Why Can't Israel Be the Norway of the Near East?

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Scandinavians can be pretty annoying. It’s not just that they live quietly and contently way up north where no one bothers them with rocket attacks or Security Council resolutions, or that they all have blond hair or get to shop at IKEA before the rest of us. It’s mainly because they seem to have it all.

We’re constantly told that the great economic alternatives of the 21st century are either to go with Anglo-American-style free markets, low taxes and small government, or with European-style social democracy.

The first choice would bring rapid economic growth but at the expense of equality and financial blow-outs. The second would bring more balanced societies, where the gaps between the rich and the poor are narrower, and health and education is superior, but growth would be sclerotic growth and unemployment would be high. Social democracy is also difficult to pay for, as Europe’s financial crisis demonstrates.

But then there are those smug Nordics who seem to have achieved both – big government that provides quality services and a social safety net side by side with competitive private industry. And, while American and the euro zone countries have been slapped around by their respective financial crises, the Nordic economies have been thriving.

To their credit, the Nordic countries have not allowed their success to get the better of them. As "The Economist" highlights this month in a special report called "Nordic Lights", the Norwegians, Swede, Finns and Danes have adjusted their socio-economic model in the last two decades. Much of what they have done would be useful to Israel to examine as we begin to reconsider the economic policies of the last decade that has brought us closer to the American way of doing things.

The Nordic secret: Honest government

In fact, the Scandinavians have shed much of the social aspect of their social democracies by cutting government spending, encouraging free enterprise and looking more American. Yet they continue to perch contently at the top of the world rankings for everything from global competitiveness, the ease of doing business and innovation (all those things at which hyper-capitalist America is supposed to excel) but also for human development and educational achievement (Europe’s forte).

On global competitiveness, as measured by the World Economic Forum, the four Nordic countries rank between 3 and 15, versus America’s 7. On human development, they range from 1 to 22, versus 3 to 28 for a selection of European countries.

Needless to say, they trounce Israel on all these measures. And embarrassingly for the self-proclaimed Start-Up Nation, the Nordics outdo us in the INSEAD World Intellectual Property Organization Global Innovation Index, too: Israel is No. 17 while the Scandinavian countries rank between 2 and 14.

How do the Nordics have their cake and eat it, too? And why can’t we whip up the same package of baked goods? These are two very good questions, of which "The Economist" answers only the first.

In short, it says, the Nordics can finesse an economy of big government and buoyant capitalism because government is efficient and honest. In addition, Scandinavian countries are business-friendly enough to make them a comfortable home to big and globally competitive companies that employ huge numbers of well-paid professionals who willingly pay taxes to support a state they trust and respect. The populations of the Nordic countries are largely homogenous so that social rifts are small and people are more inclined to share of wealth.

As "The Economist" points out, some of these qualities are under pressure. Scandinavia’s corporate champions, most notably Nokia, are feeling the pinch of competition from emerging Asia. Their efforts to spawn start-ups face the same challenges Israel has of entrepreneurs cashing out quickly rather than building sustainable businesses. A flood of immigrants is testing both social solidarity and the high labor force participation rate Nordic countries need to support their welfare state.

What goes in

It’s one thing to prate about achieving the same outputs as the Scandinavian economies do, to enjoy the same levels of productivity, wealth, equality, innovation and quality services. But to get that, we have to create the right inputs.

Simply spending more money on government services and transfer payments, as Shelly Yacimovich proposed during the Labor campaign, would just leave Israel with bigger budget deficits. It’s no more a solution for the distortions in Israel’s economy than a band-aid is for a broken leg.

Let's start out by acknowledging that a welfare state needs people to work and support it. In Israel, only 59.7% of the working age population is employed, compared with 79% in Sweden, 76.7% in Norway, 69.3% in Finland and 75.7% in Denmark.

To become a welfare state, if you’re a small economy like Israel’s or any of the Nordic countries, you have to be competitive in the global economy because at the end of the day you have to export goods or services.

Just as the Scandinavian countries are doing, Israel has focused correctly on innovation to achieve that. But unlike the Nordics, while Israel turned out lots of start-ups – it hasn't built many big businesses that create jobs and spread the wealth.

Even in its shrunken, battered state, Nokia alone employs 100,000 people globally. That's more half the size of the entire Israeli high-tech sector.

Moreover, Scandinavia has used its innovative capacity to compete in a broad range of industries, from energy to food and even culture and entertainment, whether it's Angry Birds or detective novels. Israel’s innovative capacity, on the other hand, is restricted to a few areas of technology based on the brainpower of too few people.

That has to change by improving the quality of education and ensuring other sectors of the economy apart from high tech aren’t held back by excessive bureaucracy and regulations.

It doesn’t require increased government spending – Finland’s top-ranked educational system is run relatively cheaply – but it does require a change in attitude.

Public sector employees see themselves as an interest group. They use its monopoly status to preserve their privileges and win new ones rather than behave like a service industry that measures its success on customer satisfaction.

If Israel is going to have big government, then it has to be far more honest and efficient than it is now to deliver the services that justify its cost.

So, can Israel become the Norway of the Near East? Painful as it is to say, probably not.

We certainly have the innovative capacity, if we choose to liberate it. But where the Nordics have a tradition of faith in government, we relate to ours as an annoying parent that we rely on financially but have little respect for. Unless the ultra-Orthodox attitude towards work changes radically, we will be saddled with a big part of the population that either doesn’t work or is underemployed in jobs that create little added value for the economy.

Given our limitations, we may just have to settle for the Anglo-American model.

They even have pretty skies: The aurora borealis running riot near the city of Tromsoe, northern Norway.Credit: Reuters
Building yet more office space in Oslo, though there is some pain from slowing exports to Europe.Credit: Reuters

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