Israel’s finance minister, Benjamin Netanyahu, will deliver an address in New York tonight on a topic no less consequential for the future of the Jewish state than the ongoing Middle East peace process: financial reform. Mr. Netanyahu will be the keynote speaker at the first annual American awards dinner of the Israel Center for Social and Economic Progress, “Toward a Free Market Future for Israel,” at the St. Regis Hotel.

“When Netanyahu entered office two years ago, Israel was on the verge of an Argentina-like crisis,” the president of the Israel Center, Daniel Doron, told us. The country had seen six years of deep recession, and the government was almost bankrupt. Businesses were going bankrupt – 70,000 small businesses folded in three years, according to Mr. Doron – which threatened the entire banking system with insolvency.

Most of Israel’s economic difficulties result from its centralized, monopolistic banking system, which benefits from government-created tax breaks and has come to control more than 80% of Israeli savings. The banks paid savers below-market interest rates and charged exorbitant rates on household loans. Their financial spread is a whopping 5%.

At the same time, the banks had lent 70% of their loans to a small group of cronies. The loans went to highly speculative and leveraged investments in entertainment and real estate, many of which failed. The banks now admit to $13.6 billion in questionable loans, while their capital base is only $10 billion. The centralized and corrupt banking system has deprived Israel of productive investment for almost two decades, resulting in Israel’s 10% unemployment rate. And the credit crunch accounts for the difficulties facing small businesses nationwide.

Mr. Netanyahu, however, came to Israel’s Finance Ministry with a bold reform agenda. He cut the government budget, reducing both the state bureaucracy and the salaries of bureaucrats. Taxes and entitlements remain problems. Israel’s government takes in 55% of gross national product in total taxes, compared to an average of 41% in European Union countries and a level here in America of about 29%. Between 1993 and 2003, Mr. Doron told us, the Israeli population grew by 43%, while the number of people on public assistance grew by 600%. Mr. Netanyahu, he says, has reversed this trend, which was created by perverse welfare rules that provided incentives to remain outside the workforce.

Mr. Netanyahu’s most important reform is a plan to break up Israel’s banking monopoly. In 1986, an Israeli government commission recommended such a plan. Yet the banking industry managed to hold off reform through a mixture of political clout and campaign contributions – until now. Mr. Netanyahu’s program to decentralize the banking industry has won ratification from the Israeli government. Once it passes the Knesset, the banks will be required to sell their provident funds (closed-end, 15-year investment funds popular with Israelis because of their favored tax status) and other assets in order to introduce competition.

Israel itself lacks large investment houses. So for the reform to work, it needs to attract the interest of foreign investors. Hence Mr. Netanyahu’s speech tonight. He’s here to turn the attention of the American financial community to the new Israeli economy. “This reform in financial markets will definitely be the achievement of his career so far,” Mr. Doron said of Mr. Netanyahu.

The Israeli economy still suffers under other burdens such as a wasteful system of monopolies and cartels that forces Israeli consumers to pay 30% to 50% above world market prices. But in some sectors, such as high technology, Israelis have exhibited an impressive entrepreneurship. Mr. Netanyahu has begun the process of liberating the Israeli economy from counterproductive socialist policies. American investors may see a business opportunity there.

In a place like Israel, economic reform isn’t only about the standard of living. After all, the Jewish state’s defense budget is not likely to decline in the near future. Nor will Israel be able to defend itself if its young people go abroad in search of better economic opportunities for themselves and their families. For the Jewish state, as the Israel Center for Social and Economic Progress reminds us, economic reform is about survival.