The Institute for Advanced Strategic and Political Studies Jerusalem, Washington

PART C: BUSINESS AS USUAL

Israeli officials have perfected the art of talking reform, but practicing socialism. They speak about restructuring money-losing state-owned enterprises, but continue to shower them with taxpayer subsidies. They denounce bureaucrats as obstacles to growth and progress, but appoint more of them. They pontificate about the need to control public spending, but increase the size of the budget deficit. They profess to be concerned about improving incentives to work and invest, but raise the top marginal rate of tax. Talk reform, practice socialism -- this is the motto of Israeli economic policy.

Part C focuses on two of these harmful contradictions, another episode in the Government's routine capitulation to Histadrut, Israel's national labor monopoly, and another massive bailout of a money-losing state-owned enterprise. The issues in question concerned Kupat Holim Clalit, the medical insurance fund (or sick fund in Israeli parlance) of the Histadrut, and the survival of Israel Aircraft Industries, a state-owned defense firm which has fallen on hard times.

First, Kupat Holim, which has about 80 percent of the population as members. Every Israeli who belongs to the Kupat Holim medical insurance program is also automatically a member of the Histadrut, whether he or she wants to be or not -- another example of coercion over choice in Israeli-style democracy. Put another way, it is not necessary to belong to a Histadrut-affiliated labor union to be a member of Histadrut. This compulsory, linked membership is a problem because Histadrut provides no benefits to these non-union affiliated, health fund members.

But there is an enormous benefit that the health fund members provide Histadrut. The organization rakes off about 30 percent of membership fees for non-health services. This huge chunk pays for a spate of Histadrut activities, ranging from athletic organizations to subsidized meals. It also means that the Histadrut health fund is chronically in deficit and constantly clamoring for larger Government subsidies. The taxpayer pays yet again.

Some savvy members of the Labor Party recognize that the long-run success of Labor depends on the gradual separation of the party from its identification with Histadrut, that a weakening of Histadrut would benefit both the Labor Party and the country as a whole. The easiest single measure available to the Government is to separate membership in Kupat Holim from membership in Histadrut. This one reform would require that all health fund dues go solely to pay medical bills. In one stroke, it would eliminate the massive Histadrut slush fund and much of its power to terrorize the nation, as it did repeatedly throughout the year. The Jerusalem Post wrote on November 22 that Prime Minister Rabin, at a meeting with some 700 company directors in Washington, D.C., had reportedly compared Histadrut to "Islamic terrorist groups." This did not sit well with Histadrut leaders, but Rabin would be well placed to know. A few days later Shohat pointed the finger at Histadrut for its threat to call a general strike in opposition for the Government's plans to push ahead with selling shares in other state-owned firms.

Some facts. As 1993 began, Kupat Holim owed NIS 1.7 billion to suppliers, the tax authorities and short-term lenders; it owed an additional NIS 800 million on long-term loans. Its annual operating losses run about NIS 600 million. The quality of its services is so bad that 300,000 of its members have transferred to other health funds in recent years. Its request for Government assistance in 1993 was initially set at NIS 844 million. Although the Government responded, as usual, that Histadrut must reform itself to qualify for its 1993 subsidy, nothing short of full separation from Histadrut will solve the problem, and Histadrut will not go quietly. The size of the subsidy was issue number one.

The Government's approach to the problem has been to develop a proposal for national health insurance. Health Minister Ramon's plan is to authorize the National Insurance Institute to collect health insurance fees, and then distribute the money among the various health funds in proportion to their memberships. Histadrut would lose control of the fee collection and thousands of its employees would have to look for employment elsewhere. Separation was issue number two.

There is little point in keeping you, the reader, in suspense. Histadrut won a complete victory on both fronts in 1993. It used the tried-and-true formula of relentless labor sanctions. It just plain wore down the Government. It would require pages of texts and dozens of footnotes to cite the demonstrations and massive strikes among doctors, nurses, and other health care employees. Strikes were a daily occurrence throughout March, April, May, June, August, September, November, and December. Don't get sick in Israel.

To some details of the struggle. The Prime Minister, Yitzhak Rabin, fired the opening salvo at a joint session of the Labor Party Secretariat and its parliamentary faction. "There are a lot of social and economic structures in this country which are obsolete and should be phased out. Changes have to be made. I urge the Histadrut to carry out changes, too." At the same meeting, Minister of Health Haim Ramon charged that Kupat Holim had taken NIS 310 million from the Government on false pretenses. And so on."

On February 14, Ramon presented his national insurance bill to the cabinet, to the obvious dismay of Histadrut officials. The cabinet held two more discussions of the bill, with most of the ministers expressing support. It approved the proposed change in policy on February 28 by a vote of 13-3 with two abstentions. The next steps in the legislative process were referral to the legal committee for drafting, assignment to the appropriate Knesset committee for deliberation, and a vote of the entire plenum for final approval. Ramon hoped for speedy action.

Meanwhile, on the second front, a proposed recovery plan for Kupat Holim included a Government subsidy of NIS 350 million, a contribution from the health fund itself of NIS 320 million (sale of some Kupat Holim assets, some early retirements and a 5 percent wage cut among pensionable employees), a contribution from Histadrut's other resources of NIS 175 million, and relief from creditors of NIS 271 million. The cabinet promptly approved the Government's share of NIS 350 million. The next day began the endless season of strikes and demonstrations.

Meanwhile, Yedioth Ahronoth reported on March 30 that the accountants for Kupat Holim, Haft and Haft, discovered an additional deficit of NIS 700 million above those already disclosed.

Histadrut stated that the strikes might cease if Prime Minister Rabin would amend the recovery plan by eliminating the 5 percent pay cut of 32,000 Kupat Holim staffers. In mid-May, the nurses appealed to Rabin to intervene. By early June, Health Minister Ramon said that he never favored the 5 percent pay cut for low-salaried employees.

