PM Netanyahu’s Comments at the OECD Conference to Reduce the Bureaucratic Burden
Briefing Room
יום רביעי כ"ז סיון תשע"א
Thank you.  First of all welcome, to Art de Geus, Heiki Loot and Joseph Konvitz and all our friends from the OECD.  It’s good to be with my colleagues: the Minister of Trade and Industry, Shalom Simhon; and our large legal adviser, the Minister of Justice, Yaakov Neeman, who knows something about business, law and government and finance; and Micky Eitan, who has been working very diligently to try to make some sense in our bureaucracy in the electronic age; and of course, the Directors General, Eyal Gabbai, my Director General in the Prime Minister’s Office, and Haim Shani and the others who are here.

I think we can learn a lot from you.  That’s why we joined, and I think you can teach us.  We joined, among other things, so that we’ll have the advantage we had when we made major reforms, huge reforms, about 40 in number, in 2003.  Huge reforms, which is one of the reasons why we’re growing at 5% a year, with one year’s exception since then.  When we did that, we received loan guarantees from the United States.  The United States initially said, “If you want these loan guarantees, you’re going to have to do ‘a’, ‘b’, ‘c’ and ‘d’.”  And I said to them, I was Finance Minister at the time, I said, “Could you add ‘e’, ‘f’ and ‘g’?” 

So, we welcome all best practices and that is something I want to tell you about in a minute, but there are essentially two ways that developed economies can grow.  One is innovation.  The future belongs to the innovators.  That is assuming you have relatively free markets.  The more innovative ones will grow because they produce the added value of products and services.  And by the way, that’s the only way you can justify the increased cost of living or the ones you already have.  Technology is key.  Israel has done quite a bit in that area.  I don’t want to get into that, but that’s obviously.  Everybody understands that. 

But there is another way to grow.  If you’re lucky enough to have a really messed-up bureaucracy, you have a tremendous growth opportunity.  Because bureaucracies, the layers of government, the layers of regulation offer a unique growth opportunity, and when I hear of other countries who have messy bureaucracies, I’m very jealous because I know they have gold in their hands.  Why?  Because if you remove it or cut it back, you’re going to grow.  People do not work for governments; they don’t work for the public; they don’t work for the collective good.  They also do that on occasion.  We’d like to think that we do it.  But markets don’t behave that way.  Markets behave in particular ways, and if you can harness that power in them, you can grow very, very rapidly.

If you can remove layers of bureaucracy, you have a tremendous opportunity for growth.  This is essentially what we did.  We removed foreign currency controls.  We had foreign currency controls for more than – how many, Yaakov?  He was Finance Minister.  What is it?  Fifty years we had it?  Fifty years!  You couldn’t take anything out of this country.  You couldn’t bring back some dollars in your pocket without putting it into a registered bank account controlled by the Central Bank.  You couldn’t take out a Newsweek subscription without getting an authorization from the clerk in the Bank of Israel, because it was foreign currency.  It’s incredible.  So obviously, when we removed that, people warned us.  They said, if you do this, a mountain of money will move.  It happened in Mexico.  Well, they were right.  It did move, but not outside the country.  It moved inside the country.  The shekel is growing.  It appreciated very rapidly since. 

We made many, many structural reforms.  But in their essence, all of them mean that we increase the degrees of freedom in the economy.  This is the other opportunity for growth that developed economies have.  You have the opportunity, if you have the will, to make anti-bureaucratic reforms. This doesn’t require great brainpower.  It’s very easy to look across economies and to see who the winners are.  I am, by the way, a very energetic reformer, but I’m not particularly energetic conceptually, because I don’t want to reinvent the wheel.  I look for the winners, and I see if there are constant and repeating elements of winning strategies and I say, let’s apply them.  You gave me one here on Denmark.  That’s clear.  I want to learn.  I want to understand what Denmark did.  So let’s study that and let’s do it.

But this is essentially what we did.  For example, now we’re doing this in education.  In education, it’s very clear what the leading countries do.  It’s very important to tie teacher performance or teacher rewards to the performance of their students.  It’s very important to measure things.  And it gets results.  Basically, four out of the five winners, the best performers in education, do this very consciously, and the fifth does it obliquely.  So you can do that.  Just repeat that.  You don’t have to reinvent the wheel.  You don’t have to.  Every country is different.  They’ll tell you they’re not analogous, but I believe that best business practices transcend economies.  They do transcend economies and societies, and they’re usually quite equal.

We have another opportunity which we’re dealing with right now.  Our land policy is definitely the worst – no, not in the OECD – it’s among the worst in the world.  We’re not that high.  The OECD has thirty-some countries; we’re ranked 140, I believe?  Is that right?  One hundred forty in the time it takes to get a building permit and, I think, 120 in the time it takes to register property.  What is that?  Is that a problem or is that an opportunity?  That’s a huge opportunity, because that means that the 5% annual growth that we’ve have was done without construction.  It means that if we reform our impossible planning and zoning bureaucracy, and the government monopoly institution on land, the ILA, it means we can have 2% – that’s my prediction – 2% annual addition to GDP every year, 2%, without doing anything else.  There’s pent up demand and there is potential development just by doing these two things, which we’re doing.  We’re about to complete it. 

