Israel’s Netanyahu could wreck his own brilliant economic handiwork

The man who did more than anyone to transform Israel’s economy from a stagnant socialist morass into a vibrant free-market “start-up nation” now threatens to undermine his own brilliant handiwork. Benjamin Netanyahu rightly is almost universally recognized as the most effective finance minister in Israel’s history. He took over the ministry in 2003, when prime minister Ariel Sharon’s government was facing what was perhaps Israel’s most serious economic slump ever; the economy had actually declined in the two years before he took office.

Netanyahu blamed the country’s stagnant public sector for Israel’s poor economic performance. He made it clear that he intended to reshape the relationship between the public and private sectors. Indeed, whereas the economy’s public/private ratio at the time stood at 55 percent in favor of the public sector, Netanyahu announced that he would reverse that proportion in favor of the private sector.

In a manner reminiscent of Margaret Thatcher’s transformation of Britain’s sagging economy some two decades earlier, Netanyahu called for the privatization of a host of sclerotic government companies, most notably government-owned infrastructure companies, through the Tel Aviv Stock Exchange and the capital markets by 2005. He sought to reform the capital markets themselves and to encourage institutional investors, especially insurance companies and pension funds, to buy the shares of the companies that the government was offering to the market. In addition, working with a talented group of career officials in his ministry, Netanyahu imposed a series of spending cuts, including subsidies for large families. He also lowered maximum tax rates by nearly 20 percent.

Not surprisingly — and again, like Thatcher before him — Netanyahu faced bitter opposition from the nation’s public-sector unions. He had to face down three nationwide strikes during his first 19 months in office. Nevertheless, during that period he stabilized the shekel, Israel’s chronically weak currency, and reversed the economy’s downward trend by registering 1 percent GDP growth, thereby bolstering both domestic and international investor confidence. The Tel Aviv stock market skyrocketed and the technology sector, crucial to Israel’s national security and economic future, underwent a major revival. By the time he resigned from his office in 2005, Israel’s economy was undergoing a major upswing that has continued ever since.

Eighteen years later, however, as he serves as Israel’s longest-tenured prime minister, Netanyahu’s determination to undermine the power of the country’s hitherto independent Supreme Court could wreck all that he previously accomplished economically. Clearly intending to assure his immunity from possible conviction for one of several alleged crimes that could result in jail time, Netanyahu, supported by his ruling coalition, seeks to subordinate the court’s rulings to legislative dictat. If his plans materialize, the court could be overruled by a single vote majority in the country’s parliament.

Not surprisingly, the government is now confronting massive demonstrations led by Israel’s center and left wing parties. It is also winning considerable support from other sectors of Israeli society, with the notable exceptions of the West Bank settler movement and the country’s ultra-Orthodox leadership. The latter’s only interests are to preserve exemptions from military and national service for its male constituents and to keep adding to the government benefits and subsidies that target its community.

The chaos that Netanyahu’s government has engendered is spooking technology companies already operating in Israel and, of even greater concern, international investors, whose confidence and support are the lifeblood of the country’s highly advanced economy. The CEO of Papaya Global, an international payroll firm valued at over $3.5 billion, has announced that it will move the company’s funds from Israel in protest of the government’s policies. The CEO of Verbit, a $2 billion Israeli company that specializes in artificial intelligence-driven speech recognition software, likewise has announced that the firm is leaving the country in protest of the government’s plan to undermine the Supreme Court’s authority. More high-tech firms could follow their lead.

Even more troubling, however, is the potential impact of the government’s policies on the country’s credit rating. Analysts at J.P. Morgan and Goldman Sachs have privately warned that “domestic political developments” could lead them to downgrade that rating. Morningstar has issued a similar warning. The J.P. Morgan analysis reportedly has compared Israel to Poland, whose changes to the role of the judiciary in 2016 resulted in both a credit downgrade and a drop in foreign investment.

Thus far, Netanyahu has rejected these dire warnings, asserting that his proposed “reforms” mirror those of Western countries and that his plans have been either misunderstood or deliberately misinterpreted. Legal experts such as Irwin Cotler, a former Canadian Justice Minister and Attorney General, argue that Netanyahu simply is being disingenuous. Evidently, international banks and at least some of Israel’s high-tech leaders appear inclined to favor Cotler’s views rather than the prime minister’s protestations.

Netanyahu’s fate at the hands of Israel’s criminal justice system has not been sealed. He claims  innocence and remains innocent until proven guilty. But the risks he is taking with his country’s economic future, evidently to ensure that the charges against him are dismissed, are very serious indeed. Of all people, Netanyahu, father of Israel’s economic miracle, should be the last one to snuff it out. 

Dov S. Zakheim is a senior adviser at the Center for Strategic and International Studies and vice chairman of the board for the Foreign Policy Research Institute. He was under secretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004 and a deputy under secretary of Defense from 1985 to 1987.