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Finance Minister Benjamin Netanyahu is sticking to his conviction that the economy is already showing signs of improvement and will see more rapid growth next year. But in a wide-ranging interview with Haaretz, he says that two obstacles remain in the way of the kind of growth he expects next year: the lagging pace of the separation fence construction and David Klein, governor of the central bank.

If the fence is built quickly it will provide the security the economy needs, reducing the number of terror attacks, which harm investment and private consumption. And if Klein were to lower the interest rate faster and deeper, nothing would stand in the way of economic growth, he says.

On other issues, Netanyahu rejects Education Minister Limor Livnat's complaints about slashes in the ministry budget cutting classroom hours, just as he isn't impressed by Health Minister Dan Naveh's worries about running out of medicine. He says they should cut their bureaucracies and fire clerks. He's angry at the media for presenting him as responsible for the destruction of the economy and society while he believes he's actually saving it, fighting for a transition from the dole to work, at war with the monopolies, particularly the longshoremen's unions, and trying to reduce the size of the government.

Netanyahu arrives relatively late to work every morning but stays very late, and works long hours. On Fridays he meets with his outside advisers on politics and the media, a group dubbed "the submarine." Netanyahu doesn't go into every subject in depth, and is largely moved by intuition, based on a deep belief in the need to eliminate the monopolies, and reduce the size of the government, as many finance ministers have done worldwide, bringing growth in their wake.

Question: Today Haaretz published an investigation that estimates the extra civilian budgeting for the Jewish settlements in the territories at NIS 2.5 billion a year and the extra security expenditures at NIS 4 billion a year. Would it not have been appropriate to have reached a diplomatic agreement, thereby saving these astronomical sums and using them to plug the huge hole in the national budget?

Netanyahu: "First of all, it seems to me that the Haaretz estimates are extremely exaggerated. I asked the people at the Finance Ministry for an estimate and I received an estimate that is of a much lower order of magnitude, about one-tenth of the numbers you mentioned - that is, security expenditures of hundreds of millions and civilian outlays that are significantly less than that. Moreover, in the last budget the tax breaks for inhabitants of Yesha (Hebrew acronym for Judea, Samaria and Gaza) were canceled and the Settlement Department has gone down during the past years to 50 percent of what it used to be.

"Secondly, the question of security. If I am interested in defending the settlements in the north, I don't calculate the cost of security there. That is, first it must be asked where I want the borders, and only afterward the economic calculation should be made. Otherwise it could be that the most economical thing would be to barricade ourselves into North Tel Aviv."

But isn't it heartbreaking that deep down in our hearts we know that one day we will have to evacuate most of the settlements in the territories, yet nevertheless we are investing billions there at a time when there isn't enough for infrastructures and education in the peripheral development towns?

"The vast majority of Israel's investment in the Jewish settlement in Yesha, even under the most minimalist plan, is within the Israeli consensus. It is not at the expense of investments in the development towns. The question is whether you want to go back to a string-like state, 16 kilometers wide. How long can a state like that expect to last? However, I am not suggesting the annexation of the Palestinian population and turning them into Israeli citizens. In the end, we will arrive at some sort of separate coexistence, with some of the territory with its inhabitants remaining under Israeli sovereignty."

How is it that you've become such an enthusiastic supporter of the separation fence all of a sudden?

"This comes from empirical observation. I saw that when the terror attacks began, they were coming from Ramallah, Hebron, Qalqilya, Shechem (Nablus) and Jenin. There was one place they weren't coming from: They weren't coming from Gaza. The conclusion is that when they come up against a fence, they are eliminated. You can't argue with this iron fact. About this I've said that three things must be done: Get rid of the existing leadership, go into the territory and purge it and put up the fence. And I'd already determined this nearly two years ago."

`Ariel must be inside the fence'

But the Americans are opposed to a fence opposite Ariel, and a gap will be created there, and infiltrations will come through there.

"We must declare our intention of including Ariel inside the fence, if only because of the fact that Ariel is situated opposite Tel Aviv and it will give us the necessary depth. Together with this, it is possible to begin to build to the east of Ariel in a westerly direction and postpone the argument with the Americans, until we come to the question of the connection."

That is, we'll build a fence in the territories, wherever we decide, on our own, without any consideration of the local inhabitants?

