Perestroika in the Promised Land?

Socialism's Last Stand I: In Israel, the people belong to the state, but that may be changing.

Americans, who fancy Israelis as pioneer-spirited, yarmulke-wearing soldiers living mostly in egalitarian kibbutzim in the middle of the desert, suffer a kind of culture shock when they first visit Tel Aviv. A cross between Miami Beach and Beirut in its good old days, the "first Hebrew city" exudes a sense of the trashy good times and the tacky culture of the nouveaux riches. Here the mostly secular Israelis practice their new religion of consumerism as their children dream of Reeboks and dance to New Kids on the Block.

Skyscrapers and shopping malls, built by Palestinian construction workers, rise on every street corner. Chinese restaurants, owned by Vietnamese boat people, explode with customers until the early hours of the morning. The new Israeli edition of Penthouse is on the top of kiosk magazine shelves, along with several gay publications.

For visiting American Jews, who grew up watching reruns of Exodus and listening to propagandists from the United Jewish Appeal, these sights of materialism, greed, and sexual permissiveness tend to produce a poignant cognitive dissonance. "I guess many of us American Jews turned Israel into a fantasy land, our collective Disney World," says Donna, a Los Angeles resident on her first trip to the country. "And you never think of Mickey Mouse as someone who has perhaps simple hopes and desires like yours.…In our script the Israeli was supposed to work hard drying swamps, not building a Jacuzzi in his backyard."

Israelis are indeed trying to erect islands of renegade capitalism and free thought in the midst of a statist economy and a theocratic polity. "Unlike the East Germans, we don't have a 'West Israel' to flee to," explains Asher Barad, a high-school friend who is an official of the Israel Discount Bank. "So those of us who don't leave for the States spend most of our energies finding ways to screw the nomenclature by circumventing the government's intrusion in our life, especially by evading taxes and spending our money on having a lot of fun."

Just as the Arab-Israeli conflict has outlived the Cold War, so, too, socialism persists in Israel despite its dramatic collapse in other countries. A massive influx of Soviet Jews makes the anomaly all the more glaring. Leaving behind the ruins of a planned economy, these immigrants may have imagined they were escaping to the capitalist West. But with the changes taking place in Eastern Europe, it's conceivable that Hungary and Poland will soon have economic systems more favorable to free enterprise than Israel's.

Founded by Eastern European socialists, Israel adopted many of the attributes of a Western democratic system—in particular, a strong and independent judiciary. But it also retained some of the elements of Eastern European political culture: a huge bureaucracy and centralized economy, political fragmentation, respect for authority, an intellectual class with a strong antibusiness mentality, and a national identity that is tied strongly to ethnicity and religion. Israel's is a political culture whose sources are Hegel, Marx, and Heinrich von Treitschke (the philosopher who developed the idea of organic nationalism), not Smith, Mill, and Locke.

In Israel, as a popular saying puts it, the state does not belong to the people; the people belong to the state. The "state" is a collection of political parties whose ideological origins go back to early 20th-century Moscow, Warsaw, and Vienna. It controls everything from the large government agencies and public corporations to the educational system, the health services, and the soccer teams; from wages and prices to the weight and shape of doughnuts.

Some indications of the government's reach and influence:

• Israel's tax system is probably the most oppressive in the Western world; the income-tax rate reaches 45 percent for salaries of $19,748. In fiscal year 1988–89, tax revenues and fees soaked up more than 50 percent of the country's GNP.

• The public sector absorbs about 500,000 workers—some 40 percent of the work force—of whom about 200,000 are employed by the national government.

• Ninety-three percent of Israel's land is in the hands of governmental authorities. Through its building construction ministry and its land policy, along with the high taxes it imposes, the government has made it almost impossible for a young middle-class family to own or rent an average-sized home.

• Transportation is controlled by government agencies or monopolistic cooperatives; the state discourages private ownership of vehicles through burdensome taxes. As a result, Israel has fewer motor vehicles per capita than either Spain or Greece.

• The state controls the communications system. There are no privately owned telephone companies or broadcasting operations, and the government has been known to keep politically controversial material off the air.

Israel's huge governmental apparatus enables the political parties to control the economy and to award benefits to their leaders and supporters. These benefits include jobs, tax exemptions, budget increases, and goodies such as free flights on Israel's airline or special preferences in installing telephones (it can take the average Israeli more than a year to have a phone installed in his home).

Over Turkish coffee in one of Tel Aviv's chic yuppie hangouts, Asher and I discuss his thesis that what he calls "the revolution against the dictatorship of the party bosses" hasn't taken place because of the $3 billion in economic and military aid that Israel receives each year from the United States. That aid, he argues, perpetuates a stagnant welfare system and the rule of bureaucratic apparatchiks over the country's economy, and it creates disincentives for any major reforms.

