Man on a Mission 3: Israel's Free Market Miracle
Man on a Mission 3: Israel's Free Market Miracle
Book Review—Benjamin Netanyahu's Bibi: My Story
“There was in fact no conflict between free markets and social justice. The first made the second possible.” —Benjamin Netanyahu
When I left off this review of Benjamin Netanyahu’s new autobiography, Bibi: My Story, Netanyahu had served a term as Prime Minister, but failed in his 1999 reelection bid, thanks in part to the machinations of US President Bill Clinton. Now it was 2003, and he accepted the offer from Prime Minister Ariel Sharon to serve as Finance Minister.
It was a hell of way to make a political comeback.
Relations were never warm between these two men. Rivals for the leadership of the Likud Party, they neither liked nor trusted each other. A top party insider said that “Sharon’s attitude to Bibi was always one of contempt and revulsion, but it was always blended with admiration and with fear.”1 Bibi was equally diffident about Sharon. Though he considered his new boss “one of Israel’s greatest generals,”2 he was chronically suspicious of Sharon’s motives and railed against the PM’s “brazen ingratitude” for failing to acknowledge Netanyahu’s role in getting him elected.3
When Sharon offered him the finance portfolio, Netanyahu described the offer as a “shocker”:
No one wanted to get close to the Finance Ministry because in 2003 Israel was in its deepest financial crisis in decades. Given the challenge of taking over a godawful mess, I had some serious thinking to do before I gave an answer. The terror attacks of the second Palestinian Intifada and the dot-com collapse had taken their toll. Growth had been negative for two years in a row, unemployment soared, and the average personal wage dropped by a staggering 6 percent in 2002. Foreign investment was fast drying up.4
Indeed, in Netanyahu’s view, and many others’, it was a trap:
In the midst of this economic collapse, Sharon’s surprising offer to me to take the Finance Ministry was immediately judged by all as a political masterstroke. If I was harebrained enough to take the job, the pundits said, I would most likely fail, thereby removing from the scene Sharon’s main rival for the future leadership of the country. And if by some twist of fate I succeeded, I would save Sharon’s government and allow him to take the credit.5
For these reasons, his friends advised him to reject the offer.
But Netanyahu was, as ever, a man on a mission. Despite the risks, he could not pass up the opportunity to strengthen his nation by reshaping its economy. “Fighter jets, tanks, drones, submarines and intelligence cost a lot of money,” he reasoned in a conversation with his friend, advisor and future ambassador to the US, Ron Dermer.
We can’t build military power without first building economic power, and the key to that is free markets and advanced technology. The combination of military and economic power will give us diplomatic power. Many countries in the world, including Arab countries, will be interested in forging ties with us when we become world leaders in civilian technology and military intelligence. If we combine all this with our ability to influence US policy through public opinion, we’ll quickly climb the ladder of nations. We will walk among the giants.6
Netanyahu had already enacted some reforms to free Israeli markets from government control during his 1996-99 stint as prime minister.
I followed a simple rule: Whenever possible, remove barriers to trade. Money, trade and investments generally flow to the freer economies and away from the more controlled ones.
So do customers, as competition drives down cost.
This was evident when we introduced competition in fixed-line international telephone calls soon after I got into office. In one week the cost of calling abroad went down by 80 percent, and it has stayed down since. Widespread usage followed and it was more equitable. Now people from the poorer neighborhoods or development towns could easily call their Israeli relatives and friends in Los Angeles or New York…
We achieved similar results by introducing competition in public transportation, enabling private bus lines to compete with Egged, the mammoth publicly subsidized bus cooperative that reigned supreme for half a century. Passengers paid considerably less on the privatized lines and enjoyed better service.7
But his "most important reform" of these years was the repeal of “third-world” currency controls. At that time, the exchange rate for the Israeli shekel was set by the central bank, whose permission was needed to take more than $7,000 out of the country. “This made even the simplest international economic transaction bureaucratic hell.”8
When Netanyahu proposed doing away with such controls, the experts, predictably, predicted disaster. “A mountain of foreign reserves would move out of the country and the shekel would become worthless,” they warned.9 Netanyahu went ahead anyway.
On May 14, 1998, on Israel’s fiftieth Independence Day, I lifted nearly all restrictions.
