What will the recent elections in Israel mean for businesses and investors, both local and international? In this op-ed, economic analyst and consultant Pinchas Landau notes that over the short run, experts expect pressure on corporate profits to be stepped up — via tighter regulation; more activist consumerism among the general public; new legislation aimed at breaking up conglomerates and ceilings on executive compensation.

As Benjamin Netanyahu labors to construct a viable and stable coalition in the aftermath of Israel’s remarkable general election in January, he is facing the simultaneous need to replace his key economic official. Stanley Fischer announced his resignation from the governorship of the Bank of Israel on January 29, one week after the elections, citing personal reasons for his decision. The much-admired governor has promised to stay on through June 30 to allow the incoming government to appoint his successor and facilitate a smooth transition.

But smooth does not begin to describe the Israeli political and economic scene in February 2013. Netanyahu is the prime minister-designate, but the bashing his own Likud Beiteinu party received at the polls, coupled with the meteoric rise of new parties and leaders, has highlighted the fact that all of the key aspects of Israeli politics — persona, platforms and public opinion — are in a state of flux. The only foregone conclusion left is that the old certainties have crumbled together with their standard-bearers.

Netanyahu knows this better than anyone else after the socio-political upheaval that found expression at the ballot-box on January 22. On Sunday January 20, a scant 36 hours before the polls were set to open, Netanyahu made a last, desperate, gambit to stem the erosion in popular support for the Likud Beiteinu party. He announced his intention to appoint Moshe Kahlon to head the Israel Lands Administration (ILA), the statutory entity that owns more than 90% of the country’s land. The ILA, which decides how much land to sell to contractors, where and at what price, effectively determines the price of land and apartments in the Israeli real-estate sector.

But at 10 p.m. on election day, all three major TV channels broadcast exit polls showing that Netanyahu’s last-ditch effort had had little, if any, impact on the outcome: Likud Beiteinu had captured only 31 of the 120 seats in the Knesset (parliament) — even less than the final opinion polls had predicted. Although this outcome still left Likud Beiteinu by far the largest single party, it represented a major disappointment — and in political terms, a serious defeat — for Netanyahu. The results also represented a major setback for Netanyahu’s ally, Avigdor Liberman, who had served as foreign minister until being forced to resign a few weeks before the election, when the Attorney-General indicted him on a charge of wrongful abuse of his authority.

Liberman is the founder and leader of Yisrael Beiteinu, a party whose primary constituency is the million-odd immigrants from the Former Soviet Union who have moved to Israel since 1990. In a move intended to create a dominant major party of the sort lacking in the existing political line-up, Netanyahu and Liberman had merged their parties at the outset of the election campaign. Likud had 28 seats in the outgoing Knesset and YB had 14, its best-ever result. The two leaders made no bones of their hope and belief that the joint party would exceed their existing combined strength of 42 seats.

Plainly, voters have dashed that hope. To the over-riding question of why that happened may be added a slew of questions arising from Netanyahu’s last-minute move, announcing the appointment of Kahlon: What did he hope to achieve by it — and why did such a shrewd and seasoned campaigner think that this seemingly minor bureaucratic appointment would have a major impact?

A Gambit that Failed

In fact, Netanyahu’s “Kahlon gambit” is a microcosm of the election campaign, which proved to be the most important in at least 20 years. The campaign not only effected dramatic changes in the political landscape — although hardly the ones Netanyahu had aimed for — it also highlighted the enormous shift underway in Israeli society. Kahlon served as communication minister in the outgoing government and, in that role, became a public hero for pushing through a deregulation of the cellular phone industry. That policy change enabled new entrants to bring a badly-needed dose of competition to the telecom market and to trigger a collapse in the price of calls and of the mobile phones themselves.

Kahlon apparently felt that this popularity should gain him a promotion in the next government — and even saw himself as the next finance minister. When Netanyahu made clear to him that he did not share this vision, Kahlon stunned Likud and the public by announcing that he would not run in the next election, but would instead take “time out” from politics. Netanyahu’s announcement that he would appoint Kahlon to head the ILA was therefore a signal that the rift had been healed and that Kahlon was no longer sulking Achilles-like in his tent, but was back in the battle.

