Israel's economists warn of dire consequences of proposed judicial reforms

The proposed judicial reform is controversial and faces strong opposition in Israel and within the international arena.

 PROTESTERS AGAINST judicial reform at Dizengoff Square in Tel Aviv, May 13, 2023. (photo credit: AVSHALOM SASSONI/MAARIV)
PROTESTERS AGAINST judicial reform at Dizengoff Square in Tel Aviv, May 13, 2023.

Israel’s leading economists have issued another warning about the short-term and long-term economic ramifications of enacting the proposed judicial reforms. Most insist that achieving consensus through President Isaac Herzog’s talks on the matter is essential, even as some of Prime Minister Benjamin Netanyahu’s allies are saying that the reforms will go through regardless of the outcome of the talks.

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Shortly after Netanyahu took office in January 2023, the Israeli government introduced a controversial plan to reform the Israeli judicial system. The plan has faced strong opposition from the Israeli public as well as in the international arena. The predicted economic impacts of the reforms relate both to the changes to the Israeli judicial system and to the political instability and polarization caused by the government’s attempt to pass the reforms.

At the Israel Democracy Institute (IDI) Eli Hurvitz Conference on Economics and Society this week, IDI President Yohanan Plesner insisted that achieving a comprehensive agreement on the reforms was necessary to safeguard Israel’s economy from negative ramifications.

“We cannot change the rules of the game without a broad consensus,” Plesner said in his speech on Tuesday. “Every day that goes by, we pay the price for this: fewer investments, fewer initiatives, and a weaker shekel. The constitutional process must go hand in hand with a new social contract that will allow us to navigate the next chapters in Israel’s miraculous story.”

Judicial reform would have severe consequences 

Finance Minister Bezalel Smotrich also spoke at the conference. Smotrich, who has been a champion of the judicial reforms, attributed Israel's economic struggles to global trends and said that the Finance Ministry is working to promote growth. 

 Finance Minister Bezalel Smotrich speaks during a Knesset faction meeting on May 29, 2023 (credit: MARC ISRAEL SELLEM)
Finance Minister Bezalel Smotrich speaks during a Knesset faction meeting on May 29, 2023 (credit: MARC ISRAEL SELLEM)

“We at the Finance Ministry are working on a program to grow the market. In the last year, the global economy has been in a crisis,” Smotrich said.

In conversations with The Media Line, experts agreed that the global financial situation is affecting Israel’s economy but insisted that implementing the judicial reforms would have severe consequences as well.

Yotam Margalit, IDI senior research fellow and professor of political science at Tel Aviv University, explained that the judicial reforms will have both short-term and long-term impacts.

“The long-term ones are going to be very severe,” Margalit told The Media Line. He anticipated that the effects—namely increased corruption and decreased oversight of government decisions—will become most evident in about twenty years.

Margalit predicted a nine-percentage-point drop in GDP even in the most optimistic scenario.

Short-term consequences of the reform have already been surprisingly significant, Margalit said. He noted that Israeli markets have decoupled from international markets. The Israeli stock market used to be aligned with the S&P 500, but “since the new government and the introduction of the judicial reforms, there’s already been a decoupling, very much hurting the Israeli economy at a range of about 20%,” he explained.

Zvi Eckstein, dean of the Tiomkin School of Economics and head of the Aaron Institute for Economic Policy, both at Reichman University, said that the political uncertainty caused by the proposed judicial reforms has already had economic effects.

“Even if the judiciary reform or revolution is not passed, it already caused a huge decrease in investment in the Israeli startups, the Israeli companies,” Eckstein told The Media Line. He predicted that the high-tech sector will shrink by about 6% to 7% over the next three years, and that the Israeli economy as a whole will have almost no growth.

Catastrophic effects would be felt within two years

Those factors combined would cause the Israeli per-capita GDP to decrease by almost 1.5% annually over the next few years, Eckstein said.

“That’s devastating, especially compared to the last six years when the economy has been booming because of the high-tech [sector],” he said.

Eckstein explained that these effects will be felt as soon as one or two years from now, seeing as Israel’s economy is currently benefiting from the strong investments that the country brought in over the past few years.

Meir Arnon, an influential Israeli investor and CEO of Focus Capital Group, told The Media Line that he has seen a dramatic decrease in investments from both outside and inside Israel.

“People do not want to invest here,” Arnon said. “Not only [foreign] investors, people who live here are looking around to see for alternatives for themselves.”

The experts agreed that, while the reform talks led by President Herzog were necessary to prevent further damage to the Israeli economy, some damage has already been done.

In the best-case scenario, the talks would lead to an agreement guaranteeing an independent judiciary and preventing a “tyranny of the majority,” Eckstein said. But even if that happens, “it will take a while until we get back to investment in the high-tech sector,” he predicted.

Margalit said that the reforms’ anticipated long-term effects are more serious than the short-term ones that have already started to come into effect. If Israel manages to walk the judicial reforms back, “we clearly could avert some of the more catastrophic effects that are now being talked about,” he said.

Manufacturers Association of Israel President Dr. Ron Tomer said that political polarization is the main issue that needs to be solved to keep the Israeli economy afloat.

“People are less happy to invest in countries where the people are actually confronting one another,” he told The Media Line.

“We are aiming for unity. We want to reunite our people and to work together,” Tomer said.