Israel Needs American Pressure to Adopt Economic Reforms

ROSENBERG, JOEL C.

Israel Needsmerican Pressure to Adopt Economic Reforms American Jewish community leaders have vehemently argued that President Bush is unfair to condition Israel's $10 billion loan guarantee...

...Boris Yeltsin seems to understand that the only long-term hope for his country is radical reform...
...Without major structural change, Israel's economic crisis will worsen dramatically...
...Bard is right—this is an economic issue— which is why the U.S...
...Providing aid to a central government that has already proven its gross inability to use resources wisely is, therefore, counterproductive...
...In 1989 total net foreign direct investment in Israel was less than $100 million...
...From 1950 to 1973, real per capita growth averaged 5.5 percent...
...In its early years, Israel was an economic miracle...
...This drives up land and housing costs by as much as 40 percent, according to Shlomo Schattner, former deputy director of the Israeli Finance Ministry's budget department...
...Such massive government intervention has caused severe economic stagnation in Israel...
...That sends the price of more highly desired apartments in the center of the country—together with overall inflation—skyrocketing...
...Therefore, rather than pressure the American government for massive economic assistance for Israel, the American Jewish community should be publicly encouraging the Israeli government to move boldly and decisively on free market reforms...
...Why should the American taxpayer guarantee loans to Israel when Israel could eliminate the need for these loan guarantees by reforming its economy, saving billions of dollars and getting on the road to real, sustained and significant economic growth...
...In 1975—following the Six Day War, the War of Attrition and the Yom Kippur War—defense spending was JOEL C. ROSENBERG 'ii percent of the GNP...
...International investors see potential for the enormously lucrative market developing in Israel, but they are discouraged by Israeli government interference...
...The same point can be made in Israel's case: Israel wastes so much money now that another $10 billion in loans would almost surely be wasted...
...It also realizes that only with massive foreign investment, a more efficient economy and a strong U.S.-Israel relationship can Soviet and Ethiopian Jews successfully be absorbed...
...As a result, many young Israelis have left for the U.S., Canada, Australia and other free market countries in search of better economic opportunities...
...They remain hesitant to move forward boldly and decisively on their own economic reform package even though it would be infinitely easier, quicker and more successful than anything Yeltsin can come up with for the Soviet economy...
...Perhaps the most important reason behind the government's unwillingness- to implement comprehensive structural change is that Israeli leaders have been spared the full detrimental effects of their unique brand of socialism by American foreign aid, which has totaled nearly $53 billion since 1948...
...By contrast, American and German foreign aid and charitable contributions to Israel topped $5 billion...
...Since 1973 Israel's real per capita growth averaged less than 1 percent per year...
...During the same lime transfer payments soared from 6 percent to lfi.5 percent of the GNP and payment on external debt rose from 0.5 percent to more than 6 percent of the GNP...
...Central government interference in the economy creates inefficiencies, shortages, waste and corruption...
...With additional investment and advanced equipment from the West, Israel could become the medical center of the Mediterranean...
...Rather than such foreign aid and charity, Israel's economy instead needs immediate, comprehensive free market reform to attract billions of dollars in desperately needed foreign investment and to unleash the creative talents of its people...
...Today the Israeli government's budget is 70 percent of the gross national product (GNP) while in 1965 it was only 36 percent...
...What the government does not own, it heavily regulates...
...Nearly 7 percent of the new immigrants are doctors...
...Israel averages about $30,000 per worker, about 75 percent of the average of industrial countries...
...The Atari Corporation, for example, recendy canceled plans to build a $150 million plant and a $75 million investment center in Israel because of excessive government delays in approving their proposals...
...Israel has the potential of becoming the Silicon Valley of the Middle East, specializing in high technology exports and capitalizing on the skills of more than 2,000 top-line Soviet scientists and more than 40,000 architects and engineers who have arrived in Israel since 1989...
...American foreign aid should no longer be granted without strings...
...The average annual per worker output in the leading industrial countries is $40,000...
...AS in other government-dominated economies, decisions made by Israel's state-owned companies often have less to do with profits than with political patronage and back-channel deal-making...
...Rather than reducing government interference in the economy to encourage private enterprise and attract billions of dollars in desperately needed foreign investment, Israeli leaders have raised taxes and enlarged the public sector—proceeding in precisely the wrong direction...
...Israeli productivity is among the lowest in the Western world...
...The American Jewish community realizes that Israel is facing the greatest challenge and opportunity in its modern history...
