By Dan Perry and Steven Graubart
Even Israelis willing to throw away their civil rights might pause before gravely risking the country’s economic and high tech miracle
The new Israeli government’s plans for “judicial reform,” which passed a first of three readings in parliament last night, have been widely condemned for undermining the checks and balances of democracy to the point of creating an authoritarian state. What critics may be missing is that on principle alone many Israelis – like people everywhere – would not be intolerably rattled by that. They need to be persuaded another way, and Israel’s friends around the world can play a role.
Liberal democracy is nowhere very popular. People tend to view democracy as a matter of free elections and majority rule. Minority rights, checks on the executive and guaranteed freedoms are an afterthought at best – and that goes double for Israel, with its considerable security problems and an array of conservative and tribal sectors of society.
The way to impact this mindset is not via a discourse on the philosophy of governance but rather a lucid (and lurid) articulation of the vast costs the country is about to incur because of the proposed shift. Impoverishment, most people will care about.
In a nutshell, the government plans to overhaul the system to allow parliament, which because of the electoral system in Israel is very much in the pocket of the executive, to cancel decisions of the courts. They also plan measures to politicize the judiciary and civil service and to make graft far easier to carry out.
The calamity this will create will be focused – just as Israel’s economic miracle has been – on the country’s stunning technology sector, which accounts for about a sixth of the economy and a quarter of tax revenue (whose decrease would impact social services, infrastructure, education, and defense). Tech also accounts for about half of exports.
The burgeoning exports create demand for the shekel which keeps it strong relative to other currencies, making imports – like cars and TVs and also vacations to Greece – cheap for ordinary Israelis from all walks of life. This exchange rate is why Israel’s per capita GDP is higher than that of most countries in Europe, but this can quickly change – driving costs for ordinary Israelis through the roof. Indeed, the dollar has gained more than 5% in recent weeks.
A survey of how much Israel stands to lose is genuinely breathtaking. The country of barely 10 million has more unicorns (private companies valued at $1 billion or more) than Europe and in 2021 the pile of money its tech firms attracted from venture capital and IPOs was half the figure of the European Union – which has 40 times its population.
This success has little to do with the far-right version of Israel that came to power in the Nov. 1 election (because of a somnolent campaign and splits on the liberal side). And it is greatly endangered by the government’s radical plans to eliminate judicial checks on executive power and politicize the courts and civil service – plans which have whipped up an emergency mindset in the tech and finance communities.
Innovation centers, perhaps paradoxically, like stability. And foreign investors need stability. They will not often sink money into a country where their assets can be seized by the government, where contracts can be voided and where protection of their rights by the courts can be overridden by a parliament of apparatchiks.
Moreover, the innovators who are responsible for the miracle of Start Up Nation – in fields from biotech to ad tech to fintech to cyber – are overwhelmingly modern people who are mobile and will not remain in such a country.
The government’s plans to turn Israel into a Jewish version of Turkey will ultimately leave it with a tech sector at the level of Turkey and a currency that is as distressed as the Turkish lira, which lost 44% of its value in 2021 alone. The lack of investor confidence in Turkey was driven in part by Turkish President’s impractical introduction of Islamic principles into monetary policy; there is a striking parallel with Finance Minister Bezalel Smotrich’s belief that religion should anchor economic strategy.
In the grim scenario in which the government does not back down from its “reforms,” here’s what’s coming beyond the obvious investment distress:
- Credit rating: S&P has already warned that Israel’s credit rating will be negatively impacted (explaining that “weakening state institutions” are a credit risk); so have investment banks, and more ratings agencies will follow. This means that as the government issues bonds, as companies access international credit markets, costs of capital will be higher. This will have cascading impact across the economy. The former head of the Bank of Israel, a top JPMorgan Chase official, warns the country is in “danger of losing everything.”
- Exit of companies and new ones not coming: We already have seen Israeli companies that have taken their funds and activity out of Israel and plan to move operations out. Not only will Israeli companies leave, but foreign companies won’t come. Some 250 major multinationals have research centers in Israel, of which 80 are Fortune 500 companies. These companies – from Meta and Google to Intel and Apple – are a major driver of the economy and the innovation ecosystem. There is every reason to fear that they will start to ramp down their activity, and Israeli staff will demand it. This is exacerbated as tech firms have been laying off workers and what is going on now will influence their decisions where to downsize and where to grow.
- Brain drain: Israel’s technology community tends to be populated by people who are open to the world and who generally did not vote for the nationalist and religious parties of the current coalition. There is ample anecdotal evidence of applications at Western embassies spiking, and anyone privy to chat groups in this community knows that the talk is of a need to leave and build a civilized life for their children abroad. Berlin and Boston, London and San Francisco – that is where they’ll go, when they lose hope.
- US relations: The new government aims to ramp up settlements deep inside the West Bank and lighten the military’s trigger finger, despite a situation that is already near the boiling point in this territory where 3 million Palestinians are effectively ruled by Israel (for the Palestinian Authority has meager powers) yet cannot vote. The loss of almost $4 billion in assistance will be the least of Israel’s problems if the United States withdraws its umbrella of diplomatic and strategic protection. An authoritarian Israel will not be able to claim “shared values” and the pressure on the White House and Congress from US Jews will gradually diminish as they themselves edge away from Israel.
- Diaspora Jews: We could be on the verge of a historic split between Diaspora Jews and Israel. Donors may choose to decrease or stop their considerable financial support for Israel, including donations to organizations such as Birthright, which brings young Jews to visit Israel. The largest community, the American one, is overwhelmingly liberal, not-Orthodox, and Democrat-leaning. Its younder members especially will not feel kinship to an Israel where fundamentalists call the shots.
- Academia: The profound cooperation between Israeli academia and US companies and professors may also decrease, leading to less innovation and IP development. This will feed the brain drain, because those Israelis who rely on such cooperation will move to where their cohort is.
- Tourism: As Israel’s image gradually changes, and when key members of the country’s political leadership are avowed homophobes, expect tourism – which accounted for almost $4 billion in revenue last year – to fall. A reduction in the visits connected to technology investment and cooperation will be part of that.
Why would Israelis risk this disaster? How badly can one despise liberal democracy? The answer is rather simple.
There are three groups in Israel who want to weaken the rule of law backed by a strong, independent judiciary. One is the ultra-Orthodox who seek to maintain special privileges (like draft exemptions) and expand theocratic practices in ways that the secular courts may strike down. The second is the far-right movement that considers the courts a block in enacting full oppression of the Palestinians. The third is corrupt officials, who are anathema to investors.
Israel’s government includes several convicted criminals and is led by a man on trial for bribery, fraud and breach of trust (as his government seeks to eliminate the latter two infractions from the statutes). As this assemblage pursues policies that will make graft easier to carry out, the investment climate will darken.
These are powerful constituencies to be sure, but they are not a majority. And that’s where some hope lies: many of the right’s voters did not sign up for this level of self-immolation. They can be made to understand the consequences.
Israel’s friends around the world – from global investors to US and other countries’ officials to Diaspora Jews – might consider speaking up right now, to ensure that no one is deluded about the dimensions of what’s at stake.
Bankruptcies happen “gradually, then suddenly,” says a character in Ernest Hemingway’s “The Sun Also Rises.” Unless a climb-down is found, Israel and its friends may find the sun also sets.
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Steven Graubart is an investor, executive and entrepreneur who has served as an economic advisor to international organizations including the World Bank, non-profits and governments on foreign investment and trade.
(A version of this story appeared in the Jerusalem Post)