At first nothing happened. I breathed a sigh of relief. But then money did begin to move in big amounts. Except that it moved into the country, not out of it. As foreign markets appreciated the liberalizing policy we initiated, the shekel’s value stabilized.
Thus in one historic decision, my government brought to an end five decades of misery for millions of Israelis. They would no longer have to hide dollars under mattresses or be limited in making international bank transactions. They lived in a free country, and they were now allowed to do with their money whatever they saw fit.
The shekel was now a free-floating currency and could be traded anywhere in the world. For the first time since the founding of the state, Israelis were able to take their money out of the country as they pleased.10
Repealing currency controls and liberalizing the bus and international telephone markets would turn out to be just the first steps in Israel’s free market revolution. During his tenure as finance minister, from 2003 to 2005, Netanyahu and his team of senior officials—all of whom had experience in the private sector—would introduce a sweeping array of reforms and successfully guide them through the political process:
Cap government spending
1% annual growth rate target
Limiting “private bills”—what we call “earmarks” in the United States
Reduce the public sector workforce by attrition
Slash taxes
cut marginal tax rates across income levels, including reducing the top rate from 60% to 49%.
cut the corporate income tax rate from 36% to 24%.
reduce the value-added tax
eliminate sales taxes
Privatize government-owned industries, including the national airline, El Al, the shipping company ZIM, the cell-phone monopoly Bezeq, and the Israel Discount Bank.11
Reform welfare—including cutting the allowances for each additional child after the second one.
Vastly improve the throughput of Israel’s ports by breaking up and privatizing the government Port Authority
Reform pensions
raise the retirement age for men from 65 to 67 and for women from 60 to 64.
drastically cut back the number of government bonds provided to the nation’s tottering union pensions. This required the pensions to invest in infrastructure projects and the private sector instead. “In one fell swoop this reform would save future pensions, create a bond market and strengthen the stock market.”12
Full disclosure: Netanyahu’s reforms did not leave everything to the free market. There was considerable government investment in STEM education, as well as infrastructure like highways and rail lines. But the overwhelming majority took the economy in the direction of less government control.
In any case, before these reforms could pass the Knesset (Israeli parliament), Bibi had to sell them to the public.
I talked in Part 2 about Netanyahu’s early experience in communicating to the public—frequent appearances on Nightline while he was Israel’s Ambassador to the UN. This experience served him well as finance minister. One metaphor, Fat Man/Thin Man, was particularly effective:
Israelis had not grown up in a culture of competing lemonade stands. Our one shared experience was service in the army.
In a nationally televised live news conference in which I presented my policy, I described Israel’s economic malady with a story from my first day in basic training. The company commander ordered us to line up in a straight row on the parade ground for what was called the elephant race. I was first in line.
“Netanyahu,” he said, “put the man to your right on your shoulders. Every other soldier do the same.”
I had to put a medium-sized soldier on my shoulders. To my right, a small soldier had one of the biggest men in the unit straddled on his shoulders, while a big soldier carried one of the smaller men on his back.
When the commander blew the whistle, I could barely move forward. The small soldier to my right collapsed after two steps. The big man shot off like a cannon and won the race.
