Working Paper: CEPR ID: DP18509
Authors: Itai Ater; Itzchak Tzachi Raz; Yannay Spitzer
Abstract: In early January 2023, Israel’s new governing coalition announced a plan for a judicial overhaul that would fundamentally weaken the power of the judiciary, the only meaningful check to the power of the executive branch in Israel. This paper describes the potential economic consequences of the judicial overhaul. We first discuss the extensive economic literature on institutions and their importance to economic development. Next, we use a large panel of countries to estimate the relationship between measures of institutional quality and four measures of economic development (GDP per capita, investment, innovation, and corruption). We use these estimates and the degradation of institutional quality in Hungary and Poland, two countries that experienced democratic backsliding, to forecast the potential long-run damage to the Israeli economy. Our calculations suggest that the judicial overhaul would have a dramatic negative impact on the Israeli economy. The estimated decline ranges from 9 percent in the most optimistic case to 45 percent in the most pessimistic one, both relative to an alternative scenario in which the judicial overhaul is abandoned. Finally, we describe the short-run negative effects of the judicial overhaul, particularly to the value of Israel’s currency, financial assets and to the hi-tech sector.
Keywords: democracy; institutions; political institutions; corruption
JEL Codes: D72; H11; K40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Judicial overhaul in Israel (K41) | Decline in GDP per capita (O49) |
| Judicial overhaul in Israel (K41) | Impair effective judicial review of the executive branch (K16) |
| Impair effective judicial review of the executive branch (K16) | Degradation in institutional quality (O17) |
| Degradation in institutional quality (O17) | Economic prosperity (P17) |
| Judicial review indicators (K40) | Economic outcomes (F69) |
| Judicial overhaul in Israel (K41) | Short-run negative effects on currency, financial assets, and high-tech sector (F69) |
| Judicial overhaul in Israel (K41) | Increase in public corruption (H57) |