Ethics@Work: Does Israel need a sovereign wealth fund?

Israel is still a young and growing country, and it is questionable if its economic circumstances will really be worse in twenty or thirty years than they are now.

By ASHER MEIR
Only last year did we obtain confirmation of large gas finds off Israel’s coast, and only a few weeks ago was the Sheshinski Committee's proposal for taxing the gas submitted to the Knesset for consideration. No gas is expected to be pumped in the next few years, only some years later will there be profits, and later yet the “superprofits” subject to the special levy proposed by the committee. But the Knesset Finance Committee is already wrangling over what to do with the money.
Many committee members do not want revenues from gas pumped in the sea to go into the ordinary current revenues of the government. Rather, they want the money to be set aside in a special fund whose permitted uses would be designated in advance.
Many other countries have such special mineral funds; Kuwait has had its own “sovereign wealth fund” since before it was even sovereign, and more recently Norway established its special Petroleum Fund. Both funds manage hundreds of billions of dollars, despite citizenries of only a few million. Eugene Kandel, the head of Israel’s National Economic Council, endorsed starting such a fund in Israel, and later Prime Minister Binyamin Netanyahu expressed his intent to establish one.
Such a fund can serve several purposes, but it can also be subject to several objections.
One object of such a fund could simply be saving up for a rainy day. In the early days of the state, Israel ran up huge trade deficits, as do most young countries (including the United States which ran up trade deficits well into the 19th century). Just as an energetic young couple is likely to take out a mortgage relying on their future ability to earn enough to pay for their home, so an energetic young country is likely to borrow from abroad relying on its anticipated future growth. But in middle age as income reaches a peak couples typically begin to save for retirement. Countries do not retire but the underlying sound idea is that when income is currently higher than it is expected to be in the foreseeable future it is prudent to save. There is a finite amount of gas in the offshore wells, it is likely to run out in a couple of decades and maybe Israel should put a little aside for the future.
Another object is to insulate certain revenues from the rough and tumble of political wrangling. All of us may agree that providing for future needs such as pensions or education is prudent, but somehow in yearly budget negotiations, outlays deemed urgent seem to take priority over those deemed important. Setting up a fund is a way of taking a step back and agreeing that certain funds will be outside the usual annual disputes.
There are also macroeconomic justifications for these funds. If mineral wealth brings in foreign currency it can drive up the value of the local money, harming export industries; by investing the revenues in foreign assets the pressure on the local currency is reduced. If the money is spent too rapidly it can lead to inflation and an “overheated” economy; investing in the fund ensures the money is spent more slowly.
BUT SUCH funds also have their downsides. The saving-up justification is subject to question; Israel is still a young and growing country, and it is questionable if its economic circumstances will really be worse in twenty or thirty years than they are now. The insulation objective is also questionable; Knesset budget disputes may be volatile and sometimes petty, but ultimately we do want public expenditures to be subject to public scrutiny.
Why should the current government be allowed to decide how future governments will spend their income? Indeed, when Finance Minister Yuval Steinitz commented that it is premature to discuss what to do with the revenues since they aren’t expected for years, a committee member reportedly replied that the current government won’t last that long. That is actually a good reason not to designate future uses now.
Another concern is that governments are good at many things, but managing large economic enterprises is usually not one of them. If there is a fund, who will be the fund manager? How much discretion will he or she be given? How will economic interests (maximizing return) be balanced against political interests? Given the dynamic economic and political situation faced by Israel – and by the rest of the world – perhaps it is futile to try to predetermine all of these considerations.
I personally am not convinced by the arguments for a fund. The amount of revenue anticipated is large, but not yet on the scale of Norway or Kuwait; Israel still has foreign debt and it is premature to talk about having foreign holdings; and furthermore the underlying justifications are not fully persuasive. But a little forethought is a good thing and it will be interesting to see where the discussions lead.
ethics-at-work@besr.org Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).