Israel Finally Fights a Major Financial Crisis

The Israeli Cabinet’s sudden decision last week to devalue the shekel, to cut into government subsidies and to reduce the bloated state budget by as much as $550 million indicates that at least some politicians finally realize the seriousness of our economic problems.

The crisis Israel faces is of its own making. And though it has not been the stuff of which headlines are made, it is far more serious than the Palestine Liberation Organization “peace offensive,” the internal uprising--the intifada --or the threat of Arab armies and missiles.

While Israel is seen as a beacon of Western values in the Middle East, its economy is not. It remains a socialist relic of Eastern Europe that survives only because the United States and the world Jewish community prop it up with generous aid. Even this aid, however, can no longer do the job.

The central fact of life in Israel today is decline. Israelis are hounded by bureaucrats and the tax collector. A nationwide poll last summer showed that a majority of Israelis no longer feel safe in their own country. And more than physical safety is involved. Israel’s leaders are routinely summoned to foreign capitals for stern guidance in how to manage the nation’s affairs. Our citizens seek green cards for emigration to the United States. Last year alone, an estimated 21,000 Israelis moved elsewhere. Similarly, potential immigrants, even those seeking refuge from oppression in Iran and the Soviet Union, veer off toward more hospitable lands. Of the approximately 20,000 Soviet Jews who were allowed to emigrate in 1988, only about 8% chose to settle in Israel.

In short, the Zionist dream of a socialist utopia is dead, and the land of milk and honey is not far behind. The question now is whether the dominant institutions will remain in place long enough to kill off our country, or whether Israel can muster sufficient will to change its ways.

If only economics were at stake, the changes could be made almost immediately--and without debate. Who, after all, prefers life under socialism? Even Western intellectuals and academics, including those in Israel who hold socialism as a high principle, do not choose to live in socialist states. Indeed, the leaders of China, the Soviet Union and much of the Third World now acknowledge the failure of their economic systems.

The change from socialism to an entrepreneurial free-market economy is a political problem, however, not an economic one. How does Israel get the policy elites in government, the trade union movement and nationalized businesses to let go of their monopoly powers? That is the real question.

Although socialist idealism is still “in” with many Israeli intellectuals, the failure of socialism is now a recognized fact of daily life among most citizens. Everywhere you go in Israel you hear the same thing, especially from the young: “I can’t make a living here.” It’s no exaggeration.

What is wrong with the economy?

-- Government spending now accounts for about 70% of Israel’s gross national product, more than double the rate of combined federal, state and local spending in the United States. Talk about budget deficits: Israel’s is approximately four times larger than the U.S. deficit as a percentage of GNP.

-- The government owns too many purely commercial businesses, ranging from the national airline, El Al, to the country’s largest department-store chain. -- Taxes are far too high. Corporations currently pay an effective rate of 55%. Individuals earning as little as $25,600 a year may pay 70% or more when the supplemental taxes are added to the already stifling 48% marginal income-tax rate. Even the Bank of Israel, our central financial institution, condemns these high tax rates as a disincentive to work and investment.

-- Because of currency devaluations, inflation has been rampant. In 1985 the annual inflation rate exceeded 200%; after a stabilization program was launched that year, it has fallen to “just” 20%.

The economy also suffers from price controls, export subsidies, import duties and a national industrial policy that pours tax money into inefficient businesses at the expense of potentially productive ones.

The new coalition government has now vowed to reduce some subsidies and make cuts in the bloated public sector but last week’s actions are only a start; much more needs to be done.

Israel suffers from nothing that a strong dose of free-market capitalism couldn’t cure. The big question is whether our political leaders have the courage to wean Israel from socialism, and if so, whether they’ll do it in time.