In contrast to the outcry in the United States, many Israelis welcomed the recent proposal by Senate Minority Leader Bob Dole (R-Kans.) to cut aid to Israel by 5 percent. The hawkish Ariel Sharon recommended that Israel give up voluntarily the $1.2 billion in economic aid it receives from Washington each year. A columnist for the Tel Aviv tabloid Hadashot dryly suggested that Israel could be integrated into the administration's war on drugs. "What Israel needs now is to go through a kind of Betty Ford drug rehabilitation program that will enable it to get rid of its addiction to American aid," he wrote.

U.S. aid fosters big government in Israel both by feeding it directly and by obscuring the drag that regulation exerts on the economy. The losers are the young, American-style Israeli entrepreneurs. Asher, who tried to launch a computer company a few years ago, discovered that more than 11 licenses are needed to open a business in Tel Aviv and that it takes more than a year to obtain them. He abandoned the venture.

"We and the American taxpayers help to keep alive Labor's socialist economic structure, to finance the religious parties' parochial school system, and to support the Khomeini-type fanatics that the Likud sends to the West Bank," Asher contends. Like other young professionals, he would like to see the emergence of a new party that supports free-market reforms; a constitution guaranteeing basic rights and the separation of synagogue and state; and transformation of the electoral system to weaken the power of the political parties and allow a more direct relationship between voters and their representatives.

Many young voters welcomed the coming to power of the right-wing Likud in 1977 after years in which a corrupt Labor party machine suffocated Israel's economy. But after toying for a while with some market-oriented steps—inviting Milton Friedman to give advice, freeing the rate of exchange—the Likud ended up adopting a populist agenda. It used the government budget to award gifts to its political supporters and to placate its lower-middle-class Sephardic constituency (Jews from Arab countries) with welfare money. The government bureaucracy expanded, and Likud's political corruption simply replaced Labor's.

Moreover, the Likud's West Bank settlement policies and its military campaign in Lebanon carried enormous costs in terms of both human life and economic spending. At the same time, the party's conservative socio-cultural policies continued to reflect the agenda of the religious parties, with which it had formed a coalition government. (Since the emergence of Likud in the 1970s as a viable opponent to the Labor Party, every prime minister has needed the support of the small religious parties to claim enough parliamentary seats to form a government.)

"Trying to make a selection between Likud's messianic foreign-policy agenda and Labor's domestic socialist program is like trying to choose between a heart attack and cancer, especially when both are competing for the goodwill of the clerical religious parties," Asher says. What he and other Israelis are looking for is a party that would combine Labor's moderate orientation on foreign policy with a radical reformist approach on domestic issues—the one Likud never adopted.

The café in which Asher and I met is located in one of Tel Aviv's gentrified sections. The owners of this eatery try to recreate, with a touch of Middle Eastern architecture and shocking pink and pale blue colors, the ambiance of a 1930s Tel Aviv coffee shop. After years in which an ugly socialist-realist style of buildings threatened to turn the city into a copy of Warsaw, the popular mayor, Shlomo Lahat, has been trying to bring back to Tel Aviv the sexy, Levantine flavor of a Mediterranean city à la Casablanca.

On the other side of town is an example of Tel Aviv's socialist architecture and Israel's political culture: the building of the Central Committee of the Histadrut, the national trade union affiliated with the Labor Party. This ugly structure, decorated on top with Israeli and red flags, is known to residents of the city as the "Kremlin." Walking through its corridors, one can look into almost-deserted offices, occupied usually by one tea-sipping yerachmiel (Hebrew for "old nerd") who, half-asleep, reads the subsidized Histadrut daily, Davar, which is about as stimulating as The Congressional Record.

Standing in front of the "Kremlin" brings back memories of growing up in the socialist environment of Tel Aviv: Demonstrations with red flags on May Day to celebrate solidarity with the workers of the world. A communist geography teacher who devoted the entire semester to the miracles of industrial development in Russia. An aunt and uncle who divorced in 1957 after the kibbutz where they lived split over the policies of Uncle Joe. (My uncle and his friends thought that Stalin was still the "sun of the people" whereas my aunt and her colleagues violently disagreed. They erected a huge wall in the middle of the cafeteria and divided the kibbutz between the pro- and anti-Stalinists. My aunt and uncle never again talked to each other.)

