The Loan Guarantees Would Hurt Israel

JOEL BAINERMAN

February 04, 1992|By JOEL BAINERMAN

JERUSALEM. — Jerusalem -- The debate over whether the U.S. government should grant Israel $10 billion in loan guarantees shouldn't be about Israel's settlement policy but rather how these loans, if granted, will affect Israel's already bloated public sector. Additionally, will they in fact produce the desired goal of creating housing and jobs for the Soviet immigrants?

It would be nice to believe that all the money will be spent erecting a modern commuter rail network or improving basic infrastructure. Some of it might, yet the Israeli game has its own set of rules. Once the loans are granted the ministers will do what comes naturally to them: finance intervention in the economy via subsidies to industrialists, factories and other programs based on non-economic criteria.

Israel's economic dilemma isn't a lack of capital, but too many economic decisions made by politicians. As the national budget accounts for more than 80 percent of gross domestic product, less than a fifth of the Jewish state's economic resources are available for distribution outside government hands.

When the large-scale immigration began the politicians told the public that intervention into the economy was justified because the private sector could not be relied upon to provide for the immigrants. When the United States granted a $400 million loan guarantee after the Persian Gulf War, the housing minister, Ariel Sharon, decided how many apartments would be built and where, offering financial guarantees to contractors for any unsold units. Hundreds of millions were wasted as construction companies owned by Likud supporters won favorable terms on contracts and land prices.

Because Mr. Sharon wanted new immigrants to live in outlying rural areas (within the pre-1967 borders) such as Galilee and Negev, nearly 50 percent of the construction contracts were directed there. But the newcomers realized that with no adequate commuter-rail system, job prospects in these areas would be extremely limited, so only 7 percent of them have settled there. The unsold homes will eventually be paid for by the Israeli taxpayer.

Instead of taking a free-market approach, the government wants to burden each new immigrant family with a long-term mortgage. This strips them of their labor mobility and forces them to sink any available capital into bricks and mortar, rather than new businesses.

Had Mr. Sharon not had access to these funds, these mistakes could have been avoided. His ministry would have been forced to hand the job over to the private sector which would have cut the cost of dwellings in half by building and financing pre-fabricated homes. If homes could be built in Israel for $30,000 and rented for $300 a month, insurance companies and other investment firms would develop the market and management companies would spring up to administer these portfolios. This would create new jobs and financial activity to stimulate the economy.

Having botched the housing effort, the government now intends to use proceeds from new loans to create jobs for the newcomers -- the next multi-billion dollar mistake. With more funds at their disposal, the ministers will be able to create more bureaucracy, give out more subsidies and finance hundreds of new factories which in a few years down the line will demand government bailouts costing many times their original investment.

For instance, the Ministry of Industry and Trade will establish a fund to offer cheap loans for small businesses, subsidize new workers in existing companies, fund commercial ''incubators'' designed to commercialize immigrant scientists' innovations, offer financial guarantees for foreign investors and finance a government-owned company to establish new high-risk ventures. All this with public funds.

When the immigrants first started coming in late 1989, the government should have begun drastic economic reform and embarked on an emergency effort to liquidate the $8 to $10 billion worth of state-owned enterprises it owns. That would have freed $2 or $3 billion worth of capital. Additional billions could be obtained by selling the government's massive land holdings (93 percent of the country) and collecting yearly tax revenues, as well as putting these assets to productive economic use. More billions would be available by offering a general amnesty to Israeli citizens who bring their dollars sitting under kitchen tiles and in foreign banks into the Israeli economy.

This year Israel will spend $750 million subsidizing industry, more than $1 billion building homes, $750 million subsidizing mortgages and $500 million in transportation subsidies. If these distorting factors were slashed and taxes lowered, the resulting economic growth would create thousands of new jobs.

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