Middle Israel: To Stanley Fisher

Time to clean your stable and put together a plan to downsize Israel's public sector to 40% of GDP.

amotz asa el 88 (photo credit: )
amotz asa el 88
(photo credit: )
It's been just over a year since your arrival in our midst, an unexpected event that confounded cynics, heartened economists and inspired Middle Israelis. The cynics had thought that people of your income bracket and professional stature would never in their right mind pitch a tent in this troubled land, certainly not for a government position that could not compete with what they would otherwise earn. To them, Israel had long ceased to be the post-colonial role model it is to some, let alone the moral beacon it is to others. To them, you offered a refreshing reminder that the Jewish state can still attract not only have-nots from Russia or Uzbekistan, but also well-tailored plutocrats from Washington and London. The economists were also surprised. After all, when did they ever see the chief economist of the World Bank and former head of MIT's Department of Economics climb down from the highest summits of global finance in order to obtain the citizenship, and enter the macro-economic trenches, of a dusty emerging market? And lastly, Middle Israelis, while vindicated in their belief that Israel can become so successful and normal that even established Western Jews will join it, were still concerned for you personally, fearing someone as soft-spoken and understated as yourself would be eaten alive in our notorious public fray. Fortunately, you arrived here speaking a fluent Hebrew that enviably mixed humility and confidence and then demonstrated skill and resolve, steering the monetary wheel and emerging as the government's main economic compass and professional conscience. At that point, joy over a nice Zionist gesture turned into actual economic hope. It was no coincidence that you were appointed by Binyamin Netanyahu, and it was no mistake to perceive you as an additional asset in the ongoing effort to modernize this economy. After all, you had played a central role, as a foreign consultant, in creating the 1985 stabilization plan that began undoing this economy's antiquated socialist foundations. It was, therefore, only natural, even poetic, that two decades on you would return here to help consolidate Israel's economic transformation from backwater to powerhouse. And yet, those who appreciate your Zionism and share your economics must now warn you that time might be running out for you, and that if you don't quickly reassess your situation your governorship might become a tragic failure. THE GOOD news is that this week's scandalous revelations concerning the agency you head cannot be linked to you personally. The bad news is that what has been happening there must end amid much confrontation, and that if you do not immediately tame the calf you are riding it will soon throw you out of the rodeo ring. Tuesday's muckraking headline in The Marker, "Robbery in the Bank of Israel," may have been journalistically tasteless, and the ratio it reported between the average Israeli wage and the average pay at the central bank - one to 10 - may be manipulative, but the fact is that the Bank of Israel, which was meant to be an emblem of financial purity and public responsibility, has been paying too much money, to too many people, for too many years with much too little scrutiny. There is no possible market justification for one in every five of your 835 employees earning (in 2004, the year covered by the Treasury's Public-sector Wage Excesses Report released this week) a monthly NIS 33,400. Moreover, in terms of its public function it is unreasonable for any central bank, in any country, to dominate the list of 20 highest paid public servants. Clearly, this is the incremental result of decades of non-supervision, and it must end. A re-standardization of the Bank of Israel's hiring and payment norms, resulting in actual pay cuts and dismissals, must now be written, publicized, and executed. This thankless task, Mr. Governor, must right now become your most urgent order of business, and I am sorry to say that the media will be out there to verify its delivery. Without this your entire arrival at the central bank, with all due respect to delivering a new Bank of Israel law or even keeping the shekel stable, will have been a fiasco. Yet this is merely the initial, retail portion of your five-year term. The longer-term, wholesale part, the one through which you will hopefully leave an indelible imprint on this economy, should address the broader malaise in which your agency is but a detail, namely the entire oversized, overpaid and omnipresent public sector that so famously congests our economic arteries. AS YOU surely recall from summer '85, then-finance minister Yitzhak Moda'i's plan to use that moment's sense of crisis to drastically shrink the public sector never materialized. And curiously enough, while then-defense minister Yitzhak Rabin delivered the first and last serious defense-budget cut, we still remain today with one of the developed world's largest public sectors and heaviest middle-class tax burdens. For people like you it surely goes without saying that a society that squeezes the wage earner's available income by keeping half the GDP outside the private sector is shooting itself in the foot, if not in the head. Tragically, the new bon ton among a growing number of opinion makers here is to actually demonize the private sector and worship all things public. This is their conclusion from the celebration of greed to which they are witnesses, and which they cannot join. To them, even a disgrace like last week's power failures that actually cost human lives does not entail the Electric Corporation's exposure by deregulating private electricity production, or even just forcing it to cut nighttime power prices, thus creating an incentive to partly shift both household and industry power consumption from the overburdened daytime to the underutilized nighttime. Yes, reforming, among others, the Electric Corporation would mean laying off many of its 13,000 employees. But while you and this newspaper understand that in a liberated economy, where income taxes will drop sharply and available income will rise accordingly, labor mobility will be such that many of those will fairly quickly find new employment, most Israelis just don't understand that high taxes and a bloated public sector were not handed to Moses on Mount Sinai, or that the needy don't have to be helped through a bureaucracy. Someone must explain all this to them and generally disabuse thousands of Israelis of the economic alchemy that is being preached to them by demagogues and ignoramuses. Right now there is no incumbent official more suitable for this educational task than you. In a shaky political setting that in the last decade alone produced eight finance ministers, you represent the stability, impartiality and professionalism which are indispensable for the planning and articulation of a long-term economic vision that our situation demands. Specifically, this means to first show personal example by mercilessly cleaning your own stable, and then proceeding to put together a long-term master plan for downsizing Israel's public sector, say to 40 percent of GDP. Such a blueprint would comprehensively list all of our redundant public entities - from the ministries of tourism, science and culture through overlapping local governments and lavish university budgets to industrial behemoths and numerous regional rabbis - and make the case for shifting their financing to the private, philanthropic or community sectors, all of whose resources will grow as a result of a reduced tax burden. What you said this week, for instance, about the need for raising university tuition, would have been so much better understood if said in such a context. Once written, such a plan would gradually assume a life of its own. It would generate a demand to set an annual public-spending reduction goal, it would make the people understand that beyond their daily abuse by the public sector there actually is an economic promised land, and it would make people understand that the Bank of Israel's employees are no longer there for themselves - but for the public interest.