- The Washington Times - Wednesday, October 13, 2004

Governments no longer have a choice. They either enact free-market reforms now at a painful but tolerable cost, or they reform later at an infinitely higher price. We live in a world full of choices. With the push of a button, billions of dollars can instantly be sent across the globe. Plants and even whole industries can be transferred to the country that offers the most business-friendly environment.

Yet because consumers and investors have more choices, governments have fewer. More choices mean more competition, and more competition means that governments — regardless of their political and ideological composition — must enact policies that will enable their national economies to compete in an increasingly uncompromising and unforgiving global marketplace.

Economies that do not provide a good investment climate will lose investors to ones that do. And economies that fail to unleash the creative potential of their workforce will see their best and brightest flock to economies that actively attract talent and initiative.

The formula for economic success in the global marketplace is clear: lower taxes, reduce government spending, streamline bureaucracy, invest in infrastructure and education and de-monopolize industry. Enacting these reforms demands political courage. Leaders can try to delay reform in the hope of avoiding unpopular decisions. But what may be politically prudent for the individual leader proves disastrous for the nation.

When reforms that enable a country to share in the enormous prosperity generated by globalization are delayed, that country falls further and further behind, becoming even less fit to compete. Eventually, the costs of procrastination become painful, necessitating ever more drastic measures. Indeed, the question is not whether a given economy will reform, but when and at what price. Israel’s government has decided not to wait.



We have already drastically cut government spending. Just two years ago, that spending accounted for nearly 56 percent of our GNP. Today, it accounts for less than 52 percent. These cuts were designed to streamline the bureaucracy, decrease the dependency on welfare and provide incentives to enter the workforce. And they have worked.

While unemployment remains high, it has stopped growing for the first time in four years. More Israelis are entering the workforce than ever before, as tens of thousands of jobs are created in the private sector. This is an important achievement because the best way to fight poverty is to provide jobs to poor parents.

No less important is that for the first time in Israel’s history tax burdens are being reduced. Income taxes on the middle class have been cut, a regressive value- added tax has been rolled back and sky-high taxes on imported consumer durables have been slashed. Just as cutting taxes has proven an effective engine for economic growth in countries across the world, it has proven the same in Israel. In little more than a year, the current Israeli government has taken a shrinking economy and placed it on a path that is expected to yield 4 percent growth this year and even more in the years ahead. Meanwhile, the deficit is expected to decline from 5.7 percent in 2003 to less than 4 percent this year.

We have also embarked on an ambitious program of privatization that includes our national airline, banks, ports, refineries, phone service and the state’s sole electricity provider. We are pouring money into infrastructure, creating a high-speed rail line that will link every city with a population of over 50,000. Along with a new highway that runs down the spine of the country, this will revolutionize Israel’s transportation system.

Most important has been the reform of our state-funded pension system. Within a few years, most industrialized countries will be unable to provide pensions for their rapidly aging populations. Rather than bury its head in the sand, Israel’s government has taken the politically unpopular steps to address this problem: We have raised the retirement age for both men and women, increased workers’ contributions and replaced failed union management with competent professionals.

The benefits Israel has gained by embracing reform are already evident. Growth has returned, the stock market is skyrocketing and the rise in unemployment has been checked. Israel’s success is easily replicable in countries that courageously embrace reform.

The more rigorously that international donor institutions and countries link aid to reform the better. The greater the incentive for reform, the sooner indebted nations will be able to repay their loans and lift themselves out of poverty. Israel, which has never defaulted on a loan, knows that reform can be a difficult road. But it is the only way. Israel is proving that it is up to the challenge.

Benjamin Netanyahu is Israel’s finance minister and former prime minister.

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