Bibi Does Economics
ROSE, TOM
Bibi Does Economics Can a former prime minister find happiness reforming Israel's economy? BY TOM ROSE Jerusalem DEMONSTRATING that petty political maneuvers don't necessarily have petty...
...New business starts are a thing of the past...
...In fact, as Sharon was reshuffling his cabinet, his office was putting the final touches on its largest request ever for economic aid...
...Rather than take Sharon's hint to quit the government, Netanyahu took the job Sharon had offered him, finance minister...
...For one out of five Israelis, government assistance is now the sole source of support...
...Another quarter of Israel's workforce is employed by companies either supported or owned by the state...
...Despite having no natural resources, no commerce with its neighbors, and only 6 million people, Israel maintains trade with both Britain and France larger than each of those countries' trade with all of the oil-rich Arab world combined...
...Initially, even Netanyahu's most vocal domestic critics condemned Sharon's maneuver as a trick designed to sideline his longtime party rival at the expense of the national interest...
...Moreover, if the one-third of Israel's economy not under the direct control or protection of the government could be judged alone, it would rank as one of the most competitive and innovative in the world...
...But a few hours later, something even more shocking happened...
...BY TOM ROSE Jerusalem DEMONSTRATING that petty political maneuvers don't necessarily have petty outcomes, last Thursday's decision by israeli prime minister Ariel sharon to reshuffle his cabinet may prove to be one of the most important of his career and a huge step toward victory in Israel's 5 5-year war for legitimacy, permanence, and peace in the Middle East...
...It would be a mistake for American policymakers to conclude that Israel no longer needs or deserves American assistance, even though its current request may well merit conditions or modification...
...The key to securing Israel's economic future lies in expanding its potent private sector...
...one out of three of Israel's workers is on the public payroll...
...The threats Israel faces are real...
...As long as Israel can count on being bailed out of an economic mess largely of its own making, it will refrain from the changes necessary to propel it to prosperity...
...Since the United States already provides roughly $1 billion a year in direct economic assistance, the latest "emergency" request, if granted, would double the level of American economic aid...
...In the six years after Netanyahu became prime minister, Israel's GDP doubled...
...The Tel Aviv stock market reacted with a nearly 5 percent rise, its single best performance in more than three years...
...It understood that Israel's most pressing challenge may well be not its fight against Palestinian terror, but its fight to stave off economic collapse...
...Another third is devoted to transfer payments to Israel's protected classes and direct assistance to the poor, leaving less than 10 percent for everything else...
...In fact, with a per capita income of nearly $18,000 a year, Israel is one of the richest countries in the world...
...The independent Central Bank has refused to cut interest rates, while the government has raised taxes and spending and halted privatizations...
...backed loan guarantees and $4 billion in direct cash assistance paid out in $1 billion increments over four years...
...Today, few countries have larger state sectors, higher marginal tax rates, or more lavish social welfare systems than Israel...
...At first, Sharon's decision to dump Foreign Minister Benjamin Netanyahu in favor of a lightly regarded Likud party insider named Silvan Shalom sent shock waves through a country seldom phased by the machinations of its political class...
...One Israeli political leader understands this problem better than any other: Benjamin Netanyahu...
...Israel's current request is for $8 billion in U.S...
...Israel's response to its economic "perfect storm" has been to make it worse...
...And now, because Netanyahu assumes the mantle of finance minister in a Sharon government that for the first time excludes small fringe parties with their extortionist demands, the two longtime rivals have a real chance to bring about desperately needed reforms...
...But maybe the time has come for the United States to try helping in a different way: insisting on reforms in return for new economic aid...
...His tenure as prime minister from 1996 to 1999 marked the first time in Israel's history that the government's share of GDP actually shrank...
...At $130 billion, its GDP is larger than those of six current and all ten applicant E.U...
...An exploding budget deficit combined with a state-supported banking monopoly dangerously close to insolvency has rendered commercial credit all but nonexistent...
...Although better known for his diplomatic experience and anti-terror crusade, Netanyahu is an MIT-educated economist...
...member states...
...have been able to maintain the kind of unsustainably extravagant socialist infrastructure that European, Latin American, and East Asian countries have been jettisoning for decades...
...Not surprisingly, Israel faces its deepest economic crisis since independence...
...Yet as bad as things are, it would be a mistake to think of Israel as a third-world backwater...
...Maintaining the country's strength and stability in a volatile Middle East still depends on its ability to obtain assistance from the United States...
...Half of Israel's children live below the official poverty line...
...Exports, upon which Israel depends for half of its growth, have declined in real terms despite a 25 percent devaluation of the shekel against the dollar...
...Prohibitive interest rates have led to a steep decline in consumer spending and devastated the housing market...
...Until now, successive Israeli governments have managed to avoid choosing between economic reform and economic collapse by turning to Washington...
...He initiated Israel's first attempt to privatize state industries, sought to reduce regulatory burdens on small business, and was the first prime minister openly to advocate significant tax cuts...
...From agriculture, medical equipment, and research to high-tech itself, Israeli businesses lead their fields...
...In 2002, government spending accounted for nearly 70 percent of Israel's economic activity...
...In Jerusalem alone, one third of all retail businesses have folded since the renewal of terrorism in September 2000...
...Unemployment is at an all-time high...
...Half of the government's $80 billion budget is spent on salaries...
...But the only way to do that is to shrink the bloated public sector, which expanded in part to fund the various constituencies represented by the small political parties whose help the large parties need to form stable governments...
...Rather than declining as a share of GDI, Israel's government sector and tax burdens both continue to grow...
...Thanks in part to continued generous financial support from the United States, successive Israeli governments Tom Rose is publisher of the Jerusalem Post...
...America could help, with encouragement—or perhaps even by conditioning some of its further economic aid on policy changes that would benefit Israelis and serve Americans' interest in a strong Israel...
...on average, Israelis face a full-spectrum tax burden of more than 60 percent...
Vol. 8 • March 2003 • No. 25
