By: Dr. Sam Vaknin

Also published by United Press International (UPI)
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Its leader seems more comfortable in battle fatigues than in civil suits. He has been long pursuing a policy of bloody oppression and annexation. The regime is often castigated due to rampant human rights violations. The country possesses weapons of mass destruction, though it repeatedly denies the allegations. It refuses to honor numerous Security Council resolutions. President Bush senior once subjected it to sanctions. The United States has already trained its sights on this next target: Israel.
The chieftains of the New World Order have made it abundantly clear that Iraq's capitulation will be closely followed by the official release of a much-leaked "road map" for peace in the Middle East propounded by the "Quartet" - the USA, UK, United Nations and Russia.
 
A series of disclosures in the Israeli media made it equally evident that prime minister Ariel Sharon's crew beg to differ from substantial portions of the foursome's vision.
To demonstrate to skeptic and embittered Muslims everywhere that its motives in waging war on Iraq were more altruistic than ulterior, the Administration will impose an even-handed peace on a reluctant Israel. Should it resist, the Jewish state will find itself subjected to the kind of treatment hitherto reserved for the founding members of the axis of evil - economic sanctions to the fore.
Can it withstand such treatment?
Institutional Investor has just downgraded Israel's 2002 country credit rating to 45th place - seven rungs lower than in early 2000. It is ranked behind Kuwait, Cyprus, Qatar, and Oman. Moody's, Fitch and Standard and Poor's (S&P) has refrained from a further rating action, following a series of demotions in the past two years.
The country's economy - especially its dynamic construction, tourism and agricultural segments - has been weakened by three years of civil strife both within the green line and throughout the occupied territories. This has been reflected in the shekel's and the stock exchange's precipitous declines, by one fifth each. Profits in the banking sector slumped by more than three quarters due to augmented loan loss provisions.
 
A global recession and the bursting of the hi-tech bubble have not helped. Gross domestic product growth in 2000 was a spectacular 7 percent. In the next two years, however, the economy has contracted. The calling up of reservists to active duty, the dwindling of immigration - from 78,400 in 1999 down to 31,491 three years later - and the disappearance of the Palestinian shopper depressed consumption, services and retail sales.
Uriel Lynn, chairman of the Israeli Chamber of Commerce, told BBC News Online, that the country has lost about $2.5 billion "in terms of business product". Defense spending spiked at 10 percent of the budget, double the American ratio and triple the military outlays of the typical EU member.
Social solidarity is fraying. The Histadrut (General Federation of Labor in Israel) - run by members of the shriveled opposition Labor party - declared a labor dispute on Sunday, heralding a general strike. This in response to reforms promulgated by the Ministry of Finance, now headed by a hardliner, the former prime minister Benjamin Netanyahu.
The private sector accounts for 70 percent of GDP in Israel and is already stretched to the limit. Instead, the hard-pressed ministry wants to sack thousands in the bloated public services and cut the salaries and pension rights of the remaining civil servants by 8 percent. Government consumption amounts to one third of GDP and public debt exceeds it.
 
In a reversal of decades of tradition, collective wage agreements will be abolished. The finance ministry is trying to reduce the spiraling budget deficit - now pegged at more than 6 percent of GDP - by $2 billion to c. 3.5-4.5 percent of GDP, depending on one's propensity for optimism.
Netanyahu also pledged to trim down the top marginal tax rate from a whopping 60 to 49 percent and to aggressively privatize state holdings in companies such as El Al, Bezeq Telecommunications, Oil Refineries and Israel Electric Company. He told the Israeli daily Ha'aretz that the fate of an American package comprising $1 billion in extra military aid and $9 billion in loan guarantees depends on such "proper economics".
Trying to balance fiscal profligacy, David Klein, the governor of the Bank of Israel, kept real interest rates high, cutting them by a mere 0.2 percent yesterday to 8.7 percent. Inflation last year, at 5.7 percent, was way above the 1998-2002 average of 3.7 percent.
Partly due to this contractionary bias, more than 50,000 small businesses closed their doors in 2002. According to the CNN, another 60,000 will follow suit by yearend. The number of tourists plunged by a staggering three fifths. Foreign investment crumbled from $11 billion in 2000 to $4 billion last year. 
Unemployment is stubbornly stuck above 10 percent - and double this figure in the Arab street. The State of the Economy Index, published by the central bank, fell for the 30th consecutive month in February. Of 1.6 million employees in the business sector, 61,000 were fired since January 2001.
It is the third year of recession: the economy contracted by 1 percent last year and by 0.9 percent in 2001. Nor is it over yet. Business Data Israel (BDI), a forecasting consultancy, reckons that the damage to Israel's economy of a short war in Iraq would amount to $1 billion, or 1 percent of GDP.
One fifth of the population survives under the poverty line. Strains between well to do newcomers, mainly from the former Soviet republics, and impoverished veterans are growing - as do tensions between destitute immigrants and their adopted homeland. Many emigrate from Israel back to the Commonwealth of Independent States, to Germany, Australia and New Zealand.
American aid - some $2.7 billion a year - largely goes to repay past debts. U.S. Secretary of State Colin Powell has announced in January the U.S.-Middle East Partnership Initiative. Local groups will be encouraged to invest in the private sectors of their countries. But the Partnership is geared to tackle the needy Arab polities rather than the far-advanced and sated Israel.
Consider next door Palestine, now severed from its main market employer next door.
A World Bank report released in early March stated that half the 3.5 million denizens of the Palestinian Authority live under an impossibly depleted $2 a day poverty line. One in two employees in the private sector lost their jobs and GDP declined by two fifths in the first two years of the intifada.
 
