Taking Stock / We Have Harpooned the Leviathan

Now all that remains is to run the country.

As if we lacked reasons for euphoria in the financial markets and in that bubble of prosperity otherwise known as Tel Aviv, we got another one as last month ended. Geological surveys of the deep-sea site known as Leviathan led experts such as Prof. Robert Pindyck of Massachusetts Institute of Technology's Sloan School of Management to conclude that Leviathan may be just the beginning. There could be six more Leviathan-sized natural gas fields in them thar seabed rocks, they think. That would give us roughly the same gas reserves as Iran.


The appearance of Leviathans off Israel's shore in 2010, after long years of assuming there was nothing more beneath the waves than sand, tar and jellyfish, resulted in a snarl-fest of unprecedented belligerence among the exploration companies, the Finance Ministry and the taxpayers over the distribution of the anticipated riches to be landed in the years and decades to come. Everyone has been assuming that if the state gets the lion's share the billions of shekels in gas revenues could solve most of Israel's social ills, the ones we don't see in the soaring indexes tracking local share prices - poverty, corruption, an ineffective public sector, a deteriorating educational system and a monopolistic, overly concentrated business sector. All of which jeopardize the global competitiveness, social solidarity and very future of the state.

Latter-day Chukchis?

As children in Israel we read "A Dream in Polar Fog," by the Siberian-born author Yuri Sergeyevich Rytkheu, who wrote in both his native Chukchi and in Russian. The tale tells the harrowing story of John MacLellan, a badly injured Canadian sailor who is stranded among the Chukchi tribe in Siberia. In addition to depicting the remarkable human ability to adapt to even the worst conditions, the book teaches that everything, absolutely everything, can be made from a single whale, using its bones, its skin and teeth, its flesh and its blubber. Leviathan is truly the solution to most of the Chukchis' problems.

Can our Leviathan solve Israel's social and economic problems? Probably not. If anything, our metaphorical cetacean has the potential to create quite a problem of its own.

The public and its leaders could be lulled into a false sense of prosperity, in which the true state of the economy and of society is obscured. That truth is that Israel hasn't been an economic miracle for a long time. It lags behind most of the world's nations in yardsticks of social equality and the pace of economic growth. The state's competitiveness has been blunted and is under threat. Bigotry and prejudice are spreading like a weed and the effectiveness of the public sector, which is supposed to supply Israel's basic needs, is gradually eroding.

The great economic success stories of the past 50 years took place in states and territories that adopted courageous macroeconomic policies, long on perspective and on commitment, not in those that lucked into Leviathans or other windfalls. China, Hong Kong, Singapore, Thailand, Malta, South Korea, Japan, Indonesia, Ireland, India, Brazil - in all, the leap forward was not spontaneous. It resulted from long-term commitment by politicians, from pragmatic, patient leadership.

We in Israel have been hailing our great feat of weathering the global economic storm while the United States and much of Europe shiver in its wake. We boast of the great might and flexibility of the Israeli economy, and of our excellent macroeconomic management. It's a moving story and true, too, at least in part. But it isn't the whole story.

In the past five years Israel adhered to conservatism in its financial management, partly as a result of the crisis we went through in 2001-2003, as the dot.com bubble burst and the second intifada exploded. When the global economic crisis erupted, we were better prepared. Our banks were not up to their necks in subprime mortgages. Our real estate market was not over-leveraged and inflated like a balloon.

Our intangible assets are crumbling

But while Israel's profit & loss statement may look good relative to the rest of the West, our intangible assets have been crumbling.

The quality of Israeli education has been sliding. Social inequalities are legion. Our transportation infrastructure is backward. The public sector is fossilized and for the most part managed badly. Our business sector evolved dramatically in 1995-2005 and stopped there. Our capital market is riddled with structural problems.

Israel's brisk economic growth and the surge in tax collection in 2010 drove a wave of demands for wage hikes (and strikes ), by all the most powerful elements in the economy. The Finance Ministry was forced to agree to blanket raises in sectors with clout.

To be sure, strengthening the public sector, improving the service it provides and paying attractive salaries to good people are all important things. But the blanket raises for all, from the best to the most incompetent, achieve none of that.

The defense budget has mushroomed to record heights, for no good reason. In fact the reasons are bad ones - it grew thanks to a lack of transparency and because the prime minister, the Finance Ministry and the Knesset wilted before the army of lobbyists the defense establishment fielded. Again and again the Finance Ministry has tried to make the defense budget more transparent and, always, it has failed. Every time there is a sense of prosperity in Israel, the defense budget grows.

The Leviathan found off our shores, and any more out there, will solve none of these problems. They will not formulate and execute structural reforms. They will not make the public sector more effective. They will not teach our children, allocate our resources better or hone our competitive edge. In some scenarios, they will achieve the opposite. As I wrote last week, cheap money poured into giant inefficient systems won't create sustained prosperity and equality.

Four years ago Nobel economics laureate Michael Spence headed an international team of academics, business leaders and government officials that studied 13 nations where economic growth had averaged more than 7% a year for more than two decades. The team's goal was to elucidate the causes of long-term economic prosperity, to nail down how countries turned a corner. In 2008 the team published "The Growth Report: Strategies For Sustained Growth And Inclusive Development."

"Fast sustained growth is not a miracle," the authors wrote. And Israel is not the beneficiary of a miracle. It wasn't included in Spence's study. In fact, looking back 20 or 30 years, Israel ranks pretty low when it comes to the slope at which GDP per capita increased. Well above Israel in the lists are a host of Third-World countries that became emerging markets, and also developed nations that achieved faster growth than Israel.

What leaders need: Credibility

Every fast-growing country is different, but they are all alike in having committed and competent government. They all have leaders who shape growth strategies, communicate them to the public and persuade the public that the strategy will pay off in the future. They can only do that if they are credible and if their strategies are inclusive, meaning no one is left out in the cold.

In Israel, most of the economic growth and rise in living standards in recent years has affected only the richest and most powerful groups. We developed a nation of high-tech and monopolies. The situation of hundreds of thousands of people improved, but millions remained behind.

We market ourselves as a nation of start-ups and indeed, we are leaders in founding start-ups. But the start-up culture exacts a price. You can't run an entire state like a start-up company, changing the business model every two years when the current one doesn't work, an organization built for sprinting, not marathons. Many of the biggest companies to sprout here are actually R&D centers of multinationals. They will disappear as suddenly as they arrived if the Israeli engineers of tomorrow, in 2021 and 2031, can't cut the mustard, if they seem dull next to their peers from India and China, Eastern Europe or Scandinavia.

It's more pleasant to applaud the start-ups and the rising Israeli stock market or to dwell on our newly discovered offshore gas reserves than to thoroughly delve into our deepest problems and seek solutions for them. But the public must start doing that very thing. Only when our leaders realize that they are being measured not by their bluster but by their long-term commitment can we expect change. It will take years, decades - an eternity, in the terms of Israel's fast-paced culture. But it's better to meet the challenge and change our culture before the crisis, not after it.