On June 16, the legal committee approved the national health bill for submission to the Knesset in two weeks. Histadrut demanded that Rabin convene a Labor Party convention to debate the bill. By late June, it had become apparent that support for the measure was waning, even among Labor Party Knesset members. Nonetheless, on July 5 Ramon presented his national health bill to the Knesset. During his speech, the benches occupied by Labor Party members were empty. Ramon's bill, and a rival, watered-down bill that maintains the linkage between Kupat Holim and Histadrut membership, were both approved on a first reading the following day and sent to a special committee consisting of an equal number of members from the Labor and Social Affairs and Finance Committees.

Prime Minister Rabin, who denounced Histadrut in January, capitulated on August 17. He announced that the Government would withdraw the section from its proposed bill which would separate the Kupat Holim health fund from Histadrut. Having surrendered in August, he denounced Histadrut again in November, as noted at the top of this section.

On December 20, as the year came to a close, the Knesset faction of the Labor Party decided that it would not bring the Government's national health bill to a vote in the plenum of the Knesset in 1993. As 1994 began, every member of Kupat Holim remained a member of Histadrut, period. The lesson? Watch what politicians do, not what they say.

But the strikes continued, because money was still at stake. And they will continue. Israel Aircraft Industries (IAI) was the second focal point of struggle in 1993. Recall that IAI had been responsible, along with Israel Military Industries, for the losses recorded among state-owned enterprises taken as a whole in 1992. Estimated losses of IAI in 1993 stand at about $400 million. In late January, the Knesset Finance Committee approved a Government guarantee for a $100 million loan to IAI to cover the firm's deficit as it prepared a recovery plan. A few days later, the cabinet approved a $280 million package of grants and guarantees to implement the recovery plan, which called for IAI to dismiss 10 percent of its employees and slash pay 7 percent across-the-board.

But recovery plans in state-owned firms rarely materialize, because like the Government, they talk reform but practice socialism. On June 24, The Jerusalem Post reported that IAI was far behind in implementing its recovery program, primarily because it failed to reduce manpower as specified in the accord. The Treasury said it would hang tough in transferring funds until IAI had undertaken the necessary measures to comply.

Once again Prime Minister Rabin was called in to mediate the dispute. For its part, IAI asked the Government for another $70 million to "invest" in creating civilian employment within the firm. In July, employees of IAI declared Minister of Finance Avraham Shohat public enemy No. 1. They demonstrated on August 4 to show their displeasure with the proposed recovery plan. Rabin told the cabinet on August 4 that the country, and its state-owned firms, could not continue to operate in the old Bolshevik ways, and that the Government does not have $400 million to throw at IAI (but does he really believe it?). Globes reported on August 25 that IAI was seeking more than a billion shekels from the Ministry of Finance, but that Shohat was holding firm until the reduction in staffing had been completed.

Upon completion of the September holidays, Shohat announced that he would withhold all funding for IAI until it set an immediate deadline for its recovery plan. Three days later, he met with the Prime Minister and Histadrut's Secretary-General, Haim Haberfeld. Predictably, IAI personnel took to the streets and blocked major highways. Rabin threatened to close the firm if its employees did not cooperate in the recovery plan. In response, IAI employees shut down the airport on October 21. Several sympathetic Labor members threatened to withhold their support on the budget unless an accommodation was reached with IAI employees.

An apparent deal materialized in early December. Shohat threatened the liquidation of IAI unless its employees agreed to link wage increases to profitability. The management and employees of IAI signed an agreement on December 7 that restricted wage increases to net profitability, the condition Shohat had imposed. In addition, 1,500 employees of IAI would resign at the age of 50 and employees that remain would accept a 15 percent pay cut. The Government, on its part, will bail out IAI with an immediate transfer of $300 million. Time will tell if IAI and its employees live up to this agreement.

PART D: CHICKEN ECONOMICS

Chickens, eggs and french fried potatoes were at the core of Israeli economic policy throughout 1993. Chickens and eggs were not the subject of intellectual discourse about which came first; rather they emerged in the policy debate in late summer in the course of the now year-and-a-half effort to establish a Free Export Processing Zone (FEPZ) in Israel. The FEPZ proposal is designed to establish on Israeli soil a set of economic institutions that provides investors and employees a maximum degree of economic freedom which would enable Israel to attract up to $1 billion in direct foreign investment and create about 20,000 jobs, mostly in high-tech fields and high-paying financial and other service sectors. There are more than 150 zones in 65 countries around the globe. In the past 15 years, the four special economic zones situated on the southeast coast of China have played a decisive role in attracting investment, increasing exports, stimulating employment, and serving as the engine of growth for all of south China.

The Minister of Agriculture, Ya'acov Tsur, issued a press release on August 10, 1993, stating that the Government's initiative to establish an FEPZ, unanimously approved by the cabinet with two abstentions on June 13, 1993, should be modified to limit the transfer of agricultural goods from Israel and foreign countries to the zone. Tsur warned "that investors could establish giant, low-cost chicken farms in the zone that could drive defenseless high-cost family farms out of business." "The prospect of giant chicken farms in the zone," Tsur said, "posed an even greater danger to agriculture than to industry."

A first reaction to Tsur's statement is stunned disbelief. Does he really belief that wealthy U.S. Jewish investors want to invest hundreds of millions of dollars in constructing a high-tech, export-oriented, special economic zone to grow chickens? A second reaction is that Tsur's statement is a practical joke, an attempt by him to inject some humor into the otherwise serious business of coping with unemployment and constant economic crises (bailouts, what to do with unneeded loan guarantees and so forth). A third reaction is that someone stole a copy of the Minister's stationery on which to put out a statement for the express purpose of embarrassing Minister Tsur and the entire Government of Israel.