"It isn't their territory. It is disputed territory, legally and historically. How much are we taking, anyway? When we enter the Ariel enclave and the Etzion Bloc enclave and the outskirts of Jerusalem, at most this is a matter of 5 to 7 percent of the territory, and if these aren't `cosmetic adjustments,' then what is? In addition, these territories are essential for Israel's security, to ensure reasonable depth and to allow for reasonable defense of the population."

That is, the fence is in fact Israel's future international border?

"No. I'd like to remind you that when we had to reach a diplomatic agreement with Egypt, we moved a lot more than fences. When you have a diplomatic agreement with a reasonable partner, you can move a lot more than a fence."

And if the fence doesn't help, and they move from suicide bombers to firing missiles at Petah Tikva and Netanya, would you continue not suggesting a political solution but rather build a reinforced glass dome over Israel?

Netanyahu laughs and answers: "No. It is obvious that the fence will not provide full security. It is not a hermetic barrier, but it does prevent the entry of a weapon that is more effective than missiles: a human bomb. It also thwarts the attempt to realize the right of return through real and fictitious marriages in the south and in the north, prevents the entry of illegal sojourners who distort our labor market and for all these reasons it is completely justified. It has to be built now, and quickly and unilaterally, without waiting for an agreement. As far as missiles and rockets are concerned, most probably this will happen, but the Palestinians will have to take into account that any firing of missiles on Israel could lead to the firing of missiles on the Palestinian territories, and this is a very, very strong deterrent."

You said recently that you are prepared to accept Palestinian Authority Chairman Yasser Arafat's latest offer of a hudna, or cease-fire, in order to get some time out, because you realize that there won't be growth without quiet.

"We don't need to make truce agreements with Arafat, because they aren't worth anything, but we also don't need to shoot automatically. We should act only in accordance with urgent security needs, and if there is no such need then we should take advantage of the period of quiet, which in part has been obtained through deterrence, in order to put up the entire fence. The fence will also help the Palestinians come to their senses, because if they know that they have been denied the possibility of sending terrorists against us, this will advance their awakening, which is a necessary step in the process of future conciliation."

Unjust and immoral

On the economic issue, Netanyahu decided to go one step further and express himself more sharply. The statements by the government ministers who object to the cuts annoy him, the expected labor sanctions annoy him and above all he is angry at the talk in the media to the effect that he is the one who is destroying the society and the economy.

He, for his part, believes that he is saving the society and the economy as he works toward the transition from living off the dole to living off work, as he fearlessly fights the large monopolies and as he tries to make the government smaller and contain the bureaucracy.

Question: The governor of the Bank of Israel has said that it is not very likely that you will achieve a deficit of 4 percent in 2004, the debt-to-GDP ratio will also go up and therefore the long-term interest rates will also go up and he will not be able to continue to lower the interest rate.

Answer: "I disagree with him. We have an excellent chance of achieving the deficit target. What the government of Israel is doing in the economic field is transforming a centralized, inefficient and degenerate economy, which is weighed down by a huge bureaucracy and inflexible monopolies, into a healthy economy.

"The Central Bureau of Statistics is also talking about the start of growth. The direction is changing, the light has changed, the cars are beginning to move and the first to move are the ones at the head of the line, and they're the high tech. The main factors that are delaying an increase in growth are the security question that we want to solve by putting up the fence, and the second factor is the high and exaggerated interest rate that we are groaning under and that creates tremendous suffocation in the Israeli economy.

"In addition, this high interest rate has missed the course of inflation in recent years and has led to inflation being, in most cases, lower than the target and this is not in accordance with the government's policy."

But Bank of Israel Governor David Klein has nevertheless now lowered the interest rate by 0.4 percent?

"Can you justify an interest rate of 6.1 percent when inflation is nearly zero? This is a very high interest rate. It is the highest in all the world markets. There is no other country that is in such a deep recession with such low, if not negative, inflation where such a high rate of interest is imposed, an interest rate that inevitably depresses any possibility of investment and growth."

What should the interest rate reach?

"It has to be much lower, and it has to get there as fast as possible."

`I'm not looking for an alibi'

That sounds like a double alibi, because if the fence doesn't go up and then there is no security, and if the interest rate doesn't go down, you won't be held to blame for the growth that won't happen.

