NCPA - National Center for Policy Analysis

Obstacles To Economic Reform In Israel

July 1, 1996

Israel's new Prime Minister, Benjamin Netanyahu, repeatedly pledged to institute radical economic reforms such as deregulation and privatization during his campaign. But experts say that as necessary as the reforms are, he faces an uphill battle against entrenched special interests.

  • A growing government deficit of up to 5 percent of gross domestic product has raised inflation to about 15 percent this year, up from 8 percent last year.
  • The country's balance of payments deficit is nearly $1 billion a month -- almost 15 percent of GDP -- and productivity has been stagnant for the past five years.
  • While the standard of living has improved for the well-to-do, most families struggle on an average income of about $1,500 a month.
  • Housing prices are inflated, with the average apartment selling for about 100 months of wages, and consumers must pay monopoly prices for basic goods -- many of which are legally protected from both domestic and international competition.

But the obstacles to desperately needed economic reforms are formidable:

  • Netanyahu's government's majority in Israel's parliament was formed by a coalition of three fiercely competitive religious parties.
  • Israel's three largest banks, nationalized in 1983, are actually run by a powerful political oligarchy which has fought economic reforms, including efforts to privatize the banks.
  • Labor unions have been organizing resistance to privatization, threatening to throw the economy into chaos.
  • Most Israeli legislators are populists, largely ignorant of economics or possessing little interest in it, according to observers.

What support for market-based reforms there is comes from Treasury officials, from within the Bank of Israel and from finance minister Dan Meridor, a politician of strong free-market convictions.

One example of the reforms so vital to economic progress is provided by the construction industry.

A number of studies show that massive land and construction deregulation, and abolishing construction materials monopolies, could cut housing costs by up to 30 percent. This would significantly reduce the amounts that the new government would have to hand over to special interests. It would also cut the budget deficit and inflation, since construction costs are a major component in the cost-of-living index which, in turn, drives other spending increases.

Source: Daniel Doron (Israel Center for Social and Economic Progress), "Can the Hold of Israel's Elite be Broken?" Wall Street Journal, July 1, 1996.


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