The memo requires that we develop a new field of intellectual inquiry: Chicken Economics. Here goes.

Since the end of World War II, some 65 countries have established more than 150 special economic zones. The primary goals of the zones were to generate foreign exchange through exports, reduce unemployment, absorb advanced technologies, and cut through internal red-tape that impeded both domestic and foreign investment. Start-up activities consisted largely of assembly and low-skilled manufacturing. In time, these low-wage activities gave way to increasingly high-tech, high-skilled, high-wage manufacturing, research and development, financial services, telecommunications, and other high value-added activities. Not a single zone specializes in giant chicken ranches.

What? No chicken zones? Throughout the world, agriculture is simply the most highly protected, highly subsidized sector. There is no reason for any producer to seek out a zone to raise chickens when his government, in virtually every country of the world, will subsidize his production of chickens for the internal market and protect his chicken farming from overseas competition. Israel is as bad, if not worse, in this regard. The result of worldwide protection for chickens and eggs is a massive glut, and no right-minded investor would give five seconds thought to chicken farming in an Israeli FEPZ.

Chapter 13, in the Statistical Abstract of Israel 1992 published by the Central Bureau of Statistics is chock full of data about chickens and eggs. Let's do a crash course on chicken economics for Minister Tsur.

In 1991, a little over 10 million Israeli laying chickens clucked out 1.8 billion eggs, roughly the same number as in each of the previous five years, which weighed 1.6 million tons. The value of these eggs totalled NIS 313 million. Only 4 percent of these 1.8 million eggs were exported.

Again in 1991, from an inventory of 13 million broiler chickens, Israeli farms produced 265,000 tons of meat, valued at NIS 507 million. The Abstract reports that none of the chicken meat was exported. The total export value of all poultry-related products came to NIS 53 million, about 4 percent of the production total of NIS 1.2 billion.

Chickens are big business in Israel, which explains Minister Tsur's concern over the impact of any new economic policy on chickens. In 1991, chickens contributed just under 1 percent of the gross domestic product.

Return to the subject of an FEPZ in Israel, whose initials stand for Free Export Processing Zone. The dictionary definition of "export" is to sell goods or services to another county, to transport overseas. Therefore, those rich U.S. Jewish investors intent on setting up giant chicken farms will have to export their eggs and poultry meat abroad. This constitutes no competition in chicken meat and only minimal competition in eggs for Israeli farms. The preliminary list of 60 firms that have expressed interest in Israel's FEPZ does not include a single agricultural enterprise, either in primary production or processing.

Israeli agriculture is a highly emotional subject (as, say, in France), but further charged with ideological overtones and the historical role of the kibbutzim and moshavim in the country's settlement. But Israel has been an independent country for more than 45 years and it is high time to put mind over heart on chicken economics and agriculture in general.

The total value of Israeli agriculture in 1991 amounted to NIS 6.8 billion, or just over 5 percent of GDP. About three-fifths consisted of crops (field crops, vegetables, citrus, fruit, and other miscellaneous crops) and two-fifths of livestock and livestock products (poultry, cattle, sheep and goats, fishing, and other miscellaneous livestock). In 1991, exports of crops were NIS 1.2 billion and of livestock NIS 57 million, about 20 percent of the total value of agricultural output (equivalent to 1 percent of GDP).

Sounds impressive. But these figures are gross totals. To calculate agriculture's net contribution to the Israeli economy, it is necessary to subtract the various taxpayer subsidies granted by the Government to Israeli farmers. The 1990 state budget, which ran from April 1, 1990, through March 31, 1991, included the following explicit subsidies to agriculture:

NIS 1,950 million for the regular budget of the Ministry of Agriculture, of which NIS 1,769 million consisted of bailouts for kibbutz and moshav debt.

NIS 101 million water subsidy

NIS 208.4 million for other non-water supports.

NIS 86.1 million for rural settlements.

NIS 43.2 million for investment grants.

Direct public spending in agriculture exceeded NIS 2.2 billion.

But this is not the whole story. Israeli agriculture, a collection of monopolies and cartels, is replete with a massive array of anticompetitive measures, including marketing boards, marketing restrictions, licensing restrictions, output quotas, and import bans, which serve to increase costs and prices at the expense of taxpayers and consumers. It is difficult to quantify the cost of this regime, but a fair guess would place it well above NIS 1 billion.

Explicit and implicit taxpayer subsidies to agriculture surpassed NIS 3 billion in 1991, which reduced the net contribution of farmers to less than NIS 4 billion, or about 2 percent of GDP. Instead of expressing concern about chicken farms in an FEPZ, Minister Tsur might better think about reforming Israeli agriculture.

Let's fill out the story with the ugly side of chicken farming. On March 25, The Jerusalem Post reported overproduction of 300 million eggs, which had to be destroyed to support prices. Studies to consider exporting the surplus concluded that it could be done only at a loss. The Post next reported that angry farmers, critical of the Government's failure to enforce minimum price laws for chickens and eggs, demonstrated in front of the Knesset on June 9, pelting Knesset members with eggs and live chickens. MK Avraham Poraz introduced a Cruelty to Animals Law, which immediately passed a first reading a day later. So now chicken farmers were engaged in cruelty to animals. A related crisis in turkeys forced the Government to agree to buy 2,000 tons of turkeys for emergency stocks to halt a slide in prices.

Meanwhile, in a story that shocked even the weary Israeli public, The Jerusalem Post reported on June 24 that Israeli farmers were suffocating chickens to death and burying them alive. The head of the Ministry of Agriculture's national patrol department, Amir Levin, said that his ministry would file a police complaint based on the potential pollution to water supplies for leaving carcasses to rot in the ground.

