During its early years, Israel was a socialist state, inspired by legendary labor Zionist pioneers, and the kibbutz movement was emblematic of its political culture. Import duties were sky high, and state monopolies and trade unions held enormous power. In recent decades, however, Israel has undergone an economic transformation that would not have been possible without Prime Minister Benjamin Netanyahu, says Ron Dermer W’96, one of Netanyahu’s most influential advisers.
Israel’s “economic miracle” required a revolution in the way Israelis think, and Netanyahu’s implementation of major economic reforms over three separate administrations paved the way for that process, notes Dermer. First, as prime minister in 1996, then as finance minister in 2003, and now again as prime minister, “Netanyahu deserves recognition as Israel’s first capitalist Prime Minister,” says Dermer, who is also the author, with Natan Scharansky, of The Case for Democracy: The Power of Freedom to Overcome Tyranny and Terror.
Dermer points to these turning points in Israel’s transformation into a modern capitalist society. First, during Netanyahu’s initial term as prime minister (1996-1999), the country moved to a free-floating currency, and competition was introduced into major Israeli industries such as telecommunications, where calls to the U.S. dropped from one dollar per minute to just 20 cents. Says Dermer, “This competition was made possible by Netanyahu not listening to the ‘Chicken Littles’ and having faith in the free market principles of Milton Friedman…. Competition is good. That simple concept makes Netanyahu, with [Bank of Israel governor] Stanley Fischer, the major economic actors of the last 15 years in Israel.”
Later, when Netanyahu became finance minister in 2003, Israel was suffering from two years of negative growth, which had cut 7% from its GDP. Unemployment was at 11%; the budget deficit was 6%, and the debt/GDP ratio was around 103%. Pressure was growing for widespread of reforms in taxes, spending, pensions, banking and the welfare system. According to Dermer, “Instead of responding to short-term factors produced by the Intifada [Arab uprising against Israel], Netanyahu attacked the underlying problem of too much government. To gain support for his ideas, he had to explain the economic problems to the average person on the street.”
Netanyahu’s strategy, says Dermer, was “to maximize reforms in the face of inevitable resistance, creating a whirling dervish of activity that combined his vision and political power.” With inspiration from New Zealand’s Roger Douglas, who introduced Rogernomics in the 1980s, many reforms were enacted simultaneously: Government spending was capped for three years; personal tax rates were cut from 64% to 49% to 44%. Corporate tax rates were slashed from 36% to 25% to 18%. Pension ages were increased from 60 to 64 for women and from 65 to 67 for men.
As for welfare reform, Israel had seen “the road to hell paved with the good intention of alleviating the poverty of large families. The combination of high taxes and generous welfare had created a disincentive to work, with a Bedouin with four wives and forty children driving a Mercedes. Capping the support at $40 per child addressed the underemployment of Arab women and Orthodox men.” Notes Dermer, these economic reforms helped Israel’s unemployment rate drop from 11% to under 7%, and its debt/GDP ratio to drop from 102% to under 80%. “These are great developments, while meeting our enormous defense needs of 6% to 8% of GDP.”
For all that, “Netanyahu is also challenged with Israel’s historically socialist mentality, which makes it feel like not just economic reform, but revolution, is necessary to change how people think. For example, in the latest budget discussions, cuts were depicted by some as evil, decrying the ‘modern pharaohs.’ This sense of entitlement and socialist culture creates a strong resistance to necessary change.”
Do Dermer’s comments about Netanyahu’s role accurately reflect your experience in Israel? What other factors – and individuals — were responsible for Israel’s transformation into a free-market economy? Was Israel’s emergence as a modern capitalist society inevitable, given the economic impact of globalization, and the need for Israel to compete for foreign investment and trade opportunities against other emerging nations whose economies had been newly opened by similar free-market reforms?
Do you believe the pendulum in Israel has swung too far in the direction of the free-market, given that – as many critics argue – the Israeli economy is now dominated by a handful of wealthy “tycoons” and the companies they control? How should Israeli policymakers respond to the Israeli tent-city protesters who have been demanding that their government make “minimizing social inequalities” one of its top priorities in a new socio-economic agenda?
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