Taking Stock / Happy Guarantees Day!

If you want to retain that patriotic glow after Independence Day, or feel the need to read about Israel's economic achievements since it freed itself from the shackles of an empire 55 years ago - stop reading now.

Israel can boast noteworthy economic achievements, mainly in the field of advanced technology. That refers to more than just Teva Pharmaceuticals: Israel has plenty of companies engaged in technology, chemistry, pharmaceuticals, plastics, communications and software that have become world leaders in their area.

Yet Israel's macroeconomic failings never seemed so acute as before the nation's 55th birthday.

Yes, the shekel and stocks have surged mightily in the last couple of months. But just look at what almost all analysts and capital market players think fueled the gains.

The primary boost came from the promise of American loan guarantees, they say. The day the war with Iraq broke out, the United States officially announced its intention to grant Israel $9 billion in guarantees. Treasury officials reported last week that Israel will be getting the first installment by month's end.

The second reason is the American victory in Iraq. Political and economic pundits believe the U.S. presence on the Syrian border drastically reduces the Middle East risk premium in general, and Israel's in particular.

And the third reason? After two years of bad macroeconomic management by a finance minister in whom Israel had lost trust, the new finance minister presented an economic program that restored the faith of the capital market and business sector.

In other words, America is the chief factor behind the wave of optimism sweeping the nation. The other factor is fond expectations that the government will change its macroeconomic ways after a long period of irresponsible management.

For years, we excused our economic misconduct by noting that Israel is a tiny nation surrounded by enemies. Until five years ago, we insisted that the international laws of economics do not apply here. Just look at how persistently economists and businessmen insisted that inflation couldn't be conquered in a nation like Israel.

Special case no more

It is now clear that the international laws of economics do apply here, and that when Israel's macroeconomic management is responsible, the results can be comparable to that of developed nations.

Or, Israel can mark economic achievement even though it is a tiny country surrounded by enemies. Many cavil that terrorism alone is responsible for the nation's economic ills. But the truth is that responsible macroeconomic management could have spurred the marketplace to far better results, despite our dire security situation.

You may feel the protracted occupation of the Palestinian territories creates social ills that explain some of the failures of the government and administration. But nobody can deny that poor macroeconomic management over years has been preventing the marketplace from realizing its full potential.

The most obvious signs of the macroeconomic mismanagement is the neglect of long-term structural reforms, a lack of uniform economic strategy encompassing all government branches, the bloated public sector that spends some 58 percent of Israel's GDP, a government debt reaching 110 percent of GDP, and a tax burden that is among the highest in the world.

Even more scary than the figures is the speed at which education in Israel is deteriorating, as evident in international tests of high school and university students, and the speed at which wage gaps are widening. Every year, the gaps grow wider, as do the transfer payments meant to bridge the gap, and the less the marketplace is able to bear the burden of these growing payments.

The results are glaring. Israel's government has squandered the fruits of 10 years of prosperity resulting from the peace process and high-tech boom, which brought the nation tens of billions of dollars; it has started the year at a low point at which it can barely roll its debt forward.

We must remember that the American loan guarantees were not meant to solve any foreign currency liquidity problem; Israel has plenty of foreign currency reserves at the Bank of Israel. They were meant primarily to solve the problem of financing the government's deficit and to help roll over its domestic debt. This means that the Israeli government cannot raise money from domestic investors any more without America's help.

It is convenient for us to attribute our need for the guarantees to the intifada, the high-tech crisis and the global slowdown. But those are weak excuses. Bad macroeconomic management, the absence of structural reform, the perennial submission of our leaders and administration to narrow-interest sectors, and the diminishing of Israel's competitiveness are what led the government to its present inability to compete in international and domestic markets without a helping hand from Uncle Sam. The success Israel's entrepreneurs can claim in the world make the magnitude of the government's malfunction all the more glaring. It goes to show how much potential was lost, and how much higher our standard of living could have been, if only we'd have demanded leadership that wanted to achieve economic independence.