In August, the Institute for the Investigation of the Profitability of Agriculture reported that the poultry sector lost about NIS 300 a ton during 1991-1992. Finally, on October 27, after the euphoria of the Israel - PLO accord had settled down, the Poultry Farmers' Association warned that cheaper eggs from the territories could put all 7,800 chicken farmers out of business.

French-fried potatoes rivalled chickens and eggs as a political hot potato throughout 1993. At stake was whether McDonald's would be allowed to import frozen french fries in accord with the company's worldwide specifications. Israel just doesn't grow the right type and quality of potatoes to fit McDonald's requirements.

The problem was laid out in the February 17 issue of Ha'aretz. The franchise operator of McDonald's in Israel stated that the cartel organization of agriculture in Israel, along with their ownership of the only french fry factory in the country, Tapud, resulted in the price of frozen fries in Israel at three times that in foreign countries. In early March, McDonald's filed an official complaint to the U.S. Government that Israel was preventing the company from importing processed potatoes for french fries in violation of the country's free trade agreement. Meanwhile, the manager of Tapud stated his hope for Israeli Government aid to be able to meet McDonald's requirements. The Minister himself said that experimental fields were being planted to meet McDonald's needs by December. Tsur said that he would not lift the ban on imported potatoes.

In June, the ministers' committee on economic affairs began discussing the proposal of the Minister of Industry of Trade, Micha Harish, to allow the import of french fried potatoes with a tariff to protect domestic producers. In late June, McDonald's announced it would establish its own french fry factory in Israel, thus ending the firm's dependence on Tapud. The cabinet continued to debate Harish's request in July, but postponed its decision until August.

In mid-August, Tsur said he would not permit frozen french fried potatoes to be imported, even in limited quantities for a short period by McDonald's. Meanwhile, McDonald's prepared to take its case to the High Court. Its brief stated that buying from Tapud would have severely compromised the firm's high standards. (What else is new about the output of a monopoly in Israel and anywhere else, for that matter?) On August 30, the cabinet gave its authorization for McDonald's to import processed french fries as needed on a temporary basis, until the factory being built by McDonald's with some local investors began operation. McDonald's withdrew its petition from the High Court.

The story has a happy conclusion. The first McDonald's opened in the fall in Ramat Gan to lines and lines of customers. Roaring demand for world class french fries was now being satisfied in Israel, whose citizens no longer had to board an airplane just to get decent french fries. Now that McDonald's had cleared the way, Burger King announced plans to establish dozens of outlets in Israel.

On November 30, Israel's high-brow newspaper, Ha'aretz, reported that the Knesset Finance Committee approved a tax of 30 cents on every kilogram of imported french fries. Despite this tax, it remains considerably cheaper to grow, process and transport french fries from abroad than to pay the prices charged by the local monopoly, Tapud. The paper's economics editor noted that the policy of overcharging consumers, reflected in high-priced domestic french fries, typified Israel's overall domestic economy, especially housing. He attributed the high price of housing to a spate of taxes: 30 percent on glass to protect the domestic glass firm Phoenicia, 15 percent on steel to protect the local steel firm Kiryat Haplada, 30 percent on cement to protect the local cement firm Nesher, 20 percent on ceramics, 30 percent on elevators, 40 percent on wood, and 45 percent on air conditioning equipment. Ha'aretz claimed that Finance Minister Shohat had promised to reduce these several taxes on construction in 1993, but was, instead, trotting them out as promises, again, for 1994.

Minister Tsur's press release was even outdone by Amir Sharon, Director of Imports at the Ministry of Agriculture. On August 24, Yedioth Ahronoth quoted Director Sharon as saying in an interview: "Who is McDonald's, anyway?...What happened, are french fries medicine?" Sharon added, "The line I follow is to raise as many difficulties as possible for importers and trip them up to protect local agriculture." In the same interview, Sharon noted that his office calculated that it is cheaper to fly milk in from Denmark every morning than to have Tnuva [Histadrut's monopoly agricultural cooperative] produce it. "So what? We should start importing milk? We have to maintain agriculture within the framework of a nation." Democracy in the framework of the Israeli nation, according to Mr. Sharon, means that Government bureaucrats are free to overcharge Israeli consumers.

No story about Israeli agriculture would be complete without some discussion of the never-ending kibbutz debt crisis. For the last few years, taxpayers have shelled out billions of shekels to help Israeli farmers regain solvency in the face of monumental debt, which the farmers had brought upon themselves. Although the 1993 state budget contained the last of the state-funded bailouts, the crisis still looms large.

In February, Minister of Agriculture Tsur noted that debt was still hampering the full recovery of the kibbutzim. Ha'aretz reported on March 25 that the Minister of Finance had asked the Knesset Finance Committee to lower interest rates on loans outstanding to kibbutzim from 6.5 to 4.5 percent and to extend repayment from 15 to 20 years. The request was approved on April 20.

The full scope of the kibbutz crisis was reported in the May 11 issues of Ha'aretz and The Jerusalem Post. More than three years after the Government authorized bailing out the kibbutzim, the debts of 176 kibbutzim had not subsided. Some 200 appeared beyond salvation. The situation of 89 had worsened according to the State Comptroller's Annual Report. The NIS 11 billion package of December 1989 was in tatters. Since the agreement was signed, the Government had transferred NIS 5 billion earmarked for loan rescheduling to the banks, even though the banks had not reached agreement on financial arrangements with the individual kibbutzim. The kibbutzim had failed to pay their portion of the arrangement through the sale of assets. "Since 1989, no kibbutz has implemented a financial recovery program."

