidental. The country’s large military-related deficits were financed partly by grants and loans from the United States, but mostly by a bulging domestic debt. Capitalists often object to large government deficits, on the ground that these serve to ‘crowd out’ private investment. In the protectionist war economy of the 1970s and early 1980s, however, the larger Israeli capitalists found the arrangement rather lucrative. Indeed, for the core conglomerates, the arrangement was doubly beneficial, since they enjoyed not only the benefit of massive military spending, but also the ability to invest in inflation-indexed government bonds issued to pay for such spending. True, massive government borrowing contributed to three-digit real rates of interest, but these hardly hurt the core conglomerates. First, their virtual monopoly over credit helped them maintain the real spread between lending and borrowing rates at 20–50 per cent; and, second, the effect on their profit of a high interest-rate regime was more then offset by political ties, which ensured cost-plus government contracts, subsidised credit, and tax exemptions. Moreover, to the extent that monetised deficits contributed to inflation, the positive effect of such inflation on profits and on the value of financial assets far outweighed its impact on rising wages. And yet, despite these benefits, since the 1970s there was growing pressure for ‘liberalisation’ in the capital market. Government intervention, went the argument, was distorting the ‘efficient allocation’ of resources, and should therefore be stopped, or at least curtailed. Surprisingly, though, when the government began doing just that, reducing its directed loans in favour of private lending, the impact was rather the opposite from the one the neoclassicists would have us expect. Instead of rising, gross investment dropped like a stone, falling to about 15 per cent of GDP in 1985, down from 30 per cent ten years earlier. But then, for dominant capital, whose differential accumulation was now in a depth mode, this was hardly a bad thing. On the contrary. Redistribution worked through inflation; inflation in turn necessitated stagnation; and stagnation required not increasing capacity, but cutbacks. Moreover, liberalisation meant that dominant capital was now given a free hand to run the stock market, the main mechanism of inflationary redistribution. Tight collusion, particularly among the large banks, enabled them to manipulate the price of their own shares – as well as those of many others – to the point of guaranteeing investors a predetermined real rate of return. In the words of the Bejsky Commission (Bejsky et al., 1986: 59), the banks were able to create a ‘new type of security’ combining the properties of shares and indexed bonds in the same paper. This ‘privately issued money’ enabled dominant 132 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 132 capital to run its own ‘monetary policy’, so to speak. On the one hand, systematic stock manipulation by these groups was tantamount to printing money; while on the other, the consequent market buoyancy allowed them to ‘absorb’ much of this newly created money from the unsuspecting ‘public’, in return for newly issued securities. In order to maximise the differential benefit of this invention, however, the government had to be pushed out, hence the pressure for ‘liberalisation’. In summary, since the 1970s, Israel was increasingly characterised by a dual political economy, dominated by several large core conglomerates. The differential accumulation of these groups was sustained mainly through depth, buttressed by a bifurcated labour market. The principal vehicles of differential accumulation were armament and finance – the first supported by the accelerated Israeli–Arab conflict and the growing superpower involvement in the region, the latter by intensifying stagflation. The Israeli government was getting deeper and deeper into debt. The servicing of this debt, though, was greatly beneficial for the local big economy, which owned much of its domestic components, and to U.S.-based military contractors, whose armament sales were intimately tied to Israel’s foreign obligations. Finally, the process has fundamentally transformed the structure of power. The core conglomerates grew increasingly intertwined through a web of cross-ownership, business, political and kinship ties, while the government’s role was gradually reduced to that of a mere intermediary, ‘absorbed’ so to speak into an increasingly encompassing process of accumulation. From Dominant Party to Dominant Capital The changing role of government in Israel has often been linked to the surprise rise to power of the Likud Party, which in 1977 swept into office, leaving the pundits gasping for an explanation. Most observers have interpreted the change, popularly known as the Mahapakh, or ‘reversal’, in purely political terms. The standard argument emphasises the cumulative impact of demographic, ethnic, cultural, religious and national changes. These changes, it is argued, have over the years altered the structure of the electorate, modified its ideological makeup, and even caused voters to skip from one camp to another (see for instance, Horowitz and Lissak 1977; Shamir and Arian 1982). In addition, global changes, goes the argument, particularly the spread of American ideals of ‘competitive’ politics, made Israel’s ‘dominant party’ regime, along with its socialist-authoritarian culture, look inadequate and unsustainable (Arian 1977; 1985; and Shapiro 1977; 1980). In this context, with voters increasingly disenchanted with an outdated system, the Mahapakh from Labour to Likud was just a matter of time. These narrow political considerations are not in themselves wrong. Making them the focus of analysis, however, serves to obscure a broader and potentially HISTORY OF ISRAEL’S POWER STRUCTURE 133 Bichler 01 chaps 20/1/06 1:15 PM Page 133 more important development, which is the declining importance of formal politics altogether. The rise of Likud certainly shattered the ‘dominant party’ model. But power, rather than shifting from politicians and party machines to the electorate, has been increasingly appropriated by ‘dominant capital’. Perhaps the most visible evidence of this transformation was the simultaneous emergence of liberalisation and big government. In its 1977 election platform, the Likud promised nothing short of an economic overhaul: During its long years in power, the Labour party created a rather unsuccessful combination of capitalism, socialism and anarchy, whose main purpose was to perpetuate the ruling party.… Likud will strive to establish a free market, based on efficiency, enterprise and competition. Likud will curtail the intervention in economic activity by government and public institutions, will gradually reduce government controls in the market, and will cut public spending earmarked for that purpose.