[Comment] Israel: Poverty Could Be Election Capital

From Business Week

Over the past year, two key Israeli businesspeople and longtime Labor Party backers decided to throw their weight behind a new, if controversial, contender for party leadership -- Amir Peretz. The powerful and charismatic boss of the Histadrut Labor Federation reassured industrialist and investor Benjamin "Benny" Gaon and venture capitalist Erel Margalit that, despite his union credentials, he strongly supported the free market and he viewed Britain's Tony Blair as a role model.

Gaon's and Margalit's support of Peretz raised quite a few eyebrows, but they felt the Labor Party needed a major overhaul and younger leadership if it ever was to return to power. On Nov. 9, contrary to expectations, Peretz, 54, narrowly defeated 82-year-old Labor leader Shimon Peres for the top party job. Now, Israel's political class is reeling. Peretz doesn't support Prime Minister Ariel Sharon's coalition government with Labor and has been pushing for new Knesset elections by March rather than as scheduled in November, 2006. The Knesset is expected to vote on Nov. 21 to dissolve itself, which would pave the way for early elections.

"Very Hard Times"
Peretz' challenge comes on top of other troubles for the Likud. The party is divided over the disengagement in the Gaza Strip and the northern West Bank. And on Nov. 15, Sharon's son, 41-year-old Knesset member Omri Sharon, was convicted of illegal campaign financing charges linked to his father's 1999 campaign. "If the Likud doesn't get its act together quickly and unite, then we are in for some very hard times," says Transport Minister Meir Sheetrit, a Sharon ally.

The Moroccan-born Peretz looks to have a strong chance to make gains on a divided Likud. Opinion polls taken shortly after his victory gave Labor under Peretz a boost. The Likud, which now has a 19-seat advantage over Labor in the Knesset, would see its lead narrow to seven, according to a Nov. 11 poll in the Ha'aretz newspaper.

Peretz focuses more on economic issues than on security, although he does favor immediate negotiations with the Palestinians on a final settlement. "The security issue is losing its importance as the major factor in elections and is being replaced by social and economic issues and corruption," notes Mina Tsemach, a leading Israeli pollster.

Peretz has made a name for himself by battling with his nemesis, Benjamin Netanyahu, over the latter's economic policies. The former Finance Minister, who resigned in August, slashed welfare payments, cut taxes, and sold off state-owned companies in moves to revive Israel's economy.

Buoyed by an improvement in the security situation and an international recovery, the Israeli economy grew 4.2% last year and is expected to grow 4.5% in 2005. But the improvement has not trickled down to large segments of the population. The number of Israelis living under the poverty line tops 20% and continues to rise. Most of the benefits from the boom and from Netanyahu's policies have been enjoyed by workers in Israel's so-called Silicon Wadis, where the country's high-tech industry is concentrated.

Hard Hit
The Likud may thus prove vulnerable in development towns such as Sderot, where Peretz served as mayor in the early 1990s. Established in the '50s in outlying areas, these are largely populated by low-income immigrants from North Africa. Traditionally, they have been a bastion of Likud support. But it's precisely these towns, where unemployment runs well above the 9% national average, that Netanyahu's policies have hit hardest.

Peretz would like to raise allowances paid for children and the elderly and cancel proposed cuts in education, health, and welfare. He wants to exempt workers earning less than $1,100 a month from income, social security, and health taxes, and raise the minimum wage by 30%, to $1,000 a month. Independent economists say his proposals could cost over $2 billion.

Many in the business community are concerned about the possible impact of Peretz' proposals. "If the minimum wage is raised, thousands of workers will be fired, factories will be forced to shut, and production will be transferred abroad," warns Shraga Brosh, president of the Israel Manufacturers Assn. The Likud is already painting Peretz as a socialist out of touch with the times. But his populist views have also put the party on the spot. Only hours after Peretz was elected Labor chief, Sharon announced the government was preparing a plan to combat poverty.

Peretz still faces an uphill battle to win the next election. But his ties with the country's lower-income groups have the Likud worried. With Sharon under siege in a divided party, a belated war on poverty could be too little, too late.