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THE ISRAEL REPORT

January/February 2001
Western Wall

Sharon's True Challenge

By Daniel Doron

(February 15) - Those obsessed with the putative peace process keep asking what Prime Minister-elect Ariel Sharon can do to put it back on track; as if only further Israeli concessions, rather than less Arab radicalism, will lead to peace, and as if an instant political solution is the only way to build peace, or the exclusive burning task facing Israel.

Yet the danger to Israel may come from internal as much as from external causes, especially from a declining Israeli economy. This may explain why Sharon, considered the last Mapainik - namely a statist who believes, like David Ben-Gurion and his followers did, that the government is capable of solving most problems, economic, social, as well as political - came out with such a surprising endorsement of an open, competitive market economy based on price stability, a restrained budget, reduced taxes, etc.

To succeed in even some of these laudable tasks, we will all have to internalize the possibility that lack of economic growth may not only severely aggravate social problems, but can also negatively affect Israel's security.

A protracted low-level war that the Palestinians may wage against Israel will require significant additional outlays on security. So will the far more serious danger from rogue states armed with nonconventional weapons. To realize how important a vibrant economy is to security, it is enough to note that our economy's almost-zero rate of growth in productivity resulted in the loss of close to $100 billion of product over the last decade, the equivalent of 50 years of US military aid.

Economic growth must therefore be a vital prime objective of a Sharon government, especially since the export-dependent Israeli economy is threatened by the world economic slowdown, and especially by the hi-tech slump. In the last two years, hi-tech exports saved Israel from a dangerous balance of payment deficit.

Growth cannot be attained without a drastic reduction in the role of government and of the huge, wasteful public sector. They not only gobble up about half the GNP, but impose unbearable costs through interference and "regulation." It takes, on average, six years for any real-estate project to go through the bureaucracy's mill. Since construction is still to the Israeli economy what the car industry was to the US - an engine of growth - getting it out of its slump is essential.

More ominously, Israel's "goose that lays the golden eggs," the hi-tech sector, may soon not only lay much smaller eggs, but shrivel or migrate from Israel because government incorporation laws, taxes and regulations make it impossible for it to compete on world markets.

Sharon should not only maintain budgetary restraint, as he promised - a most difficult task considering extravagant coalition demands - but actually cut the wasteful $70b. budget to really reduce the government's damaging role. He must also shift some of the 30 percent of the budget now squandered on mostly anti-productive transfer payments to desperately needed investment in infrastructure.

Former prime minister Binyamin Netanyahu proved that where there is political courage, a significant cut in the budget is possible.

Financial markets must urgently be reformed to reduce their control by the banking oligopoly that also owns much of the country's real assets.

Credit is the life blood of an economy. Too much of it is now allocated to cronies who use it for highly leveraged purchases of privatized government assets, thus increasing the concentration, in the hands of a few families, of our lumbering monopolies, cutting vital competition and increasing the cost of all basic commodities and services by 30 to 50% above world levels.

Discriminatory credit allocation squelches small business, making the Israeli economy highly inefficient and structurally lopsided. It prevents the periphery from growing and is responsible for much of the unemployment there.

High marginal taxes levied at very low levels, high added value and social and health insurance taxes, plus hundreds of levies and import duties, further reduce employment opportunities and cut savings. Attempts to lower taxes have floundered, not only because of opposition from powerful tax-privileged groups, but also because reforms were conditioned on being revenue neutral, thus failing to cut a huge public sector. Such "reforms" only shift the tax burden, with little impact on growth.

Higher productivity is also dependent on an urgent reform of Israel's Byzantine labor markets, burdened by antiproductive rules and regulations imposed by socialist governments at the behest of the Histadrut.

But for any such reform to happen, Sharon will have to first tackle the inordinate power of the bureaucracy, which, together with the oligarchy, manages to block any reform.

It will take all his "bulldozer" power and political savvy to do so, but, if he succeeds, he will deservedly be crowned as Israel's true savior.

©2001 - Jerusalem Post
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