During a meeting in the United States last week, Yair Netanyahu boasted that his father, Prime Minister Benjamin Netanyahu, is the one who turned Israel from a primitive economy that dealt only with exporting oranges into the thriving one it is today.
"He took a country that, besides the existential threat it was under, was... pretty much a Soviet-style, socialist, primitive economy, and no exports, besides oranges, or something like this," Yair Netanyahu said at an event organized by Trump supporter and Adelson-backed Rabbi Shmuley Boteach.
"The main reason why Israel was isolated is because it was weak," Yair Netanyahu added, "everyone wants to be friend with the strong.
According to his son, Benjamin Netanyahu "turned Israel’s economy into a free capitalist market, into a thriving economy, and now its GDP per capita is higher than Japan’s.”
Except for the factual error (Japan’s GDP per capita, modified for purchasing power parity, is still higher than Israel’s by some $6,000, and this is after 30 years of economic slowdown), one cannot deny there is a grain of truth in his statement.
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Netanyahu the father is undoubtedly identified with massive economic change in Israel, mainly a conceptual upheaval in the domestic economy. His “fat man thin man” motto, in which the fat man (the public sector) rides on the back of the thin man (the private sector), inspired his policy of shrinking the welfare state by budget cutbacks and tax reduction. This changed Israel’s economic approach from one of a welfare state to an American-style, neo-liberal one.
In fact, he should be credited with huge economic achievements during his tenure as finance minister from 2003 to 2005. From every aspect, he saved Israel’s economy from collapse. He came into the position when Israel was in the worst economic crisis of its history – the second intifada, and the only time in history when Israel suffered a recession, that is, a contracting GDP – and succeeded in extracting the economy from the crisis. He moved Israel to a speedy growth track and even gave it the tools that were necessary to get through the 2008 global economic crisis intact.
He did all that with a number of painful, unpopular but necessary steps, including massive budget slashes (for the record, his predecessor in that post, Silvan Shalom, started the cutbacks, but Netanyahu continued them even more forcefully). Educational funds and local governments were hit mercilessly, and it took them many years to recover. He also cut National Insurance funds and reduced taxes to accelerate the economy.
At the same time, he took advantage of the economic emergency to carry out historic structural changes, reforming pension funds and capital markets, as well as the benefit system, linking allowances to employment. In fact, Netanyahu moved Israel to the modern approach of paying allowances “from welfare to work,” which resulted in record-high employment rates.
The outcome was historic in two senses. First, it helped stall the immediate, acute crisis by stopping the government bonds landslide and solving the budget crisis. Stopping the landslide, along with successful military moves to stop the intifada – led by Prime Minister Ariel Sharon, who deserves a large part of the credit for the success of Netanyahu’s economy – renewed growth.
Second, Netanyahu created the infrastructure for a growth momentum as a result of the capital market reforms, but mainly as a result of the labor market reforms. The rapid labor market growth from 2003 to today is attributed in no small part to the budget slashes he led.
Historical distortion, and some serious nerve
But if Netanyahu does deserve great credit for Israel’s economic success in the past 15 years, it is still a far cry from the foolish bragging of Netanyahu junior.
When Netanyahu became prime minister in 1996, Israel already had an expanding free-market economy. The country had already opened itself to some competitive imports, and has already conducted reforms to allow free-market foreign currency trading.
The Yozma Group, founded at the beginning of the Israeli high-tech era and credited with creating the Israeli venture capital industry, was set up by the Rabin government in 1993. Even the massive reform that led to Israel’s first private colleges was carried out by the Rabin government. The country’s modern medical industry was founded via the Health Law, legislated by the Rabin government.
Israel’s biggest period of growth was in the early 1990s, a result of the moves that got the country past its economic crisis in 1985 and the range of reforms that came in its wake; the 1 million strong Russian immigration wave, which also had nothing to do with Netanyahu; and the Oslo Accords, which were signed despite Netanyahu. The moment Netanyahu stepped into the prime minister’s shoes, most of these processes were halted, or even reversed.
Worse perhaps, Netanyahu’s brave moves as finance minister in 2003-2005 did not continue. His failure in the 2006 elections, when, under his leadership, Likud contracted to 12 Knesset seats, caused him to change tactic. From Mr. Economy, he became Mr. Security and completely abandoned the economic field. Evidence of this is the fact that he put political rivals at the finance ministry, likely wishing them to fail.
A review of Netanyahu’s prime ministership shows a lack of involvement or care, a lack of nerve and sometimes even intentional economic destruction. Granted, he took a number of positive steps: the Economic Concentration Law, designed to limit the economic power of the few; forcing banks to sell off their credit card companies; the Sheshinski Committee, which called to raise Israel’s earnings from its natural gas reserves and other natural resources; steps to reduce bureaucracy; investment in infrastructure. But none of these are historic measures leading to an upgrade in the country’s economic system. And Israel’s weak spot, its education system, has been entirely neglected under his rule.
If the prime minister were to be given credit for any historic economic measures over the past 10 years, it would be decision 922, which reduced the budgetary discrimination against Israel’s Arab citizens by some 10 billion shekels. On top of this came another two programs for advancing the Bedouin community, funded with 5 billion shekels.
These two plans pitted Netanyahu in a bitter battle against the far-right ministers in his government. To his credit, he fought and saw the measures through, leading to the results we are starting to see: The advancement of the Arab middle class and the increase in political moderation among the Arab community. Netanyahu deserves credit for his brave investment in the Arab community; here, he proved his leadership.
Unfortunately, this example is more than rare. Regarding the ultra-Orthodox Jewish community, for instance, Netanyahu sacrificed Israel’s economic future on the altar of his own political interests. The results can be seen in a graph published by the Bank of Israel: Israel’s rate of GDP growth per capita is shrinking, and the gap between us and developed nations is growing.
Netanyahu’s promise at the start of the decade to have us among the world’s 15 most advanced countries is nowhere near becoming reality. The reason is that he wasted the decade, and didn’t do what was necessary to get us there.
To credit Netanyahu with Israel’s evolution from an orange economy to a high-tech economy is not just a historical distortion. It takes some serious nerve.