Opinion | Netanyahu’s Judicial Coup Could Destroy His Start-Up Nation

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By Thomas L. Friedman

Opinion Columnist

If you want to understand the economic riskiness and moral fraudulence of Prime Minister Benjamin Netanyahu’s headlong rush to ram through a total overhaul of Israel’s judicial system and put it under his thumb while he faces corruption charges, you just need to study two statistics and ask one question.

The two statistics: The Economist ranked Israel as the fourth-best-performing economy in 2022 among O.E.C.D. countries. And in 2020, Israel ranked 19th among the economies in the world, making the top 20 for the first time in its history, based on G.D.P. per capita — ahead of Canada, New Zealand and Britain.

That’s right: Israel has been enjoying a quiet economic miracle in the past few decades, and no Israeli leader deserves more credit for that than Netanyahu. During his previous 15 years as prime minister, he did a superb job, in my view, helping to transform Israel into the world’s leading start-up nation. He put in place smart economic policies to attract investors. He would go anywhere and talk to anyone (except me!) to promote the Israeli economy. And he played a key role in providing government resources so Israel’s high-tech community could forge world-leading positions in cybersecurity technologies, water conservation, solar energy and digital health.

So you cannot be surprised that many global and Israeli investors are looking at Israel today and asking this simple question: If the Israeli legal system that has gradually and collaboratively evolved over the past 75 years was so awful — so in need of emergency radical surgery overnight, without any national debate — how did it help produce and guard the Israeli economic miracle of the past 20 years that Netanyahu always, and justifiably, takes credit for and has made Israel’s middle class amazingly prosperous?

Nothing is more dangerous to Israel’s continued prosperity than Netanyahu’s inability today to give a credible answer to that simple question.

Because in the absence of a credible answer, the only thing one can believe — the only thing foreign investors increasingly believe — is that the whole process is being driven by a small group of far-right authoritarian ideologues, an extremist right-wing think tank inspired by the Federalist Society in America and a prime minister who seems so desperate to escape from his trial on 2020 charges of fraud, bribery and breach of trust that he is ready to change the rules of the entire Israeli Monopoly game to secure his own get-out-of-jail-free card.

Now, that is scary.

Any investor, foreign or domestic, should be worried that Netanyahu is letting the judicial extremists in his cabinet ignite a legal intifada in Israel and a Palestinian intifada in the West Bank — at the same time. And they are doing it in a hyperconnected world where American and European investors now have a strong motivation to carefully guard their E.S.G. ratings, which measure a company’s resilience and exposure to long-term environmental, social and governance risks.

And you want to talk about governance risks? Israel’s own president, Isaac Herzog, is publicly warning that the Netanyahu ruling coalition’s refusal to engage in a calm, patient dialogue with the opposition on the proposed makeover of the Israeli legal system and the independence of Israel’s Supreme Court “is tearing us apart from within, and I’m telling you loud and clear: This powder keg is about to explode. This is an emergency.”

As a general rule, investors don’t like investing in countries roiled with protests and chaos.

And that is why some have started pressing the pause button. Leo Bakman, the president of the Israel Institute for Innovation, a nonprofit organization that serves as an incubator for 2,500 start-ups, gave an interview last weekend with the Haaretz reporter Hilo Glazer and summed up the concerns of the Israeli business community right now.

“Investors are taking a step back and saying: ‘First, decide whether you are a democracy or a dictatorship, and then we’ll talk,’” Bakman said. “Look, I’ve been working with government ministries for years.” He continued, “We have always been apolitical. If I thought this [judicial] ‘reform’ was like shooting oneself in the foot, I would probably think twice about speaking out. But I believe that we are shooting ourselves in the head.”

And that is also why, behind the scenes — behind their don’t-worry-be-happy public bluster — my business contacts tell me that Netanyahu and his strategic adviser Ron Dermer have been calling global corporate leaders, financiers and even economists, like Lawrence Summers, to try to persuade them that the breakneck, radical judicial transformation they are imposing will not unleash so much social and economic instability that their companies should consider freezing new investments or transferring their money back home.

But the more that Netanyahu and Dermer call to tell them not to worry, the more those investors worry that they have something to worry about.

Here’s a report on Sunday from one of Israel’s leading business newspapers, The Calcalist: “An investigation by Calcalist shows that a large number of high-tech companies, whose managers are not at all involved in the protest against the judicial coup, are quietly withdrawing their companies’ cash balances from Israel. An examination of dozens of public high-tech companies, unicorns and start-ups shows that as of last Friday, 37 companies decided to withdraw $780 million from bank accounts in Israel and transfer the money to banks abroad.”

And on Tuesday, The Times of Israel reported that the country’s leading bankers met with Finance Minister Bezalel Smotrich and informed him that they were seeing “early signs” that the planned radical judicial overhaul “will damage the economy and urged the coalition to adopt a compromise plan proposed by President Isaac Herzog.”

According to Israel’s Channel 12, Uri Levin, the C.E.O. of Israel Discount Bank, one of the country’s largest, told the finance minister: “We see a tenfold increase in interest in opening savings accounts in foreign banks. The shekel is growing weaker, Israel’s risk factor is rising, and our stock exchange is doing worse than others around the world. The market is based on trust, and if we don’t stop it now we may find ourselves in a deep crisis.”

This comes after Amir Yaron, the nonpartisan governor of the central bank of Israel, reportedly warned Netanyahu — after talking to business leaders in Davos — that “the ruling coalition’s plans to upend the judiciary could scare away investors and negatively impact the country’s credit rating,” The Times of Israel reported.

Caution: One should have no illusions that somehow the market will save Israel’s democracy for democracy’s sake. The electronic herd of global investors has no soul. It will take money away from Israel or put money into Israel based on one criterion only: the ability to make a profit. Just ask China.

But here is why one of Israel’s most important, veteran high-tech investors, who asked not to be identified for fear of government reprisals, is becoming so worried.

“It is not that you will see a stampede of all the high tech running away,” he told me. “But people are very concerned that the rules of the game are being unilaterally changed. Whether Israel was socialist or capitalist, the government and the business community always sat together and arrived at what was the best for the country. Now these guys are coming in with all kinds of radical unilateral changes. People feel threatened because they don’t know what will be the next suggestion tomorrow.”

Foreign investors, he added, always trusted Israeli courts. If foreign companies had disagreements with the Israeli government over the firing of employees or the land authority over property or the customs authority over imports, they knew that they could go to the courts and get a fair hearing, he said. But if this judicial coup goes through, he said, “and the courts and the government become the same — and then you have a dispute with the government — where will you go to get a fair hearing?”

Also, international and Israeli investors and innovators, he said, need to decide where to register their companies — in America, Europe or Israel — and where to put their profits. If this radical judicial coup goes ahead, he added, you will see more and more companies registering abroad and moving resources abroad. That’s why young Israeli techies, who are being courted by every major tech company in the world, are now wondering if they should stay or go.

Netanyahu thinks he can finesse all of this with investors, he said, adding, “The problem is: Suppose that he’s not right? The risks are enormous.”

The damage won’t happen overnight, but over time, he concluded: “It will be like termites eating your house. It looks great today, but it will one day suddenly collapse.”

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