“Israel’s economic policy over the past 15 years has been endangering the nation’s security. When I said so in the past, people answered back “Think you’re so wise?” says Prof. Yaron Zelekha, former Accountant General at Israel’s Ministry of Finance. “By now it’s no stroke of genius to propose that such an economic policy contributed to the situation on October 7, but there were indications far earlier.”
Zelekha is currently a professor of accountancy and economics and he heads the School of Accountancy, Economics, and Financial Management at Ono Academic College. He served as Accountant General at Israel’s Ministry of Finance between 2003 and 2007, when Benjamin Netanyahu was Finance Minister. In this interview, he speaks about the destructive influence of the many years of reductions in the defense budget, and about the inefficiency of the public sector — including the security services. But he begins by explaining how Israel reached its current pass in the first place.
“The GDP in Israel — the gross domestic product — comes to something like 2 trillion shekels and it’s built from 5 factors: private consumption, private investment, government outlays, exports, and imports. In a normal situation, exports and imports more or less balance out and the rest are responsible for the level of the GDP. But in Israel today, private consumption amounts to about 50 percent of the pie, and that’s very low as compared to a country like the USA where it’s 68 percent, or the UK where it’s 63 percent, or as compared to Israel in the past.”
What about other countries in Europe, where private consumption is relatively low?
“It’s true that in countries like Germany and Sweden, private consumption is lower than in the USA and the UK, but their governments are very efficient so that the factor of government outlays compensates for the limited private consumption. In contrast, Israel falls short on both counts. On the one hand, private consumption isn’t allowed to grow into an engine big enough to propel the GDP. And on the other hand we don’t have a government of Germans and Swedes to propel the economy. We lose on the swings and lose on the roundabouts. No private consumption and no governmental efficiency.”
So the main problem is simply low consumption?
“The low private consumption is a result of unsuccessful policy. One of the main factors restraining private consumption in Israel is that the trillion shekels of private consumption are channeled into our own country of thievery, where competition suffers from many problems. If I let you choose where to shop with a trillion shekels, you wouldn’t shop here. You’d shop somewhere much cheaper, in Europe or in the USA. But we’re forced to spend the trillion shekels here in our beloved land of robbers. As a result, the consumers’ money — instead of driving the economy — lines the pockets of monopolists, sole licensed importers. bankers, and an inefficient government.”
It’s no wonder, then, that so many Israelis make purchases overseas for shipment to Israel.
“Israel is under-importing. When consumption rises, imports should rise. But in Israel, that doesn’t happen. Although everything you might want is priced lower by tens of percent a few hours away by plane, imports are blocked. Ideally when exports rise there are more dollars circulating, the dollar weakens, and imports become cheaper, raising the consumers’ standard of living. But in Israel the surplus from exports doesn’t trickle down to raise the consumers’ standard of living. In our lopsided economy, it’s impossible to extract the full benefit from the export engine. Our economy is repressing private consumption by means of distorted prices and high taxation, while the government is large and dysfunctional.”
So what economic policy would help Israel out of this predicament?
“The main point is to liberate the consumers and enable them to freely drive the wheels of the economy, without having the banks and the big importers slice themselves an unnecessarily large share at the expense of the consumers and small businesses. When I came to the Finance Ministry at the start of 2003, the national debt had reached almost 100% of the GDP, the deficit was 10% of the GDP, and the income per capita in real terms had sunk to 49% of the income per capita in the USA — a drop that put us back at the 1960s level — while the price of housing had risen to 96 monthly salaries for an average apartment. That situation was an all-time low for our economy, worse even then 1985. But after 5 years of a policy that stopped repressing private consumption, the real income per capita had risen to 62% of the income per capita in the USA. In 2007 prices were 5% to 10% lower than in the USA, and housing prices dropped to a level of 80 monthly salaries for an average apartment. And prices could have dropped farther if the policy that I’d set out had continued. Today apartment prices have risen to 170 monthly salaries on the average and prices overall are higher by 35% than in the USA.”
What are the implications of that economic predicament for our security?
“The powerful growth during my term enabled us to channel 7% of the GDP to security. But in the 15 years since then, the economic policy has been entirely different under Netanyahu, Gantz, Bennett, and Lapid. As a result, the economy was in trouble even before the war. Real income per capita in Israel, with purchasing power factored in, dropped to less than 50% of the income per capita in the USA. In that situation, it’s impossible to keep channeling 7% of the GDP to security as we’d been doing before, and so all those prime ministers and ministers of defense and finance were forced to cut back on security. Before the war hit, the defense budget stood at 5% of the GDP as against the former 7% that I mentioned. The difference amounts to 40 billion shekels per year. But that’s not all. The defense budget includes two elements: salaries and operations. The salary part has increased in the meantime, meaning that the part for operations — that is, the money available for weaponry, training, and so on — suffers twice over. There’s a smaller pie to divide up, and operations receives a smaller fraction of it.”
You’re saying that economics is the key to security.
“Yes. Everyone knows about the Battle of Waterloo, where the British and Prussian armies fought Napoleon to his final defeat and ended the Napoleonic Wars. Who was the most important participant in the battle? None of the commanders. It was Rothschild, the funder of that carnival, and without him the British and the Prussians couldn’t have advanced a single step toward the enemy. In Israel, our distorted economy is unable to support the army and therefore downsizes it. Divisions and air squadrons are closed down, training is reduced, and less ammunition is manufactured. The 40 billion shekels missing from the budget make a dent that the security services feel strongly — not to mention the similar effect on health, education, and infrastructure.”
