Israel Grows Beyond Its Socialist Roots

But yesterday's strike shows not all want free market

Israel's government- and state-run businesses - which account for nearly half of the country's output - ground to a halt yesterday as a powerful federation of labor unions called a general strike to protest Prime Minister Benjamin Netanyahu's economic policies.

His vision of turning Israel's semi-socialist economy into a capitalist, high-tech tiger is one of Mr. Netanyahu's favorite topics of conversation - and a welcome diversion from wide criticism of his handling of the peace process.

But liberalizing markets and trimming government spending are proving as tough as the road to Arab-Israeli reconciliation.

Among the utilities that shut down yesterday was the public bus system, a critical service in a country with no mass rail or subway systems and many one-car and no-car families.

But even the way Israelis get to work is changing as the nation races to join the global marketplace, along with other countries that used to have planned economies and belong to the fading "second world."

A case in point is this city's old central bus station. Here, fresh fruit piles up amid the din of vendors who bleat out their daily price specials.

Scrappy wooden booths offer a wide selection of fake leather bags, cheap rayon shirts, and bootleg tapes that are the stuff of flea markets everywhere.

All that's missing are the buses. Most have been moved to the new central station nearby. There, a six-story shopping mall-cum-transportation hub lets travelers pick up CD-ROMs, muffins, and cafe lattes - even a pair of Levis - while they wait.

Teenagers drawn to the fashionable clothing boutiques and pop music stores - as well as the McDonalds, Burger King, and Sbarro chains - hang around as though they have come here more for the scene than to catch a bus.

The difference goes beyond money and modernity. This juxtaposition of the old and new is like a flashing neon testament to how drastically Israel has been changing since the beginning of the decade.

But such rapid change brings its own growing pains. Yesterday there were no buses to be taken at either station as the country's services were shut down by the general strike called by Israel's labor unions, which oppose Netanyahu's economic policy.

The Israeli leader has made some headway in his first 18 months in office. Foreign-exchange controls have been eased, as have restrictions on companies raising capital abroad. He and his new finance minister managed to pass some unpopular belt-tightening, but the planned $650 million cut for 1998 is hotly opposed by the unions. It would reduce government expenditures as a percentage of gross domestic product (GDP) from 47.3 percent to 46.8 percent next year.

But that still leaves state spending at a much higher proportion of economic output than in most Western countries, with which Israeli exporters are trying to compete.

No peace, no progress

Further frustrating Netanyahu's plans, a plunge in expectations for Middle East peace since his election has slowed the robust growth Israel experienced during the height of historic Arab-Israeli reconciliation.

GDP jumped 6.5 percent in 1994 and 7.1 percent in 1995, the two years following the signing of the Oslo peace accords. The rate of increase in GDP for 1997, originally forecast at 4 percent, will be 2.5 percent instead.

Analysts note that there are many structural problems with the Israeli capital markets, which are devoid of long-term institutional investors like pension funds and life-insurance companies that are the staples of stable markets elsewhere in the world.

Such problems hindering growth, in turn, could be helped by privatization.

The wish list for eventual sale includes parts or all of the Bezek telephone company, El Al Airlines, Israel Oil Refineries Industries, Israel Military Industries, and Israel Chemicals.

But, for example, Israel is only putting small amounts of El Al on sale each year while the government reviews whether it should retain a controlling interest in case another crisis like the 1991 Gulf War arises.

Then, all international airlines stopped flying here and only Israel's airline continued operating.

Moreover, each move to shrink government has been met with fierce labor opposition and strikes. And throughout this give and take, some Israelis yearn for old ideals - essentially those of Israel's socialist founders - while others say Netanyahu is dragging his feet in bringing US-style economic liberalism to Israel.

Hebrew University's Moshe Lissak, one of Israel's premier sociologists, says the changes underfoot are a watershed.

"The Likud plan is to sell 90 percent of government-owned industries. That will be the end of the dream of socialism in Israel," he says. "The Labor Party doesn't oppose it. It's a less idealistic country today, and most people are looking only to profit."

It's not as though Israel ever made social equality a top priority, he explains. The first prime minister, David Ben-Gurion, removed that issue from his agenda in favor of priority No. 1: ensuring the fledgling Jewish state's survival.

Matters of national security have continued to push social issues onto the back burner for almost half a century.

Nonetheless, Israel does offer such benefits as health insurance and free education - including college tuition - for all its citizens. Tax rates are high, but problems like homelessness are nearly nonexistent.

"Sweden was our model and we never achieved it, but I still think we achieved a lot," says Mr. Lissak. Still, he says the gap between rich and poor, one measure of a income distribution, is broad for a so-called socialist country. "The gap between the top 10 percent and the bottom 10 percent is now one of the widest in the world. The real backlash," he predicts, "will be to this move to fast privatization."

Some say, however, that the pace of privatization has been like watching grass grow.

"According to Netanyahu's agenda, he intends to sell off 12 or 13 out of about 100 state-owned companies," says Zeev Golan of Jerusalem's Institute for Advanced Strategic and Political Studies, an economic think tank. "That's not exactly massive privatization. Even if they succeed in privatizing everything, sometimes they'll sell only a portion of a company, so ... it's not really going to reduce the size of government."

End America's $3 billion?

Mr. Golan suggests that Netanyahu can help liberalize the economy and strengthen its private sector by following up on the offer he made to the US Congress shortly after his election last year: to start weaning Israel off its yearly $3 billion in aid.

"We get this huge amount of aid and loan guarantees, so the government has money to grow with and distribute at the expense of the private sector," Golan says.

Other critics complain that even of the privatizing Netanyahu has promised, too little has been accomplished while the government remains wrapped up in trying to resolve its differences with the Palestinians.

"If we had peace, and the peace process was completed, maybe he could just concentrate on this," says David Lev-Hari, an expert on international economics at Hebrew University.

Professor Lev-Hari says that the most important thing for driving the economy - privatizing the state-run banking industry - has not been touched.

"They haven't done anything about the competitiveness of the banking system," he says. "That means there are not many foreign banks in Israel."

As a result, Israeli banks charge fees unheard of elsewhere in the world and have many conflicts of interest, such as giving loans to and owning shares in the same businesses.

"The communications sector is the only one - no other sectors have made the changes in competitiveness that Netanyahu is talking about. They admire Thatcher, but they're not Thatcher yet," says Lev-Hari, comparing Netanyahu's economic circle to that of former British Prime Minister Margaret Thatcher.

The area where Israel is continuing to experience a boom is its high-tech sector, which has fast gained a reputation as the Silicon Valley of the Middle East. Giants like Intel are setting up shop here, attracted by a labor force swimming with highly educated programmers that include Russian-immigrant scientists.

Smaller, indigenous companies producing software and Internet-related products are now finding the business environment more conducive to start-ups.

Jacob Perry, president of Cellcom - Israel's fastest growing cellular phone provider after two years in business - says critics have been too quick to write off Netanyahu's efforts.

"Israelis don't have enough patience. The rate of privatization is Israel is not bad at all," says Perry, interviewed at his headquarters in a sparkling new office park outside Tel Aviv.

"It's not so easy to privatize a dynamic market in such a little country with so many contradictory forces. In this political environment, privatization is not such a simple task."

The wheels of change, he says, are not going to be held up forever by tacks thrown in the road by the labor unions. "It's a menace because they can paralyze the country.... But that's not the most important point. It's that people are getting used to the idea of a free market."

* First of two parts on Israel's historic shift to market economy.