The Costs of U.S. Aid to Israel
By Daniel Feith
The close relationship between Israel and the United States was born out of Cold War tensions projected onto the regional conflict in the Middle East. Following the 1967 war, relations between Israel and its neighbors remained tense and by 1970, Israel found itself entangled in war of attrition with its southern neighbor Egypt. The U.S., implementing its policy of containment at the time, was competing with the Soviet Union for influence in regions around the world. So when the USSR began providing Egypt with their most advanced antiaircraft system and 1,500 combat personnel,1 the U.S. responded by providing Israel with a military loan of $545 million, nearly 20 times the military aid Israel had received the previous year and twice the total military assistance Israel had received in 22 years of existence.2 The alliance between Israel and the U.S. grew stronger through the 1970s as Soviet support of Arab states continued and as regional tensions peaked during the Yom Kippur War, and that alliance remains strong today. With its $3 billion annual aid package, Israel today receives more aid on better terms than any other nation in the world.
The substantial increases in U.S. aid to Israel during the 1970s, however, were based only in part on Israel’s immediate security needs. The major change responsible for increased assistance was not a worsening of Israel’s security but rather a revision of American Cold War strategy that emphasized Israel’s potential value as a U.S. ally. Once American policymakers began regarding Israeli strength as an American asset in the Cold War, they supported significant aid as a matter of strategy, not charity. However, some critics of aid to Israel assert that today the Cold War has been over for more than a decade and that Israel no longer has value to the U.S. as a buffer against Soviet expansion. Yet American aid continues to flow to Israel. At the same time, critics on the opposite end of the political spectrum argue that while aid to Israel may be tied to the best of intentions, it does more harm than good to the Jewish State by propping up a big and inefficient government and making Israel dependent upon the U.S.
These second set of critics are correct in the long-run, but for the time being continued U.S. aid to Israel remains valuable to both Americans and Israelis. As the only democracy and ideological ally of the U.S. in the strategically important Middle East, Israel continues to yield benefits to the U.S. in the post-Cold War world. Moreover, Israel is a vital ally in the U.S.’s global war on terrorism. In Israel, the current war with the Palestinians ensures that any possible damage U.S. aid does to the development of free enterprise is outweighed by the security guarantee U.S. aid provides. While self-reliance for the Jewish State is an important goal and should indeed be the long-term aim of policymakers in both Israel and the U.S., aid to Israel today is important to the state’s very existence.
Aid to Israel as Part of Cold War Strategy
Israel’s military conflicts during the early 1970s occasioned a dramatic reshaping of its foreign assistance package from the U.S. When American policymakers began seeing aid to Israel as a long-term investment that was part of U.S. Cold War strategy, the amount of aid they provided skyrocketed. In numerical terms, the increase is staggering. Since 1974, when Nixon’s emergency aid package went into effect, annual U.S. assistance to Israel has consistently hovered around $2-3 billion, an increasing share of which has been given as grants rather than loans. As a result, U.S. aid to Israel since 1974 totals roughly $80 billion, whereas U.S. aid to Israel between 1949 and 1973 totaled only $3.1 billion, or $122 million annually, most of which was provided as loans.3
The Nixon administration began providing such substantial assistance to Israel as part of a Cold War strategy devised by Henry Kissinger, who served as secretary of state during the Yom Kippur War and before that as National Security Adviser. Kissinger based his strategy on the assumption that in attacking Israel, Egypt and Syria were principally interested in regaining territory—the Sinai Peninsula and Golan Heights—lost in 1967 during the Six-Day War. From a strategic perspective, one of that war’s most important outcomes was demonstrating Israel’s great military skill. With this in mind, in 1973 Kissinger reasoned that if Israel’s military, using American weaponry, could defeat Soviet-supplied Arab forces, Arab leaders would recognize: first, that they could not regain territory from Israel by force, even with Soviet support; second, that diplomacy was therefore their only option; third, that the U.S. was the only power capable of maintaining good relations with both Arab and Israeli leaders; and fourth, that they should accordingly break their alliance with the Soviet Union and seek closer relations with the U.S. In addition to weakening the Soviets’ hold on Arab leaders, this strategy would deprive Arab radicals of their militant platform while strengthening Arab moderates who favored a diplomatic solution to the Arab-Israeli conflict. In sum, this strategy would accomplish four strategic goals: “to reduce Soviet influence, weaken the position of Arab radicals, encourage Arab moderates, and assure Israel’s security.”4
