OECD Report Casts Light on Dark Side of Israeli Economy

For once, economists at the global organization looked at the standard of living, housing, quality of life and lack of competition here, and had no trouble declaring: The emperor has no clothes.

A homeless person on the streets of Tel Aviv, December 2015.
Moti Milrod

The periodic reports published in recent years by the Organization for Economic Cooperation and Development, including those on the Israeli economy, never excelled, to say the least, in their originality or groundbreaking thinking.

Funded and staffed by representatives of member countries – the world’s 34 most advanced economies – the OECD is an institution whose analyses and recommendations have almost always been situated in the center of economic orthodoxy, with a worldview shared with the World Bank, International Monetary Fund and the central banks of the United States and Europe.

But why should it be any other way? When they come to the country to write critiques of and suggestions for Israel, OECD economists tend to spend most of their time with economists at the Bank of Israel, the Finance Ministry and other government ministries, large commercial banks and academics – all of them the heart and soul of the connection between money, power, government and academia here. This is a circle of people who see reality through the same glasses, in addition to the fact that they too benefit from the present situation and same worldview.

The result is that few differences are usually found between the policy recommendations of the Bank of Israel, the IMF's report on Israel and the OECD report.

However, in the OECD Economic Survey of Israel 2016 – released on Sunday – the OECD economists surprised us: Not only did they shine their spotlight on different places and conduct different analyses of the situation than in the past: They even determined that a number of things claimed by the Israeli economic orthodoxy until recently, do not even exist.

This is no less than a revolution.

You don’t believe me? Take a look for yourself at the first recommendation in the “assessment and recommendations” section, in which OECD economists tell Israel’s economic leaders: “Improving productivity and raising living standards will require strengthening competition and efficiency in the sheltered sector.”

Pardon me? Since when do you OECD people talk about competition? Tycoons? Groups of interested parties who have created “sheltered sectors” for themselves? After decades of talk that always focused on the budget, inflation, taxation, education and technology – this constitutes a fundamental change in the language of economic analysis: a transition from words and formulas that come from macroeconomic textbooks, to a worldview and analysis of the situation in Israel using the tools of political economics.

This is not all. Here, for example, is the next sentence in the recommendations section: “Enhancing social cohesion would raise sustainable long-term growth. Efforts to promote employment among groups that have only tenuous links to the labour market must be accompanied by further steps to improve their education and training. Additional actions are needed to reduce the cost of housing.”

Say that again? Since when do orthodox economists examine economies based on the development of social capital? And why exactly would economists from Paris care about what happens to housing prices, as long as another bubble does not burst (and the banks swear on the Bible that there is no subprime problem in Israel)? They have not learned over there that rising housing prices raise GDP numbers? What is going on here?

There is more: If we go back to the main findings discussed at the beginning of the survey, we discover that the OECD economists have written that Israel suffers from problems of inequality and poverty: “Israel is also characterized by high poverty and large gaps along many material and non-material dimensions of well-being. Poverty is especially high among the elderly, in part because of low basic pensions. Employment rates for ultra-Orthodox (Haredi) men and Arab-Israeli women remain low.

"Rising housing prices impose an additional affordability burden, increasingly even on the middle class. Relatively high price levels due to weak competition, in particular in the food sector, impose a greater cost, in terms of living standards, to socioeconomically disadvantaged groups.”

Isn’t that amazing? What happened to the usual discussion of defense spending and diplomatic tensions? Where is the Startup Nation? Since when is it permitted to analyze the Israeli economy in terms of standard of living, quality of life, housing and competitive markets?

Wake-up call for leaders

Okay, maybe we’ve gotten a bit too carried away. But only a bit. The OECD report on the Israeli economy, the first updated edition since 2013, has not completely abandoned the accepted terminology. This year, too, its economists praise the Israeli government’s fiscal discipline, the economy’s resiliency, and the fact that the economy continues to grow despite wars and global economic crises.

Israel receives praise for its level of employment, low inflation, balance of trade surplus and healthy national accounts. According to the OECD, Israelis are also personally more satisfied with their lives, their health and their ability to obtain an education than people in nearly all other OECD countries.

But after comparing Israel’s standing to other member countries in other areas, it is clear that most of the remaining focus and recommendations seem to have come directly from the Trajtenberg committee report following the social justice protests of 2011, or from the position papers of the protesters themselves. They concern inequality, poverty, social capital, housing prices, solidarity, interest groups, standard and cost of living, quality of life, economic concentration – and of course competition.

This is an enormous change from past OECD reports, and as compared to current report of the IMF and even the annual reports of the Bank of Israel and the Finance Ministry. Where does these winds of change come from?

It is possible that a new spirit and direction in analyzing Western economies has swept up the OECD's offices in Paris. Perhaps the debate on economic concentration and centralization, interest groups and political economy – about which much was written in these pages over the past three years – has trickled down into the worldview of the senior officials and economists the OECD consulted with, and then found their way into the report.

It is possible, too, that it the organization's own economists – who, as opposed to Israeli citizens, do not need to be cautious about what they say when they analyze the country's economy (because otherwise they may lose employment opportunities offered by the same interested parties and tycoons with whom they are dealing) – felt they simply could take a look at reality and declare out loud what many in Israel know but are afraid to say: The emperor has no clothes.

In normal times, this periodic OECD survey on the Israeli economy would be quickly filed away, and forgotten; in another few years, with a move to a new office, maybe the report would even be thrown away. But this time that must not happen: Israeli decision makers must grab this report and understand that despite the restrained language it uses, it is a wake-up call for them and other leaders.

Israel has a serious problem of poverty and inequality; a major problem with human capital that disappears quickly; a serious housing problem; severe economic concentration and centralization; an inefficient banking sector; a problem of pensions for low income workers; a very high cost of living; and a plethora of monopolies, tycoons and interest groups, both in the public and private sectors, who have too much economic power, and prevent competition.

The country's leaders must realize that if all these problems are not dealt with, they will blow up in their faces.