But kibbutzim are rich in land resources. Zvi Weiss, senior economist in the Bank of Israel's research department, reported that kibbutz land holdings in the central region of Israel were worth NIS 30 billion if converted into non-agricultural use. So, the solution is easy. The Government need merely eliminate the obstacles imposed by the Committee for the Preservation of Agricultural Land, change the zoning laws, and compel the debt-ridden kibbutzim to sell enough land to eliminate their own debt.

On July 15, the Post reported the comments of the Knesset state control committee. The chairman, Dan Tichon, stated that a second kibbutz bailout was inevitable, since half of them was unable to repay the loans they received during the first bailout. He conjectured that the second bailout could exceed the scope of NIS 13 billion in debt extant in 1989.

But the kibbutzim remain mired in the nineteenth century. Yedioth Ahronoth reported on July 23 that Kibbutz Ein Zivan was instructed to cancel its system of graduated wage payments to members or risk losing its status as a kibbutz. No incentives for these institutions can be permitted. It appears that nothing, not even billions of shekels of debt, is sufficient to challenge the ideological commitment to egalitarianism. Dr. Ori Levitan of Haifa University concluded in a study of productivity that growth rates for industries in kibbutzim are lower than those for Israeli industry as a whole and that labor productivity was declining in the kibbutzim.

We can conclude our discussion of the new field of chicken economics with a statement issued by Shlomo Leshem, chairman of the farm section of the Agricultural Center, as reported in the Post on August 2, that "assuring farmers a living must be the central goal of governmental agricultural policy." Israel's Luddites are alive and well.

PART E: THE ABSENCE OF ECONOMIC FREEDOM IN ISRAEL

Israeli officials boast to the world that they live in a democracy, with the same freedoms that citizens of other Western democracies enjoy. But this claim is not true. Israelis do not enjoy the same freedoms found in many other countries. Among the 16 leading Western democracies, which includes the countries of North America and Western Europe, Israel comes in dead last in economic freedom. On a larger list of more than 30 countries, which includes some from Asia and Latin America, Israel's degree of economic freedom ranks it ahead only of Bulgaria, Romania, India, Russia, and Ukraine on a comprehensive index of economic freedom. In yet another comparative ranking of economic freedom of 99 countries encompassing the industrial democracies, Central and South America, Europe and the Middle East, Asia, and Africa in 1990, Israel ranked thirteenth from the bottom.

These rankings mock the claims of Israeli officials and academics, who define their economic system as a market economy, perhaps subject to an unusually excessive degree of government intervention. But the abysmal ratings of economic freedom in Israel by a variety of measures and studies go well beyond "an excessive degree of government intervention." The subject of economic freedom, and its general absence in Israel, warrants special consideration.

Since 1986, the Fraser Institute, a public policy research institution situated in Vancouver, Canada, in conjunction with the Liberty Fund, Inc., located in Indianapolis, Indiana, has convened a series of six conferences for the purpose of developing a measure of economic freedom for a broad cross section of nations that can be used to make comparisons among countries and to track the direction of economic freedom over time. The inaugural conference was held in Napa Valley, California, in 1986 and the proceedings were released in a book edited by Michael Walker, Freedom, Democracy and Economic Welfare, published by the Fraser Institute in 1988. The conference explored several conceptual themes and examined case studies in East Asia, Sub-Saharan Africa, Latin America, and Sweden.

The paper givers at this conference included the following distinguished professors and public servants:

Lord Peter Bauer, Professor of Economics, London School of Economics

Ramon P. Diaz, Governor, Bank of Uruguay

Milton Friedman, Nobel Laureate in Economics

Rose Friedman, Senior Research Fellow, Hoover Institution, Stanford University

Raymond D. Gastil, director of the Freedom House "Survey of Freedom," New York

Tibor R. Machan, Professor of Philosophy, Auburn University

Douglass C. North, Nobel Laureate in Economics

Svetozar Pejovich, Professor of Economics, Texas A & M University

Alvin Rabushka, Senior Fellow, Hoover Institution, Stanford University

Ingemar Stahl, Professor of Economics, Lund University, Sweden

Michael A. Walker, President, Fraser Institute, Vancouver, Canada

Lindsay M. Wright, Ph.D. candidate, University of Pennsylvania

Discussants of the papers included:

Armen Alchian, Professor of Economics, UCLA
Walter E. Block, Senior Research Fellow, The Fraser Institute, Vancouver, Canada
Herbert G. Grubel, Professor of Economics, Simon Fraser University
Arnold C. Harberger, Professor of Economics, UCLA
Brian Kantor, Professor of Economics, University of Cape Town, South Africa
Assar Lindbeck, Professor of Economics, University of Stockholm, Sweden
Michael Parkin, Professor of Economics, University of Western Ontario
Gordon Tullock, Professor of Economics, University of Arizona
Sir Alan Walters, The World Bank

The second conference was held in Vancouver in July 1988. Alvin Rabushka presented the main paper on how economic freedom should be defined. His paper built on the work of John Locke, Adam Smith, Milton Friedman, and his own extensive empirical and theoretical analysis. He argued that private property and the rule of law provided the foundation -- the institutional basis -- for economic freedom. He applied the concept of economic freedom to five basic areas -- taxation, public spending, economic regulation of business and labor, money, and foreign trade -- and outlined some ideas of how it might be measured in each of these areas.

An initial attempt was undertaken by Professor Zane A. Spindler of Simon Fraser University to rate economic freedom for 145 countries by tabulating data on privatization, public sector involvement, profit repatriation, import restrictions, foreign ownership, infrastructure, licensing, taxes, banking, government stability, tariffs and non-tariff barriers, foreign investment incentives, bureaucracy, labor relations, deregulation, price controls, and exchange controls. The Fraser Institute published the proceedings in 1991, edited by Walter Block, Economic Freedom: Toward a Theory of Measurement.