Kissinger also understood that American aid could moderate Israel’s approach to the Arabs. Arab leaders insisted as a precondition to peace that Israel withdraw from territory conquered in 1967. Israel, for whom this territory was a valuable buffer against its neighbors, was reluctant to return it without a security guarantee. Kissinger believed that American military aid could provide the assurance Israel wanted and thereby make the concessions needed for peace possible. Peace, in turn, would diminish Soviet influence over Arab states.5
The history of Israeli security agreements since 1973 reflects Kissinger’s basic calculation. Each time Israel has considered making a territorial concession, it has looked to U.S. aid to ease its security burden. In 1979, when Israel agreed to return the Sinai Peninsula to Egypt, the U.S. gave Israel $3 billion in aid to help pay for redeploying its troops from Sinai and rebuilding air bases in the Negev. Following the 1998 Wye River Accords, Congress approved $1.2 billion in special aid to help fund Israel’s pullout from the West Bank and Gaza Strip.6 When Israel withdrew from southern Lebanon in May 2000, it requested special assistance from the U.S. to cover the redeployment costs although Congress ultimately denied the request despite President Clinton’s efforts.7 Similarly, when Israel was negotiating a return of the Golan Heights with Syria in January 2000, Israeli and American media reported that Israel would seek $10-17 billion in U.S. assistance for military upgrades to compensate for the loss of the strategically valuable Golan.8 In short, when Israel calculates the costs of peace, American aid figures heavily in the equation.
Post-Cold War Aid
That Kissinger’s strategy calling for U.S. aid to Israel was closely connected to Cold War policy raises the question of whether Israel retains strategic value in today’s post-Cold War world. Now that the U.S. does not contend with Soviet influence in the Middle East, it no longer needs Israel as part of a containment strategy. Yet the flow of American aid to Israel continue uninterrupted.
For a variety of reasons, Israel has remained strategically relevant since the Soviet Union’s demise in 1991. Israel’s geography ensures its continued importance to the U.S. Even without a Soviet presence, the Middle East remains important to the U.S. as the primary source of American oil imports. The U.S. valued stability in that region so greatly that in 1991 it committed hundreds of thousands of troops and roughly $70 billion in the Persian Gulf War to repel Iraq’s invasion of Kuwait.
Israel also remains a valuable part of American post-Cold War strategy. According to Marvin Feuer, the director of defense and strategic issues of the American Israel Public Affairs Committee:
The end of the Cold War meant the end of one set of strategic calculuses. But it also allowed us to focus on areas like missile defense...where the U.S. and Israel have a lot in common. We’ve had more in common with the Israelis on missile defense than with any country in the world. We’ve moved from a geographic focus to a lot of functional foci.9
Indeed, the U.S. and Israel have collaborated on many defense issues since the Cold War, foremost among which was their joint development of the Arrow anti-ballistic missile system, which Israel deployed in 2000.
More generally, Israel has been a loyal ally to the U.S. and, through its strength, a stabilizing force in an otherwise volatile region. Although Israel’s very existence has fueled numerous conflicts in the Middle East, from the perspective of the U.S. government, the destruction of Israel, the region’s sole liberal democracy, is strategically not an option. Operating on the principle that Israel is here to stay and should stay, U.S. aid to Israel has yielded enormous strategic dividends for the U.S. By creating a regional imbalance of power favoring Israel, aid has curbed Arab military aggression and prevented situations—namely full-blown war between Israel and its neighbors—in which the U.S. might need to deploy troops to the Middle East. For these reasons, the military assistance Israel has received is most appropriately judged in light of U.S. strategic defense spending, such as the costs of basing troops in South Korea, and not in comparison to the foreign aid budget.
While Israel was a strategic asset to the U.S. in the decade between the Cold War’s end and the September 11 attacks, those attacks magnified and arguably increased Israel’s importance. September 11 drew the U.S. into a war on terrorism that Israel had been waging more locally for years. Israel’s experience fighting against terrorist networks similar to those threatening the U.S. has provided valuable tactical lessons to the U.S. military. In addition, Israel has happily shared its intelligence on terrorists and their organizations with the U.S., gathered over many years.
