Reform: Prospects and pitfalls
DANIEL DORON May. 4, 2009
Binyamin Netanyahu's recent economic plan has great promise. But it faces obstacles that may undermine its success. Israeli governments have serious governing problems; 75 percent of their decisions are never implemented (perhaps mercifully, since those that are create enough mischief). Netanyahu's extra large government makes governing more complicated, especially since some key ministers have little experience.
The country's monopolistic system creates even greater obstacles. Powerful vested interests, oligarchs, monopoly unions and bureaucrats control the economy. Aided by a media mostly hostile to anything Netanyahu does, they will fight reform ferociously, especially if it threatens the "system" that they so profit by. Unless they can be neutralized, they may defeat necessary reforms.
The reforms' success depends heavily on Netanyahu's unusual (among politicians) economic understanding, and on his even rarer willingness to pay heavily politically to implement them. Past experience teaches, however, that despite his extraordinary achievements as finance minister - Netanyahu saved the economy from an Argentina-like collapse and changed two decades of no growth and deep recessions into five years of spectacular growth - his rivals did manage to prevent the completion of his reforms.
Key media outlets framed him, in a total reversal of the truth, as cruel to the poor and as ruining the public's pensions, when he actually saved the poor and saved Histadrut-run pension funds from bankruptcy. Many also caricatured him as the champion of the rich when in fact he was the only politician who dared challenge their banking duopoly and broke it. Consequently reforms in financial markets and in the ports were not completed.
The Histadrut still fights to squelch the little competition introduced in the ports, and the bankers, with media support, try to reverse the financial markets reforms and to do away with essential boundaries erected between banks, insurance companies and other financial institutions. As the recent collapse of CitiBank and AIG insurance teaches, the absence of boundaries allows serious conflicts of interest and the spread of the crisis to various financial sectors, creating a fearful domino effect.
The global economic crisis is not over yet. Attempts by the American government to restrain it at a huge cost and great risk have not been too successful. The crisis may erupt again at any time, and in an unforeseen manner and scope. Only strong, resilient economies will weather it. Our economy has been spared the worse so far, but it is neither that strong nor resilient.
HOWEVER, THE CRISIS is also a historical opportunity to reform the economy.
Financial markets, especially banks, are still not competitive or efficient. It is vital during this crisis to expand credit, yet it is doubtful whether government guarantees and cash injections will help so long as bankers doubt the ability of their greatest creditors, the oligarchs, to repay their debt; bankers are justifiably worried about the adequacy of their capital base. Only a major efficiency drive can secure the banks. But the bankers and the bank workers union resist it. The government must therefore condition any help for the banks on their becoming efficient and on their helping to complete financial markets reforms rather than obstructing them.
Mass unemployment is another serious danger. Fortunately Histadrut chairman Offer Eini seems like a smart and pragmatic man. He must understand that he can't protect jobs without massive government assistance. In return, he should help with eliminating monopolies and distortions in the labor market, especially in the public sector.
True, monopoly unions control the Histadrut. Yet who but Eini could convince them that it is impossible, during a grave crisis, to preserve a distorted labor market without paying a heavy price in employment and wages. It is also impossible to secure the "social justice" that the Histadrut preaches by discriminating against weaker workers and protecting costly tax privileges for so-called "advanced training funds."
THOSE NEEDING further proof for the severe damage inflicted by our bureaucracy should read the sensational revelations in former accountant-general Yaron Zalika's book The Black Guard. Zalika details the depth and scope of the problem of bureaucracy - its many billions in waste and damages, alongside its strangulating effects. The venomous attacks on Zalika prove that he hit a very sore spot.
Unless our bureaucracy is curbed, it will continue to economically lame us. Instead of devoting their energy to increased production, Israelis will keep spending it on struggles over government hand-outs. Time will tell whether the very intelligent Finance Minister Yuval Steinitz will have enough political clout and experience to control this plague.
Zionism's vision of making the Jewish people productive has faltered in part because our media, part of our left-leaning elite, constantly foments the politics of envy and the culture of "you owe me." It is obsessed with who should get what from government. Public broadcasting is controlled by a sect of economic ignoramuses who deny freedom of speech to anyone who differs with its regressive government hand-out ideology. It had the temerity to cut the prime minister in the midst of his economic policy presentation and insert its biased commentaries, showing its habitual contempt for the public's right to know the facts first.
The government will not be able to implement crucial reforms without public support. Failure to address resistance to its reforms may result in their defeat and weaken the economy in times of crisis and beyond.
The writer is director of the Israel Center for Social and Economic Progress (ICSEP).
www.icsep.org.il 