I recall the shame I felt when my dad left his job as an economics editor for Davar to become a businessman. These days I feel only jubilation over the fact that the walls of the "Kremlin" are finally crumbling. The political-economic empire of the Histadrut, which includes several industrial corporations, cultural institutions, and a huge bureaucracy, is gradually being sold to the highest bidder. The sales range from the gigantic Koor Corp., which includes manufacturing and construction operations, to the English-language daily, the Jerusalem Post. But there is still a long way to go.

Just across the street from the "Kremlin" is the country's first classical-liberal think tank, the Israel Center for Social and Economic Progress (ICSEP). The organization's director, the bearded and feisty Daniel Doron, emphasizes that it is not a political party. Rather, ICSEP is a research, information, and lobbying center that is slowly beginning to change the way the Israeli public—and, more important, its political and intellectual elite—thinks about economic and business issues.

The center, Doron contends, has been instrumental in transforming the Israeli zeitgeist. Socialism and government intervention in the economy are "out," he argues, and capitalism and free enterprise are "in." Doron is an intellectual-turned-businessman who spent several years in the United States. He gave up a successful art dealership to help develop an Israeli version of economic Thatcherism.

With the support of American businessmen, economists, and neoconservative intellectuals such as Irving Kristol, Doron raised enough money to launch the center in 1984. ICSEP is performing well by the standards of success that apply to U.S. think tanks. Doron's views are covered in Israel's print and broadcast media, and he publishes op-ed pieces in the Israeli and American press. The conferences and seminars he organizes introduce Israeli policymakers and intellectuals to classical-liberal thinkers such as Milton Friedman and Thomas Sowell and free-market advocates such as members of the Thatcher cabinet.

The center was the driving force behind a recent Israeli Television documentary that supported expanding the role of free enterprise. ICSEP brought skeptical Israeli economics reporters to the United States to meet with leading figures of American business and the economics community. These included George Mason University professor Walter Williams, whose views on the welfare problems of American blacks "came as a total shock" to the journalists, Doron says.

Indeed, the Israeli journalists, like other members of the mostly Ashkenazic (European) intellectual elite, still believe that the solution to the problems of the lower-middle-class Sephardic Jews lies in Great Society–style welfare programs. Meeting with Williams and with Korean immigrants who have prospered in America helped shake this dogma.

But these journalists did not have to fly to the United States to uncover the truth. The Sephardim themselves probably know better. A study produced by a sociologist at Tel Aviv University found that while the income gap between the Ashkenazic and the Sephardic population is widening in government and public-owned enterprises (where the former tend to be the managers and the latter the intermediate and low-level bureaucrats), it is closing in the private sector, where many Sephardim are making it.

"Many of my snobbish Ashkenazi acquaintances return from vacations in resort towns like Eilat horrified to find out that 'they,' the growing number of Sephardi plumbers and shop owners [who are more Middle Eastern in appearance], probably not their own cup of tea, are among the occupants of the hotel suites and the owners of the yachts in the port," Doron says. A prominent example of Sephardic entrepreneurship is the Jordache Jeans empire, founded by a Moroccan Jew who emigrated from Israel to the United States.

So Doron does not focus his efforts on changing the views of the Sephardic Jews. Many of them, in practice at least, have rejected Labor's socialist ethos, although their self-appointed "leaders," like those of black America, have used the culture of welfare as a political weapon. ICSEP's main goal is to transform the world view of the Israeli WASPs—the "White Ashkenazim with Protekzia," most of whom choose government over business as a career route. (Protekzia literally means "protection"—government patronage and aid.)

There is a sense in Israel that the free marketeers are gradually winning the day. "Both in terms of its own historical experience and that of the rest of the world, Israel has grasped that government is not the generator of solutions to economic problems," Pinchas Landau, an Israeli economics reporter, wrote in the Jerusalem Post earlier this year. "The appalling record of government intervention in Israeli economy and society, coupled with the general world trend in favor of deregulation, and the preference for market forces to find solutions, finally combined to convince the policy-making elite that the entire direction of policy had to be changed."

As treasury minister, Labor's Shimon Peres oversaw the dramatic continuation of Israel's privatization program, while his young socialist deputy, Yossi Beillin, shocked the nation by stating that society might have to come to terms with an unemployment rate of close to 6 percent. Even the leaders of the small Marxist-oriented Mapam Party are now offering nothing more than a mild Western European social-democratic vision as their economic platform.

With the expected immigration of close to 150,000 Soviet Jews in the next year or two, the need to reform the economy will become more urgent than ever. The destitute Holocaust survivors and the Jewish refugees from Arab countries who arrived in the country in the first two decades after its establishment found jobs mainly in the public sector. The new immigrants, on the other hand, are well educated and professional. Fleeing from the communist nightmare, they do not look to the government as a savior.

