“It is still not too late to stop the train before the abyss,” so urges another expression of opinion by senior economists in Israel, which was published towards the end of the week (Thursday).
Two months ago, with the swearing in of the new government and the announcement of the series of articles of the legal revolution, it seemed that the basic premise of Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich was that the economy could be taken for granted. that it is possible to completely change the balance between the authorities, and dramatically weaken the judicial branch, without this having a significant effect on investments, growth, GDP in general and the high-tech sector in particular.
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Or to phrase things using Netanyahu’s favorite metaphor, at least in the past: the assumption was that we would continue to enjoy the same economic pie, and that the pie would also continue to grow – and in the meantime we could devote ourselves to dividing it among the members of the coalition.
This was the background to the economists’ previous letter, from the end of January, which warned that this was absolutely not the case. Hundreds of economists, including senior economists in Israel, warned of “unprecedented damage to the Israeli economy”: from damage to high-tech, through brain drain, to damage to Israel’s long-term growth rate. However, their warning was dismissed by Netanyahu, who explained that the “legal reform”, in his words, would actually strengthen the economy – even if the prime minister admitted that there would be “turbulences” along the way.
In the time that has passed since then, one could see the scenarios that the economists were warning about taking shape. An outflow of funds from Israel, pressure from high-tech investors, a jump in yields on government bonds.
“The damage may materialize”
“Since the publication of the first opinion, many indications have accumulated that the damage to the economy may materialize with greater intensity and speed than we anticipated,” the economists write in their current opinion. But as of now, even though the damage is already evident, the train continues to travel.
As the economists remind, they are not alone. Similar warnings could be heard from the top executives of the business sector, from the global economic press and more. On Wednesday there was also a warning from the credit rating agency Fitch.
“The reform,” the Fitch analysts write explicitly, “may have a negative effect on Israel’s credit profile.” Among other things, they explain that, as in other countries that have passed similar changes, the weakening of institutional checks and balances could lead to a lowering of Israel’s governance indicators (WBGI) – which play a central role in Fitch’s model.
The one who knows the rating agencies very well is Prof. Danny Twill be discussed from Tel Aviv University, formerly No. 2 at Bank Leumi and today the manager of the Viola Fintech investment fund, who is also among the signatories of the disclosure. Zidon, who was in meetings abroad this week, says that the people he met with, mainly from the high-tech field but also from the banking field, approached “hesitatingly and apprehensively, as if entering a room where seven are sitting, to ask me what is really happening in Israel.”
On the scale of the rating agencies, says Zidon, who was previously among the representatives of the private sector with whom the foreign analysts met, this is a “serious warning”. Even in the reports of the foreign banks, which he follows, the wording “is more severe than how they described things in Hungary and Poland when they happened there.”
What is the message of the foreign analysts? “Everyone sees in the process that is happening now not a legal reform but a change in the institutional structure of the State of Israel – and a change for the worse,” says Zidon. “A change in the ways of government of the State of Israel and not a change in the legal system.”
From an external point of view, he explains, the concern is for property rights and intellectual property. “But mainly they are anxious that a government has been established that they feel they do not understand.” In fact, Zidon says, this is not unusual. Fitch doesn’t understand most governments in the world. However, since the 1990s, when the governor at the time, Jacob Frankel, took control of inflation (who also signed the declaration), Israel has managed to enter the group of “respectable” countries whose behavior can indeed be understood. And that is what is changing now.
No more change
“In fact, the coalition not only did not stop the legislation, but there were proposals to harm the independence of other institutions besides the judicial system,” the economists elaborate in the disclosure. They mention the proposals to “interfere in the Bank of Israel’s interest rate policy, to appoint a political businessman to the position of chief statistician, to interfere in the management of the National Library, and to damage the independence of public broadcasting and academia.” All these join the things of Sidon. The story we are witnessing is much bigger than a change in the justice system.
In recent weeks, public attention has been captured by fluctuations in the dollar exchange rate. It’s easy to see. But like other economists, Zidon actually suggests not to attach excessive importance to currency fluctuations, which are “another indication”, and suggests looking at the long term as well.
The message of the latest academic research, Zidon explains, is that “when you undermine the governmental institutions, you undermine the economy, and the more frightening message is that when you undermine them, with a very small probability they return to what they were. It is difficult to return from a semi-democracy to a democracy.”
“I don’t think we need concepts like dictatorship – these are concepts that are good for demonstrations,” Zidon says about the reality that will be created if the legislative initiatives are passed. “I don’t know what you would call the government in Hungary, Poland or Turkey. But what will happen in Israel is not democracy, and it will harm growth.”