Fighting against monopolies just as against the (not comparable) Hamas terrorists
Zelekha believes that the core crisis in Israel’s economy is the cost of living and the government’s unwillingness to deal with it. The high cost of living is caused by the hampering of free competition, by corruption and intermingling of the power of capital and the power of government through the agency of public servants and politicians who favor the wealthy, and by the monopolies, sole importers, and banks that dominate the economy. Under that banner, Zelekha founded the New Economic Party, which ran in two elections — for the 24th and 25th Knessets — but did not pass the electoral threshold.
The million-dollar question is how to fight the cost of living and the housing crisis.
“In fighting the cost of living, there are three fronts to address. The first is against the monopolies and the sole importers, and most of it is rather easy to tackle. Cancel all the customs duties and all the local standards, and most importantly ֮— break up the interlocking ownership of the import companies. If you’re sole importer for a big international player, you shouldn’t also be the sole importer for a competing international player, because then you’re fixing prices for them both. If you’re a local monopoly manufacturing some product, you shouldn’t also be the main importer of the same product because then you’re blocking competition against yourself.”
Is it really that simple to stop the monopolies?
“It won’t be an instant cure. Battling against the tycoons’ practice of centralization, and against their attempts to control the economy, is a ceaseless job because capital always wishes to create centralization. But the government must fight back. Just as it fights terrorism — although those two enemies are obviously not comparable. Even a small change will bring a plentiful return.”
So that’s the first battlefront against the cost of living. What’s the second?
“The second front is our lopsided taxation. Among other things, it adds to the burden not only on consumers, as I mentioned, but also on small businesses. It prevents them from competing properly with large businesses. The tax benefits for large businesses should be cancelled and the small businesses should be free to compete with them on the basis of equal taxation.”
Isn’t there added value for the local economy in the economic activity that big multinationals bring to Israel?
“Yes, there is added value, but there is a price as well and the price outweighs the benefit. In my opinion, they would come to Israel even after cancellation of the benefits — which they don’t receive in the West anyway.”
Let’s go on to the third battlefront against the cost of living.
“The third battlefront concerns the budget. Both the size of the budget and the quality of governmental services. When government services in infrastructure, education, and health are inefficient, it doesn’t help to increase the budget. For example, if you add hours to the school day instead of investing your money in reducing class sizes, you’re cultivating an absurdity. We have many more class hours than are customary in Europe, but we also have many more children in each classroom. So an hour of school isn’t worth much, because it’s impossible to teach in those conditions. When there are 40 children in the classroom, more hours won’t benefit you because zero plus zero plus another zero is still zero. But progress on the three fronts that I’ve mentioned will reduce housing prices even with no other intervention.”
“I’m against admitting Palestinian laborers.”
After the attack of October 2023, you said no more Palestinian laborers should be admitted into Israel from Judea, Samaria, and Gaza because they come to envy the Israelis and they impede the self-reliance of the Palestinian Authority. Aren’t you worried for the many Palestinian families who depend on work opportunities in Israel?
“First and foremost, I’m against admitting Palestinian laborers because of the distortion caused to the Palestinian economy and to the Israeli construction sector. The Palestinians do receive lots of jobs at better pay than they could earn in the Palestinian Authority’s territory, but they work in low-productivity sectors so we’re actually diverting labor from places where in the long run the productivity could be higher. For example, when a factory opens in the Judea and Samaria area and offers wages lower than in the Israeli construction sector, the best workers will go to Israel instead of to the factory even though the factory has the potential of eventually offering higher wages. So working in Israel raises the standard of living for the Judea and Samaria area in the short run, but it freezes the standard of living at a relatively low level over the long run.”
Don’t you think that letting Palestinian laborers work here promotes peace and quiet on the ground?
“On the contrary, I think that the Palestinian economy’s dependence on the Israeli economy made the intifadas and other confrontations possible. Confrontations like those do wreck the economy, but if you have no local economy anyway, you have nothing to lose. Furthermore, it aggravates the conflict when hundreds of thousands of Palestinians come and see what our own standard of living is. They envy us. Envy is human. They can be replaced by Chinese, Thai, and Indian workers. Is it hard to find laborers whose families don’t live two meters from us?”
Then what about the Israeli construction sector? It depends on cheap labor.
“But the problem is that if you bring cheap labor in, the contractors have no reason to invest in automation and in modern working methods. What should be replacing the laborers is, above all, equipment and technology. Technology will enable the sector to do well with fewer workers. I mean not only the technology underlying equipment, but also methods of construction and also advanced knowhow. In Israel, the construction methods are labor-intensive whereas elsewhere in the world much more advanced methods are used.”
Let’s move on to agriculture. You said that you believe direct support for the farmers is preferable to raising customs duties on imports. Why?
“Because it’s cheaper and more efficient. Currently we’re trying to help the farmers by impeding imports. We’re paying for the world’s most expensive fruits and vegetables, and how much of the retail price reaches the farmers? Zilch and zero. It’s simpler to give the money directly to the farmers while importing freely and cheaply.”
How vital are the farmers economically?
“There are many reasons for well-developed agriculture. Food security, retention of the border areas, distribution of the populace, environmental quality, and more. But economics isn’t one of them. It would be wrong to say that agriculture is vital to the economy. But not everything is about the economy. The economy needs to be strong enough to support our values.”
In conclusion — if you were appointed Minister of Finance, what would you do first?
“Ultimately, economic policy is intended to affect the public’s expectations. As soon as it starts improving their expectations, it starts to achieve benefits — even before any material change occurs. So the first target is expectations. In taxation, benefits should be cancelled for large companies and VAT should be reduced. For pricing, it’s enough to grab 4 or 5 big monopolies and wipe the floor with them (pardon the expression) to send a clear message that policy toward monopolies and importers has changed. Visibility is an inseparable part of economic policy, because if we want the public to consume more, it needs to believe that we’re going to reduce the cost of living. Then we need to deal with the three biggest gougers, and as soon as the public sees we’re serious, consumption will be spurred.”
