Israeli Industrialists' Strategy in the Global Supply Chain

By Efraim Davidi

Tuesday, April 17, 2007

The Sewing Factory in Gaza, the Administration in Tel-Aviv, and the Owners in New York

The aim of this paper is to try to understand the Israeli industrialists' strategy in the globalization process in the course of the recent years. The new strategy was implemented in the days of the first Intifada (the Palestinian uprising) in the late 80s. At that time voices were heard in the Association of Israeli Industrialists, the strongest organization of Israeli employers, advocating an agreement with the Palestinians which would not oppose the establishment of an independent Palestinian State, as long as the Palestinian economic dependence on Israel is preserved.

The paradigm of the new strategy can be summed up as follows: "establishing a sewing factory in Gaza (or in Jordan, or in Egypt or in Turkey), administering it from Tel-Aviv, with the owners residing in New York." Of course, the product was not intended for the local Arab market or for Israel, but for the heartland countries of globalization - the U.S.A., Canada, and the European Union. On the Arab side, there were those who regarded this strategy as "a way of enforcing Israeli economic control over the Middle East." However, this was not the intention. Israel cannot control the Middle East economically or even militarily. Last year's events proved that Israel is incapable even of maintaining military control over the Gaza Strip.

On the one hand, Israel was to become integrated into the Middle East as a base for the activities of multinational companies, and, on the other, to establish progressive high-tech industries mainly connected to three branches with enormous development potential - computers, telecommunications, and the Internet - all of which are interdependent and belong to multinational companies, mostly American.

At first sight this strategy appeared to be sound. The agreements signed with the Palestinians in 1993 opened the gates for foreign investment, the takeover of local companies by multinationals, and the merging of local and foreign companies. The privatization process, one of the economic guidelines shared by all Israeli governments in the last two decades, contributed to this strategy.

Since the implementation of the Oslo Accords with the Palestinian Liberation Organization in the late 90s, an impressive growth in the national product per capita in Israel was recorded. This stood at $5,500 in Israel in 1980 - as against $771 in Egypt, Jordan, and Syria - while in the European Union it reached $9,381. In 2003, the figure jumped in Israel to $16,700 per capita, and the prognosis was for $18,000 in the course of 2006. This can be compared to $1,260 in the aforementioned Arab states and $21,242 in Europe. However, the second Intifada and the fall of the Nasdaq (both of them in the last quarter of 2000), combined with the prolonged recession that began when the peace process ran out of steam, led to only a tiny or even negative growth in the gross national product in the years 2001, 2002, 2003, and 2004.

Nevertheless, it would be wrong to assume that the fruits of this considerable growth in the total production and the integration into the globalization process were equally enjoyed by all the residents of Israel. The socio-economic gap grew over the last two decades, particularly in the last five years. The Israeli economy is notable for the increasing concentration of capital in the hands of a few individuals. In the opinion of some experts, the economy is controlled exclusively by 20 to 50 families and multinational companies.

Dov Lautman, the former president of the Association of Israeli Industrialists and one of the owners of "Delta-Galil Industries,"1 stated in a meeting with Palestinian manufacturers in 1993: "The important issue is not whether a Palestinian state, an autonomy, or a Palestinian-Jordanian state is established, the important thing is that the economic borders between Israel and the territories remain open."2 For Lautman, and many others, economic relations between the states of Israel and Palestine should be modeled after "the free trade agreement that exists between Mexico and the U.S." For him (and others), there was no doubt as to who would play the role of the United States and who, the role of Mexico. Former Prime Minister and now vice-premier and Minister of Regional Cooperation Shimon Peres met with the Mexican President Carlos Salinas de Gortari in September 1994 "to learn about the NAFTA model."3

What Is a Free Trade Agreement?

