Reforms – prospects and impediments

Israel’s last elections proved how right David Ben-Gurion was when he said that, in Israel, whoever does not believe in miracles is not a realist.

Bank Leumi (photo credit: REUTERS)
Bank Leumi
(photo credit: REUTERS)
Israel’s last elections proved how right David Ben-Gurion was when he said that, in Israel, whoever does not believe in miracles is not a realist. In spite of a media almost totally dedicated to making him a “has been,” despite the consuming hatred of our political, media, academic and even business “elites” (Udi Fridan, one of Israel’s top PR men and campaign managers, called Netanyahu “a Satan”), despite the unanimous pollsters’ predictions of a resounding defeat for the prime minister, Netanyahu, the man Israel’s movers and shakers love to hate, won a landslide victory.
Our ruling elites so oppose Netanyahu because they believe he is perhaps the only politician willing to take on the corrupt political and economic system that they constructed, and they fear that he may break it up. They fear that economic reforms, those Netanyahu has already managed to implement and even more so the ones he plans to implement, may finally break the enormous power they wield economically and politically, with their almost total control of the media and their direct and indirect contributions to the primaries of Knesset members. Isaac Herzog, the head of our putative loyal opposition, devoted a big chunk of his maiden speech to an appeal to Finance Minister Moshe Kahlon to jump the coalition boat and have the reforms he leads, that are so vital for Israel’s survival, sink. Such is the animosity for Netanyahu that even the less radical Herzog is willing to cause great harm to Israel just to prevent Netanyahu from succeeding in a task that is vital for Israel’s survival.
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The surprising election results may beget additional miracles if the prime minister’s political skills enable him to navigate his narrow, hard-to-govern coalition. It will be another miracle if at long last, after years of neglect, such an unstable coalition is able to put its many divisions and conflicting interests aside and focus on vital economic reforms that will rid Israel of its dysfunctional and corrupt economic system, or at least restrain it.
Our highly concentrated “system” has impoverished a nation with excellent human capital and corrupted its economy and politics.
Unless we get rid of it, it may endanger Israel’s survival.
There are two political leaders who may be able, if they are lucky and if they manage to put aside partisan considerations, to overcome the immense obstacles that any significant reform meets in Israel from powerful vested interests that protect the corrupt system from which they benefit. They are Prime Minister Netanyahu and Finance Minister Kahlon.
The prime minister is the only top politician in Israel who is interested in economics and understands its crucial significance for the survival of Israel. He led some key economic reforms in the past, notably the reform that broke the Poalim-Leumi duopoly. However imperfect, this reform helped generate five years of five percent annual growth, after decades of no growth and several recessions. It also saw the average income of Israelis double from $20,000 annually to $40,000, while their savings grew from the pre-reform NIS 1.2 trillion to NIS 2.7 trillion today.
Because of strong political resistance from the tycoons and the MKs that support them, the Bachar reform left important parts of the monopolistic financial sector untouched, at immense cost to the economy. Now is the opportunity to tackle them.
Kahlon, as a Likud communications minister, led the very important and successful reform in the cell phone sector, breaking its cartel- like structure and opening it up to competition with great benefits to consumers.
Running independently as head of the Kulanu Party Kahlon promised to first tackle three major issues: the high cost of living, the forbidding costs of housing and the remaining anti-competitive practices in Israel’s financial markets. All are very important and deserve urgent attention. But as Kahlon may soon find out, all three are extremely complicated. Because markets and prices are so distorted in Israel, attempts to modify them by fiscal means may not work as expected. It may not be easy to devise straightforward, implementable solutions for these problems, especially since reforms will meet stiff resistance from many quarters, including politicians, tycoons and their army of enablers, lawyers, accountants, public figures, academicians, media and PR people, and even some “social activists.” No reform will have an easy ride.
It may be politically more opportune then if while work proceeds on the major, more difficult reforms Kahlon also launches smaller, politically more feasible growth-inducing reforms such as the long awaited reform to remove the many obstacles to the formation and growth of small businesses in Israel: excessive regulation, high and complicated taxes and lack of access to credit. There will be hopefully less resistance to a reform that does not directly threaten vested interests and that can bring about a great spurt of growth in a reasonable timeframe, increase employment and cut prices by creating competition.
Other reforms could be launched that will train women and enable them to become more productive at what they do, thus improving their employment prospects and their wages. Women usually occupy the lower rungs of the labor market and are scandalously paid much lower wages than men even when they work in hi-tech. Training them to improve their skills as secretaries, teachers, nurses and saleswomen will increase their productivity and pay. It will grow our economy.
Instead of only mending what is broken in the Israeli economy, in real estate markets, in financial markets and in consumer trade markets, all dominated by monopolies and damaged by government, namely political intervention – all for sure vital and urgent tasks – the simultaneous undertaking of growth-inducing reforms like those mentioned above may create a better political climate and facilitate the implementation of other more difficult reforms by stimulating growth, that like the tide lifts all boats.
The author is the founder and director of ICSEP ( il) an independent public policy think tank.