Israel’s political storms have put radical economic changes on the back burner, writes Alex Brummer
ISRAEL’S economy appears intent on mimicking the Italian model. Despite political assassination, terrorist bombings and reprisals, a soldier running amok on the West Bank and a government, under Binyamin Netanyahu, apparently determined to win prizes for impetuousness and incompetence, the economy is defying gravity.
Only this month the International Monetary Fund (IMF) upgraded Israel’s status from developing to industrial nation. Any one of the political shocks since Yitzhak Rabin’s assassination some 14 months ago would, in almost any other market economy, have deflated confidence. Expansion has slowed, but it would in most economies seeking to defy 15,5% interest rates.
Israeli society has been polarised in the debate about secularisation versus creeping fundamentalism, but business change and economic restructuring continues. Despite the stuttering peace process, which has put hopes for intra-regional economic progress on indefinite hold, life as it was before assassination has not been snuffed out.
“I must admit the temperature has gone down,” remarks Oded Eran, the Israeli foreign affairs official most deeply involved in the economic aspects of the peace process. But it is economic ties inside the region, rather than the liberalisation and globalisation of the Israeli economy, which have been most affected.
Eran points out that a $600-million public offering in New York this month by the Israeli electricity company was over- subscribed and increased in value to $800- million, symbolising international confidence despite the stop-start which led to completion of the Hebron pull-out last week.
minister of Finance Dan Meridor, a cool lawyer and Likud dove, is less sanguine: “Over the last five years investment has been quite unprecedented. Of course, this has to do with the stability of the peace process. If we have 1996 revisited, terror like the buses in February and March, Grapes of Wrath in April and then the tunnel riots in September; then we have a bad year in tourism.” The worry is that the tourist barometer could be an early sign of trouble from the business community.
With a government perceived as weak and vacillating, much of the responsibility for steering the economy has fallen on Jacob Frenkel, who became governor of the Bank of Israel in 1991 after a stint as chief economic adviser to the IMF in Washington.
Frenkel, who was courted as a potential finance minister in the early days of Netanyahu’s cabinet-building, wields a double influence over economic policy. As a special adviser to the prime minister on economic issues, he has sought to impress upon the administration the importance of taming the budget deficit, which careered out of control in 1996. As the nation’s central banker he is seeking to make the inflation rate a totem of his success.
On both counts, 1996 was deeply disappointing, and the determination to restore the stability of budgetary policy and inflation will be critical to achieving medium-term growth of 5% until the millennium.
On the budget front, Israel experienced a British-style phenomenon in 1996 as revenues failed to meet expectations; the deficit ended up at 4,7% of total wealth as against 2,5%.
“This is outrageous really,” says Tsipi Galyam, who runs revenue administration at the finance ministry. She believes that the combination of $7-billion in new taxes and spending cuts – imposed under Netanyahu’s first much disputed budget – will bring borrowing down.
However, Israel’s prospects of shrinking a bloated public sector largely rest on the transformation from the introspective, controlled economy of the 1980s to a modern, liberal economy. This will largely depend on Netanyahu’s ability to push through industrial restructuring and privatisation.
Much to Frenkel’s disquiet it looked as if Israel might slip back into its sloppy inflationary habits last year. After the Peres government conceded some over- generous wage settlements, prices rose in the first six months of last year at a 13 to 14% annual rate before interest rates were ratcheted up, bursting the property bubble and reining in inflation, which fell sharply in the final months of the year.
Frenkel is adopting the British practice of setting an inflation target to prevent the Bank of Israel drifting into the same difficulty again. “I am very impressed with the Bank of England’s targets. They provide much more transparency.” Israel has set itself an inflation range of 7 to 10% for 1997 and a longer-term target which seeks to bring price levels down to average Organisation of Economic Co-operation and Development levels by 2001.
The effort led by Frenkel and Meridor to restore the macro-economic framework will only work if it is accompanied by the correct supply-side policies. This means pressing on with policies to maintain Israel’s technological investment so that new industries such as biotechnology and life sciences can displace declining manufacturing, such as textiles.
With a surprisingly large number of technology start-ups proving successful, the challenge is to provide better private finance flows to replace state support. This, according to industry overlord Shuki Gleitman, means developing a better institutional investment framework, including vehicles for technological development.
The other leg of change is revamping state- owned industries, such as telecoms, transport and electricity, so that the power of the Histadrut trade unions is broken and the enterprises prepared for privatisation.
At the core of the strategy is state phone company Bezeq, now feeling the heat of competition from a newly-licensed European consortium including Deutsche Telecom, and a second group, Zahav, whose main investor is South-West Bell of the United States.
The Thatcherite agenda is at the heart of Netanyahu’s domestic agenda. But with peace in abeyance, radical industrial and economic change has been on the back burner: it was as much as Israel could do to pass the budget.
The realisation that peace and prosperity are inextricably linked is recognised by Meridor, who spent much of the past week trying to persuade Jordan that closer investment and trade ties are essential to the region’s progress.
But with the war of words over Hebron and the West Bank withdrawals bitterly dividing the cabinet, the economy and commerce are navigating by automatic pilot.