All economies, I said, were engaged in a similar race. In each, the public sector, “the Fat Man,” straddles the shoulders of the private sector, “the Thin Man.” The private sector creates most of the added value in economies and is the engine of job creation and economic growth. It carries the public sector on its back and pays for it.13
And when people told him they couldn’t possible survive without generous welfare benefits, he had no hesitation to tell them, “Get a job! Sweep floors, wait on tables, start a delivery service. Get a job! Any job! But don’t come to me!”14
The reforms drew significant opposition from the country’s powerful labor federation, the Histadrut. There were numerous strikes. The ports were shut down for months. Inspired by Margaret Thatcher’s knock-down drag-out with the coal miners union in Great Britain, Netanyahu stuck to his guns. He appealed to public opinion, missing no opportunity to call attention to the dockworkers exorbitant salaries. He even found out about one who had a BMW and a Jaguar. In another one of those metaphors that made him such an effective communicator, he named the fight over port reform, “The Battle of the Jaguar.” “This image stuck, shifting public opinion further into our corner. Once the public was strongly behind us, the unions could not sustain a strike for very long.”15
On another occasion, the customs workers in the national airports struck, threatening to bring air traffic to a standstill. Passengers clogged the air terminals, unable to enter the country. I told Eitan Robb, the customs and tax head, to throw the arrival gates open. He did, and for a few hours passengers entered Israel without customs control. The strike ended almost as quickly as it began.16
Enactment of these free market reforms was a race against the clock. Netanyahu and Sharon were on a collision course. Sharon gave Netanyahu a free hand on the economy while he tended to other issues. One of these issues was Israel’s withdrawal from Gaza, a policy with which Netanyahu most emphatically disagreed. Netanyahu knew that at some point he would have to vote against withdrawal. When that day came, either he would have to resign in protest, or Sharon would have to fire him. Netanyahu dragged things out as long as possible. He swallowed his pride and voted for a bill on the withdrawal. It was an interim bill, and non-binding, but he was still heavily criticized by opponents. On another vote, he just didn’t show up. Things finally came to a head in an August 7, 2004 Cabinet meeting in which Netanyahu voted against withdrawal and submitted his resignation.
The last of Netanyahu’s reforms had passed the Knesset twelve days before.
The results were spectacular:
After the reforms were enacted, overall participation rates in the job market grew dramatically, from 54 percent in 2003 to 64 percent in 201817…
While Israel’s GDP had contracted by 1.3 percent in 2002, three years later it was growing by more than 5 percent a year. Israel’s growth rate ranked at the bottom of the OECD countries in 2002. Within three years, Israel was one of the fastest-growing countries in the industrialized world. This continued over the next two decades.
In 1999, Israel’s GDP ranked 50th in the world. By 2020 it jumped twenty places to 30th place. GDP per capita made an equally extraordinary leap, from 34th place in 2009 to 19th in the world in 2019, outstripping Britain, France, Japan, Italy, and Spain.
Most important, this growth was shared across all income levels. Inequality was dramatically reduced, principally because of the massive entry into the job market of previously unemployed people.18
Even the “generally hostile” liberal newspaper Haaretz had to concede, “The Israeli economy is today enjoying the results of the steps taken by Benjamin Netanyahu in 2003 in the depth of the Israeli recession.”19
When Netanyahu decided to accept Sharon’s offer of the finance portfolio, one of the close advisors who tried to talk him out of it was his ten year-old son, Yair:
He thought there was no point.
“Abba,” he said anxiously, “look at New York’s skyline and look at Tel Aviv’s. They have skyscrapers. We have nothing. We’ll never be like them.”
“Don’t worry, Yair,” I said. “Your father will become finance minister and you’ll soon see skyscrapers here, too.”
“You’re just saying that. It will never happen,” he insisted.
“We’ll see, won’t we,” I said.
Twenty years later, Tel Aviv’s forest of high-rise office and apartment buildings is visual proof of the force of the free market revolution we put in place.20
Netanyahu’s free market revolution would not be the only spark of genius in his career. In the final installment of this review, I discuss another area where he turned conventional wisdom upside down, resulting in a major accomplishment: the Abraham Accords. Check it out here.
Michael Isenberg likes ribeyes, bourbon, and writing historical novels set in the medieval Muslim world. Please check out his latest, The Thread of Reason, at http://amazon.com/dp/0985329750.
Landau, David. Arik: The Life of Ariel Sharon, New York: Knopf Doubleday Publishing Group (2013), Kindle Edition, loc. 6272.
Netanyahu, Benjamin, Bibi: My Story, New York: Threshold Editions (2022), Kindle Edition, p. 74.
Ibid, p. 342.
Ibid, p. 343.
Ibid, p. 345.
Ibid, p. 339.
Ibid, p. 268.
Ibid, p. 266.
Ibid, p. 267.
Ibid, p. 267-268.
Bank Hapoalim had been privatized previously during Netanyahu’s first stint as PM. Bank Leumi would complete its privatization in 2018.
Netanyahu, op. cit, p. 358.
Ibid, p. 354.
Ibid, p. 379.
Ibid, p. 365.
Ibid, p. 367.
Ibid, p. 376.
Ibid, p. 382.
Ibid, p. 385.
Ibid.