Benjamin Netanyahu, Israel’s finance minister, tells Karina Robinson about Israel’s economic turnaround and his thoughts on returning to power.

In a measured voice so deep it appeared to come from his feet, the prime minister in waiting of Israel dismissed my carping about the rudeness of the immigration service at Tel Aviv’s airport.

“Let me get the GDP per capita above $20,000 then the market will demand that. It is like you can now actually eat good food, in Tel Aviv in particular. Once you cross above $13,000 per capita you start getting good food. By $20,000 you will begin to get good manners,” said finance minister Benjamin Netanyahu.

Israel’s GDP per capita is over $16,000. As he lit up a Cuban cigar one could see that Mr Netanyahu’s – despite a relatively modest government salary – is obviously above that.

With an American accent left over from his teenage years in the US, he insisted GDP per capita should be double its current level because of the “scientific and technological capabilities here, which are probably more concentrated than in any other country in the world. The real handicap, contrary to what people think, has not been wars or terrorism, but primarily the rigid and bureaucratic nature of our economy which we are cutting back on now.”

Quite a statement. And a theme that recurs throughout the interview in his rather dilapidated offices. The Ministry of Finance’s grottiness, compared with the impressive nearby Foreign Ministry and Supreme Court, says something about its position in the pecking order of government.

Changing the old order

Fifty-five-year-old Mr Netanyahu, who only agreed to take on the role in rival Ariel Sharon’s government in March 2003 if he was given various extra powers to do with state-owned companies, has perhaps gone some way toward changing this order.

The structural reforms and privatisations he has succeeded in forcing through are astounding for an economy known for its bureaucratised, monopolistic and union-bound nature. During his stint as prime minister in 1996-1999 he was less successful in this field. He also, at the time, let the Oslo accords die a quiet death while allowing settlements and granting more influence to his allies in Shas, a right-wing religious party, in order to remain in power.

Return to power

Mr Netanyahu’s prime ministership ended with his popularity at an all-time low, amid accusations that his cynical deal-making had plumbed new depths in the political sphere.

That has all changed. Mr Sharon thought he was handing him a poisoned chalice. Instead, Mr Netanyahu, known domestically as Bibi, has turned the economics ministry into a launchpad for his incipient bid.

A messy compromise reached in June on the government’s proposed withdrawal from Gaza makes it likely this could be sooner rather than later. The statistics are favourable: the average lifespan of Israeli governments is less than two years. Mr Sharon may be forced to call early elections or perhaps the Labour Party might join a government of national unity – there are many possibilities and nothing can be ruled out at this stage.

But when asked whether he is going to be the next prime minister, the heavy-set son of an historian says: “Don’t know. I am currently finance minister. How shall I say, at the moment, I’m otherwise engaged.”

Uri Ginosar, his press man, interrupts: “You don’t think about it.”

Quick as a flash Mr Netanyahu emphatically disagrees: “No, I think about it, that’s not true. I do think about it.”

He denies raising funds abroad for a bid – although sources say he has been doing so quietly, rather like he did when he was Israel’s ambassador to the United Nations – and insists he has learned a couple of lessons since his last time in office. These involve doing the hardest tasks as quickly as possible, which he has done on the economic front, and allocating more time to people, including spending time with staff, with the public, with adversaries and allies, presumably with the aim of carrying public opinion with him.

It is worth noting the press is not in that list. He already spends time with us and is a master of spin.

“If you are possessed by ideas as I am, [allocating more time to people] takes up a lot of time,” he complains. Despite being a graduate of MIT, the prestigious US university, with both an undergraduate and a Master’s degree, he appears rather intent on underlining his intellectual credentials by, for example, mentioning Laffer’s curve – an economic principle which at its most basic says tax cuts lead to economic growth – a couple of times and underlining Israeli politicians’ ignorance about it.

Tax cuts

Mr Netanyahu, who served with distinction in an elite commando unit in the late 1960s and early 1970s, has made tax cuts a central plank of his high-speed reforms.

“I told you they are not familiar with Laffer. So the first thing we did was take a tax reform programme done by my predecessor spread over seven years and compressed it into two years and passed it, so every six months taxes go down,” he says. In 10 months this will be complete, at which point the maximum tax rate, including not only income tax but health tax and social security, will be 49%, down from a mind-boggling 62%.

Corporate tax rates are being brought down to 30% from 36% over four years while value added tax (VAT) has also been reduced to 17% from 18% and will fall to 16%, depending on the revenue stream.

On the expenditure side, Mr Netanyahu cut the budget, cut government employee numbers by about 7% and cut welfare. He showed no fear in the latter, even though it had become a sacred cow. From 1990 to 2002 Israel’s population grew 30% due to immigration, while welfare grew about 600% or 20 times more.

Generous child allowances, for example, rose by increments for each additional child. “With the child allowances … the tenth child got five times more. Anyone could do it [have many children], but effectively two populations, the Arabs and the Orthodox [did so]. That’s a very good living. Their job is to have children. They ride around in limos,” says Mr Netanyahu, making the sort of politically incorrect statement that would end a politician’s career in Europe.

El Al to Bezeq Telecom

On the privatisation front he also forged ahead.

“You really have to believe in this because you are giving up political power,” he says. “We privatised [national airline] El Al. Put it on the stock market. They’d been talking of privatising it for 17 years. We did it in three months. The [Zim] shipping line: talked about it for 15 years, we did it in nine months.”

