Benjamin Netanyahu was dismissed as Minister of Foreign Affairs in a phone call from Ariel Sharon, who offered him the ministry of finance in its place. Netanyahu had previously indicated that the foreign ministry was the only portfolio he was interested in holding. The terse and brief phone call ended with a stunned Netanyahu rejecting Sharon’s offer.1
The dismissal of Netanyahu from the ministry of foreign affairs was a shrewd tactic by Sharon that in one bold move solved many of his problems. It reassured Washington of his good intentions by getting rid of the minister who, during the Likud leadership campaign, had adopted an extremely hawkish line towards the Palestinians. It also ensured that Sharon alone would be responsible for conducting relations with the Bush administration. Netanyahu’s replacement, Silvan Shalom, was considered to be much less problematic for Sharon.
Sharon also fully understood that the ministry of finance had proved to be something of a graveyard for politicians with leadership ambitions. Ministers of finance were forced to make difficult economic choices that always carried political ramifications, most of them negative.
This usually meant that the minister offended a particular sector by not giving it a big enough slice of the economic cake. Given the perilous state of the Israeli economy in 2003, it was likely that the minister would have to offend quite a considerable number of key constituencies from which he might one day need support in a leadership challenge.
Part of Sharon’s thinking was a hangover from the Likud leadership election campaign in November of the previous year, during which Netanyahu had taunted him that he knew little about economics. Netanyahu’s assertion during the campaign that the cause of Israel’s economic ills was not the fault of the Palestinians, but, rather, the government’s policies, had also irked Sharon and his advisors.
‘You think you can do better? Go and fix it then.’ Sharon didn’t utter these words to Netanyahu, but his proposal to appoint him to the ministry of finance implied exactly that thinking. Sharon also understood that if Netanyahu took the job it would keep him in the cabinet, while at the same time stopping him criticizing the government’s economic policies and Sharon’s policies on peace and security. He also believed that Netanyahu would be tempted by the offer.
Sharon’s thinking was spot on. As Netanyahu considered his options, he looked back over what had been a very mixed return to Israeli politics since 2000. Despite his renewed popularity, he had overplayed his hand in 2000, and had failed to dislodge Sharon as leader of the Likud in November 2002. There weren’t many political options left to him, as the all-powerful Sharon prepared to present his new government to the Knesset.
The option of remaining outside the government and becoming its chief critic from the right-wing was highly risky for a politician like Netanyahu, who still believed that he would one day return to the premiership. In the spring of 2003, Israel found itself in a virtual state of emergency with the Palestinian peace process on hold and the near-collapse of the economy the most serious issues requiring urgent attention.
What most tempted Netanyahu about Sharon’s offer was his deeply held belief that he was the only man capable of introducing the necessary liberalization of the economy, specifically the privatization of key sectors of it and reduction in Israel’s extensive welfare provision.2 Put simply, Netanyahu wanted to introduce ‘Thatcherite’ and ‘Reaganite’ economic reforms in Israel.
When he spoke with Sharon for a second time, Netanyahu indicated that he was interested in the offer, but demanded total control over economic policy and a free hand to impose the economic reforms, both of which, he argued, were essential in turning the economy around. Sharon agreed to his demands, and so when he presented his new government to the Knesset on 27 February 2003, Netanyahu was a member of the cabinet.
Despite having apparently handed over control of the economy to Netanyahu, during the course of his address to the Knesset on the presentation of his government Sharon reminded his new Minister of Finance of the importance of the economy to his premiership. Specifically, he stuck to his position that it had been the Palestinians and the global recession that were the root causes of the problems:
My new government’s primary mission will be to confront the economic situation, in an attempt to maintain market stability and return to the path of growth and prosperity.
I believe that the members of the new government share a common denominator – in recognizing the importance of this confrontation and in their outlook of the economic path that should be followed.
The economic situation, which has, in the past few years, been affected by the situation of the global economy and the terrorist campaign against us, requires us to make difficult and painful decisions. We will all have to mobilize for this effort. Each one will be required to make concessions and compromises.
I am confident that with the proper cooperation of all of us – the Government, the Histadrut, the employers and employees – we can end the economic recession and return to the path of growth.
It will not be easy. But this government was not elected to make easy decisions.3
It was intended to serve as a gentle reminder to Netanyahu as to who was the senior of the two. Sharon’s comments did, however, provide an an early warning to Netanyahu of the vested interests in the economic status quo that he would have to take on if his reforms were to be fully implemented.
In historical terms, Netanyahu’s tenure as Minister of Finance was relatively short, lasting two and a half years, but his impact was significant as he implemented a series of reforms to the Israeli economy. In many ways these reforms completed the work of Shimon Peres from the mid-1980s. Peres had introduced a programme of economic reforms in response to the hyperinflation that dogged the Israeli economy at the time.