… (cited in Ben-Porath 1989: 327–8) And yet, much like in the United States of the Reagan era, as liberalisation started to kick in, the government budget, instead of falling, only grew bigger. During the 1977–84 period, at the heyday of Likud, it averaged 105 per cent of GDP, more than twice its level during the dominant-party era of 1950–76, when the average was a modest 50 per cent. The puzzle of how a professedly liberal government ended up creating the country’s biggest public debt burden elicited numerous explanations. One line of argument invoked Huntington’s ‘government overload’ theory (Huntington 1975). According to this view, the Likud got entangled in multiple commitments, ranging from populist promises to its voters, through burning security needs, to blackmail from coalition partners. In addition, went the explanation, the Likud was also faced with the lingering legacy of bureaucratic petrifaction, a remnant of many years of Labour rule. And, so, despite the government’s best intentions, its excessive commitments on the one hand and stifled initiatives on the other left the deficit and debt nowhere to go but up. Another line of reasoning was the ‘march of folly’ argument, à la Barbara Tuchman (1984). Israel’s founding fathers, explained the experts, failed to build up their own succession; the leadership was eventually taken over by less than mediocre politicians; and these politicians, when faced with big challenges, naturally got into trouble (Shapiro 1984). Now, on the surface, the evidence of their folly indeed seems overwhelming. During the period between the late 1970s and early 1980s, the various Israeli administrations appeared to be marching from blunder to blunder. Some of the period’s highlights include the hasty peace negotiations with Egypt; the scorched-earth withdrawal from the Sinai peninsula; the first Palestinian ‘autonomy’ and Sharon’s ‘civil administration’ in the occupied territories; the first invasion into Lebanon (1979); the second invasion into Lebanon (1982); the land plunder and settlement in the occupied territories; attempts to ‘quell’ the Palestinian Intifada; the botched 134 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 134 withdrawal from Lebanon; the faltering ‘balanced-budget’ and ‘anti-inflation’ policies of the 1980s; the heroic ‘export subsidy’ programmes; the pathetic attempts to ‘regenerate growth’; and so on. There were also endless scandals: the rise and demise of the ‘Lavi’ fighter aircraft; the manipulation and crash of the stock market; the technological hallucinations of Ya’acov Meridor (who, among other things, promised to solve the world’s energy problems with one of his ‘inventions’); the more modest proposal to build the Tunnel of the Seas (which, by linking the Mediterranean and the Dead Sea, pledged to give Israel more energy than it could ever use); Menachem Begin’s scheme to use gold speculation in order to solve (once and for all) Israel’s housing problem; and so on. It should be noted, however, that many of the politicians, civil servants and managers involved here, while indeed lacking in personal qualifications, were hardly inferior to, and sometimes better prepared for their job than their counterparts of the 1950s and 1960s. The question, therefore, is what made them all of a sudden embark on this march of folly? Why had government become so much more inefficient and impotent? And why did its failures look so systematic? Was this a mere historical fluke, or was there some logic in the chaos? There was of course no open conspiracy here. When preaching economic liberalisation, Likud members usually meant exactly what they said. Most of them were socialised during the British Mandate era, and many of them, even today, remain locked into the petty bourgeois mentality of ‘free markets’ and ‘small government’. But that is precisely the point. In their imagination, they were merely removing the shackles of government from an otherwise competitive economy. What they did in practice, though, was deregulate an oligopolistic war economy, effectively inviting dominant capital to take the lead. Viewed from this perspective, their ‘political folly’ no longer seems senseless. On the contrary, it looks as if their actions, unbeknown to them of course, were in fact serving a broader ‘latent function’. For Israel’s dominant capital, stagflation, rising military spending, growing dependency on the United States, and a ballooning debt, were the basic ingredients for successful differential accumulation. These very policies were also consistent with the interests of dominant capital groups in the United States, particularly those related to armaments and oil, which benefited from the escalating regional conflict, and which played an important role in shaping U.S.–Israeli relations. The most promising political platform for achieving these results was a combination of laissez-faire economics and racist militarism; and the party which believed in these principles, was ready to implement them, and, most importantly, was to never fully understand their consequences, was Likud. Now, although such a ‘latent function’ could only be articulated in hindsight, political pressures to move in that direction were already evident in the late 1970s (for a detailed analysis see Bichler 1994–95). Toward the 1977 elections, the Labour government found itself between a rock and a hard place. On the labour front, unemployment started to rise after a long period of decline, real HISTORY OF ISRAEL’S POWER STRUCTURE 135 Bichler 01 chaps 20/1/06 1:15 PM Page 135 wages began to stagnate after growing continuously since the early 1960s, and the government, in its attempt to ‘redress’ the problem, implemented regressive taxation and a contractionary economic policy. Previously, such a predicament, although serious, would have been insufficient for an opposition victory. This time, though, the discontent ran much deeper, touching the very heart of Israel’s power structure. Between 1974 and 1976, the leading core conglomerates saw their earnings drop by an annual average of 9 per cent. Much of the previous rise in their profits was fed by the armament build-up of the late 1960s and early 1970s. Now, however, with military expenditure already at record highs, the Labour government, although sympathetic, found it difficult to raise spending further. These limits could have been stretched by seeking higher military assistance from the United States, so as to free up resources for domestic contracts and subsidies. But, then, instead of courting its American patron, the Labour government got entangled in a dispute with Washington over peace talks with Egypt and over Palestinian self-rule, prompting the Americans to ‘reevaluate’ their military assistance (Gazit 1983a). The consequence of these developments was that, although dominant capital and the majority of the population continued to have conflicting interests, there emerged for first time in Israel a broad ‘dissatisfaction consensus’ against the Labour government. And once the heavy rhetoric of this negative consensus percolated down to the electorate, Likud was on its way to victory. The depth regime finally received its proper political shape, and the rest is history. Or rather, the rest should have been history. As it turns out, the nature of this regime has never been fully articulated. The next two chapters are devoted to filling this void, with Chapter 4 dealing with stagflation, and Chapter 5 examining the role of militarisation and conflict. 