The Triple Whammy
When the El Aqsa intifada (so called after the famous mosque on the Temple Mount in Jerusalem) broke out in October 2000, it simply added to the woes of the Israeli economy that year. In March, the crash on Nasdaq had signaled the burst of the high-tech bubble and the beginning of the international high-tech crisis. In mid-2000, there were clear initial indications of a slowdown in the U.S. economy (partly as a result of the high-tech crisis), which everyone knew would eventually spread to the global economy.

Since high-tech had by that time become the lead sector of the Israeli economy, and since the well-being of the global economy is crucial for Israel to sustain the growth of its exports, it was obvious that these two elements of the triple whammy -- the high-tech crisis and the global slowdown -- were of most concern at the time. In any case, no one knew then how long the intifada would continue, and, in principle, as opposed to the other two elements of the whammy, the intifada was an event over which Israel could possibly have some control.

Tourism and Construction
Several things occurred to change attitudes regarding the economic effects of the intifada.

Firstly, there was an immediate effect on tourism and construction. Over the past 20 years, Israel has suffered several major episodes of security unrest, and in each case, there was an instantaneous decline in the volume of incoming tourism. However, from the point of view of the severity of the decline, the intifada that began in late 2000 left all previous episodes far behind.

Whereas in the past the decline had been in the region of 30 percent, and it had taken up to three years for the volume of tourism to regain the level prior to the particular episode of security unrest, the outbreak of the El Aqsa intifada brought on an immediate 50 percent collapse, which continued afterwards at a slower pace. Today, close to four years after the intifada began, the volume of tourism is still some 45 percent lower than the pre-intifada level, despite the gradual recovery that has taken place in tourism from mid-2003.

In construction, the problem was from the supply-side -- the supply of Palestinian workers, that prior to the intifada had constituted over 25 percent of total employees in construction. The number of these workers slumped after the outbreak of the intifada and continued to decline thereafter.

True, there were always foreign workers to replace them. In 1999, these workers already made up 24 percent of total construction employment and their numbers indeed increased through 2002. But from early 2003, the government began implementing a strict policy of repatriating foreign workers (particularly illegal workers), who therefore became less available to work in construction. Building contractors continue to complain bitterly about the scarcity of skilled workers, which is holding up construction work.

The Importance of High-Tech
But beyond these immediate effects, it soon became clear that the intifada was dampening the high-tech sector as well, in addition to the strong influence of the international high-tech crisis.

High-tech activity calls, in general, for a lot of international travel, in both directions. The intifada reduced travel from abroad drastically -- for business meetings in Israel, for high-tech conventions, and for exhibitions. Certainly, Israeli business executives could travel abroad for this purpose, but the two-way nature of this travel had become an integral part of promoting the Israeli high-tech city.

It is no wonder that in view of this additional effect, the high-tech sector led the economy into deep recession in 2001-02, just as it had led the economy in the rapid growth year of 2000.

The Overall Effect of the Intifada
What has been the overall effect of the intifada on the economy? In its 2003 Annual Report (published on March 31 this year), the Bank of Israel, in a section titled "The Effect of the Intifada on National Output", refers to the intifada's overall influence. Increased terrorist activity influenced the way of life in the country: people stayed at home more, and thus spent less. Exports have fallen, among other things, because of reduced involvement from abroad in Israel's high-tech sector. Indeed, the economy has been affected in very many ways.

Despite the difficulty of the exercise, the Bank has attempted to estimate, empirically, the effect of the intifada on GDP, which is the best measure of national output, and has come up with the following results: in 2002, there was a loss of 3.1-3.8 percent of GDP, and in 2003 – a loss of 0.7-1.8 percent. These may be small numbers, but the overall loss of national output is tremendous.

Is the Influence of the Intifada Coming to an End?
One of the interesting aspects of these results is the fact that the output loss in 2003 was substantially less than a year earlier. Does this mean that the economic influence of the intifada is winding down and coming to an end?

As already mentioned, incoming tourism has been recovering -- albeit gradually. Retail trade has been improving, which shows that people are out there and consuming. Based on this, there seems to be some perceived change in the terror situation, and indeed there has been a decline in terrorist activity.

In addition, high-tech executives are definitely coming for business visits. This may, of course, be connected with the clear signs of recovery in the global high-tech sector, but, in addition, it seems that they are now less wary about coming to Israel.

One major explanation for this may be the change in the world since Sept. 11 -- the realization that terrorism is a worldwide phenomenon and not restricted to the Middle East: nowhere is considered completely safe. With this mindset, visiting Israel is not necessarily more dangerous than traveling anywhere else.

Were the current intifada to end today, the effect on the growth of the Israeli economy would be extremely significant, especially given the current global revival. This means, of course, that the influence of the intifada has not yet come to an end, but it is not difficult to conclude that the influence has lessened.

Under the current circumstances, we have no choice but to be thankful for small mercies.

Yaacov Fisher is joint founder and Managing Director of I-Biz - Israel Business Information Services Ltd.