Israel's economy - good, but not good enough

There's a correlation between economic freedom and wealth, but social justice mustn't be forgotten.

bank of israel 88 298 (photo credit: Ariel Jerozolimski)
bank of israel 88 298
(photo credit: Ariel Jerozolimski)
This week, the Bank of Israel is expected to publish its 2006 Annual Report including a forecast for 2007 and the figures are very impressive. The Gross National Product will increase by 5.1 percent, just as it did in 2006, the business sector output will increase to 6.2%, and the per-capita Gross National Product and standard of living indices will similarly see increases. The achievement of these notable figures is an exceptional success story, one that is all the more remarkable in view of the bleak failure of our feudalist Arab neighbors. But there is a catch. Even if we persist in attaining these admirable results for years to come, Israel will still not become a wealthy nation. We are still far from the per-capita GNP of many developed countries. Likud Party chairman and former finance minister Binyamin Netanyahu, who deserves a great deal of the credit for this recent economic miracle, stated that an annual growth rate of 8% is within our reach. That would make it possible for us to be counted - within a few years' time - among the world's wealthiest countries. So what's keeping us from joining this list of the world's most prosperous countries? According to Washington's Heritage Foundation, national wealth is directly related to the degree of economic freedom. Heritage publishes an annual Index of Economic Freedom. In this year's index, Israel is rated as having the world's 37th freest economy - below Trinidad, Togo, El Salvador, Georgia and Mauritius. Some claim that this index does not measure major data related to education, health and social justice, and that the United Nations' Human Development Index provides a more accurate picture of the situation. Nevertheless, there can be no doubt that there is a clear correlation between economic freedom and national wealth. In the Heritage index, all the free countries are also the wealthiest ones, and all the wealthy countries - with the exception of Italy - are also the freest. Moreover, among the free and rich nations of the world, welfare states par excellence, such as Denmark, Germany and Sweden, are found ahead of Israel. The consensus in Europe is that national economies should be free. This is a view shared even by social-democratic governments. National wealth is needed to support the weaker members of society. As Lionel Jospin, the former Socialist prime minister of France, puts it: "The economy is free; the country is not." A free economy is an instrument for the wealth attainment. But the state cannot free itself of its concern for social justice. WHAT IS keeping Israel from making the leap forward to joining the world's wealthiest countries? According to the Heritage survey, Israel is weak in business freedom and overburdened by unnecessary government control. "Complicated and inefficient bureaucracy makes closing a business difficult. Government spending is high, constituting 40.8 percent of the GDP. [...] Israel's financial sector is still subject to government intervention and control." Those conclusions are framed in diplomatic terms. They don't say outright what we know - that Israel's bureaucracy causes economic development to fail, that entrepreneurs and developers are often abused for no good reason; that almost all land in Israel, including buildings, is controlled by the Israel Lands Administration, and that the planning authorities lag many years behind in making crucial decisions. IF EXCESSIVE regulation is an obstacle to wealth creation in normal countries, in Israel this is even more so. There's something terribly wrong with our regime of supervision and regulation. Consequently, the entire system is paralyzed. Things that work in other economies are paralyzed in the Israeli economy. As an example, negotiations lasted 17 years between the city of Tel Aviv and the ILA over the development of Jaffa Port for tourism, without any results. Only an agreement between the mayor and Ehud Olmert, then the minister responsible for the ILA, put an end to this madness. Yet, to add insult to injury, this agreement was condemned by the State Comptroller's office as an example of the problematic association between "big money and government"! How can any development get off the ground in this ridiculous state of affairs? Israel can boast enormous achievements thanks to large-scale economic reforms, all of which reduce regulation in the areas related to communications, currency, imports and the capital market. But to take that additional leap, the government must expand these reforms in the areas related to land, planning, scientific research and higher education. The chances are excellent that such reforms would enable the Israeli economy to soar to the levels that we are entitled to. Netanyahu's talk of an 8% annual growth are not a pipe dream. True, all of this is still not enough. We also want to see the huge gaps in Israeli society reduced, starting with the working poor. But there is no connection between "too much regulation" and social justice, as is proved by Scandinavia. But social-justice can best be served by means of budgeting, welfare, and via the educational system, rather than by means of excessive regulation. Indeed, the housing shortage suffered by the poorer sectors of society is the direct result of inflated regulation. A Knesset member who wants Israeli society to be wealthier as well as more just should not only refrain from encouraging additional regulation, but should also be doing everything possible to reduce existing red tape. The writer is former president of the Interdisciplinary Center Herzliya, a former minister of education and a former Knesset member.