The UN Conference on Trade and Development (UNCTAD) warned last September that the economy of the West Bank and the Gaza Strip was drained of up to $2.4bn due to closures, mass unemployment, and damages to infrastructure. "The profound changes that have taken place in the functioning of the economy ... are unlikely to be easily reversed even if stability is attained," the report concluded gloomily.
Israel withholds more than $400 million in back taxes it had collected on behalf of the Palestinian Authority. Business Week predicts that donor aid - more than $1 billion annually at current levels - will dry up in the wake of the Iraq conflict with resources diverted to reconstruct a nascent and oil-rich democracy on the Euphrates.
Hence Blair's sense of urgency. Come victory in Iraq, Israel will face a united "land-for-peace" front, encompassing ostensible adversaries such as France and the United States. Unity on the Palestinian question will salve the wounds self-inflicted on the Euro-Atlantic coalition on the road to Baghdad.
Few place bets on Israel's ability to resist such concerted action, led by the sole superpower. The Economist Intelligence Unit foresee the imminent collapse of Sharon's narrow right-wing government - this despite a modest economic revival.
 
The current account deficit, prognosticates the EIU, should fall to 1.7 percent of a GDP growing, in real terms, by 3.1 percent in 2004 (compared to a rosy scenario of 0.3 percent this year). This may be unrealistic. Exports have sharply plunged to less than $28 billion in 2002, two fifths of it to the USA and a similar proportion to the European Union.
Still, with a GDP per head of about $16,000 (or $20,000 in purchasing power parity terms), Israel is one of the richest countries in the world - particularly if its thriving informal economy is considered and if the global hi-tech sector recovers which is widely tipped to happen. According to Jane's Defense Weekly, Israel is the third largest exporter of armaments, materiel and military services, ahead of Russia.
The country's foreign exchange reserves per capita, at $3500, are higher than Japan's. Its external debt - c. $27 billion - is puny and almost entirely guaranteed by the United States. Only one tenth of it is held by ordinary foreign investors. Israel can withstand years of economic sanctions unaffected - as it has done well into the 1970s. The Jewish state also enjoys the support of a virulently nationalistic diaspora, willing to dip into bulging pocketbook in times of need.
Another scenario, however unlikely, would see the European Union siding with Israel against a bullying United States and its sidekick, the United Kingdom. Last week, Italy's outspoken prime minister, Silvio Berlusconi, normally a staunch supporter of president George Bush, floated the idea of further enlarging the EU to incorporate Russia, Turkey and Israel.
But visionaries like Stef Wertheimer, an Israeli industrial tycoon, talk wistfully of a regional "mini" Marshall Plan. It calls for massive infusions of aid and credit, overseen by the International Monetary Fund (IMF) and the World Bank, into the eastern Mediterranean - Jordan, Turkey, the Palestinian Authority and Israel's minorities - at least until GDP per capita throughout the region surges fivefold, to $6,000 per year.
Such misguided development nostrums are alluring. They cater to the Western misconception that terrorism is born of poverty and ignorance. Removing these alleged causes of violence, goes the refrain, will end all aggression. Throwing money at problems is an inveterate American and European reflex. Prosperity and democracy are keys to stability and moderation, they preach.
But the unpalatable truth is that Israel is the haughty outpost of Western civilization in an area distinctly un-Western and anti-Western. Terrorism is about clashing values and opposing worldviews, not about the allocation of scarce jobs and the benefits of technology parks.
People like Osama bin-Laden are rich and well-educated. Muslim fundamentalists - in between atrocities - provide health, welfare benefits and schooling to millions of the poor and the deprived. They don't seem to think, like Wertheimer and his patronizing ilk,  that higher standards of living negate their mission to oppose American culture, ethos and hegemony by all means, fair or foul.