A free trade agreement (FTA) is an agreement between two or more countries to allow uninterrupted trade in commodities produced in each country, such as the North American Free Trade Agreement (NAFTA) concluded between the U.S., Canada, and Mexico. This trade policy holds only for goods produced within the signatory states, which are allowed to pass freely across the internal borders of the FTA. Goods produced outside the FTA have to cross trade barriers corresponding to the external borders of the parties.

Since these trade barriers for different external borders may not be identical (customs rates on the same item may differ for each partner), all goods have to be screened at an internal border, in order to ascertain their origin: from inside or outside the FTA.

The only trade policy enabling the abolition of internal trade borders between partners is a customs union. A customs union extends the free flow of goods beyond those produced by the FTA partners to goods produced in "the rest of the world." This is done by means of an agreement between the partners to apply identical barriers to trade with other parties, i.e., third parties. This obviates the need for checking the origin of goods after they have passed the national internal borders.

NAFTA, Israel, and Palestine

According to a team of Israeli economists, "many of the economic ratios between Israel and the Palestinian economy are of the same order of magnitude as those between the U.S. and Mexico. The total GNP in Israel is approximately 18-20 times larger than that of the combined Palestinian territories; GNP per capita is six times larger in Israel than in the Palestinian territories. By way of comparison, the U.S. GNP is twenty-five times larger than that of Mexico. Other features in the U.S. and Mexico are also comparable to the relations between Israel and the Palestinian territories: Mexico suffers from low wages and an excess supply of labor, and workers from Mexico attempt to find work in the U.S."4

For more than ten years (between the first Intifada and the second one), numerous conferences were held in Israel with titles such as "The Future Economic Relations between Israel and the Territories," usually sponsored by the Association of Israeli Industrialists, the Chambers of Commerce, or universities. Meetings between Israeli and Palestinian manufacturers were also held, mostly behind closed doors. The meetings, studies, official pronouncements, and seminars reveal a growing anxiety about the economic implications of Palestinian independence considered by Israel's ruling class to be only a matter of time.

Why this anxiety? Maintaining economic relations with the territories is very important to Israel. Most of the Palestinian territories' trade is with Israel: some 80-90 percent of all imports to the Palestinian territories originate in Israel, and similar ratios of their exports are sold in Israel. "Israel is thus by far the largest partner of the Palestinian territories. The Palestinian territories also represent an important trading partner for Israel, being the second-largest export market for Israeli products (after the United States)."5 The exports from Israel to the territories grew by 80% in ten years, from US $961 million in 1987 before the first Intifada to US $1800 million in the eve of the second Intifada.

As a result of the first Intifada, the Israeli bourgeoisie has come to recognize that there is no alternative to some degree of Palestinian political independence. An entire generation of Israeli manufacturers have tried to ruin every chance of capitalist industrial development in the territories. The Israeli occupation authorities operated as the long arm of the Israeli bourgeoisie, making it impossible for any Palestinian capitalist to obtain the thousand-and-one approvals required for establishing any large business without producing a document stating that he would not be competing with an Israeli company.6 In this manner, the authorities prevented the establishment of dairies, cement factories, food factories, and textile plants. A team of Israeli economists described the situation of industry in the territories in the following words: "These are extremely low levels of industrialization, probably lower than in most countries in the world."7 On the other hand, "for several years, restrictions in the form of trade barriers prevent Palestinian agriculture from competing in the Israeli market."8

At the same time, the Israeli economy has been the source of a sizeable portion of the territories' income. In the late 80s, about one half of the national income of the Gaza Strip reportedly came from the labor of Gaza workers in Israel, and this situation has remained unchanged ever since. According to the figures of the Economic Branch of the Israeli Coordination Office of Government Activities in the Territories after the second Intifada, 42% of income in Gaza derived from work in Israel. In the West Bank, 47% of income derived from work in Israel.9

Palestinian independence, a total and immediate loss of the West Bank and Gaza markets, would probably cause heavy losses to many Israeli businessmen in the fields of construction, hotels, imports, and manufacturing.