"I'm not looking for an alibi. I took the job of finance minister in order to rescue the Israeli economy, to bring this economy to the real potential there is in this nation and in this state and it is huge and powerful. Now we have a centralized, monopolistic economy with enormous taxes and huge welfare allotments, and it's all organized in a kind of endless self-righteous preaching about `social justice.' Yet we're committing a terrible injustice, first of all to the middle-class citizens of Israel who are paying huge taxes, and then to the weaker classes whom we are ensuring will remain weak for their entire lives and the lives of their children and grandchildren. It's simply a system that has to change, and I'm determined to do everything I can in the time at my disposal to bring about this change, for rescue and recovery and also to bring about prosperity - and I'm not looking for an alibi.

"We must make far-reaching changes in the economy, for the needs of our overall national existence as well as with respect to the economy, culture, defense and demography, for every reason."

What bothers you most about the Israeli economy?

"I'll give you three examples. Transfer payments are our largest budgetary item. We spend NIS 43 billion on National Insurance, which is NIS 10 billion more than the shekel budget of the defense establishment.

"Our transfer payments have increased in a frightening way, and we have created a huge class of the population here that does not work and receives welfare payments, and it is growing. It is clear that if we continue this way we will collapse and fall apart, and in order to change this we have to get out of the culture of allotments and into the culture of work and this is a change that demands political courage, exactly that, to face all those publics and tell them go out and work. And I am doing this fearlessly.

"The second thing is breaking the monopolies. Every citizen of Israel, every person who is now reading the newspaper, is paying too much for water, electricity, fuel, milk, mail, higher education. We are paying for our children's education, relative to the GDP, more than any other country in the world. And what are we getting for this? Low achievements.

"They're simply taking money from us! All the time. They're taking taxes from the citizens of Israel. Every time you switch on the electricity in your home you pay tax, every time you open the water faucet you pay tax, every time you fill your gas tank you pay tax, and these are huge taxes that come to tens of billions over the years, and this has got to stop.

"Every time you take a can of food, or buy a piece of furniture, this thing has to go through ports and then either the raw materials or the goods themselves are imported, and we pay enormous sums for every single product, because our ports are the most inefficient in the world. There are 100 leading container ports in the world, of which 85 are private. That leaves 15 government ports, of which seven are in China, but there aren't any strikes there, and in the next place is Israel with Haifa and Ashdod. Two government seaports with workers' committees that are costing me and you and everyone who is reading us tremendous amounts of money in every area of life.

Why not go back to the plan of establishing the Jubilee Port under private ownership?

"It wouldn't make any difference. Ultimately I want competition between the ports, and I have no objection to this being in the form of government companies that compete with each other. In any case you'll encounter the same strike."

The last dinosaurs in Jurassic Park

And how will you get through the expected strike, which will paralyze Israel's imports and exports?

"Not `how will you get through' but `how will we get through.' There's a problem here for the entire society. There are no longer any dinosaurs in this Jurassic Park; only we and the Chinese remain. Do we really want to be so different? Are we really prepared to let 2,000 workers simply grab us by the neck? This is impossible. It's simply something anachronistic. And if they want to conduct a public struggle over this, go right ahead. I'm expecting of the industrialists and from every citizen of Israel simply to revolt against this.

"Why should every single one of us pay enormous amounts of money, year after year, to a workers' committee that is simply taking money from me and from you? Why? What justification is there for this? What is it that we have here - `Justice for the workers?' And what about the rest of the workers who are being dismissed from their jobs because the merchandise does not arrive in time or can't go out in time? And what about the rights of all the people of Israel who have to pay for various products, and can't afford to do this, because of the inflated prices that stem from the inefficiency at the ports? Everything that is produced in the state of Israel goes through them.

"The situation is simply unjust! Immoral! And the struggle to bring competition to the ports is the most just struggle. And we have all the necessary means to win this struggle. I'm not prepared to accept anything less than the institution of competition between the ports. The workers can choose between a course of struggle and a course of dialogue. If they go into dialogue with us, they will benefit from it, and the entire country will benefit.

"Ireland, which was behind us in per capita production 10 years ago, is now ahead of us by $10,000 per capita and is ahead of Britain, because they instituted all those reforms.

"And the third thing is to shrink the government bureaucracy, which is enormous, and I'm also doing what is necessary in my own sector, at the Finance Ministry. It is necessary to cut down our large delegations abroad, first and foremost in New York. It is possible to cut Israel House down to half its size and get about $100 million from selling half the property and also get the additional efficiency measure of tens of millions of dollars from cutting back on the representatives, including the ones from the Finance Ministry and the Defense Ministry.