In fact, according to Danielle Pletka, vice-president for foreign and defense studies at the American Enterprise Institute, a Washington-based public policy research center, these particulars of U.S.–Israel cooperation are still less strategically important than Israel’s fundamental qualities:
In the post-September 11 world, it has become abundantly clear to us that the geo-strategic concepts of the Cold War are gone, and that in fact, it’s less important to have nominal allies in presidential palaces who may or may not betray us and more important to ensure that there are more countries in the Middle East that look like Israel—countries whose leadership derives its legitimacy from the people.10
With President Bush predicting that the war on terrorism will be a long campaign, and with the Middle East likely to remain a focus of that war, Israel will remain a key ally and strategic asset to the U.S. Already, there are powerful signs of these two countries’ shared mission. In the 2003 Emergency Wartime Supplemental Appropriations Act, Congress granted Israel an additional $1 billion in military assistance to help it fight terrorism. Congress also approved more than $8 billion in loan guarantees to help Israel’s flagging economy which in recent years has been shrinking due to the crash of the high tech sector and the decline in tourism. Through these appropriations, Congress has literally invested itself in Israel’s future and has signaled to the world that common values dictating common actions link the U.S. and Israel.
Development of U.S. Aid Policies to Israel
The increasing levels of U.S. aid to Israel reflect the consensus among American policymakers of Israel’s growing strategic value as an ideological partner in international relations. The increasingly favorable terms on which Israel receives American aid also reflects the development of this partnership.
During the first 25 years of Israel’s existence, when the U.S. did not consider Israel to be of great strategic value, the aid Israel received reflected that assessment. Of the $3.1 billion that Israel received from 1949 to 1973, roughly half came as military loans between 1971 and 1973, when Kissinger’s policy was beginning to take root. Prior to 1971, Israel had received only $277 million in military aid from the U.S., all as loans.11 Against the backdrop of U.S.–Israel relations, however, this small sum of aid is not terribly surprising. Seeking to avert an arms race that would involve the Soviet Union, the U.S. maintained an arms embargo against Israel from 1947 until 1962, when President John F. Kennedy lifted it with missile sales to Israel. Yet even with the embargo lifted, the U.S. remained ambivalent about the value of Israeli strength, and during the 1967 Six Day War, President Lyndon Johnson reinstated the embargo.12
In 1968, after the Arab League rejected an Israeli peace offer, Congress broke with precedent by pushing the Johnson administration to sell Phantom jets to Israel. This sale marked the first time the U.S. gave Israel a qualitative edge, and since then, Congress has been committed to maintaining this advantage against the array of Arab militaries vastly outmanning Israel.13 This development in U.S.–Israel relations set the tone that carried through the Nixon administration’s policy of building closer relations to Israel. Reflecting the strategic value it attached to Israeli strength, that administration awarded Israel its first large military loans in 1971 and its first military grant during the Yom Kippur War.
Annual aid packages for Israel have held steady in the $2-3 billion range since 1974, although the breakdown of the packages has changed. When the level was first set, the package was pretty evenly split between grants and loans. Military assistance, known as Foreign Military Financing (FMF), slightly exceeded economic aid, known as Economic Support Funds (ESF). In 1981, Israel began receiving its full economic aid in grants, and four years later, all its military assistance became grants as well. By 1987, the amount of military and economic assistance—$1.8 billion and $1.2 billion, respectively—was at the level at which it would remain for 12 years.
