“There are few precedents in Israel’s history for such developments,” the JP analysts wrote last week. Morgan on the legal revolution of Prime Minister Benjamin Netanyahu and Minister of Justice Yariv Levin. The search for a similar case sent them to Eastern Europe. “We would highlight the legal reforms that took place in Poland after the ‘Law and Justice’ party came to power in 2015 as the closest example in recent years.” In the case of Poland, they mention, it ended in a downgrade of the credit rating.
● Is it possible to reach a compromise? Four legal experts from all sides talk about the reform
● Liquidation sale: three transactions from the last two weeks symbolize the new era in high-tech Analysis
● Power, honor and money reform: the most prominent stain in the legal revolution opinion
The analysts of J.P. Morgan is not alone. Also in the review of the British Barclays from last week, the Polish precedent is mentioned. Whereas HSBC, another banking giant that warned this week about the possible consequences of the legislative initiatives on the shekel exchange rate, mentioned more generally that “questions surrounding the rule of law” had an important effect on the exchange rate in the countries of Eastern and Central Europe, the Middle East and Africa. In this region you can find, among others, Hungary and Poland.
This is not how we would like to think of ourselves. Take for example the growth acceleration plan that the Bank of Israel has been promoting in recent years. You can find our comparison with countries such as Austria, Denmark, the Netherlands or Finland. These are small and advanced countries, which we need to close the gap with – through investments in infrastructure and education. You will not find there a comparison to Hungary or Poland as a source of inspiration.
But more than that: we ourselves were a target for imitation. Israel has become known in the last decade as a startup nation. It’s a pair of words that has already become a cliché, but we must admit that this branding caught on. You could hear the phrase “Startup Nation” repeated over and over by senior officials from abroad who came to visit Israel. Israel was not only “the only democracy in the Middle East”, but also the country that could teach the rest of the world about entrepreneurship and innovation.
Branding, reputation, this is part of the so-called “intangible assets”. In the rather virtual business reality of the 21st century, these assets have become more important than ever. And Israel worked hard on its branding. But in recent weeks, the music has changed. Suddenly it is possible to find comparisons of Israel to other countries, which we would not have dreamed of being compared to.
Not only with Israeli economists who are concerned about the consequences of the legal revolution, but also with external bodies. And not just banks. This week, in response to questions from my colleague Assaf Oni, the analysts of the Economist’s prestigious research unit expressed “significant concern that Israel is heading towards some of the patterns we saw in Hungary and Poland.” Suddenly the Israeli economy is not being talked about in the context of innovation, but in a completely different context. The fear is that the damage will accumulate: we are losing control over the image we have built with great effort.
Demonstration against legal reforms in Poland, July 2017 / Photo: Reuters, Kacper Pempel
The pair of words no investor wants to hear
The government’s legislative initiatives have not yet passed, and we have to wait and see where they will lead. The foreign banks also emphasize in their foreign exchange reviews that for the time being the factors that contribute to the strength of the shekel remain unchanged. But at the same time they talk about uncertainty as a result of the legislative initiatives. And “uncertainty” is not a phrase that foreign investors, whose investment is affected by the exchange rate, would like to hear .
The wave of warnings from the consequences of the legal revolution was joined this week by a statement by senior economists in the USA, signed by 11 Nobel Prize winners, among others. Some of the economic giants of the past decades can be found there: from Robert Solow, through Richard Theiler to Daron Asmoglu. There are none of these seniors And in the statement, they join the concerns of their Israeli colleagues, that the proposed reform “will lead Israel in the direction of Hungary and Poland”.
After the publication of the statement, I contacted the husband of the Nobel Prize in Economics Eric Maskin, who teaches at Harvard and also taught for many years at the Institute for Advanced Studies at the Hebrew University, to hear from him about his concerns on the economic level. His answer was remarkably simple: “In order for potential investors to be willing to put their money into the project, they must feel confident that the government will not simply take over the project for them – and then they will lose all the money.
“In a country with an independent judiciary, this is unlikely to happen. Even if the government wanted to expropriate the project, it is likely that the courts would stop it. That is, they would enforce the property rights of the investors. What is troubling about the reform proposal is that the government would have the last word. So That when the courts tell the government, ‘No, you can’t deprive these investors of their investment,’ the government can simply overpower them. And that will make investors hesitate to put their money in Israeli projects in the first place.”