"In every ministry there are huge pockets of fat. The Health Ministry doesn't need to put patients in the corridor, there's no need to cut the budget for cancer medications and there's no need to cut the number of school hours - they should start firing officials, they should start shutting down units, and I expect the ministers to do these responsible things.

Let them fire officials

But Education Minister Limor Livnat says that it's impossible to cut anything in education.

"This is definitely incorrect. It is possible to cut the education budget, without cutting school hours. There are duplications at the ministry. Let them fire officials. Let them cut down the enormous army of inspectors. There is administration upon administration upon administration there, all kinds of overlapping functions, and I'm convinced that the minister of education knows all those places."

But the Health Ministry is saying that it will have to make cuts in life-saving medications.

"We are familiar with that kind of talk. How is it that in the companies and research foundations there are tens of millions of shekels, at that same hospital where there isn't single agora for medicines? This whole business is based on distortions and layers of fat that have been accumulating for years, and it's hard to go on a diet. Whenever I've tried to go on a diet, it's been very, very hard, but if you know that you are terminally ill, that you will simply collapse if you don't do it, that you've had a heart attack or two, then there's a big incentive for going on the diet.

"And we were about to have a bad heart attack, we were on the brink of collapse only half a year ago. We were about to collapse financially. The state could not keep its commitments and it had no way of raising the money because the markets abroad weren't prepared to give us a dollar."

Why not close the gap in the budget by raising the taxes on capital, or postponing the income tax reform for a while?

"This suggestion is the fastest way to bring about the collapse of the economy. If you want to ensure that we don't emerge from the crisis, then raise taxes on labor and capital. But we want to lead to more work and more investments.

"When you tax, you're going in exactly the opposite direction and the most paradoxical thing is that when you raise the tax rates, with the tax collection we have today, then you also decrease the amount of tax you take in, and this has happened in recent years. Therefore we have to decrease government expenditure and decrease taxes.

"I'm not discovering America here; I'm not even imitating America. I'm imitating Ireland, Spain, New Zealand, Canada and Australia, which suffered from centralized and monopolistic markets like ours and underwent processes of reform, which some of them are still undergoing today. We are making these changes at a very fast rate, and this is being accepted well in the world markets. We are getting excellent reactions from all over the world.

"People say that the way to make the economy grow is to take a rich man and impose taxes on him, and distribute the money to the poor, so that they become recipients of allotments. This is the conception that prevailed here in a big way. That the rich man will leave here is clear, and that the poor man will never work, never get ahead, never improve his position - this is also clear."

The price of water

Why is there positive discrimination in favor of agriculture as compared to industry? Why is it that only there the number of foreign workers is not being reduced and the tax on them is not being increased, thereby not creating job openings for Israelis in agriculture?

"You're right, at least in part. I don't have the ability to get results in every single thing. In agriculture we will have to wait. I regret this and I will make further efforts to save something more out of this budget. Over time we have to bring about a situation in which there will also be Israeli agricultural workers, certainly at the packing plants, and not just there. The Scandinavians work in agriculture. Life without work here is a function of the policy of the extravagant allotments on the one hand, and of the importation of foreign workers on the other."

And why is the price of water for industry and households double the price of water for agriculture?

"I agree that we have compromises in the budget. There are big distortions in everything that has to do with the price of water. Here too there is a monopoly, the Mekorot company, which has a huge surplus of workers who cost millions of shekels. And this way you're paying twice, once because of the monopoly and once because of the price distortions."

How do you see the silence of the members of the Sharon family in all the investigations?

"Allow me to maintain the right to remain silent here."

You see yourself as a future prime minister, so what is it like to work under a prime minister when you most probably think that you could do a better job?

"There's a little thing called democracy and the voter's judgment, and I'm a true democrat in every bone of my body. The voters elected Arik (Prime Minister Ariel Sharon) and I respect their choice. I want to tell you that a very good pattern of cooperation has developed between us."

We are on the threshold of a new year, and the atmosphere in the economy is bad, very bad.

"The signs are indicating that 2004 will be a year of turnaround. The economy, which shrank for two years, with the government unable to raise a single dollar abroad, has changed direction very rapidly and I am convinced that if we implement the reforms I've spoken about, we will get to a good place that everyone will enjoy. Growth benefits not only the strong; it mainly benefits the weak. Next year will be much better than this year."