Israeli students and teachers protest against planned judicial reforms in Tel Aviv on Feb. 5, 2022. Photo by Tomer Neuberg/Flash90.
Israeli students and teachers protest against planned judicial reforms in Tel Aviv on Feb. 5, 2022. Photo by Tomer Neuberg/Flash90.

Economists’ warnings about judicial reform are overblown, analysts tell JNS

The roaring debate in Israel over Justice Minister Yariv Levin’s reforms has nothing to do with economics, the balance of powers or democracy, says Kohelet Policy Forum researcher.

The Netanyahu government’s judicial reform plan has come under heavy fire since it was first announced on Jan. 4. Critics say it spells the end of Israel’s system of checks and balances and even the end of democracy. In the last week, a new argument has taken center stage, an economic one, according to which the reform threatens Israel’s financial well-being.

However, analysts JNS spoke with said the warnings of economic collapse are without merit, and are based on political and not economic assumptions. Furthermore, the fear-mongering ignores the positive impact the reforms are likely to have on Israel’s economy, they said.

Amatzia Samkai, CEO of Samkai Global Strategy, an economics consulting firm, told JNS that he was surprised when he heard the economic argument against the reform. “It was so far-fetched that I didn’t expect it to take hold, certainly not with such strength,” said Samkai, who has a Ph.D. in economics and lectures in the department of economics at Bar-Ilan University.

The contention that the judicial reforms pose a grave threat to the economy received a lift from two events: 1) the publication of a letter last week signed by hundreds of economists warning of the reform’s potential economic damage; and 2) a meeting between Bank of Israel Governor Amir Yaron and Benjamin Netanyahu on Jan. 24, in which the former reported to the prime minister that senior economic figures had expressed fears about the judicial plan at the World Economic Forum in Davos, from which he had just returned.

Yaron, and the economists who signed the letter, claim that the reforms could lead to a downgrade of Israel’s sovereign credit rating and drive away foreign investment. According to the economists’ letter, the greater difficulty in recruiting foreign investment would “hurt first and foremost the Israeli high-tech industry, the engine of the economy’s growth,” and could lead high-tech companies to relocate from Israel to other countries.

Israeli news site Ynet, the first to report on the economists’ letter, identified Samkai as the only senior economist among Israeli faculty members “known to have spoken out in favor” of the judicial reform. (Samkai told JNS that wasn’t true, citing as an example mathematician Robert J. Aumann, winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.)

Samkai dismissed the economists’ warning about credit ratings. “It [the reform] can’t affect the credit rating because it doesn’t work like that. The guys from S&P [Standard & Poor’s] and other rating agencies carry out very long, fundamental processes to figure out what the real changes are to determine the government’s ability to repay its debt. They don’t change their mind in two weeks. It’s a process that takes at least a year,” he said.

“They’ll do a thorough examination where they’ll look at the balance of powers between the three branches [of government] in Israel and then compare it to the situation in other parts of the world. They’ll likely arrive at the conclusion that Israel is correcting the balance and not harming it, as anyone would who isn’t biased and who comes at this issue without preconceived notions,” he said.

Ricky Maman, a research fellow at the Kohelet Policy Forum, an Israeli think tank that has long advocated for legal reform, agreed, telling JNS that those opposed to the reforms are working from assumptions that are political in nature.

“They work from underlying assumptions that they don’t even recognize as assumptions. They’re just convinced the reforms will hurt democracy,” said Maman. “But taking power from the courts and giving it to the Knesset strengthens democracy. Another assumption they have is that the reforms will harm the independence of the courts. The point of this reform is to change who gets final say. The courts remain independent.”

Maman said the root cause of the attacks on the judicial reforms is the fear on the left that it’s losing a base of support; that the debate has nothing at all to do with economics, the balance of powers, or democracy.

“The left finds it very difficult to win elections and they’ve built up a lot of hope that the courts will defend them. It’s a little island of left-wing views they see as keeping them safe and the liberal agenda alive. And if that changes, they won’t have any place left,” she said.

Explaining why the message coming from economists in academia is virtually monolithic against judicial reform, Maman said, “Economists are people, too. They have their milieu, their friends. The academia in Israel, as elsewhere, is overwhelmingly left-leaning.” They’re afraid of a right-wing coalition that’s pushing a genuinely conservative agenda and that comprises a strong haredi, or ultra-Orthodox, component, she said.

Elise Brezis, professor of economics at Bar-Ilan University and director of the Azrieli Center for Economic Policy, who opposes the judicial reforms, appeared to confirm Maman’s assessment. Speaking in apocalyptic terms, Brezis told JNS, “Israel is in danger of being hijacked by dark forces. The Jewish liberal country that we have built is in danger.”

“The haredim will take over and women will be forced back into the home. All of Israel will become Bnei Brak,” Brezis said, referring to the ultra-Orthodox city near Tel Aviv. “This will be the end of Israel as we know it. Do you know one investor that will want to invest in this country? Are they going to invest in Iran? Israel is becoming Iran.”