Prior to Netanyahu’s arrival in the ministry, the Israeli economy was characterized by a large and inefficient state sector, groups with a strong vested interest in maintaining the economic status quo, as well as high levels of public debt and inflation. Israel’s welfare state placed an unsustainable burden on the economy.
Netanyahu, as a result, argued that Israel’s economy was in dire need of significant reform, and that the previous government had failed to implement the necessary reforms for fear of offending strong political interest groups. He outlined his views in an interview during a visit to the United States with the Israeli newspaper Haaretz. He argued:
Everything we are doing now has already been done over the past 20 years in other countries that have surged forward, from New Zealand to Chile . . . In the past, Israel was a ‘bad’ country for business – with its Histadrut, taxes, welfare – and things could not go on this way. On the other hand, we have the advantage of being a technological country, and if we combine this with a pro-business climate, our economy will also surge forward. That is the message I want to send in Washington – look at us, see the changes.4
In 2003, there was an additional factor, to which Sharon alluded but about which Netanyahu was much more sceptical: the damage inflicted upon the Israeli economy by the ongoing violence with the Palestinians. Much of the success story of the economy during the era of the Oslo Accords came from foreign investment in the economy, especially Israel’s famed high-tech sector. A lot of this investment turned out to be highly mobile.
When the Second Intifada broke out at the end of September 2000, and the intensity of its violence increased, foreign investors simply pulled their capital out of the country. Laptops were closed and key personnel relocated to Asia or other hubs across the globe. Without realizing it, the Palestinians had discovered an effective weapon against Israel, namely damage to its economy.
Netanyahu accepted the premise that the Second Intifada had hurt the economy, but he argued that the deeper causes of the malaise were to be found in the structural problems inherent in the economy almost since the creation of the state in 1948. He put together a radical plan of action of reforms and methods for dealing with those groups that tried to thwart the implementation of his reforms.
He was fond of telling an old story from his army days. The public sector had become a fat man resting on a thin man’s back, he said. If the Israeli economy was to be successful, it would have to reverse these roles. The private sector would need to become the fat man, something that would only happen with tax cuts and a reduction in public spending.5
There were four main components to Netanyahu’s reform plans: the privatization of key public companies, deregulation and tax breaks to benefit the private sector, wage reform and a shrinking of the welfare state.6 These all constituted ambitious targets, and Netanyahu staked his political reputation on achieving all his goals. Unlike previous occasions, when there was a sizeable gap between his rhetoric and his action, this time he was deadly serious about implementing his ideas.
By and large, from his perspective, he was successful, although the social costs of the reforms were heavily criticized by his political opponents. In terms of privatization, he oversaw the controversial sale of the national airline El Al and a government-owned bank, the Discount Bank, the third largest in Israel.
He saw the private sector as being able to run these companies much more efficiently than the state. He also partly privatized the national telephone company, Bezeq. He was also successful in bringing competition into the energy sector, and encouraged new private ventures in this previously closed sector of the economy.
In the spirit of true ‘Thatcherite’ reform, Netanyahu cut taxes to help stimulate the economy. Like Margaret Thatcher, Netanyahu was a firm believer in putting money into people’s pockets and letting them choose how best to spend it, rather than giving it to the state to allocate in services. This policy proved to be very popular with Israel’s middle classes, but naturally was less popular with lower-income groups.
As Forbes magazine noted, the highest rate of individual taxation was reduced from 64 to 44 per cent, and corporate tax was reduced from 36 to 18 per cent. Controversially, government spending was capped for three years. The pension ages were raised for both men and women.7
In trying to attract greater foreign investment into the country Netanyahu liberalized the bond markets to encourage the inward flow of foreign capital. He also liberalized currency exchange laws. Netanyahu viewed high levels of foreign investment as vital to the health of the country. He wanted to make investment as easy as possible.
In terms of the trade unions, Netanyahu once again took a leaf out of Margaret Thatcher’s book. He moved to essentially take on the unions in an attempt to weaken their power to resist the changes he wished to implement. He privatized the pensions of workers, and removed the right to strike unless the union’s members had approved the industrial action in a ballot. In addition, he introduced legislation to make it easier to fire employees.
He saved his greatest wrath for what he saw as the militant trade union practices in the Histadrut, one of the last bastions of the Labour Zionist economy. He understood that the Histadrut appeared to have the power to shut down the country whenever its leaders felt like it. The frustration and lack of patience was clear for all to see. He argued:
This has to be changed by law. Otherwise, this isn’t a state. It’s madness. A group of gangsters and hypocrites is oppressing workers everywhere, preventing a recovery program that would save the workers, shutting down the economy and sending factories fleeing, causing the most strikes in the world, while the entire rest of the world is streamlining and competing, and there’s a free flow of products and goods. We can’t continue this way.