136 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 01 chaps 20/1/06 1:15 PM Page 136 4 The Making of Stagflation … all our science is just a cookery book, with an orthodox theory of cooking that nobody’s allowed to question, and a list of recipes that mustn’t be added to except by special permission from the head cook. – Aldous Huxley, Brave New World The Israeli literature on inflation and stagflation is conspicuously unoriginal, owing much of its deep insight to conventional economic theory. With only few exceptions, its framework is entirely macroeconomic, dealing with aggregates. There is little discussion of the underlying political economy, and practically none of its central process of capital accumulation. The usual assumption, regardless of overwhelming evidence to the contrary, is that the economy is perfectly competitive. And when facts such as government involvement, corporate concentration, unions, war, conflict and ideology are acknowledged, they are usually treated as ‘imperfections’, deviations from how the world ‘ought to be’, and therefore justifications for why the model does not work when it should. None of this is acceptable, however. According to positivist guru Milton Friedman (1953), the assumptions of a theory are of little significance as long as the theory yields correct predictions; but then the predictive record of the Israeli literature is so poor, that even a positivist would suspect something must be wrong with the assumptions. And, indeed, as we examine some of the Israeli macroeconomic writings of the past three decades, what we find is that the assumptions – whether reasonable or nonsense – are never ‘value free’. They are always useful for some, harmful to others. The study of mainstream economic theory, therefore, like the study of any other dominant ideology, is an integral part of political economy. It helps us not only delineate the patterns of social conflict, but also decipher the methods by which such conflict is concealed and camouflaged. The ‘basic mystery’ facing Israeli economists, write Razin and Sadka (1993: 3), is ‘what caused the change from exceptionally rapid growth in the early years of the state, and even before, to exceptionally slow growth in more recent years?’ Even more seriously, how could it be that despite rapid growth and heavy government intervention in the earlier period, inflation remained so low, whereas in the second period of stunted growth, and particularly after the economy was ‘liberalised’ in 1977, inflation began to soar? As we saw in 137 Bichler 02 chap 4 20/1/06 1:19 PM Page 137 Chapter 2, conventional thinking suggests that inflation should be positively related to the rate of economic growth. The argument, popularly known as the Phillips Curve (named after the British economist A.W. Phillips who first formalised this relationship), is that a ‘heated’ economy causes prices to rise, while a ‘cooling’ economy pulls them down. And yet in Israel, as in most other countries, the long-term Phillips Curve appears to be inverted. This negative relationship, illustrated in Figures 2.7 and 2.8 for the United States and the industrialised countries, is also evident in Figure 4.1 for the Israeli case. In all three charts, the general pattern has been for inflation to accelerate as the economy slowed, and decelerate when it grew – exactly the opposite of what the Phillips Curve says. Regardless of this basic anomaly, most Israeli economists continue to hum the mantras of standard macroeconomic models. Inflation, they maintain, is the outcome of excess demand (or insufficient supply). The principal debate is 138 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 1 10 100 1,000 02468101214 Real GDP (Annual % Change) Prices* (Annual % Change) 1956 2000 1967 1972 1984 log scale Figure 4.1 Israeli Growth and Inflation * Prices are measured by the GDP Deflator. NOTE: Data are shown as 5-year moving averages. The curve drawn through the observations is a power regression line. SOURCE: Israel’s Central Bureau of Statistics. Bichler 02 chap 4 20/1/06 1:19 PM Page 138 over who is to blame. On the demand side, the villains are the government and the workers. On the supply side, there are the oil sheiks and, again, the workers. When standard demand and supply analysis does not work, there are expectations. And above all, inflation is an ‘autonomous’ phenomenon. It is created at will – by greedy workers or foreigners, and particularly by stupid or weak politicians – and it can therefore be stopped at will, by having visionary politicians listen to professional economists and implement bold (albeit) orthodox policies. Let us look at each of these explanations more closely. Demand Side: Money Theory The mainstream literature, in Israel as elsewhere, takes as gospel Milton Friedman’s famous maxim that ‘inflation is always and everywhere a monetary phenomenon’. The theoretical justification comes from the Quantity Theory of Money, first articulated by the eighteenth century thinker David Hume, and later popularised by the American economist Irvin Fisher (1911). In its simplest form, the quantity-of-money equation could be written as: (1) M · V≡P · T where (M) is the quantity of money, (V) is the velocity of money (that is, how many times each unit of money is used during a given period), (P) is the price level and (T) is the overall number of transactions. The right-hand side of the equation represents the monetary value of transferred goods and services, and is equal, by definition, to the left-hand side which denotes the corresponding transfer of money (Friedman 1970: 4). The tautology is turned into a price theory by rearranging equation (1), and then ascribing causality from right to left: (2) P= (M / T)· V so that price is determined by money, transactions and velocity. Turning this price theory into an inflation theory is then straightforward. All we need to do is express the variables of equation (2) as rates of change using lower case variables, and replace division and multiplication signs by subtraction and addition, respectively: (3) p= (m – t) + v so that inflation (p) is a function of the rate of growth of money (m), the rate of change of transactions (t), and the growth rate of velocity (v). Because velocity THE MAKING OF STAGFLATION 139 Bichler 02 chap 4 20/1/06 1:19 PM Page 139 is assumed to be changing only slowly (so vis roughly zero), equation (3) could be further simplified as: (4) p≈m – t The difference between (m) and (t) is often referred to as ‘liquidity’, denoting the growth of money ‘in excess’ of what is needed to lubricate the economic machine at stable prices. The implication is simple. Inflation is the consequence of two principal variables – the money supply in the ‘nominal sphere’, and the level of economic activity (or transactions) in the ‘real sphere’. If the money supply grows faster than the level of economic activity, the inevitable consequence is inflation. If it rises more slowly, the result is deflation. Now, unfortunately for policy makers, goes the orthodox wisdom, economic policy has little impact on the pace of real economic growth, and, by extension, on the growth of transactions. In the long run, we are told, these are determined by the underlying parameters of productivity and factor endowments. The conclusion is that economic policy should hence be limited to ‘sound finance’ – that is, to letting the quantity of money expand as fast as the long-term trajectory of the real economy. No more, no less. Because the shortand