Israel - a stormy relationship: Rogernomics inspired reformer

In the final of a three-part series, Benjamin Netanyahu tells FRAN O'SULLIVAN how he came to embrace NZ's Rogernomics.

Benjamin Netanyahu, known as "Bibi", is turning Israel's economy around with the same ruthless efficiency he once employed as leader of Israel's anti-terror unit.

Since he took power he has cut Israel's public sector, slashed taxes, axed welfare entitlements and privatised state assets with a breathtaking speed.

The firebrand politician credits New Zealand's former Finance Minister Sir Roger Douglas as his inspiration.

"Sir Roger has bold ideas. He really gets down to the bone. To the core of it."

Netanyahu singles out another valuable contribution - "you cannot do reforms too fast" - which he absorbed from Douglas' book Unfinished Business.

"What I learned from New Zealand was this. Seeing we were going to have a general strike for any one of these reforms, we may as well maximise the number of reforms for the strike.

"This is not conventional wisdom. Usually you are supposed to isolate the fronts.

"But especially after a victory in elections, you have to move fast with great rapidity and great boldness. "

He took up the reins in March last year, promising a shakeup to end the country's worst economic crisis.

Israel's economy was in freefall. Loans worth US$9 billion ($13.5 billion) from the US Government propped up Ariel Sharon's Government, stopping a complete collapse.

The Palestinian intifada accounted for half Israel's recession, the Nasdaq's high-tech bust for the other.

It was a grim convergence. September 11 and the Iraq invasion frightened off tourists and foreign investors.

In the first two years of conflict with the Palestinians alone, Israel lost US$11 billion, about 10 per cent of its GDP.

"Israel was only a few weeks away from financial collapse when we took over and put forward what was seen by many initially as emergency reforms," says Netanyahu.

"Only later did they see that we needed emergency measures to stop the haemorrhaging.

"And only later did people understand that there was a longer term structural reform that would be done and was now pressing full scale across all areas of the economy."

Boldness is in Netanyahu's blood. After an educational spell in the US, he enlisted in Israel's military and took part in missions such as the Beirut Airport operation, and the rescue of the hijacked Sabena Airlines hostages at Ben Gurion Airport, in which he was wounded.

His brother Jonathan died leading the rescue party at Entebbe.

In May 1996 he was elected Israel's youngest Prime Minister, losing office three years later.

His experience at the top levels of Israeli politics has boosted his ability to push through his reform agenda.

Much of this is standard Rogernomics. But Netanyahu says the most important thing Israel has done is to put a cap on pension funds.

"They were facing bankruptcy. We put professional managers in and now we're going to privatise the management of those funds. It was a threat hanging over our heads."

He concedes that two-thirds of the people initially resisted his welfare reforms. "Now they are supported by two-thirds as they see we are moving out a lot of freeloaders.

Netanyahu is confident the economy has been turned around.

"We've done it. We were a contracting economy in 2001 and 2002; the last quarter we grew by 5.1 per cent."

He says the situation has vastly improved since Israel constructed its security wall which was "widely condemned without people knowing that it actually saves lives".

"Ultimately you can remove a fence, but you can't restore a life once it's taken.

Israel was heavily slapped by the International Court of Justice for walling off many Palestinians from their place of work.

Unemployment has rocketed to 50 per cent in areas under the Palestinian Authority. International opprobrium has been heavy.

But Netanyahu says the "smart money" is back.

He attributes this to two factors - Israel's technology, such as its "number one communications, and depressed prices.

"They have figured out that what I call CNN-investing is giving you a tremendous opportunity, because it's lowering the price of buying these companies and investing in them.

"If I told you there was a country that had gone to war and for 50 years had no favours from its neighbours and had a fence running through it, but had opened up a very vigorous free-market economy, you wouldn't think about it, but I'd be talking about South Korea.

"So, would you not invest in Samsung because there's no formal peace between North Korea and South Korea? Of course not."


Citigroup has put Netanyahu on its list of economic heroes.

"We'll soon see the name of Benjamin Netanyahu enter the pantheon along with Ronald Reagan, Margaret Thatcher and Roger Douglas," it enthused in a March client report.

The influential Landua report begs to differ: "The best thing that can be said about this claim is that it is somewhat premature."

Landau's report, GAAP: Growth against all Probability, says the key part of domestic economic growth, construction and real estate, shows no signs of recovery in Israel, large infrastructure projects are needed, the budget must be cut further and "extremists" at the central bank must be purged to enable a looser monetary policy to depreciate the shekel and help Israeli exporters compete in Europe.

News reports suggest a strike which paralysed Israel and grounded airlines this week has not diminished Netanyahu's reform ardour.

He met Douglas at a Jerusalem think-tank symposium this year.

"I found Sir Roger very extraordinary. The depth of his insight is very impressive.

"Sir Roger's main idea, which I must say was presented with great vision to me, is this: Take social services - instead of feeding the cow which is to give the milk, you give vouchers for the milk to the public or some mechanism like that. Pour as you go.

"You can buy a lot more milk for a lot less money."

"The reason we are asked not to make these great reforms - getting unions to give up their monopolies, cutting Government spending and so on - is in the interests of the so-called underclass.

"Sir Roger argues, and it struck a chord with me, that if you empower this underclass to have choice and if you encourage entrepreneurs in education and in health to offer them their services in impoverished areas or rundown areas they will do a much better job than the Government services would if this is done over time.

"My immediate response to this idea was, 'Let's think of trying a pilot somewhere, let's prove it. And if we can prove it we can expand it'.

"And that is stirring my imagination and I will see if we can get it going during the next three years."

In the heady days of Helen Clark's new Labour Government, Israel was flavour of the month as New Zealand investigated how to build a knowledge economy.

Technology Minister Pete Hodgson led a mission to Israel in late 2000 to study venture capitalism, business incubators and harnessing new ideas.

But even before the "passports affair", interest had tailed off.

Netanyahu says relations are "obviously strained ... it's not a good look".

"But you should know that as Finance Minister I have only great admiration for New Zealand.

"People always ask me, 'are you borrowing the American model or the British model?' I say that to some extent that is true.

But actually, if I look for a country with a few million people, with no traversible land borders that has undergone a great transition from a controlled economy to a market economy, then the first country I would look at is New Zealand.

"You are responsible for the great transition that we are doing."


A question or two about the standoff

Israel's Finance Minister, Benjamin Netanyahu, says the diplomatic impasse over the passports affair will "absolutely" be resolved. Relations between Israel and New Zealand have been at a standoff since two alleged Mossad agents were caught trying to steal a NZ passport.

Herald: What is it going to take?

A: "I don't know - happily I am not foreign minister."

What do you think it might take?

A: "Time."