Escaping the Curse of Riche$

Rabbi Michael Melchior believes that Israel can harness the revenues from the recently discovered natural gas to create a kinder and more just society.

Historic Opportunity 521 (do not publish again) (photo credit: Flash 90)
Historic Opportunity 521 (do not publish again)
(photo credit: Flash 90)
FOR DECADES, ISRAELIS have watched other countries in the Middle East contend with the blessings and the curses of oil spurting from the ground. What would life be like, they could only wonder, if their country had won nature’s lottery and possessed a bonanza of natural resources.
Israelis can stop wondering. Nature has been generous. Tens of billions of cubic meters of natural gas have been discovered in Israeli territorial waters, with perhaps as much as $300 billion worth of natural resources waiting to be tapped.
But winning the lottery is not always a blessing. Some individuals who won the big prize wasted it on frivolous, uncontrolled spending and ended up worse off than before.
Entire countries can squander their windfalls, too. The phenomenon even has a name: “the resource curse.”
The storyline typically goes like this: After initial rejoicing at the discovery of large resource reserves, the economy booms.
Property prices shoot up along with stock market indices. Large amounts of foreign currency sweep through the country. But this also leads to unstoppable appreciation of the local currency.
Exporting manufactured goods becomes more difficult and local producers cannot compete with cheaper imports. Wages rise, but industries cannot afford to pay the higher wages so they either lay off workers or shut down. The ensuing bust leaves a crippled manufacturing sector, unemployment, inflation, increased income disparities, a nose-dive in investments, higher public debt incurred during the euphoric go-go years and a generally depressed economy.
That is what happened to the Dutch economy in the early 1960s after immense natural gas deposits were discovered off its coast in the North Sea. And there’s even a harsher scenario, more common in non-Western countries with weak public institutions: the spurt of hot money flowing through the economy signals open season for corruption, which eventually hollows out whatever vestiges were left of a functioning, decent and fair government.
It could happen in Israel.
The recent natural gas discoveries off the Mediterranean shores has catapulted Israel into the position of a potential energy exporter. The first successful find of a natural gas reserve was in 1999 at a site called Tetris Sea off the shore of Ashkelon, which is expected to run dry in a few years. This was followed in 2009 by discoveries at the Tamar and Dalit sites off the coast of Haifa, and the major bombshell of the immense Leviathan reservoir a year later. The anticipated overall revenues from Dalit are $2.5 billion, from Tamar over $40 billion, and Leviathan is expected to yield perhaps as much as $80 billion to $90 billion. To put this in perspective, the natural gas reservoirs found so far off the shores of Israel are twice the size of the British natural gas fields in the North Sea. And the sea may contain even more riches.
In March 2010, the U.S. Geological Survey released a report on estimated recoverable gas and oil reservoirs in the Levant Basin, which includes the sea shelf off the shores of Israel, Syria and Lebanon. The report estimated the volume of recoverable oil at 1.7 billion barrels, and the volume of natural gas at 3.5 trillion cubic meters. The total economic value of these reservoirs was estimated at around $700 billion, with 40 percent of that, $300 billion, within Israel’s zone.
That staggering amount of money, relative to a country whose annual state budget is currently only $100 billion, holds both promise and peril.
“THIS IS A HISTORIC OPPORTUNITY,” says Rabbi Michael Melchior, head of the Israel Civic Action Forum, an NGO dedicated to creating “social solidarity” by integrating concepts of a free-enterprise economy with those of a broad welfare state. “It is the single most important social-economic development in the country’s history. We have always been told that spending on social needs is justified and a pressing issue, but that since we are a country with large security needs and no natural resources, it always has to be put off to the future. That excuse can no longer be used.”
Over the past few months, Melchior has been telling government ministers, the governor of the Bank of Israel, senior financial officials, and just about anyone else with whom he has had an audience that Israel must copy the example of the one country that is universally recognized as having extracted the full economic and social benefits from oil and gas – Norway.
“Norway used to be one of the poorest economies in Europe,” explains Melchior, who is from neighboring Denmark “It had net emigration for many years. Most of its economy was based on fishing and ship building.”
As late as 1960, when most of the Western world was enjoying the fruits of 15 years of unprecedented post-war economic boom, cars and houses were still rationed in Norway. But the country’s fortunes turned around after the first indications of oil and gas were found in Norway’s economic waters in the late sixties and early seventies. Today Norway consistently ranks at or near the top of the world on virtually every measure of standard of living, from income per capita to health care to employment. Norway is at the top of the Human Development Index, ranks third in the world in per capita GDP ($53,451), is fifth on the Gini Index of equitable distribution of income and has very low poverty rates.
