Paying the Price of Israel's Crackdown

By Bill Montague

WHEN IT COMES to U.S. aid to Israel, the ordinary rules don't seem to apply.

After Haiti's military government sabotaged scheduled presidential elections last November, the United States retaliated quickly, suspending nearly all economic assistance to the impoverished nation.

After Panama's unofficial ruler, General Manuel Noriega, was publicly exposed this year as a drug profiteer, the Reagan administration and Congress jumped to halt the flow of aid to his regime.

Last December, as Israel tried to crush the emerging Palestinian uprising in the West Bank and Gaza, Congress also moved quickly- -to overwhelmingly approve a $3 billion dollar package of military and economic aid for Israel.

The aid measure, which included several major concessions sought by the Israel lobby, sailed through the House and Senate as part of a mammoth omnibus spending bill, even as Israeli troops-- armed and equipped with U.S. aid--were firing on unarmed demonstrators in the streets of Gaza.

In fact, the House voted to approve the package by the largest margin ever for a foreign aid bill. The mounting Palestinian death toll was not even mentioned during floor debate on the legislation.

As in past years, the bill devotes more than one-fifth of the total foreign aid budget to Israel--about three times what the United States will spend on all of sub-Saharan Africa next year. American assistance will equal roughly 11 percent of Israel's gross national product, and will pay for more than a third of Israel's defense budget.

In relative terms, it is as if some friendly nation agreed to donate $440 billion to the U.S. Treasury--enough to eliminate the entire federal budget deficit for at least the next two years.

Welcome to the remarkable world of the "special relationship"-- that unique marriage of money and politics that ties America and Israel tightly together, preempting the normal standards that govern U.S. foreign aid policy.

It is an embrace that so far, at least, has not been shaken by the turmoil in the occupied territories. Last month, even as Secretary of State George Shultz was vainly seeking Israeli Prime Minister Yitzhak Shamir's participation in an international peace conference, other administration officials were on Capitol Hill asking for another $3 billion in aid for the coming year.

Israel "deserves our support and will get that support," said Assistant Secretary Richard Murphy, who heads the State Department's Near East Bureau. On the same day that Israeli soldiers shot and killed two Palestinian boys on the West Bank, Murphy promised a House subcommittee that "we intend to send no signal to Israel or to the other countries in the region that there is a wedge between us."

Such views find an appreciative audience on Capitol Hill. Whatever its collective opinion of Israel's "iron fist" policies--and even some of its most avid supporters have expressed their doubts--Congress remains unwilling to even consider linking the massive U.S. subsidy to an end to the brutality, much less to Israel's willingness to negotiate.

Even more independent minded legislators refuse to draw a connection between the two issues, despite the tremendous potential leverage the United States derives from being Israel's major donor, creditor and military supplier.

"First, I think such a move would be totally counterproductive," said Rep. David Obey, the Wisconsin Democrat who chairs the House committee that oversees foreign aid programs. "Secondly, you couldn't pass it if even if you tried."

Don't Touch
No one is thinking of trying. Even questioning the aid relationship has steep political costs, as several congressional critics have learned, much to their regret. When Adlai Stevenson III, then the senior senator from Illinois, proposed mild aid sanctions in 1980 to push Israel into halting its West Bank settlements, he paid a heavy price. Organized opposition from pro-Israel groups was widely credited for his razor-thin loss in a 1982 gubernatorial bid.

Such attacks are not only directed at American critics. In 1982, New York Times editor Max Frankel reported a conversation with an unnamed Israeli politician who urged the U.S. to reduce economic aid as a way of forcing Israel to halt its settlements on the West Bank. Frankel's column raised an uproar, as angry Israel supporters attempted to identify and punish the heretic-- widely reported to be former U.N. Ambassador Abba Eban.

The Israel lobby's success in isolating the aid bill from any and all political challenges stands out as a remarkable exception to overall U.S. aid policy.

While the United States has shown no reluctance to wield aid as a weapon against other recalcitrant client states--Haiti and Panama being only two of the more recent examples--Israel has long enjoyed blanket immunity from such pressure, even when its actions have injured U.S. interests in the region.

This curious arrangement was actually formalized in 1977 by the Carter administration, which publicly promised never to attach conditions of any sort to Israel's military aid. According to Middle East analyst William Quandt, then a senior official at the National Security Council, administration officials also rejected a proposal to place some economic support in an escrow account until the Israelis halted their West Bank settlements.

"It wasn't a credible threat," Quandt recalled. "We knew we could never get anything like that through Congress."