Other conference participants included:

James C.W. Ahiakpor, Professor of Economics, California State University, Hayward
David Friedman, Visiting Professor of Law, Cornell University
James D. Gwartney, Professor of Economics, Florida State University
William M. H. Hammett, President, Manhattan Institute, New York
Henry LePage, Institut Euro '92, Paris
Henry G. Manne, Dean, George Mason University School of Law
Richard McKenzie, Professor of Economics, University of California, Irvine
Antonio Martino, Professor of Monetary History, University of Rome, Italy
Charles Murray, Senior Fellow, American Enterprise Institute, Washington, D.C.
Ellen Paul, Professor of Philosophy, Bowling Green State University
Robert Poole, President, Reason Foundation, Los Angeles
Gerard Radnitsky, Professor of Economics, University of Trier, Germany

The third conference was held in Banff, Alberta in 1989. Building on the earlier discussions and debates, considerable progress was made toward the development of an approximate definition of economic freedom. Conference participants discussed the merits and flaws of a comprehensive index that would require measurement of and data collection for several hundred elements compared with a more compact set of broad indicators for which data would be readily available. Walter Block and James Gwartney, in conjunction with Robert A. Lawson of Shawnee State University (Ohio), agreed to explore the latter approach and presented their findings at the fourth conference held at Sea Ranch, California, in 1990. The Fraser Institute in 1992 published the papers from the third and fourth conferences in a volume edited by Stephen T. Easton and Michael Walker, Rating Global Economic Freedom.

Participants who were new to the third and fourth conferences included:

Juan F. Bendfeldt, Professor of Economics, Francisco Marroquin University, Guatemala
Jack L Carr, Professor of Economics, University of Toronto
John F. Chant, Professor of Economics, Simon Fraser University
Edward H. Crane, President, Cato Institute, Washington, D.C.
Arthur T. Denzau, Professor of Economics, Washington University (St. Louis)
Thomas DiLorenzo, Professor of Economics, University of Tennessee, Chattanooga
John C. Goodman, President, National Center for Policy Analysis, Dallas
John G. Greenwood, Chairman, G.T. Management (Asia) Ltd., Hong Kong
Edward Lee Hudgins, The Heritage Foundation, Washington, D.C.
Ronald W. Jones, Professor of Economics, University of Rochester
Sally C. Pipes, President, Pacific Research Institute, San Francisco
Richard W. Rahn, President, Novecon Corporation, Washington, D.C.
Alan Reynolds, Director of Economic Research, Hudson Institute, Indianapolis
Gerald W. Scully, Professor of Economics, University of Texas, Dallas
Bernard H. Siegan, Professor of Law, University of San Diego
Alan C. Stockman, Professor of Economics, University of Rochester
Richard L. Stroup, Professor of Economics, Montana State University
Melanie S. Tammen, director of global economic liberty project, Cato Institute

A fifth conference was held in Santa Cruz, California, in 1992 to further explore the various measurement issues that had surfaced in the previous two meetings. New participants in the series included:

Gary L. Becker, Nobel Laureate in Economics
Henryk Kierzkowski, Graduate Institute of International Studies, Geneva
Gramoz Pashko, Deputy Prime Minister, Tirana, Albania

The sixth conference was held at Sonoma, California, in November 1993 to discuss two summary efforts to measure economic freedom that built upon the five previous conferences. The first paper, written by James D. Gwartney, Walter E. Block and Robert A. Lawson, set forth a consensus "objective" measure of economic freedom, and applied it to 100 countries for the four periods 1975, 1980, 1985, and 1990. The second paper, written by Stephen T. Easton and Michael A. Walker, presented the results of a survey approach to an index of economic freedom. In addition, Simon L. Ogus of G.T. Management (Asia) Ltd. submitted a paper that surveyed economic freedom in Asia in 1993.

The Gwartney-Block-Lawson index of economic freedom consisted of five key components, each of which included three sub-components. The justification for each of the 15 separate measures was presented at length in their paper. The overall index is reproduced below.

Exhibit: The Components of the Index of Economic Freedom

Money and Inflation (Protection of money as a store of value and a medium of exchange)
1. Annual growth rate of the money supply, adjusted for GNP growth
2. Standard deviation of annual inflation rate
3. Freedom to own foreign money, maintain overseas bank accounts
Government Operations and Regulations (Freedom to decide what is produced and consumed)
1. Government consumption as percent of GNP
2. Number and scope of government-owned enterprises
3. Price controls
Takings and Discriminatory Taxation (Freedom to keep what you earn)
1. Transfers and subsidies as percent of GNP
2. Top marginal tax rate and threshold at which it takes effect
3. Conscripts per 1,000 population
Restraints on International Trade
1. Taxes on trade as percent of exports plus imports
2. Difference between official exchange rate and black market rate
3. Actual size of trade sector compared to expected size
Capital Markets and Real Interest Rates (Freedom to save and invest)
1. Difference between world real deposit rates and local rates
2. Foreign investment as percent of GNP
3. Restrictions on direct foreign investment.

The overall summary table for 1990 gave Israel a score of "F." Summary ratings across the five major component areas were assigned a score ranging from 0 to 10, based on extant published data assembled from a broad variety of world statistical sources. Across the five components, the authors rated Israel 1.3, 0.7, 2.1, 6.0, and 4.0, which yielded a composite average of 2.8. A passing grade of D began at 4.0. Israel also earned summary ratings of "F" for 1975, 1980 and 1985.

The Gwartney-Block-Lawson paper devoted a separate chapter to each of the five major component areas, explaining how the measure of each subcomponent was constructed, what data were used to measure the subcomponent, how the rating scale was established, and how the three subcomponents were combined. Israel received failing grades in every major component but international trade for each of the four observations of 1975, 1980, 1985, and 1990.

