The thirteenth of the 13 Principles of Faith articulated for Jewry in the 11th century by Rabbi Moshe ben Maimon (Maimonides) testifies to the absolute belief in the Resurrection of the Dead, an event to take place in some as yet unknown future. Without intending any blasphemous comparison, it is this article of faith and the indefatigable and enduring spirit of the policy proposal for a Free Processing Zone in Israel that give rise to yet another article of faith, but this one intended for all of those dedicated to public policy and reform: A policy proposal intended to fundamentally reform a political economy mired in socialist and statist institutions will survive many fatal assaults, and indeed be resurrected, if it is well grounded in factual research, truth, and freedom. To gain some perspective and to place this article of faith in its proper context, consider the following review.
In June of 1992, a group of leading U.S. Jewish businessmen formed a company that was to become the Israel Export Development Company (IEDC). The founders of IEDC, men like Robert Tishman, Larry Tisch, Sy Syms and Larry Silverstein, were ardent supporters of the State of Israel. But like many Americans, they were leery of investing directly in Israel. However, it was their fears that made them ready to support the rather grandiose proposal embodied in IEDC’s mandate.
For all of these men, Israel represented a place to donate millions by way of their favorite charity, be it the United Jewish Appeal or Israel Bonds. To contemplate a real direct investment in Israel was not in the cards. The reason was simple: Israel didn’t play by any fixed rules. When it came to allowing the private sector to do what it does best, Israel was not the place to be. It was a land without any real legal protections or level playing fields. The horror stories by these men and their friends about “doing business” in Israel were legion. Until IEDC came along, this was a nasty truth better kept under wraps and avoided. Philanthropy - yes; entrepreneurship - no.
IEDC sought to change this reality through a straight forward policy initiative proposed by IASPS designed to create a free‑market business environment liberated from the infamous Israeli bureaucrats and anchored in LAW. Such it was when IEDC shareholders first met with then‑Finance Minister Avraham (Beiga) Shohat in September 1992 in New York and made their best pitch, a collective personal guarantee: Enact the Free Processing Zones (FPZ) Law as we have proposed and rest assured that we will spearhead $250 million of direct investment just in the development of the first high‑tech, “infopark” free zone in Israel. The companies that would be attracted to the zone would invest hundreds of millions of dollars more and employ at least 20,000 workers. Beiga Shohat was impressed.
Unfortunately, then‑Finance Minister Shohat lacked any useful knowledge of economics, business, and free markets. What impressed Shohat was the idea that the world’s leading Jewish businessmen had come together in one room and promised a huge investment without asking for anything in return – no grants, no loans, no handouts whatsoever – just an FPZ Law that guaranteed them a truly free zone that still respected Israel’s health, safety, and environmental laws. Indeed, the FPZ Law would still allow the Israeli government to collect a 15 percent flat tax on distributed profits. What was there not to like?
Death at the Hands of the Bureaucrats; and Resurrection
As far as Shohat was concerned, however, that was as far as it went. From there on, the best he could muster was the ability to appoint one committee of government bureaucrats after another. The bureaucrats in charge of the government continued to leak story after story to all of the newspapers that the FPZ was a non‑starter. It came as no surprise then, in January 1993, when the committee of bureaucrats empowered to decide on the FPZ Law’s fate had rendered its decision: NO. The headlines were all but unanimous as they proudly declared: The Free Zone project is “Dead and Buried.”
It was at this moment that our article of faith was to be tested. Would solid research, truth, and freedom overcome what seemed to be insurmountable odds to all of the Israeli pundits who dared to speculate? Indeed, the FPZ policy proposal, anchored in the reality of a for‑profit company advancing its own interests and the interests of the economy of the State of Israel, was not about to remain among the deceased for long. As many of you know who have followed the Scorecard over the years, the committee’s decision, headed by Yoram Gabbay, at the time the director of the Internal Revenues Department, was not the final answer. In fact, IEDC successfully lobbied then‑Prime Minister Yitzhak Rabin who in turn pressured Shohat. Shohat’s response was to appoint another committee, this one headed by the tax commissioner, Moshe Gavish, the one member of the Gabbay Committee who had voted for the project. Gavish, it must be told, had already announced his intentions to depart from government service and was already eyeing the private sector for a future position.
What was it that ultimately carried the day? Why was the Israeli government literally forced to reject the Gabbay Committee’s report? The answer: IEDC promised to publicly expose the report as a bundle of absurdities, lies, and deceptions. The most egregious of these lies was one crafted by Chairman Gabbay himself. In fact, it was technically the most important reason for the committee’s rejection of the proposal. Fortunately for IEDC, Gabbay had overplayed his hand.
