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August 5, 2011 1:47 pm

Understanding the Israeli Economic Crisis, And the Opportunity

avatar by Arik Elman

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Real Estate Protest in Tel Aviv. Photo: Itzuvit.

Since the beginning of the current social unrest in Israel, many worried supporters of the Jewish state abroad who aren’t members of the Liberal-Bolshevist cult of “The worse it gets, the better it is” are asking the same question: are those protests authentic? What is going on? Do the tent camps, the mass demonstrations, the petitions, the wall-to-wall media coverage express true and real grievances of the Middle Israel, or they’re yet another cynical attempt by the foreign-funded extremist Left to topple the hated Netanyahu?

The answer to this question would be “Yes”.

Yes, the involvement of the Leftist groups and their attempt to organize, steer and hijack the protests are clear for everyone to see. The red flags, Che Guevara icons and banners “Mubarak – Assad – Netanyahu” haven’t appeared out of a thin air. After certain procrastination (probably hoping no one would notice), the New Israel Fund has admitted to its part in providing the financing. In large part, the crowd that usually haunted places like Sheikh Jarakh or Bil’in has migrated to the Rotschild Boulevard in Tel-Aviv. People who are quite keen to display “Boycott Israel” badges on their Facebook photos suddenly become concerned with the burden of indirect taxation.

One of the founders of “The National Left” movement Eldad Yaniv, a wealthy lawyer and a former confidant of Ehud Barak, who had his picture taken while pitching a tent, had openly admitted as such. Nevertheless, after the earlier attempts of the protest leaders to drag the elected Prime Minister to a televised revolutionary court had backfired, recent polls have shown that right now, it’s not Netanyahu or Likud who bear the brunt of the turmoil, but Kadima, whose left-inclined voters are rediscovering their quasi-socialist sympathies. Since Kadima is the main party of the opposition and the Labour is busy with its leadership contest which is growing uglier by the day, there is no real prospect of government collapse, despite the shrill agitation from the red-bannered Left and the adoring media.

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But, on the other hand, YES, the widespread sense of anger and grievance against Big Business and the government that can’t or won’t bring it to heel is very, very real. The gruesome statistics are all over the Web, and they paint a painfully clear picture. There’s almost nothing that the average Israeli can buy in the store that doesn’t cost him more then it would cost his counterpart in Europe and the US. In many industries, despite the privatization of the recent years, there’s almost no real competition. Two or three companies divvy up the market, fixing the price and bilking the customer. The former state monopolies became part of huge cartels, bringing the concentration of economic power in the Israeli economy to an enormously high level and suffocating the free market.

While Netanyahu credits his government and the Bank of Israel with impressive macroeconomic indicators and financial stability, and Israeli hi-tech arouses Jewish pride and the envy of the world, back home many of the salaried workers of those high-tech firms are struggling to make ends meet. As you descend down the wage rungs, the problem becomes more acute – because of the widespread practice of hiring through personnel contractors to avoid the payment of benefits, hundreds of thousands of workers in a service industry work full shifts and still lag behind the poverty line. The gap between the rich and the poor in Israel is the highest in OECD, which means that this favorite number of Netanyahu’s – GDP per capita – doesn’t really mean much.

The State’s fiscal policies don’t help either. With or without Netanyahu in government, Israel for the last decade has been going down the same road – to provide for economic growth, the State has cut taxes on corporations and on earned income. Since the Israeli government must balance its checkbook somehow, it went for the source of taxation which is supposedly least harmful for economic growth – namely, the consumption and property taxes. Today, almost half of government’s income is paid out of the Israeli consumer’s pocket. Moreover, since the Israeli economy is burdened with two sectors who deliberately decline from full participation in the labor market – ultra-orthodox Jewish men and Muslim women – consumption taxes are the only way government could reach into their pockets and make them contribute something to the cost of services they require. While proving its worth in terms of GDP growth, this fiscal scheme had become increasingly unsustainable socially, like any regressive taxation throughout history.

The feeling that while the government puts some money into your pocket through the income tax cuts (which look much more impressive on the rich), it takes much more through indirect taxation, was exacerbated by the decline in quality of the social services Israelis came to expect from their government. Contrary to Netanyahu’s favorite cliché about the fat man (the public sector) who needs to be given a diet and taken off the back of a thin man of the private sector, right now Israel simply doesn’t have enough government where it is needed the most – the policemen, the firemen, the teachers, the doctors are inadequately paid and in increasingly short supply. The dismal failure of the government to suppress a fairly modest (by international standards) Carmel forest fire without foreign help brought those deficiencies into sharp relief, hurting Israeli national pride.

