Prof. Avi Ben Bassat, former Director General of the Ministry of Finance (Photo: Reuven Castro)
The farewell ceremony for Chief Economist Shira Greenberg could have ended like other farewell ceremonies for public sector workers: speeches in praise of the departing, words of thanks, Rogelach and a gift with a standard dedication: "With appreciation from the Ministry of Finance." But then former Finance Ministry Director General Ram Belinkov took the stage, and among other things, said the following sentence: "The voice of the chief economist thunders against the background of the silence of the sheep," and aimed at the senior Finance Ministry officials who remained silent after the legal reform began, and when they opened their mouths, it was, at least in his opinion, too late and too little.
Prof. Avi Ben Bassat, 78, professor emeritus in the Department of Economics at the Hebrew University, is very familiar with the Ministry of Finance, he was the Director General from 1999 to 2001. He knows all too well whether officials face the dilemmas when criticizing government policy or warning against it: "When we talk about a system, you can't discuss them all as one group," he says. "But there is no doubt that when such a big and significant move was made, they should have expressed their opinion. Eventually they did it. It's a little late, but better than never."
"Finance officials voiced their opinions late, but better than never" (Photo: Reuven Castro)
Torn from the inside
His resume is illustrious and includes senior positions and awards, including the Knight of Quality Government award. Ben Bassat wrote his doctorate on "Foreign Exchange Reserve Management: The Israeli Experience" and became an expert in the field.
In 1971 he began working as an economist in the Bank of Israel's Research Department, and after two and a half decades he was appointed responsible for the Central Bank's macroeconomic policy on monetary policy and the exchange rate, and headed the team of capital market reforms and changes in the structure of the banking system.
He also headed the team in the economic negotiations with the Palestinians to implement the Wye Accords and consolidate permanent relations following the Camp David peace talks. In addition, he served as a member and chairman of no less than 15 public and government committees. From the years of experience and knowledge he has accumulated, during which he looks at what is happening in Israel, it seems that he is torn from within and pained by the crisis into which the country has entered.
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"The weakening of two of the three branches paves the way to dictatorship" (Photo: Reuven Castro)
The independence of the Knesset is not complete
What concerns you about legal reform?
"The damage to democracy. In every democratic state there are three branches that must be independent: the Knesset, the government and the judiciary. We start from a bad starting point. The independence of the Knesset in Israel is not complete, because the elections are not personal but partisan, and most parties do not have primaries, and the appointments are made by the head of the list, so Knesset members have no real independence.
"Even within the Knesset, there is no independence, because there is factional discipline, which is very severe, and if a MK violates it, there are severe sanctions against him – from voting prohibition to impeachment, and in addition to it there is also coalition discipline. Norwegian law is another problem.
A MK appointed as a minister resigns from the Knesset and is replaced by the next in line on the list. The 'Norwegian' MK is threatened that if he does not behave properly, the minister will return, and there is a whole set of rules that reduces his freedom. So if we also weaken the judicial system, there will be one strong authority, the government, and two weakened authorities, paving the way for dictatorship."
"If an investor sees that his rights are less protected, and we see it in high-tech, he won't be here" (Photo: Reuven Castro)
Economy and Democracy
You signed the economists' letter, which warned of the severe consequences of the reform on the economy.
"Take, for example, the 'cause of reasonableness.' I am not a jurist and the illustrations I give are principled. It is said that the government wants to build a new, vital road, so it must expropriate land, but it is willing to give the owners compensation less than the value of the land. Who can the victim turn to, who will protect him from the arbitrariness of the government, if the grounds of reasonableness do not protect him? Once a citizen does not have the full protection of the judicial system, he is exposed.
"Over the past 30 years, economists have been dealing with the effects of state institutions on the economic system, by measuring the independence of institutions, the degree of freedom and independence of the economic system. Researchers examined the impact of democracy on economic growth, and the latest study by experts from leading US universities, published in 2019, examined the relationship between democracy and growth in 179 countries over 50 years, a huge collection of measurements over a long period of time.
"The dramatic findings show that in less democratic countries, the loss of GDP per capita is almost 1% per year, and 20% of GDP damage over 25 years. This severe impact is already reflected in the motivation of foreign and Israeli investors to invest in Israel. If an investor sees that his rights are less protected, and we see this in high-tech, he won't be here.
I listened excitedly to a discussion held in the Constitution, Law and Justice Committee, when a high-tech entrepreneur who developed protein sugar for diabetics appeared, and said that investors told him they would invest in him only if he moved his venture to the United States. He spoke in tears about losing his dream.
"The most obvious thing now, at a time of uncertainty, whether the legal revolution will be legislated or not, is that people are moving from weights to foreign currency and therefore see a depreciation of the shekel, 9% from December last year. It should be remembered that in Israel the import component is large, equipment and machinery are imported, but also raw materials – and when they become more expensive, inflation rises.
"It's true that the global price increase started after the war in Ukraine broke out, but here the suffering is greater. Look at the stock exchange, it works the opposite of what's happening in the world. So they complain to the Bank of Israel about why the Governor is raising the interest rate. If the Governor had not raised the interest rate, prices would have risen much more, and therefore the claims against the Governor are empty claims. The independence of the central bank is very important. With us, it arrived relatively late, 20 years ago, and damaging it will lead to inflation and instability in the Israeli economy."