Is MEFTA Viable?

Is an agreement like NAFTA - MEFTA (Middle East Free Trade Agreement) - viable in the region? If the question is posed to a member of the American administration, the response will be positive. According to Robert Rubin, the former United States Secretary of the Treasury:

Israel has been moving in the right direction by making reforms to open its economy... Economies that are relatively open to trade tend to enjoy superior economic performance. I think all countries should make it a priority to actively participate in the multilateral free-trade process sponsored by the WTO (the World Trade Organization). But, with that said, it could certainly be to Israel's advantage to take part in a regional free trade agreement. Regional agreements can facilitate movements towards a free-trading world, as long as they cover substantially all trade among participants and do not raise barriers against third-party countries in the process. For example, since the free trade agreement between Israel and the United States took effect more than ten years ago, trade between our two countries has more that tripled.10

But, the trade policy that has existed between Israel and the Palestinian economy since 1967 is best described as an involuntary, one-sided, impure, customs union. Exchange between Israeli and Palestinian traders was ostensibly free and the geographical area comprising Israel and the West Bank and Gaza Strip had no internal trade borders, or trade barriers. Trade with the rest of the world was carried out under the Israeli trade regime and according to Israel's (changing) policies. Thus, Israel customs and other barriers to trade operated along the external borders of the combined area. Since there was no Palestinian (economic) authority and Palestinians did not participate in policy-making, all decisions were made by the Israeli authorities.11

MEFTA and the Sub-contracting Scenario

The relocation of Israeli industries especially in the field of textile began in the last 10 years (after the Oslo Accords and the Jordan-Israel Peace Accord signed in 1995). One of the leading textile companies is "Delta-Galil," which owns industrial plants in Jordan and Egypt. In recent years, Delta has bought other plants, in Turkey, Central America, Thailand, and in Romania. The former CEO of "Delta-Galil," Arnon Tiberg, said that "the critiques that we are relocated in other countries and thus we contribute to the growing unemployment in Israel, are not fair. In Israel we employ 3,200 workers. In Jordan and Egypt we employ 3,000 workers. The plants in Jordan and Egypt make it possible to work on management in Israel as well as development, design and marketing - all the capital intensive activities."12 The owner of "Delta-Galil" Lautman said in an Israeli-Palestinian Businessmen Meeting held in Tel-Aviv in June 1999 under the title "Doing Business in Peace": "Jordan and Egypt are a strategic step for 'Delta'. The territories can become another such step. It's not easy to open a factory in France or in the United States, but it is much easier to open a factory in Gaza." Lautman in this meeting returned to his old idea and proposed to adopt the NAFTA model for the Middle East with Israel in the role of the United States and the Palestinians in that of Mexico. "Our mission is not to make peace. Our mission is to make money," emphasized Lautman.13

Another leading textile company "Polgat" has opened a plant in Jordan. In Egypt and the territories, "Polgat" worked through subcontracting local plants.14 Rimon Ben-Shaul, former CEO of "Clal" (owner of "Polgat") said that "Polgat has become a multinational company. We produce where cheap labor is available." For years, "Polgat" has employed hundreds of Palestinians in the company plants situated in Kyriat Gat, a "development town" 60 km. south of Tel-Aviv. The third leading textile company, "Kitan," has closed the Levi's jeans plant in Nazareth and has opened a new jeans plant in Jordan. Today, 50 percent of the Kitan's textile production originates in Jordan or in subcontracting Palestinian companies.15