Kahlon’s appointment to the ILA was also significant for more than personal reasons — it was not just about the “who”, it was also about the “what”. As noted, the ILA is the linchpin in the Israeli real-estate sector. By making land — and by implication, the construction of apartments and their prices — the focus of his final play in the election campaign, Netanyahu was belatedly admitting that this issue was the central focus of the election.

Amazing as it may seem to outsiders, the Israeli public made clear that in 2013, its primary concern was not the Iranian nuclear threat, nor the threats of further clashes with Hezbollah in Lebanon to Israel’s north, or Hamas in the Gaza Strip on the southern border. Netanyahu, for his part, had made every effort to focus the public on security concerns, where he felt he and his party had a clear edge. Yet, for the first time in Israeli history, an election campaign was focused overwhelmingly on socio-economic issues. The country’s massive security problems and the vexed questions relating to relations with the Palestinians and its other Arab neighbors were pushed into a distant second place.

This reorientation of the political debate was not the result of a clever politician persuading the public to change its thinking. Precisely the opposite was the case: The general public imposed its views on the political establishment. That is why Netanyahu’s “Kahlon gambit” was tried but, being too little and too late, it failed.

The parties and persons who succeeded in the election were those who correctly identified the significance of the grass-roots revolution that burst onto the Israeli scene in the summer of 2011. The winners were those who identified with it and with the young people who conducted it. Their overarching message to the country’s political establishment was, “The old verities of Israeli politics are irrelevant to us; we have a new agenda.”

Three Takeaways

The three takeaways that most clearly emerge from the election all reflect this upheaval in Israeli society. First, the winners and losers lined up on a scale of incumbency (losers) through to “fresh faces” (winners). The biggest losers were Likud and its new partner, Yisrael Beiteinu, because they made the fewest changes to their line-up in both persona and program. At the other end of the scale, the biggest winner was Yesh Atid, a party founded in 2011 by TV host Yair Lapid, who offered the public an attractive electoral list that included people from all walks of life — business, media, academe, the rabbinate and more. Thanks to a late surge in voter support, Yesh Atid (which means “There is a Future”) romped home with an amazing 19-seat haul, making it the second biggest party in absolute terms and the effective arbiter of the composition and policy platform of the next coalition. In one of the many ironies of this election, the apparent winners — Likud Beiteinu and Netanyahu — were the losers; the runner-up will call the shots.

Another big winner was Jewish Home, the remnant of the old National Religious Party, which a young high-tech millionaire named Naftali Bennett had taken over and turned around, as if it were a failing company with a shrinking market share and a soiled brand. Under Bennett’s charismatic leadership and with the help of his deep pockets, Jewish Home succeeded in not merely uniting the national religious constituency, much of which had drifted away to Likud over the previous decade or two, but even reached out to a wider constituency, especially young (and secular) voters in the Tel Aviv conurbation. In the final week of the campaign, Jewish Home fell back from the stunning levels of 15-16 seats that the opinion polls were giving it, perhaps because a chunk of the frothy Tel Aviv vote swung over to Yesh Atid. Still, its 12-seat final showing made it a powerful new player, and its success was the flip side of Likud Beiteinu’s decline.

In terms of the old framework of Israeli politics, with its focus on the future of the West Bank and the Israeli settlements there, Jewish Home is far to the right of Likud, whilst Yesh Atid is pretty much dead center. But in the new politics, in which socio-economic issues are paramount, both are center-right in that they accept and support a market-oriented economy, but they want the economic structure and, most particularly, the social structure to be more equitable. Yesh Atid’s slogan of “equalizing the burden” is the defining phrase for the election, the new politics that surfaced in it and the key issues on which the next coalition will focus.