And while this resentment had piled up, the elected Israeli officials could only talk, protest – and do nothing. Unlike the American Congress, the Israeli Knesset has no mechanism of independent budget evaluation and income projection, no real power to create a budget or to intervene in the fiscal policy. To add insult to injury, having formed the government in 2009, Netanyahu proceeded to abolish even the ritual of yearly budget vote, during which members of the Knesset could at least engage in small-time extortion aimed to please their sectoral constituencies. A few weeks before the protests erupted, Netanyahu and his puppet minister of Finance Yuval Steinitz had even boasted that many other countries are looking into their revolutionary practice of biannual budgets. Two unelected, elitist bodies stand as paramount overlords of the economic policy – the Bank of Israel and the Ministry of Finance. Between them, they’ve exacerbated the problem by treating the issue of concentration and cartels with kid gloves, raising interest rates on mortgages while the supply of residential construction fell half short of the demand, and regarding any criticism from the public or the Knesset with either exaggerated alarm or open contempt.

Is it any wonder, then, that while the plurality of Israelis polled still prefer Netanyahu as the leader, the huge majorities (anywhere from 75 to 84 percent) claim support for the tent protests? That the traditional Likud constituencies and even settlers are joining in? That the members of the governing coalition feel the acute need to confess their social conscience?

Like it or not, this widespread resentment and the feeling of being used cannot be a product of Leftist incitement, although Netanyahu can justifiably claim that after he has come to power the Israeli media’s interest in the problems of middle class’ welfare has become more acute. On the other hand, he can give himself credit for taking the security concerns off the table and thank the hapless American President for creating a complete stalemate vis-à-vis the Palestinians. For the first time in many years, Israelis have time to look around their own house and notice the cracks, the peeling paint, the dirt and the broken windows. They are not pleased.

The irony is, of course, that contrary to the warm and fuzzy beliefs of the tent youth, Israel needs more efficiency and competition, not less, and considerably less bureaucracy, not more. In its “Doing Business 2011” survey the World Bank had placed Israel at a shameful 121st place in its efficiency of dealing with construction permits, 147th (!) in “registering property” and 82nd in the “ease of paying taxes” category. Is it that surprising that the Jewish state can’t provide enough housing and the government-owned Land Administration and the Tax Authority were both exposed as breeding grounds of inefficiency and corruption?

Another factor that must be confronted in the Middle Israel’s quest for more comfortable life are the unions. Chairman of the Histadrut Labor Federation Ofer Eini has jumped right in front of the tent movement, and he knows exactly why. Histadrut serves the most powerful public sector unions, first and foremost the utilities, the ports, the transport. Just by laying off workers who aren’t needed and eliminating unauthorized benefits and salary bonuses, the Israeli Electric Company can save the taxpayer about half a billion NIS (USD 143 million). The enormous wages of Israeli longshoremen are reflected in the cost of the imported goods. And instead of being worthy of the country that build it, the Israeli railway system is a disgrace of inefficiency, tardiness, subpar service and a sheer danger to passengers.

Netanyahu will have to part with the ideological illusion that the interference of the government in the market is a uniformly bad thing. When the prices and the rents on real estate are going through the roof, Israelis no longer believe that government should just tender more land to developers. Rent control is one of the most popular protest slogans, and it makes sense to the younger generation and to the tens of thousands of elderly immigrants who will never be able to buy an apartment for themselves. Of course, the same will to interfere is required if the government is truly determined to curb the power of the cartels. A few days ago, the country was treated to a spectacle – the Director-General of the Ministry of Finance resigned abruptly, and the “sources” in the Ministry had accused Netanyahu, of all people, of “inciting the public against the businessmen”. The Finance officials had become so accustomed to having it all their way and to using their posts to secure cushy jobs with the oligarchs, and so absolute is the Big Business’ control over the Israeli media, that it will require iron will and public support to change the economic power structure. In that, Netanyahu is lucky – Middle Israel is awake and demands change. It is now his opportunity either to use – or to lose.

Before the elections in 2009, Netanyahu talked the right talk on almost all issues which bother the Israeli middle class, but he made a bargain with the oligarchs and the unions to provide for the financial stability and economic growth in a dangerous global environment. This bargain can hold no longer. Right now, the Israeli public still believes that Netanyahu can be the man who will make things right and, most importantly, cheap. It is willing to give him time to change the course. But this time is finite. For Netanyahu, the sandglass is now running.

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  • Dan Friedman

    No wonder the Left are deeply involved in the “protests.” They are timed to take the spotlight off Netanyahu’s accomplishments successfully parrying Obama’s anti-Zionist campaign and calling the PA’s bluff set for September. It’s a pity the writer falls for the ploy hook, line and sinker. Or maybe he just votes Labour.

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