The Enemy Within

First published in Forbes, Dec 28, 1987

DANIEL DORON, director of the Tel Aviv-based
Center for Social & Economic Progress
, is fighting an
enemy that may be more dangerous to his country than the
PLO: an inefficient, statist-oriented and
bureaucracy-ridden economy. A third-generation Israeli,
the U.S.-educated Doron made money as an art dealer in
Manhattan (specializing in the work of the visionary
painter Shalom of Safed), then returned to his native
land to found this think tank dedicated to releasing
Israelis` entrepreneurial energy from the grip of a
bureaucracy he ruefully compares to that of the Turkish
Empire, which ruled Palestine when his great-grandfather
settled there.

Doron: You know the story of the man who
complained to the rabbi that he hadn`t room in the house
for his 11 children. The rabbi told him to take in a
goat, and when he let him put the goat out again, it
seemed a relief. Well, Israelis have got rid of the goat
of inflation, it`s down to about 20%, and they are
basking in that relative success. This has taken the
edge of urgency off the need for economic reform. But
the house still isn`t big enough for the 11 offspring.

Now market forces are coming together to produce a
sea change, a new Israel. Politics in Israel have been
primarily about patronage. The old statist system has
completely lost its verve, only a few Labor stalwarts
still pay lip service to socialism. And no one can
predict the political consequences of the fact that now
Israel`s three major banks, which with the Labor
Federation`s holding company own most of Israeli
industry, are experiencing serious financial
difficulties. So are the Labor-affiliated agricultural
cooperatives and many of the over 200 state-owned

But doesn`t Israel`s defense burden mean that the
government must inevitably play a major role in the

The Israeli GNP is officially about $27 billion, and
the total government budget comes close to that. Defense
is about 25%. But if you factor out American aid,
defense takes only about 6% of Israel`s GNP.

Israel does have national goals, such as encouraging
immigration, which are often given as reasons for
government intervention in the economy. But they`re
mostly rationalizations for continuing the present
inefficiency, and in fact government intervention is
often counter-productive. Israel would have more
immigrants, and could afford more defense, if its GNP
were twice as big, which it could easily be.

Why? It has no natural resources.

Neither does Japan. Israel`s wealth is its people.
For example, it has more scientists per capita than
Switzerland. Look at the Lavi fighter. [A major defense
project, just canceled.] From an economic standpoint, it
should never have been built; we should have bought a
mainframe in the U.S. and adapted it. But it was a
remarkable technical achievement.

What happened to the "liberalization` of the
Israeli economy under Begin?

Liberalization never got off the ground. The economy
remains so highly regulated that even most of the
so-called private sector is run by what are in effect
cost-plus bureaucrats. All the liberalization episode
did was allow people to claim that the free market was
discredited. We`re holding a special conference marking
its tenth anniversary in January–we wanted to have it
near the Dead Sea, for symbolic reasons, but we couldn`t
make reservations in time. The Israeli hotel industry is
a government-organized cartel.

Are market forces still prevailing?

Under the circumstances, it`s astounding that
Israel`s been able to do so much. Look how many of its
inhabitants drive Cadillacs–to you, they look like (and
they are) Subarus, but they cost as much as Cadillacs.
This is largely due to the underground economy. The real
Israeli GNP is probably $30 billion.

And it is producing an interesting phenomenon: The
social groups that have access to political power–the
WASPs, White Ashkenazi with Protektzia –are not doing
as well in their highly taxed government jobs as many of
the Sephardim, who have been forced by lack of access to
political power into establishing their own small
businesses–beauty parlors, vegetable stalls and so on.
Of course, Tom Sowell [the black American economist who
has written critically about racial quotas] would not be
surprised by this.

How is your message being received?

Among Israeli intellectuals, in some senses better
than expected. American Jews I find amazing. They`re
often hard-nosed businessmen, but they go soft on
Israel. Even their so-called investments are frequently
noneconomic. Too often, they seem to like regarding us
as a charity ward.

Republished on VDARE.COM on
September 26, 2002