Unemployment is at 3 percent – a number so low that many economists consider it to be a full-employment situation. In contrast, Israel’s unemployment is between 6 to 7 percent, and the United States is struggling to reduce unemployment at well over 9 percent.
Norway achieved this status by funneling over 90 percent of state revenues from natural resources into a fund and using the proceeds to finance social reform in education, health, welfare and infrastructure.
Which model – Holland or Norway – will Israel copy? According to Melchior, if Israel follows the route marked by Norway, in a short period of time, Israel can transform itself, exceeding even the wildest dreams of its Zionist founders.
MELCHIOR, 57, SEEMS TO BE the ideal person to lead this public action. He is the scion of a Scandinavian-Jewish family that has provided Denmark with no less than seven generations of chief rabbis. After receiving ordination as a rabbi in Jerusalem in 1980, Melchior returned to Scandinavia to take the role of chief rabbi of Norway, continuing in the family tradition.
He came back to Israel in 1986, initially serving as the International Relations director of the Elie Wiesel Foundation for Humanity.
Melchior, a physically large man, is always dressed in a dark-colored suit and a black skullcap, but sports a well-trimmed beard that gives him the look of a “modern” rabbi. He became active in politics through his leadership position in Meimad, a religious- political movement established as a liberal alternative to the National Religious Party.
After Meimad joined an alliance with the Labor Party in the 1999 elections, Melchior was elected to a Knesset seat and became minister of Social and Diaspora Affairs in Ehud Barak’s government, gathering around him a devoted following of activists, many much younger than he, and mostly secular. He continued to serve as a deputy minister in several governments and was a Member of Knesset until the 2009 elections, when he failed to win a seat in the Knesset.
With this résumé, Melchior brings two important elements to the public movement for establishing a national oil and gas fund. As a former government minister who forged excellent international connections over decades, he has direct access to the highest echelons of government and business leaders in Israel and around the world. And as a long-standing Norwegian public figure, he had a front-row seat to the dialogue in that country around the adoption and eventual success of its national fund model.
Yet Melchior says he finds it strange that people turn to him for advice on economic and technical matters. He has, after all, devoted his life to religious and social issues, so debates about taxing natural gas profits and using their proceeds to establish a long-term investment fund do not come to him naturally. It sometimes seems as if the cause found him, rather than the other way around.
“After 10 years as an MK, I decided I want to devote my time and energy to strengthening civil society in Israel,” Melchior tells The Report in an extensive interview that took place in his office in Jerusalem’s Talpiot neighborhood.
“The influence of non-governmental institutions here is much less than it is in other comparable countries. There is a high level of public mistrust of the Knesset and the political parties…The most significant and far-reaching decisions are adopted in small backrooms, in meetings attended by interested parties, often at the public’s expense.
“In Norway, policy differences between political parties is not as great as it is in Israel,” he continues. “It is true that here we are dealing with existential challenges. But mistrust of public institutions is itself an existential challenge.”
While preparing the groundwork for a new project for strengthening civil society and promoting environmental causes, Melchior came upon newspaper articles detailing the natural gas finds. “My immediate thought was, why is this being reported only in the economics section of the press?” says Melchior. “This should be on the front page and discussed vigorously by the public. Instead, it was buried several pages deep in the newspapers.”
Throwing himself into the topic, Melchior then spent two full weeks studying the subject matter in all its aspects, both by extensive reading and by speaking to some of his friends – a list that includes government ministers and governors of central banks from around the world. Following this, he drew up a two-stage plan for a public action group: first, the group would advocate for a greater government take from natural resource sales; in the second stage, the group would concentrate on calling for the establishment of a fund based on the Norwegian model. This became the Israel Civic Action Forum, a broad coalition of social activists, environmentalists and student organizations. “Even the Yesha Council is part of it,” he says, referring to the leadership of the settlement movement.
In bumper stickers and public announcements, the Forum called for an 80 percent government take and ran videos depicting energy companies as greedy giants seeking to overshadow society and democracy on its website. The energy companies involved in drilling responded aggressively.
“They ran a smear campaign against us,” recalls Melchior. “They tried everything.
Anonymous full-page ads in the papers were bought for the purpose.” Melchior even claims that there were publishers who stopped the publication of newspaper articles due to pressures they received from tycoons, but he declines to provide specific details.
