Tuesday, September 06, 2005

Milke: Bureaucrats have been the key architects of Israel's economic renewal

Mark Milke for Business in Vancouver

When Benjamin Netanyahu resigned recently as Israel's finance minister in protest over the unilateral withdrawal from the Gaza strip, economic reformers lost their public face. While not the creator of reform in Israel, Netanyahu helped to sell economic changes to the Israeli cabinet and market the same to the public.

He also helped those who wanted to break up Israel's monopolies, deregulate, privatize chunks of the economy and free the state from its past approach to economic development.Ironically, the people responsible for Israel's new economic approach come from a sector where one would least expect to find radical economic transformers.

Who are they?"

Government civil servants," replies Jim Lederman in a recent conversation over dinner in Jerusalem.

Lederman, an Israel-based Canadian journalist for over three decades and analyst for Oxford Analytica, recounts Israel's economic challenges and recent responses to them.

Israel's political situation is reported on daily. But go back 30 years and imagine the task of an entrepreneur in a country with an 85-per-cent unionization rate. Back then, to get a job or obtain health-care insurance, most people were forced to join the labour movement. The result was that the national union, Histadrut, was "the country's biggest conglomerate, employer and health maintenance organization," says Lederman.

When in 1995, the Israeli government took away labour control over health-care insurance for good, "that was the coup de grace to the unions," Lederman notes.

And that, along with previous changes, dropped unionization in Israel to about 40 per cent, according to the Journal of Industrial Relations.

But if that monopoly was tackled, others remained, including a monopoly on access to capital. Lederman says that at one point, "97 per cent of credit came from just two banks."

But the need for reform of Israel's underlying economic structure - the social democratic thinking of which predated Israel's statehood and can arguably be traced to the 1930s - became critically apparent with the collapse of the Oslo peace process when the second intifada began in 2000, and the worldwide collapse of the high-tech bubble. Both events added to the impetus for change.

Enter the civil service.

In their 30s and 40s and educated at the University of Chicago, MIT and Harvard, "five or six" bureaucrats, Lederman argues, took aim at the dead hand of the state and laid the groundwork for deregulation, monopoly breakups in the grocery and banking sector and privatization.

Over the last three years in particular, Netanyahu and the economic reformers began to privatize the nation's ports, the electricity provider, some oil refineries, the state-owned telephone company, shipping line, two airlines and a bank.

The top marginal tax rate was dropped and reached 49 per cent this year from a high of 64 per cent. To reform pensions, Netanyahu sacked the pension fund's union management and replaced them with professionals; he also - note to Paul Martin and status-quo types on the Canada Pension Plan who only raise rates but veer away from the spending side of the CPP - raised the retirement age.

The results of those and earlier reforms (Israel liberalized trade in the 1990s, for example) combined with a resurgent high-tech sector and relative lull in suicide attacks, have revitalized the Israeli economy. This year alone, Israel's stock markets are up 11.8 per cent and its GDP grew by 4.8 per cent compared with this point in 2004. Inflation has been tamed; it now runs at 1.6 per cent.

Still, future challenges remain, including high defence and debt payments and the need for increased competition in a country with a small population and where the main players in a sector know each other too well. In addition, while high-tech is again booming, the need for more diversification with an expansion in the service and manufacturing sectors is crucial lest Israel be a one-trick economic pony.

If Netanyahu returns either as finance minister or as prime minister one day, the public face of Israel's economic reforms will again be more visible.

But Lederman has no hesitation about where a good chunk of the credit should go for getting Israel through the recent five years: "The real heroes of the economy are five or six civil servants."


reasoned_approach said...

from the story:

"note to Paul Martin and status-quo types on the Canada Pension Plan who only raise rates but veer away from the spending side of the CPP - raised the retirement age."

does that mean the Canadian TaxPayer's Federation advocates raising the retirement age?

David MacLean said...

Yes we have recommended raising the retirement age for young people currently in the workforce.

reasoned_approach said...

Yes we have recommended raising the retirement age for young people currently in the workforce.

just young people? so i get screwed and boomers already in the system get to retire at 65?

David MacLean said...

If that's the way you want to look at it, yes. Either way, you are going to get screwed. By reforming CPP you get screwed a little more gingerly.

John Murney said...

Actually, I've had second thoughts recently on lifting the cap on retirement age. It won't make much of a difference - those greedy boomers who are able to will retire early anyhow, and those greedy boomers who blew their bankroll partying in the 70s and 80s will find a way to keep working until they die anyhow.

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