Stephen T. Easton and Michael A. Walker presented a second, survey-based approach to an index of economic freedom. Their survey instrument asked respondents to rank different countries as to the amount of economic freedom present on a scale running from 0 to 100, along with ratings of sub-indexes of economic freedom. The respondents included members of the Mont Pelerin Society, an international association of about 500 distinguished academics, businessmen, and public officials from several dozen countries, founded in 1948 in Switzerland, and a group of Eastern European experts at the European Bank for Economic Reconstruction. The questionnaire asked each participant to mark their selected countries along five scales ranging from 0 to 100, and give their subjective ratings to the five components embodied in the Gwartney-Block-Lawson index.

The five reference countries were the U.S., Germany, Sweden, Israel, and India, which received a large number of responses, and were thus amenable to rigorous statistical analysis. Their respective scores, on the hundred point scale, were: 84, 73, 48, 31, and 21. Only India ranked below Israel. (These results correlate closely with the more objective Gwartney-Block-Lawson index.) When the list of five reference countries was expanded to include every other country that was ranked by at least 12 respondents, Israel ranked 28 out of 33 countries.

To repeat and to summarize: On the basis of a rigorous, objective measure of economic freedom, defined by 5 major components and 15 sub-components, Israel received a failing score for 1975, 1980, 1985, and 1990. On the basis of a survey measure of economic freedom, Israel ranked near the bottom, surpassing only 4 former communist countries and India.

Some discussion of linguistics is perhaps in order to explain the huge disparity between global rankings of economic freedom in Israel and the repeated statements of Israelis about the prevalence of freedom, free markets and democracy in Israel. The dictionary definition of freedom set forth in the Third Edition of The American Heritage College Dictionary, published by Houghton Mifflin in 1993, includes, among others, the condition of being free of restraints, the liberty of the person from slavery, detention or oppression, and immunity from the arbitrary exercise of authority. Freedom's prime synonym, liberty, specifically means freedom from unjust or undue governmental control, a right to engage in certain actions without control or interference. Add in the adjective economic, and the concept of economic freedom or economic liberty really means the rights of individuals to engage in voluntary economic transactions free from undue governmental control or interference. This notion of economic freedom derives from the Anglo-American traditions of the common law, John Locke's Second Treatise on Civil Government, Adam Smith's Wealth of Nations, The Federalist Papers, and the free-market economic development of Great Britain and the United States in the last two centuries.

Israel, as any informed reader knows, is the antithesis of this vision of economic freedom. Israel is one of the world's last remaining socialist economies, with massive governmental control over almost all aspects of economic life.

Now look up freedom or liberty in any comprehensive Hebrew-Hebrew dictionary. There are no references to protecting the rights of individuals from undue government control or interference. The Western notion of limited government does not pertain to the Hebrew definition of freedom. Israelis have no historical or cultural referents against which liberty takes on the Anglo-American connotation of limiting government control, and therefore the word means something else. In fact, it means autarky, the independence of the country from foreign economic control. And autarky is usually the result of excessive internal government intervention and control.

Those Israeli academics, politicians and business leaders who say that Israel's economy suffers from an excessive degree of government control do not fully acknowledge the scope and severity of that control and its destructive effects on the economic freedom of individual Israelis. Perhaps one reason is that they cannot think constructively about economic freedom. Neither their language, culture nor history have given them the intellectual framework and vocabulary with which to see the country's true condition, a state of affairs that is readily apparent to dozens of the most distinguished scholars from around the world, who participated in the six Fraser Institute conferences, and the hundreds more who responded to the several surveys reported at those meetings.

Consider the most basic elements of human survival: food, shelter and clothing. Minister of Agriculture, Ya'acov Tsur, says that french fried potatoes cannot be imported and that the country must maintain a ban on the import of fresh fruits, vegetables and other foodstuffs. Sorry, no fresh bananas, blackberries or boysenberries for you people. No freedom in food unless Minister Tsur grants an exemption. Minister of Immigrant Absorption Yair Tsaban says that new immigrants must be forced to move into empty apartments in the Galilee. Sorry, no freedom of shelter for them. And Bank of Israel Governor Jacob Frenkel acknowledges that Israelis pay twice as much for shirts as they cost abroad. Sorry, no freedom of clothing for Israelis who cannot afford to travel abroad.

There it is in a nutshell. No freedom of food, shelter and clothing -- openly acknowledged by high ranking ministers and the Governor of the central bank. And while at least Frenkel is critical, the other two ministers express disdain that Israelis should have freedom of choice in food and shelter. Is Israel really a democracy under these circumstances? The only real freedom available to Israelis is to get on an airplane and leave, as hundreds of thousands have done.

The academic defense of Israel is to note that the relative size of the public sector in Belgium is about the same size as it is in Israel, and that Belgium's tax burden rivals that of Israel. This statistical comparison overlooks fundamental differences. Belgians can eat big ripe bananas, can live where they want, and can buy high quality shirts at internationally-traded prices. Belgians are much freer than Israelis in these three, and almost all other, respects. Indeed, Belgium ranked in the top one or two categories on nearly every measure of economic freedom. Israeli democracy lacks the most important component of real democracy -- individual freedom. Any country that denies its citizens individual freedom is not a real democracy, despite the outward forms of its governing institutions.

PART F: FOURTEEN FOLLIES IN REVIEW

1. Nobody cares about the taxpayers' money. Government spending in Israel is so large that it amounts to more than three-fifths of the country's gross domestic product. One would think that the state budget would receive a high degree of attention from Knesset Members. The reality is quite the opposite. The day after the Minister of Finance presented the budget to the Knesset on October 25, the headline in The Jerusalem Post read: "Budget debate plays to near-empty house." The plenary chamber of the Knesset was virtually empty, with few MKs present and even fewer ministers. The budget proposed NIS 126.5 billion ($43.6 billion) in spending in an economy whose total size is about $60 billion. Somewhere between one-fourth to one-sixth of the membership listened to some of Minister Shohat's presentation.