"If the Governor had not raised the interest rate, prices would have risen much more, and therefore the allegations against the Governor are empty claims" (Photo: Reuven Castro)
Open the economy to imports
The governor cannot plug the hole in the dam with his finger. He must have supportive government action to curb inflation.
"The government not only doesn't support, it makes it difficult. The regime coup creates great uncertainty, the dollar strengthens and prices rise. If there had not been a regime revolution, the exchange rate would not have risen so much. In addition, a distinction must be made between the increase in prices and the cost of living. The cost of living has been with us for years. Many products cost us more than in developed Western countries because of the lack of competition, and unfortunately Israeli governments in recent decades have not done enough to increase it.
"We need to open the economy to imports and lower tariffs. Several moves have been made in the field, but not enough and not on the structural side. There are several mechanisms that perpetuate the situation, such as exclusive import licenses. Why do we agree to this? A foreign company that wants to operate in Israel cannot operate through only one importer. And there are more serious things, as, for example, in the automotive industry.
One importer has four exclusive import licenses. If one of the pasta manufacturers is also an importer of pasta, this is inconceivable. Structural reform needs to be done."
The Minister of Economy tried to introduce a law to limit concentration, and the Minister of Finance removed it from the Arrangements Law. Now a government bill is being submitted on the matter.
"There is an organized plan in the budget department that you can rely on and start working. We're not doing enough. Israeli law protects property rights, but it contains a clause that it is permissible to infringe property rights if the purpose is proper and does not exceed what is necessary. In 2005, the banks were forced to sell provident funds and study funds in order to increase competition. We will have to make similar moves in other areas, because the competition is a worthy goal and it does not exceed what is required, because there are few players here."
"The regime coup creates very great uncertainty, the dollar strengthens and prices rise. If there had not been a regime revolution, the exchange rate would not have risen so much" (Photo: Reuven Castro)
Arnona Fund Error
Everyone understands that lack of competition is the main failure, and for years it has not been addressed.
"And that's very bad. Our price level is too high relative to the OECD. I was a member of the Strum Committee that decided to split the credit companies from the banks. Two were split and this year they will split another one. But now they are deciding that they can also be sold to institutional investors, that is, to transfer them from the big banks to the large institutions in the field of pensions. Both Strum and I contacted the Ministry of Finance and warned that it is forbidden to sell the credit companies to entities that are already playing in the credit field and lending money."
The finance minister said he intended to impose a tax on bank profits. This is absurd, because the public owns the shares of the banks, which means imposing an additional tax on citizens.
"It's a subject I've been dealing with for years. There is no competition between banks, take care of it. I prefer creating competition between banks over taxation of profits. Corporate tax should be uniform and not give preference to export and high-tech companies. All prime ministers over the past 40 years sanctify competition, but where is the competition when one company pays 26% and the other pays 7%? Those who pay less find it easy to get the better employees because they can be paid more. This is terrible discrimination.
"Another unacceptable distortion is the preference for exports over imports. There has been an ongoing export surplus for 20 years, and the Bank of Israel's artificial intervention in the foreign exchange market leads to export subsidies. Why do we need such large foreign exchange reserves?"
One of Ben Bassat's areas of expertise is the economics of local authorities, and in his view, the establishment of the Arnona Fund is a mistake, since there is an existing mechanism in Israel for indemnifying deficit authorities. "The trend in the world is to transfer powers from the central government to the local government," he says. "Government intervention through the Arnona Fund harms competition and creates distortion. Instead of rewarding excellence, you hurt it.
"After all, we have an ancient mechanism that deals with the gaps between the authorities – the balancing grants. A normative level of services has been established, which every citizen must receive, and an authority that fails to provide them receives money from the state. For many years they didn't follow this formula, and two years ago they dealt with it. Let's increase the balance grants in a cleaner way than the Arnona fund, from the taxes collected by the government. Those who earn more pay more tax, so this is a much more just and correct way."
Apropos of injustice, the distribution of coalition funds is also problematic.
"Because most of the NIS 14 billion of the coalition funds go to the ultra-Orthodox and the settlers. It is true that the distribution of coalition funds is always done from a partisan perspective, but this time they concentrated on two population groups, when there are other problems in the country. Let's say we want to support Torah institutions, no problem, but require them to study the core curriculum.Even
so, the rate of participation of the ultra-Orthodox in the labor market is low, and when we increase support for those who do not provide advanced education, what will happen here in 18 years, when the world will be much more technological? The growth rate of the ultra-Orthodox population is large, how will we manage to support them when they are 30% of the population?
"I see it all around me, in Jerusalem. 30 years ago, the city was in socioeconomic cluster 6, and today it is in cluster 2. This happened because of the rate of increase in the ultra-Orthodox population and the migration of a strong population outward. I'm afraid that in 30-40 years it will also happen on the national level, and beyond the inability to support them, there will be strong Israelis emigrating abroad. I'm not against allocating funds to the ultra-Orthodox, but it needs to be done with a strategic look forward."
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