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Remaking Israel

International Business: ISRAEL


Will rolling back state control double the economy's size?

From a penthouse terrace overlooking the Swiss Alps, Benjamin "Bibi" Netanyahu is talking excitedly about his bold plans to transform Israel's economy. To make a point, he chops the air as he wolfs down roast chicken and wine to restore himself after negotiating with Palestinian leader Yassir Arafat and Egyptian President Hosni Mubarak. The 47-year-old Israeli Prime Minister sounds like a man in a hurry. "Everyone talks free markets in Israel, but very few are doing anything about it," he says emphatically. "We are doing something about it. We are committed."

Netanyahu's underlying message: Don't underestimate me when it comes to either peace or economics. After months of delay, Netanyahu finally pulled off a groundbreaking accord on Hebron with Arafat's Palestinian Authority in mid-January, shocking many of his hard-line supporters. The deal, which hands over 80% of the last big Palestinian population center on the West Bank, firmly committed the Likud leader to an Arab-Israeli peace process he once was quick to disdain. Now, the ambitious Prime Minister wants to press ahead toward a goal that may be only marginally easier to attain than Arab-Israeli peace: bringing free-market ideas to Israel, where the government has long dominated the economy and provided one out of three jobs.

Netanyahu's vision is bold. By rolling back the state, he seeks to create a high-growth, high-tech economy--the "Silicon Valley of the Eastern Hemisphere" (page 50). Armed with an American MBA and business experience both in the U.S. and Israel, he aims to push through a revolution similar to those undertaken by Margaret Thatcher and Ronald Reagan in the 1980s.

For the first time, Netanyahu is openly talking about including Israel's Arab neighbors in his country's future. By asking skilled Palestinian and Egyptian workers to join Israel's high-tech push, he hopes that spreading prosperity will lock in peace. "We can think of a marriage of common interests, which will get some of the economies around us into the high-tech era," he says.

The hurdles, to be sure, are formidable. Not only does Netanyahu face difficult peace negotiations with Syria, he must persuade Israelis that his economic shakeup will benefit them. Still, the Prime Minister's aides insist he has the political will. "You have to remember, Bibi is stubborn and he wants to see this thing pushed through," says Izzy Tapoohi, an Australian-Israeli businessman whom Netanyahu brought on as senior economic adviser. "He's going to bulldoze these things through."

The first demolition site is Israel's public banking. The three largest banks--Hapoalim, Leumi, and Israel Discount--control not only 80% of Israel's banking and chunks of industry but also dominate securities trading and pension management. Bank Hapoalim accounts for 40% of Israel's bank deposits and indirectly controls 8% of the economy through holdings from chemicals to real estate.

MODEST? The plan is to cut down on rikuzyut, Hebrew for "concentration." "By breaking up Hapoalim there will be greater competition," says Daniel Doron, a disciple of Milton Friedman who heads the Israel Center for Social & Economic Progress, a Jerusalem think tank. Doron, now a Netanyahu adviser, says the Prime Minister "will have to do what Teddy Roosevelt did: bust monopolies."

Although Netanyahu claims his first-year goals are "modest," they are anything but. The government is already lining up potential buyers for controlling stakes in the banks. They include Ted Arison, founder of Carnival Cruise Lines and Republic National Bank shareholder Edmond J. Safra, who flew to Israel for talks with Netanyahu in December. Also set for fast-track sell-offs through public offerings and private deals are 13 state-controlled companies, from Bezeq Israeli Telecommunications Corp. to El Al Israel Airlines Ltd. The aim: to raise $1.2 billion from privatizations in 1997.

Netanyahu wants to go further, from privatizing Tel Aviv's water-treatment plants to setting up privately managed toll roads to ease Israel's chronic traffic congestion. He plans to dismantle the monopoly on domestic public transportation enjoyed by local bus cooperatives. And he is taking aim at other traditional concessions such as air cargo.

If he can push through even some of this agenda, he will change the contours of Israel's economy. By unleashing competitive forces, Netanyahu believes he can spur rapid growth. He sees a doubling of Israel's $17,000-per-capita GDP in 10 to 12 years. The pay-off could also be considerable for the entire Middle East. "As the peace process proceeds, our region will become a much more attractive economic entity," predicts Jacob Frenkel, Bank of Israel governor. He has a green light from Netanyahu for measures aimed at bolstering Israel as a regional financial center, such as full currency convertibility.

Although the Prime Minister's reforms take direct aim at vested interests--from the 700,000-strong Histadrut trade unions to Big Business--timing may be on his side. The unions are weak. And as the first directly elected Prime Minister, Netanyahu has a lock on power that no head of government has enjoyed since independence in 1948.

The situation hardly looked so promising last May, when he startled the world by winning the election. Netanyahu's apparent backtracking on the Oslo peace accords with the Palestinians threatened a return of war drums to the region. There was also sheer ineptitude, from hurried decisions to second-rate appointees. Some blame it on Netanyahu's status as a relative outsider in Israel's power structure. He spent many of his formative years far from home, as a high school student in suburban Philadelphia and at Massachusetts Institute of Technology. So, he had no solid, old-boy network to rely on.

ALOOF. To make matters worse, virtual war broke out between Big Business and the new administration. Before the May elections, more than 300 business leaders had come out for Netanyahu's Labor Party rival, Shimon Peres. They feared that a collapse in the peace process would throw the economy into a tailspin. Only after the Hebron deal did business warm up to Netanyahu.

Some analysts worry that Netanyahu has surrounded himself with yes-men. But he is proving he can get things done. With Finance Minister Dan Meridor, once a rival for leadership of the Likud Party, he pushed through $2 billion in budget cuts--Israel's biggest ever--in January. Meridor designed Israel's trade liberalization in the late 1980s. As a result, in the past seven years, the economy has grown an average 6%, with exports increasing 7% a year. Now, Meridor aims to cut red tape impeding cross-border trade between Israelis and Arabs.

As he works to carry out his plans, Netanyahu will be steering through minefields. Although the Hebron Accord proved that the peace process is alive, further progress will not come easily. He also must overcome skepticism about his economic effort. "By the year 2000 Netanyahu will not have substantially reduced the government's share of the economy," argues Tel-Aviv University economist Haim Ben-Shahar.

No way, Netanyahu replies. While he admits that reality checks may temper his economic plans, there is no doubting his will to make a lasting mark. When close friend Rolando Eisen telephoned the Prime Minister to congratulate him on the Hebron Accord, Netanyahu's response was telling. "He said, `Now look what I'm going to do to the economy,"' recalls Eisen, who gave Netanyahu a job marketing furniture when the young MIT grad returned to Israel in the 1970s. In today's Middle East, Netanyahu seems convinced that peace and prosperity must go together.By John Rossant in Davos and Neal Sandler in JerusalemReturn to top

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