In addition to the stable flow of strategic aid through FMF and ESF, the U.S. provided Israel with several packages to help cover the costs of implementing negotiated treaties and troop redeployments. The first such package came in 1979 following the successful conclusion of the Camp David Accords, when Israel received a $3 billion aid package, consisting of $2.2 billion in loans and $800 million in grants, on top of its regular assistance. Then in 1985, Congress approved a $1.5 billion emergency package to help Israel rebound from an economic crisis. Congress approved the most recent special aid package in 1998 after the Wye River Accords, when it gave Israel $1.2 billion, disbursed over three years, to help pay for withdrawing troops from the West Bank and Gaza strip.14
Unlike these special packages, Israel’s annual assistance goes towards specific expenses year after year. After Israel receives them, American ESF essentially return to the U.S. to repay large debts Israel incurred borrowing money from the U.S. to finance its military.15 Today, even after years of repayment, Israel’s debt is still around $3 billion.16 Military aid, on the other hand, is exchanged for goods, specifically weapons. Israel’s annual defense spending amounts to a little over 10 percent of the country’s GDP, or around $10 billion. Of that, American FMF accounts for about $2 billion and is the portion of the defense budget used mainly for weapons procurement from both Israeli and American contractors.17
The size Israel’s annual aid package is not the only measure of its strategic value to the U.S. In addition to receiving more assistance than any other country, Israel receives that assistance on exceptionally good terms. Israel is not required, as most countries are, to account for how it uses ESF. In addition, unlike most aid recipients, Israel receives its ESF and FMF as lump sum direct cash transfers within 30 days of Congress approving the aid package. The U.S. began applying these terms to Israel’s economic aid in 1979, the year of the Camp David Accords,18 and to its military aid in 1991, the year of the Gulf War. These lump sum payments allow Israel to invest the money in U.S. bonds from which it accrues interest, which does not appear in the records as part of Israel’s foreign aid allocation.19
Israel’s use of FMF is privileged in another important way. Whereas most countries receiving FMF must spend nearly all of it procuring American military equipment, Israel may spend 26 percent of its FMF on domestic military procurement, which acts as an enormous boon to Israeli defense industries.20
In addition to the large sum of aid received on exceptionally good terms, several military collaborations reflect the increasingly close connection between Israel and the U.S. Since the late 1980s, the U.S. has provided over $600 million towards the development of the Arrow anti-ballistic missile program in conjunction with Israel. In 2000, Israel deployed the Arrow system, making it the only country armed with missile defense. On the non-defense front, the U.S. Agency for International Development (USAID) manages two separate programs aimed at addressing the developing world’s needs by funding research collaborations by scientists from Israel, the U.S., Arab nations, and developing countries. These programs have received over $180 billion in U.S. support since 1981 and currently fund over 100 grants. By encouraging cooperation between Arab and Israeli scientists, USAID has sought to build Arab-Israeli relations in a less political setting.21
The Future of Aid to Israel
In recent years, the balance of U.S. aid has been shifting towards military assistance as Congress implements an agreement with Israel designed to phase out economic aid. This shift reflects a new goal in American-Israeli relations. In the late 1990s, policymakers from both countries agreed to wean Israel off of economic aid in hopes of making it self-reliant. Critics felt that aid to Israel was propping up a large and inefficient government, and they hoped to liberalize the Israeli economy. This goal, while worthy in the long-term, is currently impractical as Israel is facing grave economic problems related, in large part, to its protracted conflict with the Palestinians.
In 1998, when Israeli ESF stood at $1.2 billion, the Israeli finance minister arranged with Congress to reduce ESF by $120 million annually over 10 years while increasing annual FMF by $60 million. This plan went into effect in 1999 so that current Israeli ESF roughly amount to $600 million and FMF to $2.1 billion. The rationale behind this plan was first expressed as Israeli policy in a 1996 speech by then-Prime Minister Benjamin Netanyahu to a joint session of Congress. Addressing the future of the U.S.–Israel economic relationship, Netanyahu said that, “I believe that we can now say that Israel has reached childhood’s end, that it has matured enough to begin approaching a state of self-reliance…We are going to achieve economic independence.” In stating this goal, Netanyahu had two major projects in mind: ending U.S. economic aid to Israel and reforming the Israeli economy into “a free market of goods and ideas.”22
Although Netanyahu drew no direct connection between the projects, he believed that both were essential to economic independence. Phasing out economic aid would grant Israel that independence in the short-term, while reforming the economy would make the continuation of that independence possible long into the future. From a diplomatic perspective, this approach was brilliant. It allowed Netanyahu to express appreciation for American economic assistance—which he did, calling it “magnificent and munificent”—while announcing its upcoming end.
