Four Hidden Truths About Poverty in Israel

The Bank of Israel dismantles an elaborate web of myths and misunderstandings about poverty, the causes and cures of which have been distorted by the social lobby and media.

Eyal Toueg

The Bank of Israel has dismantled an elaborate edifice of myths and misunderstandings constructed over the years about poverty and inequality in Israel.

It's not that either issue isn't serious, but their causes and their cures have been distorted by the social lobby and the media.

An analysis it published this week in the central bank's annual report provides a useful corrective. Using figures from 2010, its offers nuanced look at poverty and inequality, and weighs the trade-offs that Israel faces in trying to fix the problem.

Here are four misconceptions the study corrects.

1: Israel's economy is structured in way that creates high levels of poverty and inequality.

To a certain extent that appears to true, but not as true as you might think. Monopolies, powerful unions and a high-tech industry that pays wages far in excess of other business sectors all serve to create huge wage gaps and increase the cost of living.

Before taking into account the positive effect child allowances and other transfer payments or the negative ones of taxes, Israel's Gini coefficient – a measure of income inequality – is relatively high 0.501 . The average for countries belonging to the Organization for Economic Cooperation and Development is 0.470

But Israel is not among the most unequal economies in the OECD. Its Gini coefficient is not much higher than Germany's. Countries like Italy and France, which are often regarded as exemplifying European egalitarianism, have higher Gini ratios than Israel.

More surprisingly, Israel's poverty rate – again before transfer payments and taxes – is in the lower half of the OECD – 28% versus an OECD average of 28.5%.

Where Israel fails is in reducing poverty and inequality by progressive taxation and income transfers. Factoring those into the equation, Israel has the worst rate of poverty in the OECD, indeed a higher rate than even Mexico.

In other words, the economy delivers reasonable standards of equality and wealth; it's the government that fails.

2: Poverty is growing more severe over time

Again, there is some truth to it, but not much. Raw figures from the National Insurance Institute show a sharp increase in the late 1990s and early 2000s, when the number of people below the poverty line rose from 17.5% of the population to close to 25%.

Since then, except for a brief upswing during the global recession, they have stabilized, or even declined.

What the NII figures don't capture is that the non-income measures for living standards have improved over the past 15 years. The Bank of Israel shows that the percentage of poor households with a car, air conditioner, dryer, two or more mobile phones, a personal computer and an Internet connection has risen.

For all the 2011 social justice protests, prices for consumer durables have gone down over the past 15 years and more people can afford them. Moreover, as more and more of the poor have joined the labor force, the poverty line has risen, i.e., people with what had been considered relatively good incomes are now regarded for statistical purposes as poor.

Housing prices have, of course, ballooned and this is going to create severe problem for everyone – the poor and the middle class alike – but not as severe a one as you might guess. Some 63% of households under the poverty line owned their own homes in 2010, according to the Bank of Israel – a rate that is five percentage points higher than in 1997 and not very far from the 70% for Israel's other households. At a time of rising prices, a surprising Israel's poor have home equity.

3: Inequality is the price we have to pay for economic growth.

Government efforts to fight poverty by redistributing income through progressive taxes, social-welfare programs and the like will inevitably drag on growth.

The International Monetary Fund itself put paid to that piece of conventional wisdom in a pair of studies. One, dating from 2011, suggests that inequality makes it harder for economies to sustain long periods of economic growth, undermining the long-term performance. Another, published in February and cited by the Bank of Israel, found that except in the most extreme cases, redistribution programs had no discernible effect on the overall rate of growth.

Transfer payments make up just 11% of Israeli GDP, versus an average of 17% for OECD countries, so Israel certainly has room to be more generous.

But, as the Bank of Israel, makes clear, there are better ways to reduce poverty than through allowances. The government should be investing more in education, enforcing the minimum wage rules, providing subsidized daycare and limiting the number of foreign workers competing for the same jobs as the lowest skilled Israelis – all aimed at creating jobs and creating conditions under which people can take them.

4: Benjamin Netanyahu himself created the poverty problem in Israel when he was finance minister a decade ago

To some extent that is true and the Bank of Israel report confirms it. Starting in 2003, when he was finance minster under Ariel Sharon, the government, adopted a policy of reducing child allowances and other assistance on the grounds that it was deterring people from working. At the same time, the government cut income and other direct taxes to create a positive incentive for working hard.

To ensure tax revenues, the government increased indirect taxes, mostly notably the value-added tax, to the point that Israel relies on them relative to direct taxes more than any other OECD country.

The problem is that, unlike Israel's direct tax regime, indirect taxes are not progressive, i.e., they put too much of the tax burden on the poorest. Thus we have a ridiculous situation where the tax burden for the wealthiest 20% and poorest 20% is about the same level of 30%.The poorest not only get fewer benefits - they are paying a bigger proportion of their earnings in taxes than do middle class families.

But Netanyahu's strategy worked as well. Poverty stopped climbing and the percentage of the working-age population holding a job increased from about 54% in 2002 to 57.4% in 2011, even as unemployment fell.

More people, the Bank of Israel notes, seek higher education, seeing it as the route to prosperity.

The poor, broken down

What the Bank of Israel report misses is the social aspect of poverty.

The study treats the poor mostly as one undifferentiated mass when we know that the problem is concentrated in two sector s – Israeli Arabs and Haredim. Education is, of course, an issue for both populations, but it is more than a matter of improving the schools. The Haredim actively oppose a secular education that will bring them into the workforce; Israeli Arabs face discrimination in the allocation of government resources and in the workplace.

Neither group is anxious to break out of its cocoon, nor is Israeli society quite ready to welcome them in. To break out of poverty, both groups need more than well-designed government programs, they need a grassroots social revolution that changes attitude inside their communities and across Israel.
 

Bloomberg