medium-term growth path will cycle around the economy’s long-term trend, the consequence will be a cyclical alternation between periods of inflation and deflation. But these will be mild and, in the long term will average out around price stability. Underneath all the many layers of complicated reasoning, this belief in the classical dichotomy between the ‘nominal’ and ‘real’ spheres is the basic credo of Israeli economists. The conviction was hammered into their minds early on by Don Patinkin, a Chicago-trained economist who is credited for educating a cadre of followers, fondly known as the ‘Patinkin boys’. ‘Anyone who studied macro even at the introductory level’, romanticises former Governor of the Bank of Israel Michael Bruno, ‘would remember Patinkin saying: “Multiply the quantity of money, the wages, the prices … and the real system will have remained unchanged”’ (Bruno 1995: 581). As if by magic, the resulting inflation is ‘neutral’: Don drilled this theory into us until it was thoroughly assimilated, though it remained a theoretical principle. In 1981, when you suddenly see that prices really double or more within a year, and that all monetary aggregates similarly multiply without a change in the real system, you realise that this is what you learnt from Don Patinkin twenty years ago. This is his great achievement. (p. 581, emphasis added) Indeed. Making your students look but not see is certainly somewhat of a triumph. For otherwise, how on earth could Bruno believe that the Israeli inflation came and went ‘without a change in the real system’? Were rising 140 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 02 chap 4 20/1/06 1:19 PM Page 140 of its entanglement in Vietnam, Washington began giving Israel, for the first time, heavy assault weapons, including tanks, aircraft and missiles. In that year, Soviet involvement in the region seemed more menacing than ever. First, Britain announced it would soon be leaving Aden, notwithstanding the ongoing Soviet-backed war in neighbouring Yemen, just south of the world’s richest oil fields; then, the pro-Soviet Ba’ath party staged a coup in Syria; and finally, the Kremlin began to promote a socialist union between Egypt, Syria, Algeria and Iraq, threatening to engulf Saudi Arabia from the west and north. Given its difficulties in Vietnam, the United States was not prepared to counteract these developments directly, but Israel certainly was and did. Toward the end of 1966, the Arab–Israeli dispute was again heating up. In November, Israel staged a massive raid into the Jordanian town of Samoa, officially in retaliation for guerrilla attacks. Then, in April 1967, an Israeli tractor, sent to cultivate a demilitarised zone just beneath the Golan Heights, sparked a border skirmish which ended with humiliating Syrian losses. Adding insult to injury, the Israelis went on to announce their intentions of forcibly dethroning the Damascus regime. Faced with mounting challenges to his Pan-Arab leadership, Nasser was more or less compelled to respond, moving two army divisions into the Sinai desert and closing the Straits of Tiran. There are, of course, other explanations. Aronson (1994–95), for instance, argues that the escalation was in fact an unintended consequence of Nasser trying to stop the development of nuclear weapons by Israel. One way or the other, it is clear that the Americans (like the French and British before them) hoped that Israel would use the opportunity to topple Nasser, and the closing of the Tiran Straits now offered the pretext for a pre-emptive strike. Contrary to popular belief, the Israeli and American leaderships had little doubt about the outcome of the looming war. The certainty of Arab defeat was also known to Nasser – as well as to the other Arab participants – but given their internal disputes, they found it politically impossible to ignore Israeli provocations, and were thus increasingly drawn toward a point of no return.11 Following the closure of the Straits of Tiran, Israel scheduled its attack for 25 May, but had to wait until 6 June, after Meir Amit, head of the Israeli Mossad, returned from an emergency trip to Washington with the ‘green light’ to ‘break Nasser’s bones asunder’ (Haber 1987: 214–16). And so, by maintaining its loyalty to U.S. strategic interests in the region, Israel had finally succeeded in THE WEAPONDOLLAR–PETRODOLLAR COALITION 243 11 According to former Israeli ambassador to the United States, Abba Eban, many in the State Department were convinced of Israel’s military superiority and ability to win a ‘crushing victory’ already in the 1950s (Eban 1977: 185). After the 1967 War, IDF generals such as Ezer Weitzman, Benjamin Peled and Yitzhak Rabin, admitted quite openly that Nasser had presented no real danger. Ten days before the war, a secret CIA report delivered to Johnson accurately predicted an Israeli victory within six days. Some U.S. officials who hoped to avert a war communicated these assessments directly to Jordan and Egypt and, indeed, until the last moment, Nasser still hoped for a diplomatic resolution (Cockburn and Cockburn 1991: 140–54). Bichler 02 chap 4 20/1/06 1:19 PM Page 243 joining the U.S. orbit as an official satellite, a process which would further intensify during the 1970s and 1980s. Preoccupied with the ‘free flow’ of oil, the Petro-Core may have viewed the war’s outcome as highly favourable: Soviet aspirations were undermined and the cause of Pan-Arabism suffered a serious blow. However, the companies must have also noticed the positive effect the war had on their differential profitability (see Figures 5.7 and 5.8) – an ominous sign that their ‘free-flow’ system was itself coming to an end.12 And as if to hasten the process, the aftermath of the war was marked by increasing arms exports. Rewarded for its victory, Israel began receiving F-4 Phantom aircraft made by McDonnell Douglas, which were previously sold only to Britain and Germany. With this, the door was now open for an arms race of sophisticated weapons, a race which would eventually help ‘limit’ the flow of oil and introduce the petroleum business into the new era of ‘crisis’. The 1973 Arab–Israeli War The 1968 U.S. presidential elections brought in an administration highly attuned to the coinciding interests of oil and arms. Nixon’s campaigns were supported heavily, and sometimes illegally, by contributions from both defence contractors and oil companies, while his Secretary of State Kissinger enjoyed close connections with the Rockefellers, and proposed an aggressive realpolitik which on more than one occasion entertained the feasibility of ‘limited’ nuclear war.13 In the eyes of this new administration, the 1967 War did little to secure U.S. interests in the Middle East. Qaddafi’s 1969 showdown with the oil companies in Libya and the attempted coup in Saudi Arabia were disconcerting reminders of pending regional hazards. Washington, so it seemed, must pay more attention, not less, to this troubled area. The Realist View And yet, that was easier said than done. In 1969, the United States began withdrawing its troops from Vietnam, and with warmer relations with China 244 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 12 While official crude prices had not changed, fuel prices for Western consumers rose, thus boosting the profits of the oil companies while undermining them elsewhere in the economy. 