(graph added by this blog)

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Issue 110, July/August 2008

ECONOMY

Roots of the Neoliberal Takeover in Israel

by Orly Benjamin

http://www.challenge-mag.com/en/article__224/roots_of_the_neoliberal_takeover_in_israel

I

t is customary to define globalization with a view to the threefold mobility of commodities, labor and capital, a mobility that diminishes the capacity of nation-states to protect economic borders. When the proponents of globalization want to emphasize that it opens new opportunities, they also dub it the “Information Economy,” claiming that, via the internet, knowledge too respects no national boundaries.

I take my point of departure from Ankie Hoogvelt’s Globalization and the Postcolonial World: The New Political Economy of Development (2001, Johns Hopkins). Following her lead, I propose to view globalization as a colonialist phenomenon, in which the system of dependency and military rule is replaced by an economic order based on the needs of subject nations for loans. A code of financial management, known as the Washington Consensus, is implemented by three bodies that offer the required support: the US Treasury Department (Note added by this blog: the Federal Reserve), which directly influences the nations dependent on it (Israel, for instance); the International Monetary Fund; and the World Bank. Their actions focus on the organizing principle of “stabilization,” which means a number of things: liberalization (the relaxation of control over national boundaries where goods and capital are concerned); privatization (Note added by this blog: banking seigniorage laundering); and less state regulation of economic activities. (Note added by this blog: less democratic overview on economics and banking)

The historical process

In their 2007 article, “The Politics of Institutional Reform: the ‘Declaration of Independence’ of the Israeli Central Bank” (Review of International Political Economy 14), Daniel Maman and Zeev Rozenhek explored the process that Israel has undergone. They anchor it in the social and political construction of a “crisis” of galloping inflation that marked the close of the 1970’s. These were years when American economist Milton Friedman was lionized within the ranks of the Likud (then the governing party). Triple-digit-inflation gripped Israel at the start of the 80’s. It appeared to endanger the stability of the nation. The apparent need for an emergency solution made it possible to shape public policy into the mold prepared by the Washington Consensus.

Maman and Rosenhek have studied the way in which Israel submitted to the first demand of the Consensus: financial and budgetary discipline. Discipline was implemented in 1985, when the Knesset amended the Bank of Israel Law, forbidding the Bank to print money for loans to the government. In the years when the state was being established, such loans had been needed to cover inevitable budgetary deficits: for instance, to finance the absorption of immigrants, to gain quick industrialization and especially to ensure full employment. The last was considered crucial to prevent new immigrants from moving elsewhere. The amendment to the Bank law was part of a process entrenching neoliberalism, a policy characterized by the massive transfer of power from various government agencies to the Finance Ministry and the national Bank.

From the work of Maman and Rosenhek, it emerges that the Washington Consensus was not imposed on Israel from above. It was rather the gradual product of a merger between forces in the American Treasury Department and certain Israeli professionals, who made themselves a niche at the center of power—the Finance Ministry.

At this time US President Ronald Reagan was developing a neoliberal administration bent on strengthening the Washington Consensus both domestically and abroad. In order to wield its weight in Israeli public policy, the Reagan team adopted a new pattern of action. In the autumn of 1983, Secretary of State George Schultz appointed four economists, headed by Herbert Stein and including Stanley Fisher (today Governor of the Bank of Israel), to provide advice on Israel’s economy. A number of conferences on the topic took place in Washington with the participation of economists from the Israeli Finance Ministry and the Bank, as well as the US—especially the State Department. By means of the academic exchanges, the impression of force was softened. Directives were formulated as recommendations and suggestions. The new policy appeared to develop as a voluntary matter, guided by the professionalism of Israeli economists who weighed the US proposals independently. At the meetings there was no discussion of the fact that Israel, in order to surmount the crisis, had recently requested $1.5 billion above the usual American aid.

October 9, 1984. US President Ronald Reagan and Israeli PM Shimon Peres at a White House press conference. Photo by Herman Chanania. Courtesy of the Israel Government Press Office.

Seminars involving American and Israeli economists had begun at the start of the 80’s. In this framework, the Americans, including Stanley Fisher, were already proposing methods to stabilize the economy.

The reform of 1985

The cooperation between American and Israeli professors came to clear expression in the reform of 1985. One year earlier, George Schultz and Shimon Peres had signed an agreement establishing an Israeli-American group to formulate an economic plan, which was presented as a condition for the transfer of the extra $1.5 billion. At the end of a visit by Herbert Stein, a paper was unofficially handed to the Israelis, containing a list of steps to be included.

The economic plan aimed to accomplish two declared goals: (1) reduction of the budgetary deficit to a point of near balance; and (2) an attack on the mutually reinforcing inflationary pressures in the market. The second goal was to be coordinated with the Histadrut (the General Federation of Labor, which then contained most public-sector workers). It would include agreed reductions in wages, prices, credit and the value of the currency. Both goals had the effect of curbing the unions to the breaking point. The idea was to reduce the cost of the public sector and ease pressure on the budget, enabling a change in the structure of taxation according to the Washington Consensus.

The main points of the plan were these:
• A 2% reduction in staff each year in all parts of the public sector.
• Reduction of the deficit and, as a result, of government debt.
• A fixed currency exchange rate.
• A wage freeze.
• The aforesaid amendment to the Bank of Israel Law, forbidding the printing of money for loans to the government.
• Cancellation of so-called patam deposits, by which Israeli citizens could save their money in the form of foreign currency as a hedge against inflation.

By means of emergency regulations, and later by a special law, the government established supervision over the prices of many basic goods and services. In tandem, the shekel-to-dollar rate was fixed at 1200 (old shekels), and there was a general wage freeze. Israel then received the extra US aid.