The burdens that Yesh Atid’s Lapid and Jewish Home’s Bennett both agree must be made much more equal are, first and foremost, that of participation in military or, failing that, national service. The old system, in which a rapidly-growing number of ultra-Orthodox young men are exempted from military service to pursue religious studies while in tandem Israeli-Arab youngsters are also exempted from any form of national service, is anathema to Lapid, Bennett and their supporters. Far-reaching changes in this area are all but certain. These will probably be implemented gradually over the medium term. Still, they will mark a radical change in the structure of Israeli society, making it more inclusive.

The burden-sharing will not stop there. The roots of the election upheaval lie in the outburst of social protest in the summer of 2011. Many people mistakenly thought that this wave of unrest had fizzled, faded and died — but they know better now. That means that the demands for a fairer and more equitable fiscal policy, in which corporations and upper-income earners are not the main beneficiaries of regulations that lower direct taxation while raising indirect taxation, will now be stronger than ever. Netanyahu and his finance minister, Yuval Steinitz, had already recognized the potency of these demands and had reversed course on fiscal policy during 2011–2012. But the new government will be obliged to go further in the areas of taxation and government services. The middle class has served notice, via Lapid and Bennett, that it will not accept the “Republican” policies that Netanyahu and Steinitz have championed.

Left Turn Ahead

The class aspect of the election is important. The implicit “swing to the left” that it points to is another of the takeaways from the election — although its intensity should not be overstated. Further across the political spectrum, the Labour party’s revival under its new leader, Sheli Yachimovich, was stymied, despite — or perhaps because — of her open espousal of social democratic policies and the demand for much higher levels of government spending, even at the cost of a higher budget deficit and greater borrowing. The party did not even approach the 20-plus seats that she had aimed for, ending up with a disappointing 15 and putting into doubt her continued leadership. But to Labour’s left, the avowedly left-wing, politically dovish and economically socialist Meretz party doubled its parliamentary representation to six seats. The Arab-Jewish socialist party Hadash won four seats without difficulty. In short, persistent reports of the total demise of the Israeli left have proven to be not merely premature, but misleading.

The feature of winners and losers — fresh faces and incumbents — is closely tied to the third prominent conclusion emerging from the election, namely that a new generation of Israelis decided to re-engage, by voting and also by actively canvassing for their preferred party. Lapid was probably correct when he said that if the election had been held for people under 35 only, Yesh Atid would have won an outright majority. Indeed, the youth phenomenon was even wider than the class-based one, because it encompassed virtually every party from every section of the Israeli polity, including the ultra-Orthodox and the Israeli Arabs, as well as the overtly right-wing and left-wing fringe parties.

What does all this mean for the business sector and for investors, local and foreign? On the one hand, the short-term consequence is that the pressure on corporate profits via tighter regulation and more activist consumerism among the general public — as well as new legislation aimed at breaking up conglomerates and capping senior executive remuneration — will be stepped up. This will not be merely a fiscal move to plug the budget deficit; it will represent a socio-political move aimed at shifting resources — in a word, redistribution. To this may be added the uncertainty deriving from Fischer’s resignation and the need to find someone to replace him. It will be difficult to find a successor of similar global stature, one who has the standing over both the government and the markets that Fischer commanded.

However, from a medium-term perspective, businessmen and investors can identify what should prove to be more than just a silver lining. The strategy of “equalizing the burden” will lead, in due course, to higher rates of labor-force participation by the two sectors currently responsible for the low (but steadily rising) rate of participation, namely ultra-Orthodox men and Israeli Arab women. It will also lead to more youngsters entering higher education and, if it succeeds in straightening out some of the wrinkles and obstacles that have warped the housing market, it will address the single most powerful factor behind the youngster-driven revolution that generated the election upheaval.

The politicians, old and new, will be more than happy to squabble over who should take the credit for these achievements, if and when these are realized. The alternative, i.e. the absence of significant and visible progress in these areas, will surely lead to an even greater political shake-up in an election that will take place long before the next scheduled date of October 2017.

Additional Reading:

Haaretz: Stanley Fischer — the Israeli Economy’s Single Parent

Huffington Post: Israeli Elections and Foreign Investors

The Guardian: Centrists Gain Ground in Israel