Reagan, who differed so violently with most of Carter's foreign policy, has never questioned the aid guarantee, despite the accelerated pace of the settlements, the 1982 Lebanon invasion and Israel's successful efforts to block U.S. arms sales to moderate Arab governments.

Indeed, over the past eight years, the United States has provided Israel with steadily increasing amounts of aid on ever more liberal terms. Israel has also benefited from a number of little-publicized trade concessions designed to revitalize its slumping economy. (See story, page 22)

Even the deficit-cutting pressures of the Gramm-Rudman Act have not dented Israel's ironclad appropriation. While most other aid recipients have seen their allotments slashed deeply over the past three years, lawmakers have protected Israel and Egypt, Israel's partner in the Camp David peace accords.

Throw Out the Lifeline
With its financial security thus secured, Israel has been able to maintain its guns-and-butter economy, spending nearly 14 percent of its gross national product on defense while still satisfying its growing appetite for imported consumer goods.

American assistance has even directly subsidized actions opposed by the United States, such as Israel's disastrous Lebanon adventure. According to a 1983 report from the General Accounting Office (GAO), the Israelis used at least $50 million in military aid to replace tanks and ammunition destroyed in the invasion.

U.S. aid also helped prolong the ill-fated Lavi project, Israel's exorbitantly expensive effort to develop its own fighter plane. Although Pentagon officials strongly opposed the project, Congress earmarked a total of $1.4 billion for the Lavi, waiving a long-standing rule that requires military aid recipients to spend their dollars in the United States. (See story, page 12)

By the time the Israeli cabinet reluctantly cancelled the Lavi project, U.S. taxpayers had contributed nearly 90 percent of the project's cost. American aid will also pay for the F-16 fighters that Israel plans to buy from General Dynamics as a substitute for the Lavi.

Such special treatment is not limited to military aid. Unlike nearly every other country that receives U.S. assistance, Israel's annual $1.2 billion allotment of economic support is not earmarked for specific development projects. Instead, according to the GAO, Israel appears to use most of the money to pay the interest on its heavy military debt.

"The amount [of aid] is not based on ... need," the GAO report noted. "And there is no way to measure the precise effects that these funds have on the Israeli economy."

Until recently, auditors also could not verify compliance with a U.S. law that forbids Israel from using aid funds to subsidize Israeli settlements in the West Bank and Gaza. The Israelis simply evaded that restriction by placing the funds in their general budget account, making it impossible to track expenditures.

After years of complaints from the Agency for International Development (AID), the Israelis finally agreed in 1968 to place U.S. aid funds in a separate account. But such paper restrictions actually mean little, critics note, since U.S. aid allows the Israelis to divert their own resources to further their creeping annexation of the territories.

In much the same way, American aid also subsidizes Israel's own foreign assistance program. Ironically, the list of Israeli clients includes regimes, such as South Africa, that are barred from receiving U.S. aid themselves. In Latin America, for instance, Guatamala, Argentina and Chile are all countries that were able to obtain arms and training from the Israelis after being cut off by Congress because of their human rights violations.

Whose asset?
When speaking to their sympathetic allies in Congress, representatives of Israel lobby to stress the "strategic" benefits that accrue to the U.S. from having a dependable ally in the Middle East.

Testifying last year before the Senate Appropriations Committee, Thomas Dine, executive director of the powerful American Israel Public Affairs Committee, glowingly described Israel as "a reliable democratic ally who can the United States in promoting and defending our interests."

What usually go unmentioned at these sessions, however, are the much more tangible benefits that Israel derives from its special relationship with the U.S. Treasury. Without that largesse, it is questionable whether Israel could survive. At the very least, it would have to accept far more painful austerity measures than its political leaders thus far have been willing to impose.

Israel's reliance on U.S. assistance--and its lobbying efforts to secure that aid--have grown steadily since the 1974 Yom Kippur war, which exhausted Israel's military stockpiles and left the country staggering under an inflationary burden of debt.

In the three years following the war, the United States poured about $4.6 billion in military aid into the Israeli Defense Forces, more than triple the total for the previous 25 years of Israel's existence. Economic aid grew at a similar rate.

Assistance levels increased again in 1979, as part of the Camp David peace accords between Israel and Egypt, which called for the United States to subsidize Israel's withdrawal from the Sinai peninsula.

During this period, the bulk of Israel's military aid was provided in the form of long-term loans guaranteed by the U.S. government. Most U.S. loan recipients must repay those debts within 10 years. Israel was given 30 years.

Despite these liberal terms, the rapidly growing debt posed a heavy burden for such a small nation. Many of the loans carried extremely high interest rates, and Israel now has the highest per-capita debt burden in the world--more than $6,000 for every man, woman and child in the country.

