JERUSALEM — One year after the Second Lebanon War, northern Israel continues to suffer from high unemployment, high poverty rates and a lack of infrastructure needed to help rebuild the war-torn region. To reverse these conditions, the region needs an immediate influx of capital to create new companies and jobs.
According to a new report by the Milken Institute — which comes one year after the start of the war — this economic transformation can be achieved if both private and public sectors in Israel use existing financial tools that will leverage scarce government and philanthropic funds to create new sources of capital.
"Northern Israel′s economy will continue to suffer without the completion of long-delayed infrastructure and business-development projects," said Glenn Yago, director of Capital Studies and head of the Israel Center at the Milken Institute. "To help pay for these, business and government leaders in Israel must use alternative-financing methods that have proven successful in the United States and elsewhere."
The report, "Financial Innovations for Economic Recovery and Development in Northern Israel," offers several recommendations that came out of a series of Milken Institute Financial Innovation Labs in the U.S. and Israel with representatives from the banking, investment, legal, philanthropic and government communities.
They examined numerous ways to fund these projects and chose three that could be implemented quickly:
- Develop a Northern Israel Recovery and Redevelopment Bond Authority for infrastructure and public-private projects. The use of such bonds — often called municipal bonds — is common in the U.S., but is a relatively new concept in Israel. By expanding their use, Israel could raise previously unavailable capital from private and public sources to help pay for water, transportation, education, energy or other projects.
- Expand the Koret Israel Economic Development Funds (KIEDF) for small-business development. Through its revolving loan fund, KIEDF has successfully put philanthropic funds to work providing loans to small businesses in Israel that previously had difficulty getting financing from banks.
- Develop a northern Israel small-business collateralized loan obligation (CLO). By pooling KIEDF and other small-business loans and using them as collateral, a newly-created security (CLO) can lower the cost of capital and make more loans available that can be directed to northern Israel companies.
Unless this new capital can be created and used to rebuild northern Israel, the region will continue to suffer, because the government lacks enough funds to pay for these projects, and emergency aid is insufficient for longer-term infrastructure and development projects, lab participants said.
Conditions in northern Israel were already poor before the war. The region has high unemployment (11.5 percent, compared to 8.3 percent nationally), high poverty rates (36 percent below the poverty line, compared to 24 percent nationally) and low average income (77 percent of the national average).
The fighting only exacerbated the situation. According to The Federation of Israeli Chambers of Commerce, northern Israel lost about $1.4 billion during the war. Rocket attacks leveled nearly 6,000 homes throughout the region and fires destroyed up to 9,000 acres of forest.
Israel can no longer afford, either militarily or economically, to consider the Galilee as "peripheral," participants said. Northern Israel must be integrated into the national economy — and quickly.
"The inability to integrate the Galilee and northern Israel economically, physically, and demographically could now, as happened before, undermine Israel′s national security," the report warns. "The task of job creation will depend entirely on the speed with which the north′s regional economy is rehabilitated and how quickly the rate of economic development moves beyond prewar levels."
Project partners include the Koret Foundation, The Portland Trust and the Rosalinde and Arthur Gilbert Foundation.
The next step is formalization of a Northern Israel Task Force to complete feasibility studies and begin financing and construction that will create the jobs and infrastructure for the regional integration of northern Israel.
The complete report is available at www.milkeninstitute.org.