13 On Nixon’s campaigns, see Sampson (1975: 205–6) and Sampson (1977: 151–2, 195). On Kissinger, see Barnet (1983: 178–9). Representatives of Rockefeller’s Chase Manhattan were involved in the network of activists around Nixon’s career, and some of them accepted key posts in his administration. Paul Volker, for example, was made Under Secretary of the Treasury for Monetary Affairs; John Letty became Assistant Secretary of the Treasury; and Charles Fiero became Director of the Office of Foreign Direct Investment in the Commerce Department (Barnet and Müller 1974: 251; Turner 1983: 105). Bichler 02 chap 4 20/1/06 1:19 PM Page 244 and the declaration of Détente, the new ‘Nixon Doctrine’ called for a lower defence budget. Instead of Kennedy’s strategy to prepare for ‘21⁄2wars’, Nixon and Kissinger offered resources for only ‘11⁄2wars’. In 1969, the policy kicked in, and domestic military spending started to fall. From a statist viewpoint, the result was to weaken U.S. capabilities in the Middle East, this precisely when the region emerged as one of the world’s most sensitive (Gold 1993: 40). Moreover, Britain’s withdrawal from its last stronghold in the Persian Gulf, together with the United States losing its last strategic air base in Libya, created a military vacuum. The solution, stipulated by Kissinger, was for the United States to concentrate only on ‘core conflicts’, leaving ‘peripheral conflicts’ to be handled by local pro-American forces. The consequences for the region were twofold. First, Washington embarked on massive arms exports, initially to Israel and the ‘twin pillars’, Iran and Saudi Arabia, but later also to Egypt and other countries. Second, State Department attempts at settling the Arab–Israeli conflict were now frustrated by White House support for Israel (Safran 1978: Ch. 23). With Middle Eastern affairs increasingly handled by the Nixon–Kissinger duo rather than State Secretary Rogers, Israel was now used as a threat against antiAmerican Arab countries (Kissinger 1979: 1285, 1289). Kissinger was particularly intimidated by what he regarded as deliberate Soviet challenges, and in 1970 worked out, together with Yitzhak Rabin, then Israel’s ambassador to Washington, a joint plan for military intervention in case Syria or Iraq attacked King Hussein of Jordan. These observations do not sit well with the realist perspective. First, given the split between the conciliatory position of the State Department and the aggressive stance of the President, it is not clear what ‘national interest’ American policy makers were trying to achieve. Second, the type of cannon diplomacy entertained by Kissinger did not look particularly conducive to his goal of regional stability. Indeed, according to Safran (1978: Ch. 23), the United States continued to send arms to the region, this despite its own fears that an Israeli victory against Arab aggression would cause chaos and seriously disturb the flow of oil. The Coalition’s View From the viewpoint of the Weapondollar–Petrodollar Coalition, however, U.S. foreign policy here seems pretty consistent. Declining military spending at home hurt the large defence contractors badly (Sampson 1977: 214–21), and with pressures from these contractors coinciding with his own strategic outlook, Nixon moved to further commercialise arms exports. His new doctrine stipulated that the burden of defending U.S. allies – financially as well as in manpower – should now be borne by those allies themselves (Ferrari et al. 1987: 21). In order to do that, explained military contractor David Packard (then acting as Deputy Secretary of Defense), the United States was ready to ‘give or THE WEAPONDOLLAR–PETRODOLLAR COALITION 245 Bichler 02 chap 4 20/1/06 1:19 PM Page 245 sell [to these allies] the tools they need for this bigger load we are urging them to assume’ (quoted in Sampson 1977: 243). In the Middle East, the Nixon Doctrine elevated the arms race to a new level. Commercialisation, to be sure, was not strictly enforced. Israel, for instance, was unable to pay for its rapidly rising military imports; and, yet, to its great surprise, Washington was willing to give them for free (Rabin 1979: Ch. 4).14 Officials in Jerusalem celebrated this as a ‘huge achievement’ (Gazit, 1983a: 53), only that they failed to notice the even greater achievement of other states, who, unlike Israel, were both able and willing to pay. The most ‘successful’ of the lot was Iran. On their visit to Tehran in 1972, Nixon and Kissinger reputedly agreed to sell Iran ‘virtually any conventional arms it wanted’ (cited in Sampson 1977: 252). And with this newly acquired freedom to sell, U.S. armament companies quickly started courting the country’s Shah, whom Washington now appointed as ‘policeman of the Gulf’. At the time, domestic sales to the Pentagon were hitting rock bottom, so military exports to Iran provided a much needed lifeline for many contractors (Figure 5.3). The extent of these exports, however, depended crucially on the petroleum revenues of the Peacock Throne, an important detail which both Nixon and Kissinger were most surely aware of.15 And, indeed, the oil industry, too, was undergoing a profound transformation. With weakening prices and falling profitability, as illustrated in Figures 5.5 and 5.7, the large petroleum companies came to realise the potential benefit of a stronger OPEC. The cartel’s apparent resolve to control output impressed the oil majors, and their London Oil Policy Group was now ready to accept a new revenue-sharing agreement (Odell 1979: 105, 215). But although the price of oil started to rise in 1971, the Petro-Core’s rate of profit continued to linger and, in 1972, fell dangerously below the Fortune 500 ‘normal’ (Figures 5.7 and 5.8). And then came the October 1973 ‘energy conflict’. The war brought a sharp increase in prices, restoring the oil companies’ differential profitability high above the big-economy’s average. At the same time, it also generated dramatic increases in the oil revenues of Arab countries, with immediate consequences for the arms trade. In 1974, a year after the war, the Middle East surpassed South East Asia to become the world’s largest market for imported weapons, with over one-third of the global trade. 246 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 14 During the 1962–66 period, Israel’s annual weapon imports averaged $107 million. After the 1967 War, with the United States replacing France as the main supplier, the average almost tripled to $290 during 1967–69, and in 1970–72, with the Nixon Doctrine starting to kick in, it rose further to $550 (unpublished data from Israel Central Bureau of Statistics, courtesy of Reuven Graff). 