The debate on the Government's proposed budget continued into a second day with no more than a dozen Knesset Members present. Not a single minister showed up for the start of the debate. On October 27, the budget passed its first reading on a party line vote, which means that it was sent to the Knesset Finance Committee for review, after which it would be returned to the plenum for final approval before the end of December. But few of the Knesset Members who voted for the budget in the first reading knew or cared what was in it.

2. It is almost impossible to reward a hard-working Israeli with a pay increase. Take the case of someone who receives a gross salary of about $32,000 a year. The employee takes home, after income taxes and other deductions, about $16,800. The difference consists of tax payments, contributions to the National Insurance Institute, an employer's tax, contributions to a pension plan, and a payroll tax. (The Government of Israel loves to tax its citizenry. The more money the Government can tax away, the less freedom individual Israelis have to spend their money as they wish, rather than in accord with the wishes of the bureaucrats and politicians.) Now suppose the employer wants to give his hard-working, loyal employee a modest salary increase of $6,000 in take-home pay. The employer will have to pay out an additional $21,700. It costs an employer $3.40 to give an employee an additional $1 in after-tax, take-home pay. To put $21,700 in the pockets of his Israeli employee, the employer must spend almost $52,000.

Israel's oppressive tax system is outrageous beyond reason. Few employers can afford to reward talented, hard-working employees. It costs too much in overhead. This is true for both the private and non-profit sectors. As a result, Israel suffers the most unequal distribution of income among all Western democracies before taxes and transfers are taken into account. The reason is obvious. To give a high-salaried employee a real, take-home increase in pay requires a huge increase in gross pay, thus increasing the gap between productive and lower-salaried employees.

Compare Israel with, for example, New York City. There someone with a gross annual salary of $54,000, almost the same as in the preceding Israeli example, takes home $38,460. The relevant deductions in New York City include federal tax, state tax, local tax, social security, medicare, and disability. It is possible to give someone a raise in New York City without overwhelming an employer; it is not possible in Israel. This fact, by the way, explains why there are so many Israelis in New York City.

3. Charity goes to the Government. U.S. Jews send billions of dollars to Israel that are received by thousands of charitable institutions. These organizations have been established to promote worthy causes. But most of the funds they receive is spent on wages and salaries. And most of this, in turn, is paid in taxes to the Government. To repeat, most charity sent to Israel is taxed away by the Government. No wonder that Government officials promote Israel's massive non-profit sector on their many trips to the U.S.; they are its chief beneficiaries.

4. Why smuggling is so pervasive in Israel. An Israeli acquaintance, recently visiting the United States, purchased a Walkman for $120 and brought it back with him to Israel. The Walkman was defective so he shipped it back to the store at which he purchased it for repair. The store repaired the Walkman, and returned it by air freight to Israel. The customs authorities intercepted the package, and notified the Walkman's owner that he could collect his prized possession upon payment of $220 in import charges. A Walkman that costs $120 in New York costs $340 in Israel? Nothing more needs to be said about this absurdity.

5. The high cost of computing in Israel. This brings me back to a theme in a previous Scorecard. Israeli officials boast of their highly-skilled, technically trained labor force. Yet anyone who prices a personal computer in Israel soon discovers that it costs about double that in the United States. To put the economics of computers in perspective, per capita income in Israel is about 40 percent that in the U.S. The price of a computer is roughly double. This means that the relative price of computing, as against the country's per capita income, is fivefold that in the United States. This policy of taxing imports hardly seems consistent with any intelligent approach to developing a modern economy.

6. The high price of orange juice in Israel. The Jerusalem Post reported on January 22 that the cost of picking oranges in Israel would come to much more than the income from its sale. Time to upgrade agriculture to higher value-added produce? Not in Israel. The Minister of Agriculture asked the Knesset Finance Committee for a special $20 million appropriation for citrus growers, which the committee approved in early February. Meanwhile, Ha'aretz reported on January 29 that the Vegetable Marketing Council and potato farmers formed a cartel to raise potato prices by 20 percent. Now you know why your bill at the Israeli supermarket checkout counter is so unreasonable. And, to add insult to injury, the cashier, with disdain, throws at you a cheap plastic bag in which you can pack your own groceries. Israeli democracy also breeds bad manners.

7. Where else but in Israel do empty apartments count as growth? Globes reported on May 3 that the Government would have to shell out NIS 1.5 billion in taxpayers' funds to buy back 42,000 apartments it built in places of the country where new immigrants did not want to live (but Minister Tsaban will send them there anyway, if he has his way). The same Government also counted the money it spent to build or guarantee the construction of these apartments as part of its world-leading growth during the previous three years. In the Israeli national income accounts, empty apartments count as growth.

8. Continue the failed investment policies of the past. The Director-General of the Ministry of Finance, Aharon Fogel, chaired a panel to review the Law for the Encouragement of Investment (ECIL). The committee concluded, after 20 years and NIS 15 billion in investment grants, that the money had not been well used. At a conference in Tel Aviv on July 15 sponsored by Globes on FEPZs, then Deputy Income Tax Commissioner Zev Feldman quoted a study showing that "One-half of the companies getting grants under the investment law have a life exactly the length of the grants. Then they disappear. The other half continues living within the law via factory expansions." In response, the Minister of Industry and Trade, Micha Harish, rejected any changed in ECIL and proposed its extension through 1997. In late November, the Knesset Finance Committee approved an extension of ECIL through June 1995. After all, it isn't his or their money.