The problem worsened into a crisis in 1984. Under the terms of the U.S. loans, payments on principal were deferred for 10 years. When these grace periods began expiring in 1984, Israel was hit with a formidable "debt bulge." The Israeli economy, already weakened by the Lebanon invasion and the economic policies of the Likud government, was brought to its knees. In 1985, inflation reached 450 percent, and Israel's foreign exchange reserves evaporated.

Once again, the United States saved the day. In 1981, Congress converted all economic aid to outright grants. In 1985, the package of military assistance was also converted entirely to grants and "forgiven" loans. With the specter of an Israeli default looming, Congress also approved a $1.5 billion rescue package--the largest economic aid appropriation for a single country since the end of the Vietnam War.

As the price of the new aid, American officials insisted on the creation of a joint U.S.-Israeli commission to recommend major economic reforms. And in July 1985, Israel's new coalition government agreed to adopt a modest austerity package.

Although the plan reduced wages and trimmed Israel's generous social welfare system, it has been far less painful than the harsh measures generally demanded of other debtor nations by the International Monetary Fund (IMF)--demands usually supported by U.S. officials.

Not only is Israel guaranteed an equal voice on the commission, the panel's recommendations, unlike the IMF's, are non-binding. So far, the Israeli government has managed to avoid some of its harsher proposals without endangering the continued flow of American aid.

Reaganomics, Israeli Style
In the wake of the 1985 bailout, Israel's economy has staged a relatively strong recovery. The capital flight has been stanched and the government has been able to rebuild its depleted foreign currency reserves. Inflation has receded to a more manageable 20 percent per year.

Recent U.S. government reports have tended to paint a sunny picture of Israel's economic prospects, lauding the government's moves to sell off state-owned businesses and promote free-market mechanisms.

"Current security concerns notwithstanding, the present business climate in Israel is perhaps the most favorable in many years," a recent AID report contended.

But the outlook for the future is actually much less bright. Next year the 10-year grace period will expire on the $2.7 billion in loans Israel received as part of the Camp David accords. According to World Bank projections, Israel will need an additional $1 billion in 1990 to service its debt.

Although Israeli officials claim they can meet that need with higher export earnings, the country's giant trade deficit has actually worsened over the past two years, reaching $3.7 billion in 1987. And after two years of budget surpluses, the Israeli government returned to deficit spending in 1987. Moreover, the costs of the Palestinian uprising are certain to drive expenditures even higher this year, adding to inflationary pressures.

"The economic impact of the disturbances . . . certainly will have a cost, and possibly a substantial one," William Fuller, a top AID official, said in recent testimony before Congress. The longer the uprising lasts, the more vulnerable the Israelis will be to economic pressure, and the more vital the uninterrupted flow of U.S. aid will become.

Future Israeli aid requests, however, may have to face more critical scrutiny than in the past--but because of fiscal problems, not policy concerns. While Israel's allotment has been protected from past Gramm-Rudman cuts, that exemption has forced even deeper reductions in the rest of the aid budget, causing serious disputes with several nations that play host to major U.S. military bases.

Under such conditions, one observer said, the Israel lobby "will be doing well to protect current aid levels, much less win any increases."

While they cannot hope to match the political influence of the major Israeli supporters, competing interest groups are beginning to protest the disproportionate share of resources devoted to Israel.

Black Congressional Caucus members raised the aid issue when they met with Shamir during his recent visit to Washington. While per capita assistance to Israel has averaged about $700 in recent years, they noted, U.S. aid to black Africa has never been more than $1 per person.

"At a time when we are called upon to make the hard choice between funding for domestic programs versus foreign aid, we need to make doubly sure that the aid we give is fairly and equitably distributed," Rep. George Crockett Jr., D-Mich., told reporters after the meeting.

Right now, such a redistribution seems highly unlikely. Foreign assistance remains an unpopular item with most members of Congress, and without the energetic efforts of those who lobby for Israel, it is doubtful whether an aid bill would pass at all.

In fact, budget pressures notwithstanding, aid to Israel may increase again if the United States succeeds in brokering a peace settlement. Such "checkbook diplomacy" was the case in 1978, when the Carter administration promised massive aid increases to both Israel and Egypt in return for the compromises that led to the Camp David accords.

"It's certainly true that there can be linkage on the upside," said William Quandt, the former National Security Council official. "Offering carrots is always an option."

But with the Israelis so far refusing to even come to the bargaining table under the terms outlined in the Shultz proposal, even carrots may not suffice to break the deadlock.