15 Allegations that the U.S. government was promoting higher prices as a primary means of funding U.S. arms deliveries to the Shah were put forward on the CBS programme Sixty Minutes (3 May 1980). Kissinger, though, declined to comment (Chan 1980: 244). Kissinger was also closely associated with Rockefeller’s Chase Manhattan, and it is not far fetched to assume he also contemplated the benefit for the bank from higher petrodollar deposits (Ha’aretz, 2 January 1981). Bichler 02 chap 4 20/1/06 1:19 PM Page 246 While there is no evidence to implicate the U.S. Administration as instigator in the conflict, there is also little to indicate it keenly tried to prevent it. To be sure, the war didn’t catch the Nixon government by surprise. Warned by King Faisal of Saudi Arabia already in the beginning of 1973, the ARAMCO partners were aware of what was coming, and they passed on the information to Washington (Blair 1976: 266–8; Sampson 1975: 243–8; and Yergin 1991: 593–7). A similar message came from a CIA study (incidentally co-authored by the same analyst who anticipated that the 1967 War would last only six days), which concluded that the Egyptians were planning to attack Israel (Cockburn and Cockburn 1991: 171). Indeed, Kissinger was directly informed of the pending assault, both by Jordan’s King Hussein (who between 1957 and 1977 was a paid CIA agent), and by sources close to President Sadat of Egypt (Neff 1988: 105). The U.S. ‘National Interest’: What Price Stability? These observations seem perplexing. If Nixon and Kissinger were indeed concerned with maintaining regional stability as stipulated in the realist literature, why didn’t they heed Saudi requests that Washington softened its support for Israel? To suggest that this was because the Administration was by then irrevocably committed to the Israeli cause is not persuasive; for if that was the case, why did it fail to warn the Israelis of the pending calamity? Indeed, why did Kissinger caution Israel not to fire the first shot when the latter finally realised that Egypt and Syria were about to attack? One common interpretation is that Kissinger wanted the Arabs to win their self-respect and some territory, which would then be traded for peace through his own mediation (Hersh 1991: 227). However, from a statist viewpoint, Kissinger was walking on a tightrope here. The problem, according to his own admission, was how to achieve a ‘balanced’ outcome – one in which the war would end after Israel had recovered some of its earlier losses, but before it had the chance to destroy its opponents. For Kissinger, this must have been a real problem. He had absolute confidence in Israel’s military ability and feared that an Israeli victory would be devastating for U.S. regional interests (possibly by inciting leftist coups and encouraging Soviet intervention). Yet despite the obvious danger, he stuck to his plan, moving to broker a ceasefire only at the last moment, after Israel had threatened to use nuclear weapons (Safran 1978: Ch. 23). Clearly, then, realist calculations alone do not tell the whole story. Attuned to the plight of the oil and armament companies, Kissinger must have also pondered how an oil crisis might boost their coinciding interests. And indeed, after the war, with petrodollars and weapondollars locked in an upward spiral, peace between Israel and the Arabs was put on the backburner. The more urgent task now was to keep the ‘balance of power’; and sure enough, instead of preaching reconciliation, we find the U.S. ambassador to Cairo recommending military shipments to Egypt, while his colleagues in Kuwait and Saudi Arabia THE WEAPONDOLLAR–PETRODOLLAR COALITION 247 Bichler 02 chap 4 20/1/06 1:19 PM Page 247 explain the merit of American-made aircraft to local rulers (New York Times, 21 July 1975, cited in Frenkel 1991: 76). Working now for the new Ford Administration but still pursuing his original plan, Kissinger helped establish an ‘interim agreement’ between the warring factions. This time, though, the United States held the carrot as well as the stick; it could use Israel as a threat against pro-Soviet Arab regimes, but it could also force it to return occupied Arab land to those who promised to leave the Soviet orbit and cross the floor onto the American side (Safran 1978: Ch. 25). However, the U.S. Administration was also careful to insist that any interim agreement should not evolve into a comprehensive settlement. When in July of 1975 the Israeli government appeared willing to go to a peace conference in Geneva, President Ford threatened to withdraw American assistance (New York Times, 3 July 1975). The imperative of maintaining tension was spelled out clearly less than a year later. Appearing before the Jewish-American Congress in April of 1976, Henry Kissinger effectively asserted that a comprehensive Middle East peace depended not so much on the warring factions, but rather on the superpowers first agreeing on their respective spheres of influence (reported in Meyer 1976: 157). These pursuits on the armament front also help shed some light on the Administration’s energy policy. On the surface, Washington’s view on the subject seemed confused, even contradictory. Based on his analysis of over one thousand State Department cables and papers obtained under the Freedom of Information Act, Yergin (1991: 84) concluded that, between 1974 and 1981, the U.S. government in fact objected to higher oil prices. But then he simultaneously inferred that the government didn’t want to see those prices lowered either (p. 643). This indecisiveness, Yergin argued, was rooted in a conflicting quest for lower energy cost at home, coupled with a richer and thus more stable Middle East. And yet, if the goal was indeed stability, why send so much armament to the region, particularly when Washington itself doubted their contribution to peace? And what about the support of Kissinger and the International Energy Agency for a ‘minimum safeguard price’ as a means of protecting Western interests? (Sampson 1975: 306; and Turner 1983: 184). Perhaps the Administration, despite its declarations to the contrary, was in fact interested in neither lower oil prices nor regional stability? After all, representatives of the Weapondollar–Petrodollar Coalition were now increasingly involved in ‘state policy’, so couldn’t they have pushed things in that direction? The realist failure to square the circle around oil prices is only understandable. The basic reason is that, by the 1970s, while the world was already well into the ‘limited flow’ era, realist theories were still stuck in the ‘free flow’ logic. Stephen Krasner, for example, claimed that there was a negative trade-off between the level and variability of petroleum prices (1978b: 39–40). The consequence, he concluded, was that policy makers had to choose between low but variable prices, or stable but high ones. Yet, when those lines were written, this menu had already become irrelevant, and in fact misleading. From the late 1960s onward, with oil shifting to a ‘limited flow’ footing, the rela248 THE GLOBAL POLITICAL ECONOMY OF ISRAEL Bichler 02 chap 4 20/1/06 1:19 PM Page 248 tionship between the level and variability of prices became positive. The choice now was not between low and variable oil prices as opposed to high and stable ones, but rather between low and stable prices against high and volatile ones. Obviously, this transition fundamentally altered the relationship between the oil companies and the so-called ‘national interest’. During the early period, when the companies were concerned mainly with concessions, the Administration’s willingness to have higher prices in order to secure stability and access seemed sensible. It helped the companies, as well as the broader U.S. ‘national interest’. Since the late 1960s, however, harmony gave way to discord. The United States could no longer pay higher prices in order to