So you deregulate.  You take away the power of the bureaucracy over markets, and you will get extra growth.  It’s really applying 19th century agrarian reforms to the 21st century, but that’s what we’re doing.  Now I say that because I think this is our greatest opportunity.  We’ve reformed a lot, but we’re still lucky to have a lot of bureaucracy, so we have a lot of opportunity.  The fact that we have a lot of bureaucracy, and it seems like we’re really behind on many things here.  This, to me, says opportunity.  What we’ll do is we’ll take the conclusions that you offer here and turn it into a real work plan.  I think, from my experience, there are several guidelines that we need to adopt that go to the heart of the matter, and they will determine who will win the race – it is innovation and cutting bureaucracy that will determine who the winners are.  There is, of course, the bureaucracy of regulation, so we have to trim that too. 

But overall, you want to increase the degrees of freedom in your economy.  So you have to have a basic confidence in markets.  This is strange for Israel because it was built with the exact opposite conception.  It was built from no confidence in markets, so the layers of regulation that you, Eyal, say are being built over the years – that’s nothing compared to what it was.  You’re just young.  Everything was regulated – every single thing was regulated in 1948 when Israel was established.  Everything!  Both from a philosophical point of view and also for political control.  Gradually, or really in a step function, as my colleague says, we began to deregulate.  But we’re still very far away.

The first thing you have to have is a basic confidence in markets.  Now, here’s what competes with a confidence in markets: in Israel, and I’m sure in many of your countries, and everyone here believes in markets.  They already believe that.  That’s not a problem, right?  Everybody believes in markets, where you can.  It’s not possible in every place, you know?  There are problems in the field of medicine.  There are other problems in the field of natural monopolies, although they are few and far between.  So people here believe in markets.  That’s not the problem.  Where is the problem?  The problem is that the failed exception drives people away from markets, and that is done through the imposition of a particular philosophy that you can have a deterministic policy.  That is: you can predict in advance the failures, or more importantly, you should be able to predict in advance the failures of systems.

This is a particular point of view that is very dangerous.  It can paralyze the decisions of political leaders and also officials in the government.  You are supposed to envision in advance all the events that can develop by the adoption of a certain set of policies or the lack of adoption.  This is wild.  It’s a wild philosophy.  It’s very, very dangerous, because you don’t live your life that way.  You don’t get up in the morning and you think: Well, if I do this, than this can happen and this can happen and this can happen.  You don’t go through several branches of the decision tree.  You usually go through one or two, sometimes three.  But you don’t go through seven or eight.  If you had to think of the seventh derivative of every action that you took, you will not take action.  Yet this philosophy is exactly what is now being imposed, I suspect not only on Israel.  My guess is it’s true in your case too, because the seventh derivative could result in the – I don’t know – collapse of a dam.  Not a big dam, a small dam somewhere.  Okay?  So you shall not build.  You’ll put so much excess insurance and so many layers of approval and so many layers of disapproval that you will paralyze construction because you are supposed to have a deterministic philosophy or deterministic approach, and that is, in my opinion, the most hobbling – [TRANSLATION] the most paralyzing thing [TRANSLATION END] and we’re seeing that Israel, that opened up, opened up, opened up, in now closing up because of fear – the fear of politicians and officials that they will not see the eighth or ninth derivative and they will be held accountable for it.

Now, obviously, you need to have some accountability.  Obviously you need to have some foresight.  But that is not perfect vision.  It cannot be that way.  The Romans had a policy for their military, which was essentially the key to their 800-year-old empire.  If you failed on the first battle, nothing happens to you.  If you failed on the second battle, nothing happens to you.  If you failed on your third battle, something happens to you.  They allowed for this process.  Our modern approaches, at least in Israel, doesn’t allow for anything.  And that is something that has to be addressed.  We need careful auditing.  We need responsible regulation.  We cannot have perfect auditing and perfect regulation in advance of events, and even after events.  You must have the flexibility of not adopting perfectly deterministic models or they will paralyze an economy.

Those economies that will be able to free themselves of this approach will prosper and will overtake others.  This is our first challenge today because we don’t have to persuade anyone in the efficacy of markets.  Everyone here understands them.  But that understanding can be subordinated to the fear of criticism or worse from deterministic models.  So this is the first point that I’ll make to all of you, and I know I’m putting here a tall order.

The second is: adopt a simple rule – when in doubt don’t.  When in doubt, don’t regulate.  You don’t have to regulate at all times.  In fact, most of the time, seek not to regulate.  Regulate when you’re forced to regulate, when something really compels you, but not as the natural course of things.

Which leads me to the third conclusion, and that is: seek the areas where you can eliminate regulation all together – not simplify it, not streamline it, but actually get rid of it.  We got rid – I gave you that as an example – we got rid of all the regulation of foreign currency.  We got rid of 98% of it in one fell swoop, and then it took us a few more years, and we got 2%.  Before that, we had a burgeoning industry of black markets in foreign currency, so we got rid of it.  What happened?  Nothing.  You can’t imagine Israel in the 21st century, in the modern global economy with the inability to move money in and out.  You can’t imagine the growth of international companies from Israel who could have their base here and move elsewhere. 

So when you can, eliminate regulation altogether – just eliminate it.  And if you’re forced to have it, then streamline it, which means if you do need to regulate the public or business or anyone else, cut their time of access to you and the steps they need to get to you.  This is what we’ve seen, I’ve seen, from our limited experience, but I’d like very much to draw from your experience.  My point, and the one that I hope that our government and future governments adopt in Israel, is to seek to reduce – as a conceptual approach, as a philosophical approach – to seek to reduce regulation and thereby reduce bureaucracy.  In its most fundamental form, it believes that the collective wisdom of the citizens individually applied is more powerful than the individual wisdom, even of politicians and government officials.  That is a remarkable statement, I know, coming from a politician, but I stand by it.

Thank you very much.