This relocation is part of Israel's government policy and causes massive layoffs of workers in the Galilee and the South of Israel, especially the female workforce of Arab, Druze, and Jewish-Oriental (Mizrahi) origins. This policy is not an Israeli invention - the "subcontracting scenario" is very common throughout the world, in the economic relationships between the "First World" (the United States, Europe and Japan) and the "Third World" (Asia, Africa, and Latin America). One of the most developed models of the "subcontracting scenario" is Mexico. "Between 1980 and 1994, the number of Mexican workers employed in the maquiladora industry (subcontracting factories) grew from 119,546 to 583,044; an increase of 387,72 percent. . . . The workers' hourly wage in the United States was 9,84 dollars in 1980 and 17,30 in 1994. In Mexico the workers' hourly wage was 2,16 dollars in 1980, 1,64 dollars in 1990 and 2,60 dollars in 1994. . . . This evolution in the workers' hourly wage in the United States and in Mexico is the 'secret' of the maquiladora industry's success."16

In fact, the "maquiladora scenario" was established even before the signing of the agreements between Israel and the PLO. For about 8 to 9 years, Israeli companies have worked through Palestinian subcontracting plants. But, in recent years this scenario has included the Palestinian territories, Jordan, and Egypt. The Israeli ruling class regards itself as a regional economic power, concentrating on high-tech industries. In its vision, labor-intensive industries are to be located in the periphery of Israel and the Israeli high-tech industries are to be dependent on foreign markets (the United States and Europe) and operate under foreign ownership or joint-ventures between Israeli industrialists and foreign investors. In the words of the vice-premier and the Minister of Regional Cooperation Peres: "The world is organized like a house with two floors: in the basement, the regional agreements; and on the top floor, multinational groups of companies."17 In other words: "We do not want peace between nations. We want peace between markets."18

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Endnotes:

1. "Delta-Galil" employs 14,000 workers in 40 factories in 11 countries. Each month the company produces ten million pieces. The sales of "Delta-Galil" in 2005: 684 million dollars.
   
   
2. Efraim Davidi, "Israel's Economic Strategy for Palestinian Independence," Middle East Report 184 (September-October 1993), p. 24.
   
   
3. The former Israel Ambassador to the United Nations, Gad Yaacobi, described the meeting between Peres and Salinas de Gortari in New York: "We met with the President of Mexico Salinas and with the Mexican Foreign Affairs Minister, the former Mexican Ambassador to the United Nations. Salinas is a very small man and very nervous (in one month he must leave the presidency and in his country there have been a series of murders, among them: the official candidate to the presidency and the Secretary General of the ruling party). Peres heaped praise upon the achievements of the Mexican economy under Salinas (we later learned hat some of those achievements were no more than illusions). . . . Peres talked about the NAFTA agreement as one of these achievements and as a positive model for a regional economy and as a success for the theory of economic globalization" (Gad Yaacobi's, New York Diary - The Story ofthe Israeli Ambassador to the United Nations, Tel-Aviv: Miskal-Yedioth Aharonoth Books and Chemed Books, 1997, p. 254). The original in Hebrew. After his resignation, Salinas de Gortari escaped to exile, under accusations of participation in the murder of leading politicians of the PRI ruling party. The same day when the NAFTA agreement took effect, in the Mexican State of Chiapas, the "Ejercito Zapatista de Liberaci?n Nacional" began its fight, under the leadership of Subcomandante Marcos.
   
   
4. Arie Arnon, et al., The Palestinian Economy - Between Imposed Integration and Voluntary Separation (Leiden: Brill, 1997), p. 21.
   
   
5. Arie Arnon, 1997, p. 18; and Efraim Davidi (ed.), Anti-Globalization: Criticism of Late Capitalism (Tel-Aviv: Resling Publishing, 2003), pp. 106-110. In Hebrew.
   
   
6. Davidi, 1993, p. 25.
   
   
7. Arnon, 1997, p. 5.
   
   
8. Ibid.
   
   
9. Coordination of Government Activities in the Territories / Economic Branch, "Measures Supporting and Promoting the Palestinian Economy" (Tel-Aviv: Ministry of Defense, 1999).
   
   
10. Robert Rubin in an interview with Hillel Kuttler in "Israel - Fifty Years of Finance & Industry," supplement to the Jerusalem Post, May 5, 1998.
    