...Israeli leaders, however, are not so sure...
...And it's not defense expenditures that eats away at the budget...
...The potential infusion of massive Western aid is an obstacle to such reform in both the Soviet Union and Israel...
...The welfare state— in its extreme Soviet form or its muted though still harmful Israeli form—causes people to become dependent rather than productive...
...THL lSRAKt.1 I'OVKkN'MKNT OWNS 93.5 PERcent of the land within its pre-1967 boundaries, which it leases to about 540,000 leaseholders...
...We do Israel no favor by protecting the country from the full detrimental effects of its unique brand of socialism...
...The guarantees should more properly be viewed as an economic issue," writes Mitchell Bard, editor of the Near East Report, the newsletter of the American Israel Public Affairs Committee...
...With some entrepreneurial training, small amounts of capital and the removal of government obstacles to the creation of small, service-oriented businesses, Israel could enable Soviet and Ethiopian Jews to start newspapers and tutoring services, ethnic restaurants and grocery stores, plumbing and electrical services, beauty salons and craft shops...
...The challenges then facing the fledgling nation required central direction...
...In fact, by delaying reform, Israel has cut itself off from foreign investment and is left to rely on foreign aid and charitable contributions...
...Tin* dramatic iisc in Israeli government expenditures actually comes from domestic spending, not defense spending...
...Israel Needsmerican Pressure to Adopt Economic Reforms American Jewish community leaders have vehemently argued that President Bush is unfair to condition Israel's $10 billion loan guarantee request on changes in Israel's settlement policy in the West Bank...
...Until recendy obtaining a building permit in Tel Aviv required 74 separate steps, 20 separate licenses and was known to take up to five years to process...
...George Bush once said, 'Just as a strong Israel is in the national security interests of the United States, so, too, is a healthy Israeli economy...
...Mass Soviet immigration is now overwhelming an Israeli economy ill-equipped for such a burden...
...The Israeli government also employs more than one-third of the labor force, controls the nation's five largest banks and permits the legal operation of 60 monopolies and cartels...
...For months, the Bush administration and Western leaders have been arguing that any American aid to the Soviet Union (or what was the Soviet Union) must be conditioned on or at least accompanied by radical economic reform...
...This also hinders the ability of Israelis to use their land efficiendy...
...Once the new state became established, however, government involvement in the economy grew instead of receding...
...Twenty-five percent of the newly arrived Soviet immigrants have an advanced degree, compared with less than 2 percent of native Israelis...
...At this time, granting aid to Israel without requiring economic reform would merely prop up an economic and political system that lies at the root of Israel's economic crisis and tempers the urgency for reform...
...Between 1965 and 1985, for example, Israeli public sector non-defense consumption jumped from 21 percent to almost 35 percent of the GNP...
...But such aid has also allowed Israel to waste billions on a bloated, cumbersome and inefficient government bureaucracy...
...He won a landslide election by advocating it...
...should condition economic assistance to Israel on major changes in its misguided economic policies, not its controversial setdement policies...
...British Foreign Secretary Douglas Hurd stated it this way: "It's no good to put a lot of coins in a friend's pocket if that pocket has holes in it...
...Economic reform such as massive budget cuts, tax cuts and tax reform, privatization of state-owned industries and land are, after all, in Israel's and therefore America's best interests...
...With the Soviet aliyah (immigration to Israel), Israel could become a magnet for international investment...
...In this way the government decides who gets laud, what price is paid for it and the conditions under which it can be used...
...The government—finally geared up to provide housing for the new immigrants— is building thousands of new apartments in development towns in remote regions of the country—where there are no jobs and where no one wants to live...
...Since then it has steadily declined to less than 10 percent to-diiv, where ii was in 1965...
...The Bush administration should make Israeli economic reform a top priority on its Middle East agenda...
...From an American perspective such aid has been a wise investment: Israel has been a faithful friend in a troubled and turbulent region...
...It owns more than 160 companies, including total or substantial portions of the water company, the electric company, the shipping company, the radio and television stations, the telephone company, the airlines and the railroads, as well as dozens of smaller companies in various fields...
...We should not hesitate to insist that American aid prompt economic reform...
...The Jerusalem Post noted last year that a farmer with cotton fields near Ben Gurion International Airport may be making litde to no profit but, because he leases the land, he does not personally benefit from selling it to someone who could use it more productively...

Vol. 16 • December 1991 • No. 6


 
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