In his report, Gabbay contended that he had a government legal opinion concluding that the FPZ Law itself was illegal, a veritable violation of international free trade agreements. In response, what IEDC pointed out to all those who were listening was that (1) Gabbay had no such legal opinion; and (2) the only legal opinions that existed were ones prepared by international trade experts at IEDC’s behest. Indeed those legal opinions were potentially explosive for they pointed out not only that the FPZ Law was fully compliant with international law, but also that Israel’s current government subsidy programs, which doled out millions of dollars to many of Israel’s favorite‑son companies, were outright violations of international trade law.
Very quickly IEDC was informed that if it kept quiet about Israel’s dirty little secret known as the Law for the Encouragement of Capital Investment (i.e., Israel’s business subsidy program), opposition to the FPZ Law would end. IEDC kept quiet and the bureaucratic opposition was muted – at least for the time being.
Thus it was, that after more than a year of legislative drafting work among all of Israel’s various ministries and lobbying among all of Israel’s 120 Knesset members, the FPZ Law emerged as the law of the land (compromised to be sure, but still an excellent free zones law by international standards) on June 20, 1994.
Death by Legislation
The FPZ Law, by design, incorporated legally mandated timetables. Most notably, the Free Zones Committee, a creation of the FPZ Law itself, was legally required to publish the tender for the concession to build, market, and manage Israel’s first free zone by the end of November 1994. Of course November 1994 came and went and there was no such tender. Indeed, what was occurring was the blatant violation of Israeli law by government bureaucrats. While IEDC, in reliance upon the FPZ Law (1994), was out spending millions of dollars marketing and preparing its tender response, the Free Zones Committee, a committee whose mandate was defined and restricted by the FPZ Law, was secretly trying to kill the law by preparing 32 changes to the 67‑article FPZ Law. In other words, what the bureaucrats failed to accomplish through bureaucratic means in 1992, they now sought to achieve through legislative chicanery and outlawry.
Note well what has just been described, for in any sane, law‑bound democracy it would be cause minimally for civil recourse and administrative sanctions against “civil servants” who, within the fortress‑like anonymity they erect around their clerical fiefdoms, anoint themselves masters over the electorate. To be certain that even the bureaucrats themselves understand this point, permit a lawyer to spell it out for them in even more basic lay terms. Bureaucrats, not elected politicians, the very bureaucrats whose power was defined by the FPZ Law, broke that law by not publishing any tender and at the same time sought to eviscerate the substance of the law, rendering it impotent in all but one important way: it continued to authorize their jobs and salaries.
Indeed, a tender was never published under the law. The bureaucrats submitted and passed their own version through their surrogate, Finance Minister Shohat, who was able to take the podium and introduce the changes to the Knesset on January 1, 1996, after Shimon Peres, who had just replaced Rabin as prime minister, let it be known that the only thing in the world that mattered to him was that Israel continue to place life, limb, land, and free market reforms on the altar of his dream of a New Middle East without borders.
Predictably, IEDC publicly withdrew from the charade. Shohat begged and pleaded with this writer and others involved with IEDC to respond to the upcoming tender. IEDC remained unequivocal and steadfast: a tender based on the now perverted FPZ Law was simply a joke and unmarketable and IEDC would have nothing to do with it. Shohat, now desperate, called for a special “Focus Day” on the upcoming zone tender at which he informed several in the crowd that the interest in the revised law remained high, and he predicted with all the gusto he could muster that the tender would draw many competitive international bids.
The tender, in all of its splendor is published. No one bids. The FPZ is announced Dead on Arrival, once again. The bureaucrats, notably those in the Finance Ministry who killed the project, violated law and abused the principle of good government, either continue in their posts or “retire” to six‑ and seven‑figure salaried private sector jobs.
Resurrected Yet Again
That year, however, was to bring change to the scene and a hint of hope. Back in New York, Larry Silverstein decides it is time for a change in the leadership at IEDC. This writer, David Yerushalmi, who had led the IEDC effort since its inception, is asked to turn over the leadership of the company to Silverstein, an accomplished real estate developer and ardent fundraiser for the Jewish Federation of New York, itself a big contributor to Israel. After spending more than $7 million lobbying for and marketing the Free Zone project worldwide, very few among the IEDC shareholders were prepared to just walk away from this effort. Charity was charity; but this was business - even if till now, it wasn’t particularly good business.
