Washington has provided more than $110 billion in aid over the years, not counting loan guarantees. Last year, figured Gazit, American support accounted for 1.5 percent of Israel’s GDP, 4 percent of the government’s budget and 24 percent of security outlays. Since 2008, all U.S. aid has been for the military, but money is fungible. Israel receives $3 billion annually, three‐quarters of which must be used for the purchase of U.S. weapons. Gazit noted: “While on the face of it, three billion dollars of annual assistance seems fully advantageous, a closer look reveals not a few shortcomings.” Money from America has conditions, most notably the requirement that Israel purchase U.S. weapons, which raises Israeli acquisition costs. Gazit estimated that America’s “gift” may cost around $600 million. That’s a fifth of the nominal “foreign aid.” That money, at least, is primarily a subsidy to U.S. arms makers.
Washington also links aid between Israel and Egypt. The latter typically receives two‐thirds of whatever Israel collects. The transformation across the Nile could upend the arrangement, especially if Cairo abandons peace with Israel, but so far the relationship continues.
Jordan, too, receives bountiful American subsidies—about $700 million last year. Although the Egyptian and Jordanian grants are a mix of economic and military support, again, money is fungible. And that means American aid frees up resources for Egyptian and Jordanian military use. While the danger of either country attacking Israel remains small, Gazit pointed out that Israel “must be prepared for any eventuality—even one of very low probability—of a defensive war on either the Egyptian or the Jordanian front.”
Thus, the more money given by America to Egypt and Jordan, the more Israel must spend on its military. Added Gazit: “With Israel’s comparative disadvantage in terms of relative population (over ten Egyptians for every Israeli), maintaining a qualitative advantage in equipment and weaponry is critical.” Gazit cited researcher Erez Raphaeli in asserting that every extra dollar to Egypt requires an Israeli expenditure of $1.30 to $1.40 to maintain the military balance. In this way, complained Gazit, “Not only does American assistance not provide Israel with an economic advantage, it requires Israel to expend additional amounts from its own internal security reserves.”
There’s another problem with U.S. aid. While bilateral defense cooperation has helped boost the Israeli arms industry, the conditions on American aid do the opposite. Since in some cases the Israeli government has to go with U.S. weapons even if the domestic products were better, cheaper or both, efficient Israeli producers lose government contracts and consequent economies of scale. Israeli companies also have to purchase American raw materials, which raise the costs of Israeli weapons in world markets.
Further, notes Gazit: “Due to Israel’s reputation as a military power, any acquisition choice of Israel’s will instantly increase the demand for that product on the international market. When a foreign country contemplates a purchase from an Israeli arms manufacturer, the question of whether Israel’s own army uses that product often plays into the decision.” Thus, if the Israeli government buys American instead, Israeli companies may lose contracts abroad.
Washington even uses its leverage to limit Israeli overseas arms sales. For instance, in 2000 Congress threatened to reduce aid if Israel provided weapons to China. “American assistance places pressure on Israel in this area, with the resulting economic loss,” says Gazit.
Another impact of foreign aid on Israel is the same as elsewhere—a disincentive to be efficient. The guaranteed payment irrespective of Israel’s defense needs “leaves the system with no incentive to become more efficient,” warns Gazit. Former prime minister Ehud Olmert argued that Israel could cut its military outlays with no harm to its security but that American money reduces the pressure to do so.
Perhaps even worse is how U.S. “assistance” further inflates Israel’s already bloated government. Government‐to‐government “aid” has expanded the overbearing, money‐wasting regulatory state around the globe. Israel is no different.