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It's the Economy, Stupid?

As Ariel Sharon starts his own party, Israeli politcs might finally focus on economics.

11:00 PM, Dec 20, 2005 • By DANIEL DORON
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"STAYING IN THE LIKUD means wasting time on political struggles instead of acting for the good of the state." This is how Israel's Prime Minister Ariel Sharon explained his dramatic departure from the Likud, a party he helped establish, and his forming of a new party, Kadimah (Forward), from a motley crew of Likud and Labor pols plus a few independents, whose main affinity is obedience to Sharon. Sharon's move was heralded as an "earthquake" in Israeli politics.

But while the reshuffling of political alignments may introduce some rhyme and reason into the Byzantine affiliations of Israeli politics, it is not likely that it will address the two main causes for the governmental paralysis about which Sharon rightly complained: a stranglehold by an unaccountable bureaucracy that paralyses government, and the freezing of key government decisions by an increasingly activist Supreme Court.

Politics is pervasive in Israel because of the government's domination of the economy, a remnant of Israel's Socialist past. Since the government is the chief source of wealth, distribution policies trigger incessant political struggles. They also radicalize politics as each group of special pleaders tries to cloak itself in some adversarial "national purpose."

A MILITARY MAN accustomed to command, Sharon does not seem to consider "political struggles" between differing views, especially within his party, a legitimate feature of democracy. In Kadimah, he and his son, Omri, call all the shots. They frame policy and they alone choose who is to be elected to the party's Knesset slate and who will fill ministerial positions. All other party notables, including the veteran Shimon Peres, are essentially window dressing.

Sharon was outraged when members of Likud--the party he had led to victory--refused to follow his radical shift in policy concerning the Israeli settlements. The Likud rank and file could not comprehend why, contrary to his long and strongly held convictions about the strategic and ideological necessity of all settlements (many of which he has established), Sharon suddenly decided to evacuate one of the most successful settlement blocks without quid pro quo from the Palestinians; why the terrible repercussions he once believed would follow a unilateral Israeli withdrawal, especially from the dangerously radical Gaza strip, suddenly did not matter to him; and, above all, why his dramatic turnaround was so hasty--and coincided with serious legal challenges to his tenure. (Sharon's eldest son was indicted for fraud in the internal Likud election when Sharon overcame Benjamin Netanyahu, while his younger son has received large sums of money from a contractor seeking favors from his father. In both cases people found it hard to believe that Sharon was not aware of the problems.)

When resistance within the party grew and a movement to depose him began to coalesce, Sharon agreed to bring the dispute to a vote in the Likud's central committee. But when he lost the vote he simply ignored it, as he has ignored other party resolutions.

THE ISRAELI POLITICAL SYSTEM--35 billion dollars, over half of the government's budget, which swallows a whopping 55 percent of Israel's GNP, is devoted to transfer payments--has been progressively torn apart by the struggles between conflicting vested interests. And as the power of the parties and of the government weakened, the void was filled by the bureaucracy--(which employs 800,000 people out of Israel's 2.4 million person labor force)--and by an increasingly activist judicial system. The bureaucracy has often relied on judicial cover to maintain the status quo. It has extended its powers by creating ever higher barriers to entry by private initiatives into its domains. But it also often clashes with the legal system, creating additional gridlocks. The end result is an ever growing paralysis of government (its takes a decade to get a major real estate project approved) and a growing willingness to resort to corruption in order to get things done.

The new political alignments are not going to change any of this. Instead, since the Israeli system is already far too centralized - a state that paradoxically leads to its fragmentation and to a growing inability to govern - the additional concentration of power may even make matters worse.

Sharon's new party, Kadimah, has nothing new to say. It offers slogans about "peace with security," but gives no indication as to how Sharon plans to extend his policy of unilateral disengagement, or how he is going to handle the worsening terrorism emanating from Gaza as a result of his unilateral withdrawal and his puzzling reliance on Egypt to curb terrorist infiltration from the Sinai.

