NEW YORK TIMES & INTERNATIONAL HERALD TRIBUNE
Saturday, July 19, 2003
Israeli Economic Reform: Mixed Bag

By Greg Myre

Benjamin Netanyahu is racing to revolutionize Israel's economy, and he considers it a sprint, not a marathon. In just over four months as finance minister, Netanyahu has cut the top income tax rate from 60 to 49 percent, winning cheers from the wealthy. He is making sweeping reductions in social programs, provoking protests from the poor. He is attempting to raise the retirement age to 67, prompting demonstrations by older workers, and he has revamped the pension system, drawing praise from economists. The national airline, El Al, is being privatized, and Netanyahu plans to greatly reduce the state's role in the telephone, electricity and banking industries. "We are doing two things - making drastic reductions in the public sector and stimulating the private sector," Netanyahu said in an interview. "The country will undergo a short period of hardship as we decelerate from the old system, and then there will be a great spurt of growth."

Netanyahu expects that surge in the second half of next year. In the meantime, Israel is enduring its third year of recession and the finance minister is drawing mixed reviews. As prime minister from 1996 to 1999, Netanyahu began efforts to open up the economy, which was prospering on a wide scale. But in 2000, the high-tech bubble burst in the United States, bringing down Israel as well. Then came the Palestinian uprising in September 2000, which has stalled Israel's economy and been a disaster for Palestinians. On the sidewalk outside the ivy-covered walls of the Finance Ministry, single mothers who are heavily dependent on government benefits have been camping out in tents since Wednesday. "We can't live on what we are getting now," said Sagit Biton, a divorced, unemployed mother of four. Her monthly benefits have fallen from the equivalent of $977 a month to $790 as part of cuts enacted before Netanyahu's tenure, and are about to be further reduced. "I go to the unemployment office, but they don't have any jobs to offer," Biton said.

With Prime Minister Ariel Sharon focused on the Palestinians, he has given broad latitude to Netanyahu, whose restructuring package survived a wave of nationwide strikes and was approved by Parliament this spring. But the women protesters, numbering only a few dozen, have attracted extensive media coverage since Vicki Knafo, a divorced mother of three, walked more than 160 kilometers, or 100 miles, from her home to Netanyahu's doorstep. Amid criticism that he has been insensitive to the hardships of the poor, Netanyahu met with Knafo last week.

But her one-woman protest has been gaining steam and has sparked similar long-distance walks to Jerusalem by impoverished Israelis. Netanyahu's quest for a more market-oriented economy is faring much better in the glass-and-marble office towers of Herzliya, the country's high-tech center along the Mediterranean coast, just north of Tel Aviv. Yossi Sela, managing partner of Gemini Israel Funds, a leading venture capital firm, says the finance minister is chopping through the regulatory thicket that has long stifled Israel. "He's trying to do the right thing by opening the economy and fixing the mismatch between the productive sector and the non-productive sector, which has gone horribly wrong," Sela said.

Sela gauges the improved climate through the mood of foreign investors. In recent months, with a new peace process gaining some momentum, Sela said he is again finding a receptive international audience.

The barometers that measure confidence support Netanyahu's approach. The stock market was up almost 50 percent in the first half of this year in dollar terms. The currency has rallied from 5 shekels to the dollar last year to 4.3 today. Interest rates are falling. However, the economy contracted 1 percent in each of the past two years and is likely to be flat this year. Unemployment is approaching 11 percent. The average Israeli salary is $1,628 a month and shrinking. Israel's economy is an odd combination of the socialist ethos that dates to the founding of the country in 1948 and an entrepreneurial, high-tech sector that flourished in the late 1990's. The government sends a monthly check directly into the bank accounts of all families with children, regardless of financial circumstances. But Netanyahu has slashed the program in perhaps his most controversial cost-cutting move.

A family with five children, not uncommon in Israel, has been receiving $440 a month. That will fall soon to $340 and eventually to $167. Such programs are part of a public sector that accounts for 55 percent of the Israeli economy, and has been growing, compared to the 45 percent for the shrinking private sector. Netanyahu has compared it to a lean, fit man obliged to carry a heavy one on his back.
 
The Hazon Yeshaya soup kitchens, which have four of their five branches in Jerusalem, are serving 2,000 meals a day, up from 500 three years ago. "We see people coming in suits and ties between job interviews," said Abraham Israel, an American businessman who established the soup kitchens. "The health of any society is a balanced budget, and we don't have one," he said. "But you can't do this on the backs of the weakest sector. We are putting working people, and even middle-income people, below the poverty line. This is asking for trouble."