The warning of economists from Turkey, Poland and Hungary
If we are already dealing with comparisons, this week there was a conference hosted by the Israel Economic Association in cooperation with the International Economic Association, under the title “The Economic Consequences of the Regime Coup”. Renowned economists from Turkey, Poland, Hungary and Russia told their Israeli colleagues what lessons can be learned from their countries, which in recent years have gone through, some more and some less, a withdrawal from the democratic regime. Most of them, by the way, no longer live in their homeland. The conference was organized by professors Itai Ater, Moshe Shaio, and Yossi Spiegel.
One after the other, the foreign economists came up to zoom in on the deterioration of their countries. Each one and her own story. But it was impossible to ignore the similarities, and more precisely, two recurring motifs: an attack by the government on the independence of the judiciary, and an attempt to take over the media. Both mark the beginning of the process, and both of course have clear echoes in Israel, where alongside Levin’s legislative initiatives, there was also an initiative to harm the public broadcasting corporation. “I must say that the more I hear, the more depressed I become,” commented Prof. Spiegel, chairman of the Israel Economic Association.
Two weeks ago, an “Opinion on the Expected Damage to Israel’s Economy” was published, which was signed by 292 economists in the Israeli Academy, including the most senior. In the manifesto, they warn of “unprecedented damage to the Israeli economy” as a result of the legislative initiatives. This is a warning that speaks of a multitude of possible risks, from lowering the credit rating of the State of Israel, to much more long-term damages, such as a slowdown in the rate of growth.
But who has the power for details. When you hear about such a warning, the imagination immediately runs to the collapse that will occur tomorrow morning. But in reality things work differently. As Prof. Danny Roderick from Harvard and originally from Turkey put it at the conference, “the economic account of authoritarian populism can take quite a long time to arrive.” What does this account look like? In Turkey, among other things in the form of 80% inflation.
Similar messages could be heard about Russia, which at the beginning of Putin’s journey actually experienced economic prosperity, and also about Hungary, which managed to maintain a more or less reasonable situation with the help of aid funds from the European Union and foreign enterprises. “Today,” explained Prof. Miklos Koren, “it lags behind its reference group, which includes countries like the Czech Republic, Slovakia, and Poland, in every measure you can think of.” The importance of the union, by the way, also came up in the words of Prof. Honorata Sosnowska, who explained how it uses the threat of stopping aid funds as a lever to stop changes in the legal system in Poland.
Israel is no different from other countries
There are also differences between the countries, explained Sergey Guriev, formerly rector of the New School of Economics in Moscow. Turkey still has a competitive private sector that exports to Europe, but the macroeconomic situation is catastrophic. In Russia, the situation is the opposite. President Vladimir Putin appointed a professional team to manage the budget and the central bank, and at least until Corona, the national figures looked reasonable, “but within Russia,” says Guriev, “competition has been destroyed and there is corruption everywhere.”
Despite the differences, the bottom line is the same, Guriev emphasizes. “We need to communicate to our citizens, colleagues and friends that the destruction of the rule of law is bad for economic growth. That it is likely to end this way, and your country is no different. In many countries they say, my country is special. We will not repeat the experience of other policies.
“I was the chief economist of the European Bank for Reconstruction and Development, and I traveled on three continents. Each country has its own founding myth, culture and mentality. In all of them I was told that the global lessons do not apply to them.” But what the discussion at the conference shows, Gurayev says, is that even after delving into the specific anecdotes of each country, “in the end we reach the same result.”
Towards the end of the conference, in response to a question from Prof. Manuel Trachtenberg, head of the Institute for National Security Studies, Roderick wanted to emphasize something else. Although those present at the conference spoke in their hats as economists, the economic arguments are not the main point. “And if a one-in-a-thousand chance materializes, and your economy grows for 40 years on the back of an authoritarian regime like China’s. Does it matter? You have to remember the main thing, which is what happens to the rule of law, to individual rights, to the protection of minority rights, to people who don’t think like the government.
“These are issues that we may not be very comfortable talking about, because we are economists. We tend to say – if you screw up all these other issues, the economy will also be screwed up. We all said that, but we also said that it could take a long time. Separation of authorities, independence of the authority The judge, freedom of speech and free communication – these are things that deserve to be protected on their own.”