Israel's Economic Front

NOW that Yasser Arafat, chairman of the Palestine Liberation Organization, has renounced terrorism and recognized the existence of Israel, attention has shifted to that beleaguered Jewish nation. What will persuade Israelis to give up land for peace, the formula that produced a deal with Egypt? Developments in internal Israeli politics are probably the crucial factor. Economic issues will be important, influencing public opinion and the views of government officials.

After a 13-hour cabinet meeting, the renewed coalition government led by Prime Minister Yitzhak Shamir and Finance Minister Shimon Peres moved to avoid a looming economic crisis by approving an austerity program, including sharp increases in the prices of food and other subsidized goods, and a 13 percent devaluation of the shekel.

Defense Minister Yitzhak Rabin agreed to a $67 million cut in the defense budget. Mr. Rabin, pointing to among other factors the year-long uprising in the occupied West Bank and Gaza Strip, had wanted a $500 million increase in his budget.

Estimates differ on the costs of the intifadah. The direct military costs have so far amounted to $222 million, according to a recent report from Jerusalem.

The indirect costs, however, could bring the total bill to nearly $1 billion. Some military reserves are being kept away from their civilian activities far longer than otherwise. Tourism has declined. Exports to the occupied territories have fallen off, since their Arab inhabitants are now far poorer.

Such costs are one factor - mismanagement is more important - behind Israel's economic stagnation and inflation. National output rose only an estimated 1 percent last year. Prices are rising about 18 percent.

Yet the intifadah is a cost Israel can bear. More alarming to Israel would be an increased emigration to the United States as the Israeli standard of living declines, or a division among American Jews over Israel sufficient to threaten the US subsidy to the Israel economy of more than $4 billion yearly. The renewal of the coalition government, however, probably ends that political threat.

It seems likely that Mr. Shamir will respond to the Arafat initiative with some peace move of his own, easing concerns within the American Jewish community. He may even seek a larger American subsidy.

Whether that coalition government will ever be willing to give up most of the West Bank and Gaza in return for peace remains an open question. Israel easily dominates its region militarily. Nonetheless, Arafat will probably have to accept demilitarization of a new Palestinian state to make peace remotely possible.