That year brings change in Israel also. Israeli national elections in 1996 bring a self‑styled free‑market hero to power. Newly‑elected Prime Minister Benjamin (Bibi) Netanyahu promises radical free market reform. In July 1996, Ariel (Arik) Sharon is appointed minister of infrastructure and after several ministerial comings and goings, he is given the responsibility over the FPZ project. Because IEDC’s former lawyer, Ya’acov Neeman, is the finance minister at the time, all FPZ responsibilities are shifted to Sharon, who, true to his word, promises his strongest support for the project.
During almost all of 1998, Silverstein is busy meeting with and pushing Sharon and his bureaucrats to “get the Zone done.” At first, Silverstein is so optimistic that he authorizes the effort to compete for the tender BEFORE the FPZ Law is restored to its original form. Had not IEDC dutifully read Kaddish over the deceased: the revised and distorted FPZ Law? Had not the project died?
The short answer to these questions is Yes and No. Yes the project had died. But, a sound policy proposal that artfully enticed some of the world’s most successful Jewish businessmen to invest (not donate) $7 million in a viable business that would also provide jobs and investment in Israel was not to succumb to the realities of “dust to dust” so readily. Good policy, helped along by a design for survival that relied upon a businessman’s instinct for survival and profit, was the formula for yet another Resurrection.
Indeed, the resurrection was already in motion. First, the bureaucrats literally pack their bags and fly to New York to assure Silverstein that everything will be done to insure that things will be different this time around. These bureaucrats, they argue, are all in favor of the project.
Second, the Israeli “civil servants,” albeit in the name of their minister, convince Silverstein that once IEDC is selected as the first zone’s concessionaire, the bureaucrats will go to work to change the law back as close to the original as Israeli politics allow. Silverstein agrees and the IEDC board of directors follows in tow. Even from the grave as it were, the idea embodied in the original FPZ Law, the idea that laws are meant to protect freedom, and by freedom in economics is meant free markets, and that free markets are meant to protect real competitive level playing fields, has forced itself back upon the scene. The policy lives.
Subsequently, a special “Pre‑Qualification Selection of Potential Bidders” for the zone concession is published. Predictably, only IEDC bothers to respond, and IEDC is the choice by default. But Israel is Israel and the story does not end here. The bureaucrats then provide Silverstein with the tender, essentially saying, sign here. Where? On the dotted line of a new 400‑page monstrosity based upon the “new” law. Sign here and then we’ll get down to work fixing all of the problems: business - Israeli style.
Now, Silverstein is a believer, but he is certainly no one’s fool, especially when it comes to developing real estate, even a piece of real estate in the Holy Land. He balks. “I can’t do it. This thing is a nightmare. It can’t be done.” The message is sent. Silverstein meets again with Sharon, and again with his bureaucrats in New York, this time calling in vaunted free zone experts from the U.S. capital, and by mid‑December 1998, Sharon and his team of civil servants agree: The original FPZ Law must be restored; the changes must be rolled back. Truth and logic and good policy appear to have ruled the day.
But even good policy instruments are just that, instruments. And, even the most effective is subject to the limitations of the national and political institutions that must come to bear to wield those instruments. In this case, good policy is up against the most formidable of opponents: local Israeli politics. At the time of this writing, literally as the Cabinet is sitting down to authorize the reversal of the bureaucrats’ death‑knell changes to the FPZ Law, that very same government is disintegrating into the muck and mire of an Israeli election season, prematurely brought on because Netanyahu was not a free market reformer.
But then again, neither Netanyahu nor any leader of Likud or the so‑called Israeli right could muster the humility and leadership of a modern‑day Moses and lead Israel away from dependence on aid and toward the promised land of economic independence. For that would require “a leap in being” beyond the aid‑driven power politics that control our lives so completely in this special corner of the world. And for that and the Final Redemption, we must pray.
N.B. Reports have just been received that the Finance Ministry bureaucrats have decided that they deserve another opportunity to bury this proposal once and for all. They have apparently convinced Netanyahu’s aides that he’d better not make this a pre‑election issue or they will wreck his campaign plans. Thus, as acting finance minister since Neeman’s resignation, Netanyahu’s “election campaign economics” are now held hostage to the bureaucrats in the Finance Ministry. And, if in Israel good economics are a rare thing indeed, good economics during the run‑up to elections are a non‑existent thing. Despite the opposition of the bureaucrats, Netanyahu promises once again to restore the original law. Resurrection?
David Yerushalmi is chairman of the board of the Institute for Advanced Strategic and Political Studies in Jerusalem and Washington, D.C. Between 1992 and 1996 he was CEO of the Israel Export Development Corporation