Soviet immigrants are repelled by Israel's bureaucracy; many tell Kafkaesque stories of their frustrations in dealing with the government agencies that are supposed to assist them. They are often interested in launching money-making careers and opening businesses; some of them have already established companies involved in trade between Israel and the Soviet Union. But Israel's confiscatory taxes and heavy regulation hamper such entrepreneurs.

Doron and his colleague Yuri Shtern, a Russian-born economist living in Israel, argue that the formula for keeping these immigrants and for preventing thousands of young Israelis from leaving the country is not another grand, government-controlled absorption scheme. (Such a system, in any case, tends to aggravate social tensions between native Israelis and the newcomers by granting special aid and privileges to immigrants.) Rather, the key is deregulation of the economy to provide new avenues for utilizing the human resources in education and science that the Soviet Jews bring.

Doron and Shtern call upon the government to sell, at nonmonopolistic prices, at least some of the land it holds. They also advocate eliminating the rigidities and monopolies in the building trade. These steps, they hope, will help solve the acute housing shortage confronting the new immigrants.

As Doron and I continue to discuss translating the ideas of Adam Smith to the reality of Israel, I ask myself if there isn't something surrealistic about this afternoon chat in ICSEP's spacious Tel Aviv offices. The real political drama of this country lies only a few miles away, in the Arab towns and villages of the West Bank and the Gaza Strip.

But Doron argues that there is actually a strong link between ICSEP's agenda and the developments in the territories. In a paper he published a year ago, he suggested that one of the major reasons for the anti-Israeli violence of the Arabs in the territories has been the state's "repressive economic regime and monopolistic practices."

Israelis and foreign observers, he suggested, have tended to ignore the economic aspects of the Israeli-Palestinian conflict and the way the distorted Israeli economic system has polarized the relationship between Jews and Arabs. While Israeli rule may have raised the standard of living of the Palestinians in the territories, it has also imposed—as the Israeli bureaucracy does on its own citizens—infuriating discrimination, arbitrariness, and favoritism. The system has engendered bitterness among the Palestinians, Doron says, "especially among those with little means of protection against the routine abuses of our senseless bureaucracy."

When Israeli citizens permit their government to distort their economy, they pay for it with stagnation, rationalizing that this is a necessary sacrifice for "national security" and "social development." The Palestinians are less likely to accept passively the hardships to which most Israelis have become inured. Mainly unorganized laborers and small-scale entrepreneurs, the Palestinians in the territories lack the defenses Israelis have to protect themselves, such as trade unions and interest groups. They end up demanding a political structure and mobilizing behind political leaders that they hope will obtain for them the wealth, jobs, patronage, and status the Jews have.

Young, educated Palestinians who have nowhere to go in Israel's statist economy have become a rootless proletariat, Doron argues, making the explosion in the territories inevitable. His perceptive analysis was confirmed by two distinguished Israeli journalists, Ze'ev Schiff and Eud Ya'ari, in their recent book The Intifada. According to a secret Israeli intelligence report, they reveal, many Palestinians who have been jailed since the beginning of the uprising listed economic factors such as unemployment and a harassing bureaucracy, rather than a demand for a Palestinian state, as the major reason for the violence in which they participated.

Economic reform would probably alleviate some of the Palestinian grievances against Israel. But Doron admits that the root cause of the problem is still political. Even if Israel were to allow the West Bank and the Gaza Strip to turn into islands of dynamic free enterprise, such familiar Middle Eastern characters as nationalism, ethnicity, and religion would eventually raise their heads. Just ask the Lebanese (those who are left to tell their story), the residents of what used to be the "Switzerland of the Middle East."

But the reforms Doron advocates would enhance the prospects for a political solution, such as a confederation involving Israel and a Palestinian entity. While economic prosperity is no guarantee against violence, it does seem to make conflict less likely. What the Israelis and Palestinians need now, more than at any time in the past, are leaders who will recognize the changing international realities, deal boldly with the political, economic, and diplomatic challenges facing their nations, and transform the ideological foundations of their societies.

Given such leadership, free trade and a thriving market could bind Israelis and Palestinians with the ties of mutual self-interest. "My dream," Faisal el Husseini, a young Palestinian leader on the West Bank, told Schiff and Ya'ari, "is that 10 years from now the conflict between us will involve the fact that we lowered the prices of the computers we produce so as to squeeze you out of the market."

Leon T. Hadar is a Washington-based journalist who has covered the United States for several Israeli newspapers. He teaches political science at American University and is writing a book on U.S. policy in the Middle East for the Cato Institute.