But Netanyahu’s praise of U.S. economic assistance may belie the real contribution that assistance has made to the Israeli economy. Yuval Levin, an adjunct fellow in political studies at the Institute for Advanced Strategic and Political Studies, a Jerusalem-based think tank focused on promoting free market reforms in Israel, has argued that U.S. aid to Israel, both economic and military, slows economic growth by supporting what Levin calls Israel’s “socialist system.”23 Drawing no distinction between military and economic aid because money is fungible, Levin argues that U.S. aid has allowed the Israeli government to steadily increase spending despite running deficits year after year. By Levin’s calculations, unilateral transfers to Israel such as U.S. foreign aid, combined with borrowing by the Israeli government, allow the government to annually spend $10 billion more than it takes in as revenues. Because much of this additional $10 billion comes to Israel as “free money,” Israel’s debt burden increases only by a fraction of its excess spending. In Levin’s view, this free money allows inefficient government programs and corporations to continue running at the expense of liberalizing the economy.24
Levin also argues that American aid contributes to Israel’s lack of economic self-sufficiency. He observes that despite a sharp drop in Israel’s economic growth rate since 1973, the rate of private consumption growth has not dropped proportionately because a large percentage of the Israeli workforce is employed by the government or by government-owned corporations, which U.S. aid props up. As a result, Israelis are living beyond their means, and according to Levin they depend on U.S. aid to be able to do so. If this fiscal irresponsibility continues and the flow of aid ever stops, Israel’s lack of economic self-sufficiency could jeopardize its stability.25
And yet, in a vicious cycle, the flow of aid makes it likely that this fiscal irresponsibility will continue. Pletka notes that:
Had Israel not been receiving this money, it would have been forced to make hard decisions about how it ran the economy that would have been better for Israel’s long-term stability than getting the money in the first place. Having a stable market economy that employs people and doesn’t have overwhelming inflation is better for the long-term stability of Israel than a possibly undependable billion dollars a year.26
This vicious cycle is fueled not only by aid’s economic effects but by its psychological ones as well. Levin writes that because of aid, “Israel has come to conceive of itself as a charity case, and to live off the kindness of strangers, without in truth needing to do so.”27 This psychological dependence on aid arguably makes Israelis warier of taking the steps needed to liberalize the state’s economy and achieve economic independence.
A brief look at the Israeli economy reveals that economic liberalization basically means economic overhaul. In 2002, government spending was responsible for almost 70 percent of the country’s GDP, compared to about 33 percent in the U.S. for all levels of government. A third of the Israeli workforce is on the public payroll, while another quarter is employed by companies the state either owns or supports.28 Moreover, the state owns or supports many companies including the nation’s only water and electricity supplies, almost all of its military industries, and some insurance companies and hospitals. Beyond that, the government partially owns or subsidizes many companies.29 Besides the revenues its companies generate, the government sustains its high spending with equally high taxes—the top marginal tax rate currently stands at 63 percent but will be reduced to 49 percent by July 2005 under a recently passed tax cut. This current rate creates a tax burden—tax revenues as a percentage of GDP—of 41 percent, 8 percent higher than the average burden of countries in the Organization of Economic Cooperation and Development, a group of 30 nations committed to democratic governance and market economies. On the other hand, this difference might in large part reflect the vastly greater share of GDP that Israel spends on defense compared to most other democracies. Defense spending equals 10 percent of Israel’s GDP. With the United States providing roughly $2 billion towards this total, Israel still must spend 8 percent of its own GDP on defense. This 8 percent share is nearly quadruple what most European powers spend on defense, and this difference may account for much of Israel’s higher tax burden. Nevertheless, the overview of Israel’s economy suggests that despite a strong private sector, the country has many features of a statist economy standing in the way of Netanyahu’s sought-after “free market of goods and ideas.”
Seven years after speaking before Congress as Israel’s prime minister, Netanyahu, now finance minister, has a chance to implement his reforms. Following up on his 1996 speech, when he explained that converting the Israeli economy to a free market meant “free enterprise, privatization, open capital markets, an end to cartels, lower taxes, deregulation,” Netanyahu is in the process of instituting a number of measures aimed at economic liberalization: cutting taxes, privatizing Israel’s national airline El-Al, parts of its electric company, and its two banks, reforming pension plans, cutting government spending, lowering interest rates, and reducing union power.30 These reforms will begin the economic overhaul that in 1996 Netanyahu said would put Israel on the path towards economic independence and that today Israelis hope will draw their country out of a major economic crisis.
