Commentary: How the Treasury should help Fischer shore up the economy

Commentary How the Trea

By NITZAN COHEN
September 17, 2009 22:31
4 minute read.

 
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After a long period of silence on the economic front, Prime Minister Binyamin Netanyahu - in a speech in which he addressed some of the nation's most pressing economic issues - repeated his traditional stand regarding the need for more free enterprise in local markets, reducing the breadth of the government sector, easing bureaucracy and improving infrastructures. Netanyahu has built himself a reputation as an economic wizard, thanks to his earlier term as finance minister. But in this round, acting as a PM, he hardly makes any comments on economic issues. His attention is naturally focused on the serious challenges Israel is facing in foreign affairs, especially the growing threat from Iran. There was nothing new in the speech he delivered last week, but the importance of it was in laying out principles for Finance Minister Yuval Steinitz. Steinitz has been enjoying the positive spirit of the recent months, and though he publicly declares that the global recession has led to Israel's improved situation, it seems he likes to believe that his five-month term has been what has made the difference between a complete meltdown of the local economy and a healthy recovery. Steinitz keeps repeating his speech about how passing the budget saved Israel's economy. Even if that were true, and even if the budget and the package deal with the labor unions which enabled it had been designed by Steinitz (and they certainly were not), the minister should understand that by now that is history. What's important now is tackling the three most serious challenges: the deteriorating labor market, the growing inflation - which is about to hit four percent this year - and the deadly bureaucracy which is still burdening the private sector. The finance ministry has done very little so far to deal with any of these problems and has left the Bank of Israel the sole player on that front. It is time Steinitz and his subordinates stop flattering themselves and start helping Bank of Israel Governor Stanley Fischer in a joint effort to shore up the economy. One of these subordinates, Finance Ministry Accountant-General Shuki Oren, has made some headlines this week, attacking the idea of taxing speculated short-term capital inflows in order to stop the shekel appreciation. "How can we even identify a speculator?" asked Oren. He said there is no evidence that the shekel is under a foreign speculative attack. He also doubted the efficiency of such a tax and its ability to support the weakening dollar in the local foreign exchange market. But speculative movements in the foreign exchange market can be identified, and the shekel's appreciation is definitely related to huge speculative activity on the part of foreign players. There are many examples of sovereign interventions in the world's currency markets, from Switzerland to Korea and even here in Israel, when in 1998 Netanyahu and then-BOI governor Jacob Frenkel blocked a brutal attack on the shekel by financier George Soros. While treasury officials live in denial, the Bank of Israel has to deal with the problem all by itself and print tons of money in order to buy dollars and provide some support to stressed exporters. Oren and his colleagues should leave prestige considerations aside and join hands with the central bank officials in order to support the business sector. Taxation on capital inflows is not only technically possible, it will certainly provide some support to the dollar (though a global collapse of the American currency is not something any regulator can stop) as well as additional revenue to the government that, in turn, can allow other tax cuts. There are some who argue that taxing short-term capital inflows is a regression to the old days of a controlled market and that it might hurt the healthy inflows of real foreign investments to Israeli businesses. Israeli public opinion is quite sensitive to threats about withdrawals of foreign investments and "driving away" investors from abroad. Evidence of how much these old fears are still very much alive could be seen in last week's headlines about "a new commercial boycott" of leading Israeli companies, after two foreign investment funds sold their stake in two major companies, Elbit Systems and Africa Israel. An American fund, holding a substantial amount of shares in Africa Israel, decided to sell all stocks after political pressure from a pro-Palestinian organization, which protested against Africa Israel involvement in construction projects in the West Bank. At the same time, a huge Norwegian pension fund eliminated its investment in Elbit on account of the company's role in building the security barrier. The headlines were indeed scary, boding a return to the dark days of the Arab boycott, and most newspapers dedicated significant coverage to these events. But the facts reveal that these events tell us more about the superficial nature of the local media than about the danger of driving investors away. In the case of Africa Israel, the company's grim financial prospects and the serious likelihood of bankruptcy are more than enough of an incentive for a fund to try to minimize the loss from their crippling investment. It is not the settlements in Judea and Samaria that have destroyed Africa Israel and driven away its foreign shareholders, but its disastrous "settlements" in Manhattan and Moscow. The Norwegian fund has recorded a 45 percent yield on its investment in Elbit, not including dividends paid. This is a very impressive return on the money, especially considering today's stock market, so there is really nothing odd in the decision to sell out. Just a case of a portfolio manager reaping the fruits of a wise call. The Israeli economy and Israeli companies have enjoyed a growing reputation in recent years. From the days when treasury ministers had to beg Jewish entrepreneurs to invest some dollars here, we have reached a point where foreigners are waiting in lines to find a place to put their money in. We should make it clear that serious investors seeking a long-term partnership in Israeli ventures will be welcomed, but those looking for a short-term financial windfall had best look elsewhere.

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