achieve access and price stability; it couldn’t, simply because access was no longer negotiable, whereas higher prices were clearly causing greater instability. The oil companies, on the other hand, were now interested not in access but in higher prices. Contrary to the earlier situation, therefore, there was now clear conflict between the companies and the ‘national interest’, and the Administration’s pursuit of both instability and higher prices only indicates where its allegiances lay. Initially, the coinciding interests of the Arma-Core and Petro-Core in regional turmoil were blurred by the imaginative use of language, which insisted on equating arms shipments with ‘stabilisation’. For example, Secretary of State Rogers, who would later become a retainer for the Iranian Shah and board member of the oil company Sohio, characterised U.S. military sales as having a ‘stabilising influence’ – this in contrast to the ‘invitation for trouble’ posed by similar Soviet shipments (Engler 1977: 242). Similarly, Kissinger (1981: 182), using a more academic lingo, explained that the ‘balance of power is a kind of policeman, whose responsibility is to prevent peaceful countries from feeling impotent and aggressors from becoming reckless’. Eventually, however, as the Orwellian identity of weapons and peace began to dissipate, the true forces at play came into focus. The rising influence of the Weapondollar–Petrodollar Coalition coincided with the new policies of Jimmy Carter. Unlike Nixon’s, the ‘Carter Doctrine’ moved from emphasising loyal proxies – chiefly Israel and the ‘twin pillars’, Iran and Saudi Arabia – to direct military intervention. With growing nervousness on the part of the Saudi pillar – first in response to Soviet involvement in the Horn of Africa, and later as a consequence of Soviet participation in the Yemen conflict – Carter and his national security adviser, Zbigniew Brzezinski, decided to build a ‘Rapid Deployment Joint Task Force’, or RDJTF (Long 1985: 62). As they saw it, the lesson from Iran was that the United States should not count on local proxies, and must use its own forces to protect its own interests (Quandt 1979: 543). This fitted well with the broader strategic rethinking in Washington. According to Brzezinski (1983: 454), events and decisions in 1979–80 had fundamentally altered the U.S. global strategic position. The Middle East – which was previously seen as semi-neutral and protected from Soviet power by a defence belt comprising Turkey, Iran, Pakistan THE WEAPONDOLLAR–PETRODOLLAR COALITION 249 Bichler 02 chap 4 20/1/06 1:19 PM Page 249 and Afghanistan – no longer seemed invincible. As a consequence, U.S. dual commitments in Europe and the Far East were supplemented by a third strategic commitment toward what was now known as ‘West Asia’. The resources needed to support this new pledge, however, were unavailable, and so in order to bypass congressional objection, part of the military deployment was financed by Saudi petrodollars (Gold 1993: 51). Thus, notwithstanding his desire to promote world peace, President Carter was subject to considerable pressures to act otherwise. At home, his was the first administration to raise domestic military spending after almost a decade of decline (Figure 5.3). On the international arena, Carter indeed announced a policy of restraints on arms exports, which, in its first 15 months, led to the cancellation of 614 requests from 92 countries, worth over $1 billion (Ferrari et al. 1987: 25). Yet, despite these limitations, and contrary to the new statist stand on the principle of American ‘self-defence’, total U.S. arms exports continued to increase (albeit still slowly), particularly to the Middle East. Somewhat paradoxically, Carter, who was often perceived as a peacemaker and promoter of regional reconciliation, was also the president who contributed the most toward opening the Arab market to U.S. weaponry. In 1978, toward the Camp David Accord, he initiated the first ‘combination deal’, whereby U.S. armament producers simultaneously equipped several warring factions – a pattern which was then promptly institutionalised by other arms-exporting countries as a means of promoting peace through arms sales.16 The 1979 Iranian Revolution and the 1980–88 Iran–Iraq War The Hostage Crisis Yet the ongoing rearmament during the mid-1970s was merely sufficient to keep oil prices from falling, and in the absence of a serious upheaval, the Petro-Core’s profitability in 1977 and 1978 again dropped into the ‘danger zone’, below the big-economy’s average (Figures 5.7 and 5.8). Fortunately for the Coalition, though, help was on the way, with turmoil again starting to build up. The Islamic Revolution which began in 1978 failed to have a significant effect on the oil market, although the potential was clearly there. In this light, the involvement of the U.S. Administration in the onset of the 250 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 16 Israel was compensated for its withdrawal from the Sinai peninsula with two new airfields in the Negev desert worth $2.2 billion, and a ‘reorganisation’ package of 15 F-15 and 75 F-16 aircraft valued at $1.9 billion. The Egyptians were allowed to purchase 50 F-5 fighter aircraft worth $400 billion (with an option to buy more advanced ones later), and the Saudis bought another 60 F-15s worth $2.5 billion (Ha’aretz, 3 April 1983). Cyrus Vance, who participated in the negotiations as Carter’s Secretary of State, was later nominated a director of General Dynamics, one of the deal’s principal winners. Bichler 02 chap 4 20/1/06 1:19 PM Page 250 1979 oil crisis is noteworthy. Despite the delicate situation in Iran, President Carter quickly granted asylum to the ousted Shah, thus triggering the hostage crisis. When Iran threatened to withdraw its U.S. banking deposits, the President immediately retaliated by seizing Iranian assets. The background leading to the seizure was outlined by journalist Anthony Sampson (1981: Ch. 17; Ha’aretz, 2 January 1981). During the period from 1976 to 1978, Iran borrowed $3.8 billion to finance arms purchases. On the eve of the Iranian Revolution, an outstanding debt of $500 million was owed to a consortium headed by Chase Manhattan, which also held $433 million in Iranian deposits. In theory, these deposits could have been withheld as a forced collateral, only that Chase had no legal right to do so – that is, unless instructed by the U.S. government for reasons of ‘national security’. And as it turns out, this is precisely what happened – although not without help from David Rockefeller, the bank’s chairman and one of its principal owners. Sampson reveals how Henry Kissinger, acting as a special adviser to Chase Manhattan at the time, and Jack McCloy, a former chairman of the bank, courted President Carter, who was himself closely associated with the Rockefellers through the Trilateral Commission, so that he granted asylum to the Shah despite the fragile political atmosphere. Kissinger later told Sampson that there was nothing subversive in these activities, arguing it was inconceivable that ‘a few private citizens’ could affect state policy. The Islamic government, in any event, was deeply offended. Turmoil ensued, and as the script unfolded, Tehran threatened to withdraw its U.S. deposits, to which Carter immediately