IASPS

Quarterly Report
Winter 2001

Meet Silvan Shalom

Comments of the President

The Director's Column

Israelis Tell IASPS: We Want Freedom

IASPS and Its Impact

The Internet/Telcom Corner

Back to the IASPS Homepage

This is 2001.
Meet Silvan Shalom.
Finance Minister of Israel.

The Winter 1995 Quarterly headlined "Israel at a Crossroads." Sever Plocker, foe of the FPZ, was pictured as "The Past" and MK Silvan Shalom as "The Future." Where are they now? Israel's Old Guard is still fighting the FPZ. Silvan Shalom is the new finance minister. This is the story of the Old Guard's failure, and the young Israeli's promise. 

New MK
When IASPS printed Silvan's Shalom photograph on the cover of our Winter 1995 Quarterly, we had to introduce him as a "new MK." MK Shalom was then in his mid-thirties; he had the gall (by Israeli standards) to call for slashing income tax rates by up to 20 percent, and for across the board cuts in government spending.

MK Shalom "starred" in several Quarterlies after that. He was one of the first MKs to request an IASPS Koret Fellow to help him with economic policy research. Fellow Sharona Erlich provided this research and helped him with policy planning for two years. Shalom's assessment of the IASPS Koret Fellowship Program was printed in the Winter 1996 Quarterly: "These are the kind of high caliber people who can change things," he said.

Readers of the Quarterly knew six years before anyone else in the Beltway that Shalom was going to be part of Israel's future. Our readers have been able to follow the career of this young MK who dared challenge Israeli truisms, who did not accept the defeatist attitude that once so irked American businessmen trying to invest in Israel: "That is the way things are done in Israel, there's nothing to do about it...."

A glance through our Quarterly Reports helps follow MK Shalom on his political career: He was pictured with future prime minister Bibi Netanyahu and Fellow Erlich touring small businesses in Jerusalem; he held a press conference to reveal the bureaucratic obstacles facing small business, during which he distributed research prepared by Fellow Erlich on the subject; he submitted two bills to the Knesset, which called for tax reductions, eliminating bureaucracy, and limits on the amount of army reserve duty that small business owners can be subjected to.   

Tax Cuts
Shalom was again the focus of Quarterly interest when he responded to Fellow Erlich's request to work on tax reform and cuts by declaring: "This has been gnawing at me for years." He commissioned her to study the effects and costs of possible cuts and to research specific proposals.

Soon Shalom held a press conference and unveiled the results of Erlich's research and his own tax-cut proposal. Shalom submitted a bill to the Knesset to reduce income and corporate tax rates to 35 percent - this at a time when real marginal rates exceeded 60 percent! Ironically, the finance minister at the time was Avraham Beiga Shohat, whom Shalom has now replaced as finance minister. Then, Shalom turned directly to Shohat as he spoke in the Knesset; Shalom said:

"When you reduce tax rates, revenue does not fall. In the United States, when they lowered the tax to 28 percent, revenue rose by $375 billion. Unfortunately, spending also rose....If you don't [reduce tax rates], you will choke growth, choke savings and the desire of people to work....We have to bring income and corporate rates to the same level....Your motto should be budget cuts and lower tax rates....this is an opportunity to effect a revolution in the way people think and in the economy!" 

Shalom and Koret
Shohat called Shalom one of the few MKs with an understanding of economics but nonetheless opposed Shalom's bill. Prime Minister Rabin and other coalition members rushed in at the last minute to help defeat Shalom's bill, which fell, 41 to 33.

After Fellow Erlich's graduation from the program at IASPS, Program Director Zev Golan assigned Koret Fellow Shlomi Shuv to assist MK Shalom. Shalom submitted a bill based on Shuv's research to prevent the Israeli telephone monopoly Bezek from charging consumers for time they did not speak; the bill focused public attention on Bezek's practice of rounding off minutes, and charging phone users for full minutes even if they only spoke for a few seconds.

When Shuv brought to Shalom's attention alleged financial irregularities in an important union and pension fund in Israel, endangering the savings of many pensioners, Shalom called Knesset hearings and forced an end to the shady dealings.

Today Shalom is assisted by IASPS Koret Fellow Sara Bernstein; they are focusing mainly on the problems facing Israeli universities.

Let us not pretend; no politician is perfect and the "system," the institutional barriers to reform, are strong. We do not know what Shalom will do as finance minister, nor do we know how much support he will receive from Prime Minister Sharon, the cabinet and the shaky coalition that supposedly backs him. Any finance minister who intends serious reform needs a strong coalition behind him, and this is something Shalom cannot do anything about. But let us recall the very first time we quoted Shalom in a Quarterly, in 1994. Then he told Professor Rabushka: "It is a terrible mistake to surrender to socialist dictates. It will hurt the capital markets and privatization."

Six years ago we said Shalom would go far, and called him the future of Israel. Today he is finance minister. We expect he will run for the premiership following the retirement of the current prime minister, whenever that should be.  

Beating a Dead Horse
The other half of our front page in that winter of 1995 showed Israel's past, embodied by the editor of the Israeli daily Yediot Aharonot, Sever Plocker, who was quoted saying about the IASPS free-market reform proposal to establish a free processing zone in Israel: "We [the journalists] will pursue them to the end. We will check every cent that comes to them and every preferment they receive. The way we hounded [former finance minister] Sapir will be nothing compared to how we will persecute the FPZ." That was six years ago. And while Shalom has moved into the finance ministry, while Israel has moved into the high-tech era, where have these reporters gone? Nowhere. The paper's economic commentator Gideon Eshet is still fighting the FPZ, even though there are no longer any investors willing to build it, considering the treatment they received at the hands of Israeli bureaucrats and legislators, egged on by Plocker, Eshet, and Co. Here is what Yediot had to say about the FPZ in the winter of 2001:

"The need for a `free trade zone' seems patently questionable...other than health restrictions, everything can [already] be imported [to Israel]...this would be a zone subsidized by the state of Israel...We already have a zone like this. Eilat is a free trade zone, its residents do not pay VAT...for years a group of Americans has been trying to move this nonsense northwards. But they wanted, in addition to tax benefits, also release from labor laws, environmental laws, land at a ridiculous cost (actually, no cost at all) and the establishment of a local government ruled by the entrepreneurs."

All of which - absolutely every single word of which - the writers, reporters and editors would know is false, had they bothered to read the FPZ law or talk to any of the entrepreneurs. But they do not need to check facts, investigate a story, report honestly; for their job is not to inform readers but, in their own words, to "pursue" and "persecute." In six years they have come nowhere, learned nothing, and they are still throwing darts at a zone long since killed by the opponents of markets.

The people of the past are not moving. Readers of the Quarterly already knew six years ago where Israel's future lies. IASPS will keep you posted as we lead the way. 

Also in this issue:

Politics and Policy
     Robert J. Loewenberg on what a think tank does  

On Economic Freedom
     Alvin Rabushka on the history of the Israeli economy 

Israelis Tell IASPS: We Want Freedom
     Letters received by the Institute's Jerusalem Office 

IASPS and Its Impact
     The Institute's Web Presence is Growing

The Internet/Telecom Corner
     Amir Etzioni on the Importance of Free Markets