What this means for the future of American aid is unclear. Under current plans, economic aid to Israel will cease in five years, but annual military assistance will be $600 million greater than it was in 1998. To experts like Levin who believe the difference between military and economic aid is only nominal, the fact that there is no plan to end aid altogether dampens the hope that Netanyahu’s reforms will fully liberalize Israel’s economy. Moreover, with Israel fighting a costly war on terrorism, there is almost no talk of ending military aid. In fact, quite the opposite is happening: with Israel in essence fighting the same war as the U.S., American assistance to Israel has increased. In an ironic twist for Levin and his like-minded colleagues, Israel’s war on terrorism and the related economic crisis have occasioned both Netanyahu’s liberalizing economic reforms and increased American aid.
Even with the war on terrorism raging, looking ahead one still must ask whether total independence from U.S. aid is a realistic and worthwhile goal for Israel. In addition to figures like Levin, even some of the staunchest supporters of military assistance to Israel agree that at some point financial independence is desirable for Israel. To them, however, the question is one of timing. In their view, to deprive Israel of assistance in the midst of a war and economic crisis would be unnecessarily risky. Considering Israel’s precarious security situation, the margin of error for Israel is too narrow to experiment with removing aid in a crisis period. As Feuer observed, “If they had no external assistance, they would probably have had to be more efficient. On the other hand, they might have lost [a war] one time.”31 For proponents of U.S. aid, this chance can never be so small as to justify risking its realization.
Although aid seems likely to remain a central feature of the U.S.–Israel relationship for the foreseeable future, the same factors contributing to that forecast may also hold the key to Israel’s financial independence years down the road. A successful war on terrorism could mean a lasting peace between Israel and a new Palestinian leadership. This, combined with the possibility of a democracy in Iraq having a domino effect in the Arab world, may create conditions in which Israel need not deter its neighbors’ would-be aggression with military might. On the economic side, many are hopeful that Netanyahu’s reforms will turn Israel’s economy into a free market with a thriving private sector. If this happens and Israel exists as an economic power at peace with its neighbors, perhaps U.S. aid to Israel will become an issue that only historians debate.
Daniel Feith, Harvard Class of 2006, is from Bethesda, Maryland.
1. Kissinger, Henry. White House Years. Boston: Little, Brown, 1979: 558.
2. “U.S. Assistance to Israel.” Jewish Virtual Library. http://www.us-israel.org/jsource/US-Israel/U.S._Assistance_to_Israel1.html
3. Levin, Yuval. “American Aid to the Middle East: A Tragedy of Good Intentions.” Institute of Advanced Strategic & Political Studies (December 2000): 11.
4. Kissinger, 564.
5. Ibid., 578.
6. Levin, 12.
7. Mark, Clyde. “Middle East: U.S. Foreign Assistance, FY 2001, FY 2002, and FY 2003 Request.” Congressional Research Service (March 2002): 3.
8. Sanger, David. “Clinton Breaks an Impasse At the Israel–Syria Talks.” New York Times, (January 5, 2000).
9. Feuer, Marvin. Personal interview. July 20, 2003.
10. Pletka, Danielle. Personal interview. July 18, 2003.
11. Levin, 11.
12. “History of U.S.–Israeli Relations.” WBUR.org.
13. “Fifty Five Years of Friendship.” AIPAC. http://www.aipac.org/documents/Timeline.html.
14. Levin, 12.
15. “Israel” USAID. http://www.usaid.gov.
16. Bard, Mitchell. “U.S. Aid to Israel.” Jewish Virtual Library. http://www.us-israel.org/jsource/US-Israel/foreign_aid.html
17. “U.S. Aid and Israel’s Defense Requirements.” AIPAC. http://www.aipac.org.
18. Levin, 12.
19. Kaplow, Larry. “The Price of Peace: Despite Wealth, U.S. Aid Likely to Climb with Peace Deals.” Cox News Service. September 8, 2000.
21. USAID and Levin, 12.
22. Netanyahu, Benjamin. “Speech by Prime Minister Benjamin Netanyahu to a Joint Session of the United States Congress.” (10 July 1996).
23. Levin, Yuval. “Time to Think Again About Aid.” IASPS Op-Eds. (January 26, 2001).
24. Levin, “American,” 14.
25. Ibid., 15.
27. Levin, “American,” 14.
28. Rose, Tom. “Bibi Does Economics.” The Weekly Standard (10 March 2003).
29. Levin, “American,” 14.
30. Wolf, Martin. “Netanyahu Gets to Grips with Economy.” The Financial Times (9 June 2003).