retaliated by freezing them. The official justification was that the freeze was necessary to defend the integrity of the American banking system, although the real risk couldn’t be that serious. Iran had roughly $8 billion dollars worth of deposits, but of these only $1 billion were ‘call money’ available on demand – less than 1 per cent of the U.S. system’s outstanding cash balance. Moreover, most of these deposits were held in London, so even if drawn out, the only place for them to go was back into the Euro market. Clearly, the financial system as whole was not at threat. Certain institutions, however, particularly Chase and Citibank of the Rockefeller group, were vulnerable, and had much to gain by the freeze. The ‘Sting’ The hostage crisis in Iran sparked panic, and the price of oil finally began to rise. Adding to the turmoil, the Soviet Union invaded Afghanistan in late 1979, and in 1980 the Iraqis attacked Iran. Oil prices were now climbing beyond $35 per barrel, pulling the Petro-Core’s profitability safely out of the ‘danger zone’. And with Middle East oil revenues on the rise, the flow of imported weapons was also growing rapidly. To some extent, both the invasion of Afghanistan and Iraq’s assault on Iran were rooted in the rising threat of Islamic fundamentalism. Yet the U.S. government, although happy to see this threat being THE WEAPONDOLLAR–PETRODOLLAR COALITION 251 Bichler 02 chap 4 20/1/06 1:19 PM Page 251 checked, was not entirely antagonistic to the Khomeini regime. According to several sources analysed in Cockburn and Cockburn (1991: 317–18), during the last year of his administration, Carter embarked on a ‘sting operation’ which, if successful, would have both helped his re-election and caused Iran to renew its demand for American weapons. The underpinnings of his strategy were relatively straightforward. With much of their sophisticated arsenal made in the United States, the Iranians were crucially dependent on U.S. spare parts and ammunition. In this context, a major conflict, preferably starting before the 1980 elections, could convince Iran to release the embassy hostages in return for American military re-supply. The unsuspecting carrier of that plan was Iraq’s Saddam Hussein. With blessing from Jordan and Kuwait, promises of Saudi finances and, most importantly, a warm endorsement from Zbigniew Brzezinski, whose declared aim was to see Iran ‘punished from all sides’, Hussein swallowed the bait, and began advancing his forces into Iran (Cockburn and Cockburn 1991: 392). Unfortunately for Carter, the timing of the ‘sting’ was out of sync. Once Iraq launched its attack, his administration condemned it and began soliciting the Iranians to trade hostages for spare parts. But that was too late. Apparently, Iran already had a secret agreement with the U.S. Republican Party, according to which the hostages would be released only after the elections. And so although the weapons were ready to flow, Carter was no longer there to benefit from the deal.17 For the Weapondollar–Petrodollar Coalition, of course, the deal was manna from heaven, regardless of who won the election – although naturally, it much preferred having Reagan on its side than Carter. During Reagan’s presidency, the Middle East was defined – in some sense paradoxically – as being increasingly important for the U.S. ‘national interest’. In 1983, Reagan created a new military central command, or CENTCOM, to include the entire area of ‘West Asia’ from India to the Horn of Africa. CENTCOM’s mandate emphasised active defence over deterrence. Its capabilities, however, were very limited. It wasn’t able, for example, to counter a Soviet challenge against the oil zone in southern Iran, and certainly not to embark on a larger operation (Gold 1993: 69). Moreover, with funding being tight, the new focus on West Asia had to come at the expense of American military commitments in Europe and East Asia – this at a time when the significance to the U.S. of Middle East oil, as well as of the Soviet danger, were in fact declining, as we describe later in the chapter. The Network While the importance of oil and Soviet power were apparently waning under Reagan, the political leverage of the Weapondollar–Petrodollar Coalition was 252 THE GLOBAL POLITICAL ECONOMY OF ISRAEL 17 The allegations about a deal between Iran and the Reagan campaign headquarters were first made by Gary Sick and others (New York Times, 15 April 1991; Sick 1991). Bichler 02 chap 4 20/1/06 1:19 PM Page 252 The 1990–91 Gulf War With so much at stake, it was once again time for the U.S. Administration to hype the Persian Gulf as a ‘vital national interest’. In a speech given in 1987, Secretary of Defense Weinberger reminded his audience that the Middle East still contained 70 per cent of the world’s proven reserves. The role of the United States, he said, was to assure the region was secure, stable and, above all, free from Soviet influence and intervention. According to Weinberger’s strict guidelines, the American military was practically prevented from intervening in any conflict short of a world war. The only exception was the Middle East, where direct military intrusion was deemed warranted (Gold 1993: 76). From a realist perspective, though, this new emphasis sounded a bit odd. Indeed, according to the analysis laid out in Gold (1993: 75), during Reagan’s second term in office the region had become strategically less important to the U.S. ‘national interest’. For one, the Soviet Union, locked into a losing war of attrition in Afghanistan, was no longer perceived as marching toward the Strait of Hormuz. Furthermore, although the Middle East still contained much of the world’s reserves, the expansion of non-OPEC output, greater conservation, and THE WEAPONDOLLAR–PETRODOLLAR COALITION 259 Table 5.3 Arms Exports to the Middle East Period Total Supplier (per cent of total)(a) ($ million) United States Soviet Union/Russia(b) Others 1964–73 9,447 34.4(c) 50.2 15.4 1974–78 29,000 47.6 25.9 26.6 1979–83 65,355 21.7 31.2 47.0 1984–88 89,065 18.3 29.9 51.8 1989–93 83,600 38.3 11.4 51.4 1994–97 67,300 47.1 3.9 49.0 (a) Totals may not sum up to 100 per cent because of rounding. (b) Russia from 1992 onward. (c) Data for the United States are for fiscal years. Total does not include the re-supply effort to Israel following the 1973 Arab–Israeli War. SOURCE: U.S. Arms Control and Disarmament Agency (1975 Edition, p. 70; 1980 Edition, p. 160; 1985 Edition, p. 134; 1998 Edition, p. 174); U.S. Department of Commerce, Bureau of Economic Analysis, Statistical Abstract of the United States, 1991, Table 550, p. 340. West Germany, Italy, South Africa, the Soviet Union, China, North and South Korea, Vietnam, Israel, Taiwan and Brazil (Business Week, 29 December 1986; for a full list of the 52 known participating countries, see Stockholm International Peace Research Institute 1987: Table 7.8, pp. 204–5). According to Jane’s Defence Weekly, Iraq even supplied Iran, reselling to the latter through private dealers heavy weapons previously captured in the fighting (reported in Stockholm International Peace Research Institute 1987: 307). For detailed accounts of the arming of Iraq during and after the Iran–Iraq War, see Darwish and Alexander (1991: Chs 4–6) and Timmerman (1991). 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