Israel: The Scandal Could Scuttle Both Peace And Privatization

Last May, Prime Minister Benjamin Netanyahu looked as though he had carved out a unique position for himself. As Israel's first directly elected leader, he won a four-year mandate to take control of the peace process and recast the economy in an entrepreneurial mold. But now, prospects of further substantial progress in the peace process are fading along with his hopes of forcing the pace of economic reform.

Netanyahu's undoing is the scandal from an alleged conspiracy to appoint Roni Bar-On as Attorney General. Although Netanyahu avoided a criminal indictment on Apr. 20, his political problems are growing. The scandal arose from Netanyahu's alleged maneuvering to ensure his ruling coalition's support for the Jan. 15 deal to return Hebron to Palestinian control. Instead, nearly half his right wing voted against it.

Now, fallout from the Bar-On scandal is creating further cracks in the coalition. Dissension in his own ranks will make it much harder for Netanyahu to make concessions in the next stage of peace negotiations. And if the peace process falters, it could further crimp Israel's already slowing economy. Ultimately, that could jeopardize Netanyahu's key economic goals of dismantling Israel's traditional cartels, privatizing state holdings, and injecting free-market ideas into the economy.

"NEW BALL GAME." The promise of peace and a mass immigration of Jews from the former Soviet Union kindled six years of unprecedented growth averaging more than 6% through 1995. Growth slowed last year to a still respectable 4.4%, and the government was forecasting 4% this year. But early in April, the Finance Ministry slashed its projection to just 3%. Finance Minister Dan Meridor blames a slowdown in immigration and the Bank of Israel's tight monetary policies for Israel's dimmer prospects.

Although Meridor and Netanyahu both tend to play down the economic impact of the peace process, Israeli business executives are convinced otherwise. They believe it's the key to future growth. Israeli companies have reaped substantial gains from peace. Foreign investment has poured in, and companies have tapped foreign stock markets with share flotations. "The peace process has created a whole new ball game for the Israeli economy," says one foreign banker.

But economic advances sparked by Netanyahu's policies could falter. Foreign investment bankers say an economic slowdown combined with the end of the peace process could stall Israel's privatization program.

LOST WEAPON. Netanyahu plowed ahead with his plans despite the gathering Bar-On crisis. In mid-April, for instance, the government sold a 10% stake in Israel Discount Bank Ltd., the country's third-largest bank, for $140 million. It plans to sell off a 10% stake in Bank Leumi in May and later a controlling interest in Israel's largest bank, Bank Hapoalim. "[The] Leumi sale will be crucial in determining whether foreign interest in the Israeli economy is waning," says a senior Tel Aviv banker.

Betting on Netanyahu could get even riskier for business. Already, the Prime Minister has lost one of the most potent weapons he had to tame right-wing critics inside his coalition: an unspoken threat to form a national unity government with the Labor Party and his own Likud Party. Early in April, Netanyahu even met secretly with Labor chief and former Prime Minister Shimon Peres to discuss the possibility, first floated by Peres. But on Apr. 20, Peres himself nixed the idea and called on Netanyahu to resign.

Now that Netanyahu is far more beholden to his right wing, the task of moving the peace process forward will be even more difficult than before. And economic reform could get lost in the battle for political survival.

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