In the meantime, U.S. policymakers show no inclination to question their unconditional support for the Israel aid--despite the mounting Palestinian death toll and the seeming paralysis in the divided Israeli cabinet.

At a recent conference of the United Jewish Appeal, the primary private fund raiser for Israel, congressional leaders went to great lengths to reassure their audience that the special relationship is still above debate.

U.S. disapproval of Israeli policies, said Sen. Frank Lautenberg, D-N.J., is like a marital spat--"It doesn't rupture the relationship."



WHEN CONGRESS APPROVED its massive catch-all funding bill for the federal government last December, a small item buried amid the thousands of pages of fine print quickly turned into a major political headache for Sen. Daniel Inouye, D-Hawaii.

Inouye, the chairman of the Senate subcommittee that handles the foreign aid program, had quietly inserted an $8 million appropriation to support a school in France for the children of Sephardic Jewish refugees from Morocco. Inouye, a staunch supporter of Israel, quickly came under fire for his generosity. Press reports revealed that the "refugees" were actually immigrants who had been living in France for more than 20 years. Critics also questioned the role of Zev Wolfson, an Inouye campaign contributor who had lobbied for the school. Embarrassed, Inouye asked Congress to delete the funding.

In the furor over the school, however, most critics overlooked another, much larger act of generosity on Inouye's part--one that eventually cost the U.S. Treasury nearly $1.5 billion. Inouye, along with Sen. Bob Kasten. R-Wis., and several other Israeli allies in Congress, managed effectively to raise U.S. aid to Israel by at least $100 million a year for the next 15 years.

The deed was done through a complicated debt restructuring scheme that Congress also tucked into last December's appropriation bill. Though a number of smaller debt-ridden allies also will be able to take advantage of the deal, from the start the measure was primarily intended to benefit Israel.

For years, Israel's supporters have worried about Israel's massive debt to the United States, debt it incurred before 1983, when Congress began sending assistance to Israel in the form of grants rather than loans. Interest payments on the old debt now eat up nearly all of the $1.2 billion in economic support that Israel receives annually from the United States.

For the most part, the old loans were taken out during the inflationary 1970s, when interest rates--even the bargain- basement rates granted Israel--were sky-high. As rates came down in the mid-1980s, Israel's supporters began to push a comprehensive refinancing package that would cut the interest on Israel's debt from the current 14.5 percent to a more manageable 9 or 10 percent.

Such a deal would lead to significant savings for Israel over the lifetime of its outstanding loans, most of which have at least 15 years left to run.

Congress simply could have increased Israel's aid payments to cover the difference between the high interest rates Israel was paying and the low interest rates it wanted. But such a scheme would have pushed the foreign aid bill through the spending ceiling set by Gramm-Rudman--politically difficult at a time when other federal programs were suffering deep cuts.

The powerful American Israel Public Affairs Committee (AIPAC), Israel's main lobbyist, came up with the answer. AIPAC proposed that Israel obtain new loans from private banks, at today's lower interest rates, and pay back its existing debt to the U.S. government. All Congress had to do was authorize the deal, no federal dollars would need to be spent.

But there was still a snag. Israel's economy was--and still is-- extremely shaky, meaning that any new loans would have to be guaranteed by the U.S. government, just as the old ones were. Congress could do this, but unless the banks were willing to assume a "significant" share of the risk, the guarantees would have to go on the budget, again running afoul of the Gramm- Rudman limits.

With a little creative interpretation, however, the problem was solved. No law set the meaning of "significant" risk--that definition was left up to Congress. After some extended negotiations AIPAC and Inouye's staff decided that a 10 percent share of the risk was significant enough. The United States would guarantee the other 90 percent, Israel would get its loans, the numbers would stay out of the budget, and everybody would go home happy--except, perhaps, the taxpayers. Although the Israel lobby has tried to paint the deal as a deficit cutter--because of the accelerated repayment of Israel's old loans--the long-term effect will be just the opposite, according to the Congressional Budget Office.

During the 1970s, the government's Federal Financing Bank, which made the loans to Israel, itself borrowed money at high interest rates, expecting to repay the debt with the income it would earn from Israel's loans. The refinancing deal, however, will eliminate that income, creating an unexpected shortfall in the bank's balance sheet. Eventually, the U.S. Treasury will have to make up the difference.

This hidden reality prompted complaints from Rep. David Obey, D- Wis., Inouye's counterpart as chairman of the House foreign aid subcommittee. "Politicians always like to give out goodies without paying for them," Obey said.

-Bill Montague