Shimon Peres, Prime Minister during the 1986 economic stabilization plan, once said that the plan's success proved to him, possibly for the first time, that economic theory and forecasts were valid, and achieved their targets.
The stabilization plan operated under laboratory conditions. The government allowed the professionals to write emergency ordinances for salaries both in the business and public sectors, prices, exchange rates, and other subjects. Led by Prof. Michael Bruno and then-Ministry of Finance director general Emanuel Sharon, the team that wrote the plan was able to create a new reality that survived for many months, until the plan's other components were completed.
Today, as 2004 draws to a close, the economic theory being implemented by Minister of Finance Benjamin Netanyahu is being put to the test. Unsurprisingly, it is achieving most of its goals. Some were achieved through market forces, and others through legislation and ordinances.
In this article, I shall try to delineate the main features of the Netanyahu model, which conforms with the principles of globalization, and what changes can be expected during 2005.
The assumptions of the Netanyahu model
Netanyahu sometimes wins admiration on the basis of his charisma, and sometimes faces instinctive opposition, possibly for the same reason, and maybe in reaction to the superior attitude he projects toward his opponents. I will only comment on his economic policies here. Netanyahu's fundamental assumption is that Israel can achieve 4-5% growth by carrying out several measures:
- Cutting public spending and taxes, in order to free up resources for the business sector and boost growth, by increased entrepreneurship and incentives to work.
- Increasing the proportion of the population in the labor force, in order to accelerate growth, by expelling illegal foreign workers.
- Slashing welfare allocations to groups that could join the labor force.
- Gradually implementing the Wisconsin plan, adapted for Israel.
Market liberalization and rapid privatization will boost growth, as has happened in other countries. Countries undergoing liberalization can boost GDP by 1-1.5% a year.
Other measures include reforming education to create long-term conditions for fairly steady and rapid growth, encouraging investment in infrastructures, especially railways, and pension reform to avoid a serious future crisis.
The model's results
Background political, security, and international conditions certainly helped the Ministry of Finance's policy, and explain part of the positive results. The decrease in terrorist attacks within Israel, the US loan guarantees, a favorable international market, and the disengagement plan created a good foundation for the policy's success and more than reasonable results: growth has reached 4%, or 2.4% per capita, a satisfying figure, compared with Israel's norm over the past generation.
Unemployment has fallen from 10.8% to 10.1%, along with an increased proportion of the population in the labor force, a double achievement. If the proportion had not changed, the unemployment rate would now be in the single digits. Israelis have replaced a third of foreign workers, which is better than the global norm. Most of the 100,000 new jobs were created in the business sector.
The improved growth has been accompanied by impressive financial stability, in the form a strong shekel, and a fairly low interest rate, both of which encourage investment. The interest rate difference between Israel and the US has reached an all-time low.
Each of these items can be debated and argued: whether growth is sustainable over time; whether the newly employed are earning reasonable salaries or low ones, in full-time or part-time jobs; whether deepening poverty and widening social gaps are the result of the policies; and whether we're heading in the right direction. There are complex and hard questions, such as whether the low participation in the labor force is due to welfare allocations, a weak labor market, or a combination of both.
Conclusions and recommendations
The new government, especially its Mapai members, must recognize that Netanyahu's policy has achieved most of its goals, and should be pursued, with adjustments to meet national needs in 2005 and 2006. Economic policy should include the following components:
Reforming education on the basis of the Dovrat report, as a means of achieving higher growth rates in the long term. In my opinion, the Dovrat committee correctly made a priority of educational achievement, in order to compete in a global economy. Israel's relative position in education achievements will determine our economic place in the future. The Dovrat committee correctly gives teachers incentives, such as higher pay and an accelerated promotions track, in exchange for achievements, certification, and flexible employment (a delicate term for firing bad teachers). In my opinion, the committee correctly recommends giving school principals greater authority and professional, financial, and educational responsibilities.
The new government should reach more "Netanyahu style" agreements with labor unions, rather than imposing agreements through legislation. Unilateral legislation is sometimes necessary, but in most cases agreement can be reached with the heads of the Ministry of Finance's wages, budget and tax departments.
The new government should remove the threat of the right to strike, including sympathy strikes, enforce the minimum wage, enforce legislation for preserving workers rights, and strengthen the Labor Court.
The government should persevere with welfare cuts, but be generous in allocations for the elderly, handicapped, and youths at risk.
Assuming that growth stabilizes at 4-5% a year, government spending ought to be increased by 2% a year for improving the basket of health services, welfare allocations, and public housing. However, any increase in a consumption item should be financed by a cut in another item, and the new Labor ministers Ophir Pines-Paz and Isaac Herzog should pay attention to this limitation.
The government should plan welfare allocations in an organized manner. In matters of food, clothing, and other basic needs, the government should help various NGOs, but it should take responsibility for dealing with poverty under circumstances where a fifth to a quarter of the population is in severe distress.
In my opinion, Netanyahu's policy should be the basis for the Sharon-Peres government's growth strategy, with certain, mostly social, adjustments, and greater communication with labor unions. In the era of globalization, it is doubtful if there is any real alternative to the Netanyahu model.
Published by Globes [online], Israel business news - www.globes.co.il - on December 29, 2004