The triumphs and trials of reform

We are reaping the benefits of a brief restructuring period.

By
December 27, 2006 21:51
4 minute read.
binyamin netanyahu monkey 88 298

binyamin netanyahu 88 29. (photo credit: Ariel Jerozolimski)

 
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Israelis are so harassed by making a living, by their dysfunctional government and by increased security threats that they are mostly oblivious of economic developments which can help them meet the many challenges facing them. It is therefore not surprising that few commentators have noticed the amazing fact that despite the continued missile assaults by Palestinian terrorism on Israeli cities, the botched war in Lebanon that exposed all of Israel's north to deadly attacks and cost Israel a mint, and despite political misrule, the Israeli economy has been thriving in the past three years. This, after almost two decades of little growth and several bouts of deep recession that caused widespread impoverishment and aggravated social problems. Among the few who did notice was Haaretz economic and social affairs editor Nehemia Strasler, who enumerated the really remarkable roster of recent economic achievements: The shekel rising against the dollar by 15%; the balance of payments that turned from a chronic deficit to a surprising surplus with exports outstripping imports by $1.5 billion; the $20b. record year for foreign investment, and the growing Israeli foreign currency reserves amounting to $28.5b. Add zero inflation and a growth rate averaging 5% annually, higher than other Western economies; add the 240,000 Israelis who have joined the workforce, lowering the unemployment rate from 10.7% in 2003 to 8.3% this year; add the fact that the Tel Aviv stock market rose by 22% since the end of the Lebanon War and that the Bank of Israel dropped its interest rate to 4.5% and yet the shekel remains high - and you can speak of a real miracle. BUT MIRACLES, even in Israel, do not happen without a reason. "There is a single reason for all these good things," Strasler explains, "a responsible free-market economic policy (that included) budgetary restraints [herein lay the miracle!] a small deficit, tax cuts, reforms, privatization and opening the economy to free movement of goods, services and capital, in short: less government, more business." This is a policy, he adds, "that was greatly accelerated by then finance minister Binyamin Netanyahu… we are now reaping the fruit of his cuts, reforms and privatization." A recent World Economic Forum report on Competitiveness goes further. It raises Israel's ranking on its competitive index from 23rd to 15th place, ascribing this rise to the bold financial market reforms, undertaken by Netanyahu at great political cost. But the greatest compliment to the success of these reforms was inadvertently paid by Prime Minister Ehud Olmert. He boasted that 2006 was the most successful ever economic year in Israel. Olmert forgot, naturally, to give credit to his arch-rival Netanyahu. He also omitted to mention that while Netanyahu was finance minister, he, Olmert, did all he could to obstruct or undermine Netanyahu's reforms by opposing budget cuts, calling for increased budget deficits, and by assisting the bank duopoly fight against financial market deregulation through his ally, now Finance Minister Avraham Hirchson, who was then chairman of the Knesset's Finance Committee. THE TRIUMPH of Netanyahu's reforms was so great that a December issue of the Economist moved Israel 12 slots forward on its index of economic strength, from the 48th to the 36th place. Citing the Economist report, Prof. Amnon Rubinstein, president of the Herzliya Inter- Disciplinary Center wrote: "the heart aches at the thought to what peaks the Israeli economy would have reached had the reforms been continued. What has already been achieved in communications and healthcare could have been extended to other monopolies: electricity, land, construction planning, regulation, etc." Rubinstein mentioned the case of a physical master plan for Hadera that has been languishing for 24 years or for a park in Herzliya that was in the making for 32 years! He observed that the encouraging growth data published by the Economist represented the cup that is half full. Israel's GNP is still low compared to similar Western economies. "Until we remove the stranglehold of Israeli bureaucracy from other sectors of the economy," he concludes, "there is no chance that our GNP will grow." A major impediment to continued reform and growth is not only the strength of Israeli monopolies that exact a monopoly tax on every consumer item of between 30% and 50% on the low salaries that most Israelis earn. It is hard to fight them because of their immense political clout and the support they get from the "social lobby" that continues to advocate a massive welfare state. The lobby's sole concern is to increase governments' budgets so that more money could be allocated to transfer payments which already consume almost half of the governments' close to $70b. budget. Using discredited measurements, this lobby blames growth for increasing a putative "inequality." Dozens of lobbying groups agitate against budget cuts, call for increased government interference and higher taxes, promote collectivist policies through popular "colleges" controlled by self-described Marxists, and even mount violent demonstration against business conferences. They bus in red-flag-waving Histadrut related youth movement members (financed by the Ministry of Education). If these groups succeed, Israel will have no growth though it may enjoy equality in misery and poverty.

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