The government is now working on Bezeq Telecom, as well as Bank Leumi and Israel Discount Bank. In addition, Mr Netanyahu is intent on breaking up the monopolies that have had a stifling effect on the economy, such as electricity, water and the ports.

“We [wanted to] pass a bill to introduce competition in electricity. [The union] threatened a major strike. They said if you pass the bill we will turn out the lights. I said go ahead and we passed the bill 24 hours later. We did get massive general strikes,” he says, with the satisfied air of a successful combatant.

Israel, in fact, leads the Western world in terms of hours lost to industrial action, according to the Bank of Israel. Mr Netanyahu is pulling the teeth from the formidable Histadrut labour federation, and even managed to wrest control of pension funds from it.

 Labour relations

This was at the time he was asking them to take wage cuts in the public sector. “They said no. Finally we agreed. While we’re at it, I said, let’s attend to [another issue]. I figured I would get a general strike anyway so my dictum here was: let’s maximise the number of reforms per general strike. So we decided to do one giant move. To take the pensions away from the unions. They had been, how shall I say, let me be coy: they had been mismanaged,” he says. Coyness is not an attribute of Mr Netanyahu’s. “They were in actuarial bankruptcy,” he adds.


On the nature of coyness, take his comments about the need to create better infrastructure in Israel: “We are putting a lot of projects in place – fast road, fast rail – to create an infrastructure that a country like Israel should have. Portugal now has better roads than Israel. And I understand they make great seafood. But we have all these things [like scientific expertise] and in a tiny country it takes hours to go from one side to the other.”

So much for improving troubled relations with the European Union. But perhaps UK prime minister Tony Blair will not mind the following remark: “What did the richest economies per capita in the world today do? They did what we did. Not as fast. I looked at Singapore, at New Zealand, at Blair – who’s about as Socialist as I am. I looked at Spain, Ireland, Australia. I had a few years to go around while I was happily unemployed.”

Central Bank and the debt burden

The effect of all the reforms, allied to a moderate upturn in the world economy which is crucial for Israel’s export-dependent economy, has seen Israel’s central bank, the Bank of Israel, raise its GDP growth forecast to 3.4% for 2004. This should help lower unemployment, currently standing at 10.7%. The goal of reducing the budget deficit from 6.5% of GDP in 2003 to 4% in 2004 looks achievable, if challenging. Lowering the debt burden – 108% of GDP in 2003 and forecast at 110% in 2004 – is a different matter.

The Bank of Israel has publicly disagreed with the finance minister, saying the priority should be to pay down debt rather than lower taxes.

“We will. They are bankers. I’m thinking of the country like an entrepreneur. When you have growth, pour as much fuel onto the growth as you can,” argues Mr Netanyahu.

The married father of three has done an amazing job with the Israeli economy. When the government took power in 2003, the country was in the midst of a two-year recession, the budget deficit looked like reaching 6%, nine-year government paper was yielding 12.5% and the stock market was at a low.

Three factors have helped: a relatively stable three-party coalition with Likud (no longer the case from June) which has allowed a hard-hitting economic policy to prevail, a US loan guarantee for $9bn that has helped the government’s debt profile, and a moderate recovery in the US and technology markets.

Foreign influence

Ultimately, though, Israel does not exist in a vacuum. The economy cannot grow to its full potential without peace. This simple statement is one Mr Netanyahu disputes.

“One has to make a distinction between political treaties and security. You don’t have peace on the Korean peninsula, right, but you have security,” he says. His view is that security was a problem when suicide bombers were blowing themselves up inside Israel. Now, he argues, the building of a controversial wall around Gaza has led to a notable drop in these, while the constant reports of fighting within Gaza only deter the uninformed investor.

It is true the stock market has doubled since the government came to power in March 2003 and long-term bond rates have fallen to about 4%, evidence that investors are putting money in. However,the Bank of Israel has estimated the escalation of terrorism has cost the economy about 3% GDP growth per year since 2000. And Mr Netanyahu’s theory that economic reforms and security will help lead to peace seems naïve at best and, at worst, a sop to the liberals and one which he himself does not believe.

Basically, Mr Netanyahu’s idea goes something like this: by creating economic prosperity and security, there is less retaliation on either side, the Palestinians begin to have money and this creates a better foundation for peace negotiations. It is, however, by no means clear how wealth is going to reach the overcrowded, impoverished refugee camps, a breeding ground for terrorist organisations like Hamas.

The Palestinian Authority

Meanwhile, his old adversary Yasser Arafat, president of the Palestinian Authority, has even been acknowledged by Egypt and the EU as part of the difficulty. But Mr Netanyahu’s personification of the problem in one man seems like another simplification.

“I don’t think Arafat will be there forever, he’s not a young man. In fact, that is what is holding it back because I think there is a desire among [some] of the Palestinians for a different life, for a settlement, but these voices don’t have a chance to get anywhere as long as this very corrupt regime [continues],” he says.

What Mr Netanyahu will do on the Palestinian front when he becomes prime minister – as seems increasingly likely – is a mystery. His blunt honesty on the economy is matched by a canny evasiveness on the political front. But getting GDP per capita up to where he wants it is not possible without peace.


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