The dream of those who framed the Oslo accords that the PLO, an unreformed terrorist organization, will somehow advance peace, has only resulted in the growing radicalization and fragmentation of the impoverished, terrorized, and brainwashed Palestinians. If reasonable relations are to ever be established, and peace is eventually to emerge, Israel cannot remain indifferent to the continuous barrage of anti-Semitic propaganda and anti-Israel hatred disseminated by the Palestinian Authority, or to the indoctrination of school children. Inciting hatred against Israel and Jews is the real root cause for the strengthening of Hamas, which is seen as the only protection against a mortal Israeli threat. It neutralizes the Authority's ability to fight terrorism, and it undermines its popularity, because it is considered a peon of an intensely hated Israel.

Israel can fashion policies to reverse these ominous trends. It can also help to establish in Palestinian areas a rule of law and order by intensifying its war against terrorism. Without law and order there is no hope for fast economic development among the Palestinians and no chance that they will develop a civil society interested in peace.

That the Israeli electorate will probably give Sharon a ringing endorsement is an indication not of Kadima's vigor, but of how weary citizens are with both the Palestinian conflict and domestic politics. Because the Israeli government is so ineffective, Israelis clamor for a strong leader. Sharon seems to fulfill this prescription.

As for the opposition, at least "New" Labor, under the rule of trade union boss Amir Peretz, has a vision. But it is a vision of Israel's darkest Socialist days, when the total domination of the economy by politics was justified by ideology and resulted in a backward economy ruled by a corrupt political system.

Peretz's plan is to significantly increase the minimum wage and to build a special police force to enforce its observance. Higher wages, he believes, will increase consumption and engender economic growth (he apparently forgot about inflation). He wants to reverse the recent reforms which broke the bank monopoly in financial markets. Among other "progressive" measures, he advocates the reinstitution of designated government bonds that would guarantee returns for the pensions funds which his Labor federation brought to the verge bankruptcy. Peretz would also like all workers to join his union (which is a monopoly) and for successful companies to "share" profits with workers.

Otherwise, he asserts, he too believes in "free markets" and competition.

AS FOR THE RUMP LIKUD, with the exception of a few (most notably Benjamin Netanyahu), the old Likud was a single issue party devoted to holding on to Israel's land and resisting the formation of a Palestinian state. Now that much of the Israeli electorate, and even many Likud supporters, have shifted position, Likud remains without a role.

With the election of Netanyahu as Likud chairman, Likud's best chance is to follow the new sense of mission that Netanyahu's remarkable economic reforms created. Unfortunately, not enough people in Likud, or in Israeli politics generally, realize what a powerful force economic growth can be. Not enough of them remember that Netanyahu saved the Israeli economy from collapse and transformed a six-year recession into brisk growth.

The takeover of Labor by an alliance of its radical-leftist elements and the monopoly public unions has stimulated an unprecedented election time debate on social and economic issues. It may also finally delineate the lines separating those who claim that they are moved by a social conscience but really want to widen Israel's welfare regime that has regularly stymied growth, and those who claims that what Israel needs is economic growth that will "raise all boats", rather than wasteful and damaging handouts that for over 60 years have made the lot of the poor only worse.

The surprisingly swift success of Netanyahu's financial markets reform; the fact that breaking up of the powerful bank duopoly (it squandered two decades of savings by lending money mostly to cronies, like the banks did in Japan), did not take six years, as stipulated, but only a couple of weeks; that contrary to the fear spread by the banks strong foreign financial entities, that could compete with them, did pay above market prices for the two government owned banks, and for the banks' provident funds - indicate a faith in the Israeli economy. It also proves the success of these reforms in introducing competition and a more efficient use of savings and investments.

Growth this year is approaching 5%. It may rise next year. Unemployment is falling. So there is a chance that an economic revival may serve as the best antidote to damaging populist policies. But it is only a chance, because after years of indoctrination by a well financed (by millions in US contributions) Socialist welfare lobby, practically every politician is jumping on the anti-poverty bandwagon. Netanyahu will have to labor hard to have the election debate focused on effective economic solutions, but who can do it better than he?

It is not be the first time that populist politics threaten economic growth in Israel. The forthcoming March elections will decide whether regressive politics will again undo reform, and sentence so many Israelis to merely keeping their heads above water and surviving, or whether continued economic reform will enable Israel to finally emerge from the shackles of an impoverished state dominated economy, to grow and prosper. p>

Daniel Doron is president of the Israel Center for Social and Economic Progress, an independent pro-market policy think tank.