In the long run, the first principle listed above—the 2% annual reduction in the staff of the public sector—turned out to be the main factor in establishing a gap between (1) tenured, unionized employees and (2) people recruited to deal with the functional needs of government ministries. The state has thus been compelled to develop a secondary labor market, composed of workers hired by temporary-help agencies, personnel (“manpower”) companies and service contractors. This method lowers costs by releasing the government from pension contributions. Since the proportion of women in the public sector is high, they are especially affected.

November 5, 1984. Yisrael Kessar, General Secretary of the Histadrut, signs the package deal for economic reform with (from right) Finance Minister Yitzhak Moda’i, PM Shimon Peres, Kessar and Eli Hurvitz, Head of the Manufacturers Association. “The agreement curbed the unions to the breaking point.” Photo by Harnik Nati. Courtesy of the Israel Government Press Office.

Using the principle of staff reduction, moreover, the Finance Ministry cancels positions each year in the bodies it funds and does not permit them to make replacements in kind. In this way, for instance, the Ministry of Welfare lost the capacity to appoint psychological counselors to child victims of sex abuse. Finance’s aim in such cases is to privatize the post by outsourcing. A non-governmental organization will win the concession to manage the counseling unit. If the profitability of the service becomes dubious, the number of bodies interested in performing it drop.

The Arrangements Law

Known in Hebrew as hok hahesdarim, this is a law that the government submits to the Knesset annually in conjunction with the Budget Law. It brings under one rubric a great many laws and amendments that need Knesset approval in order that the government may implement its economic policies. The Arrangements Law, like the amended Bank of Israel Law and the entire reform, was passed for the first time in 1985, when Shimon Peres was PM, as an emergency measure completing the Economic Stabilization Plan. There is much significance in the fact that the law was meant for an emergency: it sidesteps the normal legislative process, which is supposed to be based on professional judgment, instead subjecting that process to gross economic considerations. The government gathers laws and amendments in many fields and submits them in one glob. Since 1985, the Arrangements Law has become a permanent adjunct to the Budget.

This emergency-measure-turned-permanent arouses criticism in and outside the Knesset. It is claimed that it sidetracks the work of the Knesset Legislation Committee. Whisked through in a rush, the procedure does not enable Knesset members to conduct a thorough discussion and crystallize positions based on each of its topics.

The Arrangements Law is the tool by which the Washington Consensus bends the local welfare state to its will, without regard for democracy. A clear example was a case that began in 1992, when a group of feminist Knesset members succeeded in legislating broader support for single-parent families. Ten years later, in the Arrangements Law for the Budget of 2003, their success was overthrown by a single article, which shrank the parameters of eligibility.

The Law Requiring Tenders

In 1979 the Finance Ministry’s General Accountant published internal voluntary guidelines, according to which most government contracts with outside firms would be awarded by means of tenders. Prior to that year, public corporations were not obligated to this. In the earlier period, according to Arie Reich’s doctoral dissertation (International Liberalization of Public Procurement 323, University of Toronto 1997), the cost of the tender was not the exclusive criterion for choosing the winning bid. The tenders were closed, and quality had central importance. These interactions of government and business included not just typical commercial tenders, such as purchase of equipment for the bureaucracy, but also the purchase of labor services.

In the spirit of GATT (the General Agreement on Tariffs and Trade), the Law Requiring Tenders, passed in 1992, was applied to everyday practices in a manner that created a “culture of tenders.” We shall deal here with one of these practices: the preference for the lowest bid.

In effect, this practice amounts to a “race to the bottom,” ensuring dismal job conditions. The deterioration is related to the attempt by contractors to make bids with a good chance of success. Even the contractors admit that low bids lead to systematic violations of the labor laws.1 Bidders who try to maintain a profit margin contribute to these violations. For example, when the minimum wage is added to other basic costs, the hourly total is 25 NIS. But the labor cost generally listed in the bids is 17 NIS per hour 2; this represents the minimum wage without additional expenses, such as reimbursement for transportation or payments to a pension plan.

Budgetary policy

In recent years the Finance Ministry has gained great importance in determining Israeli policy. The five clerks in its Budget Department may be said to have more political power than the Knesset or the other government ministries.

In Finance there is a branch that prepares the national budget and crystallizes the state’s economic policy. It employs about fifty economists, and they want to privatize just about everything: welfare services, the ports, the electric and telephone companies, and the post office. They also want to privatize parts of the educational system, the army, the police and the prisons. They want to privatize the Lands Authority. They count every budget cut as a victory. Competition is their religion.

These economists prepare the Arrangements Law each year, exploiting its non-democratic character in order to steamroll their plans through the Knesset without opposition. A situation has thus been created where the decisions shaping the society are taken not by the parliament, but rather by a few dozen youngsters with Bachelor’s or Master’s degrees in Economics, whose sole purpose is to cut costs.

Motivated by an extreme right-wing economic ideology, this group is the force behind the reductions in services, the privatizations, and the violations of workers’ rights. It is responsible for the diminishment in the country’s power to care for its citizens at the hour of need—whether in Kiryat Shemona during the Second Lebanon War, in Sderot during rocket attacks, or, for that matter, in Tel Aviv. If the Arrangements Law keeps appearing each year, this group will continue to shape Israel along the same neoliberal lines. 

January 4, 2006. Ceremony marking sale of Bank Leumi shares to a private investment group (Note added by this blog: Cerberus, owned by former US vice-president Dan Quayle). Bank of Israel Governor Stanley Fisher (left) with PM Ariel Sharon and Deputy PM Ehud Olmert. Photo by Amos Ben Gershom. Courtesy of the Israel Government Press Office.