    
11. Arnon, 1997, p. 88.
    
    
12. Haaretz, August 8, 1999.
    
    
13. After the election of the Labor Party leader Ehud Barak as Prime Minister of Israel in May 1999, three conferences took place at short intervals in June and the beginning of July, all dealing with the future economic relations between Israel and the Palestinian territories. First, the Israeli-Palestinian Businessmen Meeting entitled "Doing Business in Peace" in the Tel-Aviv Sheraton Hotel ("Politicians Get Out of the Way - the Business Community Can Do It Better" was how Oren Most, Deputy CEO of "Cellcom Israel Ltd.," put it). Next, the Tel-Aviv College and the Economic Quarterly organized a conference of economists. A third event was held, this time in Beit Jala in Palestinian territory - the founding conference of PRIME (Peace Research Institute in the Middle East), held under the auspices of the World Bank and attended by its Vice President, the Turkish economist Prof. Kemal Dervis. There was a clear continuity between all three events: an ongoing debate concerning Palestinian economic dependence on Israel and whether or not it should continue after the end of the military occupation and the achievement of political independence. The dimensions of this dependence were described in the Sheraton Hotel meeting by Palestinian minister Nabil Sha'ath: "Every year we buy Israeli products, and foreign products imported via Israel, at between 2.5 and 3 billion dollars. . . . The Palestinian economy is just 7 percent the size of the Israeli one, and still we are the second-largest market for Israeli products." Most Israeli participants in the three conferences, industrialists or economists, saw nothing wrong with such relations continuing to exist after Palestinian independence. Palestinians were disappointed to hear Prof. Dervis of the World Bank declaring himself in favor of the Palestinians giving up the economic aspects of their sovereignty "as France and Germany did" - protesting that France and Germany entered into an economic union from a more or less equal starting point, which is not the case with regard to Israel and Palestine. A refreshing point of view was presented in the economists conference held in Tel-Aviv by Prof. Arie Arnon of Ben-Gurion University (a prominent economist and leading member of "Peace Now"). On the basis of his research, Prof. Arnon argued that the deteriorating state of the Palestinian economy is attributable to its dependence on Israel and could only be healed by the end of that dependence, whereas the viability of the Palestinian economy is an indispensable prerequisite for stable peace. Another well-known economist, Prof. Ezra Sadan attacked Prof. Arnon and said that "independence can never work as in Nicaragua at the time of the Sandinistas."
    
    
14. Yediot Aharonot, August 13, 1999; and: Efraim Davidi, "The Israeli Economy and the Challenges of Globalization," Palestine-Israel Journal of Politics, Economics and Culture, Vol. VIII, No. 2, 2001, pp. 104-110.
    
    
15. Haaretz, August 16, 1999.
    
    
16. "La sous-traitance en peripherie, practique economique et rapport social d'exploitation,"Alternatives Sud Vol. VI, No. 1 (1999), p. 8.
    
    
17. Shimon Peres, The New Middle East - A Framework and Processes towards an Era of Peace (Tel-Aviv: Steimatzky Publishers, 1997), p. 90. In Hebrew.
    
    
18. These are the words of Peres at a meeting with the journalists staff of the daily newspaper Davar in 1992. This was an "off the record" meeting. See Efraim Davidi, "Globalization and the Economy in the Middle East - A Peace of Markets or a Peace of Flags," Palestine-Israel Journal of Politics, Economics and Culture, Vol. VII, No.1& 2, 2000, p. 34.

* Efraim Davidi is a member of the Histadrut (Labor Federation in Israel) Executive Committee. On 10-11 May 2006, the Global Union Research Network (GURN) organized at Hague (in the Netherlands) a special international research conference on "The Impact of Global Production Systems on Trade Union Strategies" with the support of the Institute of Social Studies (ISS), the International Labor Office (ILO) and the FNV (Dutch unions). This paper was delivered at the conference.