The industrialists agree with me, but aren’t standing with me. Essentially, I’m fighting a one-man battle for the country’s future. That’s how I feel.8
He then argued that there were no alternatives to economic reform, and that the leaders of the Histadrut were living in fantasy land. He understood that arguably his most decisive conflict would be with the Histadrut, part of whose leadership led the campaign to block his reforms. He went on:
What does the Histadrut want exactly to happen here, do they think someone will let us live like this? We’ll just get trampled over by billions of Chinese and billions of Indians . . .
Who could come to a country of high taxes, insane bureaucracy and swollen unions? Who would come to such a country? What are they thinking in the Histadrut, that they’ll send us back to Clerksville? Histadrutstan? Welfare-handout-land? We simply don’t have an existence if we do not make these necessary changes.9
In terms of the welfare state, he followed the Thatcher model by making it harder to get unemployment benefits, and by offering incentives to work for the individual and to the companies to hire them. He especially wanted to encourage greater employment levels among the Israeli Arabs and the ultra-orthodox. These two sectors were previously viewed as having poor levels of employment, and were costly to the state.
The results of the reforms started to be felt almost immediately. Typical economic indicators such as Gross Domestic Product rose by an average of 5 per cent a year from 2003 onwards. By 2006, exports of Israeli goods and services had more than doubled, and public debt was reduced to more sustainable levels. The unemployment rate was around 11 per cent when Netanyahu took over the ministry in 2003, but fell to around 6 per cent by 2008.
Crucially, taxes went from 35.6 per cent of GDP in 2000 to 30.5 per cent in 2015. By 2007, the reforms that Netanyahu introduced during his time in the ministry meant that Israel was able to balance the state budget.10 Netanyahu still credits these reforms for making Israel’s recent high-tech boom possible.
The reforms had not been without their critics, many of whom were in the Likud. The party had traditionally been associated with protecting the interests of lower-income groups in Israeli society, and had developed strong ties with Israelis of Sephardic origin, many of whom fell within this group.
Critics focused on the charge that Netanyahu’s reforms had increased social inequality in Israel. In layman’s terms the rich got richer, and the poor became poorer under Netanyahu. This was certainly true, and the widening income gap between the high- and low-income workers would come back to haunt him later in his political career.
Even after he left the ministry, Netanyahu continued to keep a close eye on the reforms and lobbied for additional ones. After his return to power in 2009, he was careful to appoint ministers of finance who would continue the reforms he believed still to be needed in the economy. Indeed, Netanyahu’s first choice for the ministry would be Benjamin Netanyahu himself, and he remains reluctant to entrust the ministry to traditional Likudniks who favour a more redistributive economy.
Naturally, those who look at the American influence on Netanyahu focus on the political aspects of this impact. In economic policy, Netanyahu was equally, if not more, influenced by right of centre American economics such as Reaganomics, and economic theories like the ‘Laffer Curve’, put forward by American economists. In this respect, Netanyahu did not appear to belong in the Likud.
This disconnect between Netanyahu and the Likud on socio-economic issues appears all the more remarkable given the strength of feeling within the party that it represents the disaffected in Israeli society, and not the fat cats. Despite shifts in Israeli politics, the Likud has never been the traditional party of the middle class or the wealthy – the very groups that saw the greatest advancement as a result of Netanyahu’s package of economic reforms.
Ariel Sharon was no fool. He had appointed Netanyahu in the knowledge that if he did implement the economic reforms, he would lose many friends in the party. For once, Netanyahu portrayed himself as putting the good of the country above and beyond his own narrow-based political interests. While it was clear that he hoped to attract new party members to the Likud from the middle classes and the high-income groups, the party remained very much in the pocket of Sharon and his supporters.
Throughout his career, Netanyahu has attracted headlines for his apparent hawkish approach to the peace process, but in terms of impact his economic reforms have been as important in shaping the development of the state as his policies towards peace and security. It would be an exaggeration to suggest that Netanyahu was a one-man band (as he suggested to Haaretz), but among the political elite he had few peers who felt strong enough to take on the powerful economic cartels and other vested interest groups in the country.
In drawing inspiration from the United States for his economic policies, as well as Margaret Thatcher, Netanyahu once more illustrated that he was not a conventional Israeli politician in the traditional sense of the word. His outlook and orientation were more international and globalist. He was very much a man out of sync with much of the political elite in Israel, which focused more heavily on domestic and regional issues.
For Netanyahu, with the onset of greater globalization and linkage between economic markets, it was a case of adapt or die. His reforms were, at times, not wholly perfect, and some were only partially implemented during his two and a half years as Minister of Finance. Without the reforms, however, Israel would have been poorly prepared to try to weather the storm of the global recession that hit the world’s economies towards the end of the decade.
The programme of reforms would not be fully implemented due to political developments in the peace process, which eventually brought Netanyahu’s time at the ministry of finance to an end. Successors continued the reforms, albeit at a much slower pace. In some ways Netanyahu, without knowing it, in August 2005 timed his departure from the ministry well. The global economic crisis was just around the corner, and that storm was left to his successors to weather.