Samkai, for his part, is confident that the reform package will only have a positive impact on Israel’s economy. He notes three ways the current system makes it harder to do business in Israel, and argues that the judicial reforms will help rectify them, in some cases directly, and in others indirectly, by reducing judicial activism.

Firstly, one aspect of the Israeli court system’s judicial activism is that it treats business contracts as “suggestions.” Noting that he works with many firms, Samkai said, “In not a single agreement does an international company that signs a contract with an Israeli company say that contract disputes should be judged in an Israeli court. Even companies with Israeli owners, if they have branches outside of Israel, will not choose Israeli courts.

“What this says is that they don’t trust Israeli courts. Why? Because the moment the judge is an activist he says, ‘Yes, it’s true that the contract says this or that, but I interpret it another way because it seems to me more correct and more just,’” Samkai explained.

Such an approach makes dealing with contracts a long, drawn-out and expensive affair. Instead of simply looking at a contract and determining whether an action is in keeping with the contract or not, the judges are engaged in the contract’s “moral rehabilitation,” deciding whether it stands up to certain values.

Secondly, Samkai said that in the current legal system economic plans become bogged down in government, something he’s witnessed firsthand.

“Every government office has two directors,” he said. “The first is the professional director and the second is the legal adviser, who has arrogated the right to make policy decisions. The legal adviser says he won’t approve a plan, or that it needs to wait until the next Knesset. That’s not his role. He’s an adviser. He’s not supposed to have veto power,” added Samkai.

(Reducing the legal advisers’ role is at the forefront of the legal reform package and was the focus of the first piece of reform legislation brought before the Constitution, Law and Justice Committee on Jan. 16.)

Thirdly, Samkai said it’s difficult for foreign companies to reach deals with Israel’s government due to judicial interference. A classic example is Houston-based Noble Energy, which wanted to search for natural gas off Israel’s coasts. It requested that the conditions agreed to in the contract remain in force for 15 years. The government agreed, but the Supreme Court intervened, saying that the government couldn’t impose conditions on a future Knesset.

“If we fix this so that the Supreme Court can’t interfere in government negotiations with foreign companies, will this attract or drive away foreign investment? Of course, it will attract investors,” said Samkai.

Netanyahu mentioned the gas deal as an example of “overregulation and superfluous legal processes” during a press conference, which he held on Jan. 25, the same day the economists’ letter was published warning of the judicial reforms. “The truth is the exact opposite,” Netanyahu said, assuring that the reforms would both strengthen Israel’s democracy and its economy.

However, the next day, on Jan. 26, Eynat Guez, CEO of Papaya Global, an Israeli high-tech firm, announced on Twitter: “Following Prime Minister Netanyahu’s statements that he is determined to pass reforms that will harm democracy and the economy, we made a business decision to withdraw all company funds from Israel.”

Immediately following Papaya’s Guez, Tal Barnoach, General Partner at Disruptive VC & Disruptive AI Venture Capital, announced to investors that he, too, was pulling his funds out of Israel and transferring them abroad. Then, on Jan. 31, Tom Livne, founder of Verbit Software, said he was doing the same, calling on his high-tech colleagues to join him; “to stop being residents of the State of Israel and to stop paying taxes here. After we, the engine of the economy, take these steps, I think they [the government] will come to the table and talk to us a little more eye-to-eye.”

Despite these announcements, warnings from banks J.P. Morgan and Barclays, and last week’s weakening shekel, Samkai dismissed concerns that the economic warnings against the judicial reforms could result in a self-fulfilling prophecy.

“It’s of course true in the short-term,” he said, noting that when Justice Minister Yariv Levin first announced the reform plan at the start of January, the shekel continued to rise, and that it was only on Jan. 25 with the economists’ letter that the shekel dropped. “If you look at a graph comparing the shekel to the dollar, you really see a fault line. The shekel goes up and up and, boom, suddenly it declines,” he said.

“Unsophisticated investors hear a lot of noise and it scares them. We’re familiar with such phenomena in the capital market, where people are frightened by things that are not actually real, and it affects the market, but it always affects the market in the short term, because the sophisticated investors who know Israel and its free market system wait for the decline to buy,” said Samkai.

He noted that the blue-chip TA-35 index, comprising 35 major Israeli companies, declined after the economists’ letter and dropped still further on reports from Israeli bank heads that they were seeing an outflow of funds from savings accounts and foreign investors selling State of Israel bonds. But on Jan. 30 the T-35 index bounced back to where it was at the start of the month.

Samkai said he is doing his best to get the word out in Hebrew media that the warnings of economists against judicial reform are overblown. Unfortunately, he said the mainstream news in Israel has been “recruited” to the other side. While he has been invited to speak on Channels 11 and 12, he said, it’s only during the afternoons. “Apparently, primetime is reserved for the opponents of judicial reform,” he said.

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