The energy companies, while speaking frequently to the media, divorce themselves from the smear campaign and from the violence.
A representative of one of the PR firms that ran the campaign for the energy companies, speaking with The Report on condition of anonymity because, he says, he was not authorized to comment, says, “We had nothing to do with those ads.” In response to a question from the The Report regarding pressure on the newspapers not to publish articles, he says, “We would not do that – we support a free press. We believe that our case is good enough to convince anyone, no matter what else is written.” However, when pressed, he does acknowledge that there may have been some “informal” meetings between investors connected with the companies and senior media personnel.
Despite the negative campaign, Melchior says that over 21,000 supporters of the movement have signed up through the website since it became active in July 2010.
WITH THE GOVERNMENT’S adoption of the Sheshinski Committee’s recommendations (see “Battling for Sunken Treasure” on page 6), the forum seems to be well on track towards attaining its first goal of increasing the government’s take from natural gas mining.
Melchior, however, feels that the rates recommended by the committee are too lenient; he would prefer an 80 percent government take but acknowledges that the recommendations reflect political realities.
But Melchior does not believe that the fight is over, and promises that the forum will continue noticeably pressing for the establishment of a national fund. He is making use of his extensive contacts to conduct in-depth meetings with the Norwegians who set up their national investment fund.
“The oil money in Norway initially went directly into the government’s annual budget,” he recalls. “But a sharp drop in oil prices in 1985 nearly bankrupted the country… leading to a realization that a different approach was needed. The National Pension Fund [as the Norwegian oil and gas revenue fund is called] was established in 1988. This transformed the country.”
All state revenues from oil and natural gas go directly to this special fund, so that the money is safely outside of the mundane political process, and cannot be used by specific parties or special interest groups. The fund is managed and invested by Norges Bank Investment Management, a subsidiary of the central bank; the fund reported an impressive 7.2 percent return on a widely diversified international portfolio in its earnings statement for the third quarter of 2010. An independent ethics council reviews investment and spending decisions. (The ethics council garnered some headlines in Israel a few years ago when it decided to disinvest from holdings in several Israeli construction companies because they were involved in building projects across the Green Line.) All the money in the Norwegian fund must be invested outside of Norway until the day comes in which there are no longer any revenues incoming from oil and natural gas sales. This is meant to limit possibilities for corruption, but it also tames inflationary pressures and currency appreciation.
The Norwegian fund now contains over $500 billion, which, in a country with less than 5 million residents, translates into more than $100,000 for every man, woman and child in the country. Four percent of the fund, about $20 billion, may be withdrawn annually to be spent in Norway, but only on education, infrastructure, welfare and social security.
The combination of such a strong injection of stimulus to the economy and targeted spending on the essential building blocks of any economy provides the explanation for Norway’s extraordinary climb to the top of the world’s economic ladder.
THE CIVIC ACTION FORUM’S vision calls on the government and Knesset to create a National Investment Fund, to be managed by the Bank of Israel or a similar institution, into which all of the state’s revenues from the production of natural gas and oil would be funneled. The fund would be protected by law from political meddling – “preventing the money from being spent on coalition agreements” is how Melchior puts it – and would be used exclusively to finance social reforms in the fields of education, health, welfare, employment, housing, environmental protection and public infrastructure.
Based on his numerous meetings with officials and politicians, including the governor of the Bank of Israel Stanley Fischer and Finance Minister Yuval Steinitz, Melchior says that Israel’s financial leadership is willing to consider this seriously, and there have been reports in the press that Fischer has visited Norway to study the details of the workings of the investment fund. When asked for a comment on this, a spokesman for the Bank of Israel tells The Report that “the Bank of Israel as a policy does not relate to the content of meetings that the Governor conducts with foreign officials.” However, a senior official at the bank, asking to speak off the record, affirmed that Fischer has, on several occasions, expressed support for “the need to direct government revenues from natural gas to a fund that will ensure that the money is spent efficiently, and in order to avoid the development of ‘Dutch disease’ in Israel.”
The same source notes that there have not been any suggestions to date that the Bank of Israel manage such a fund.
Prime Minister Benjamin Netanyahu has gone on record expressing his support for the establishment of a fund. In a speech he delivered on January 18, Netanyahu said, “I have decided to use the gas revenues to establish a fund for Israel’s future, and this fund will be dedicated to three main goals plus another one: education, education and education. Education in elementary schools, education in high schools and higher education. And the other goal is security. We need to safeguard our land.”