For Victims of Israel's Economic Policy, the Cure Is Worse Than the Disease

Those who have suffered for the last decades are fodder for the next OECD report showing rise rates of poverty and income inequality in Israel.

Patient package inserts for drugs generally contain a brief explanation of their purpose, such as "to relieve headaches," followed by a long list of possible side effects that takes up most of the page. Unfortunately, with Israeli economic policy it's the exact opposite: Every new economic program comes with abundant explanations of why it has been prescribed but almost no information about its side effects. And any adverse reactions that do occur are usually ignored or attributed to another cause.

This weekend the acute side effects of Israeli economic policy of the past two decades blew up in our faces. According to a report issued last week by the Organization for Economic Cooperation and Development, Israel's 20.9% poverty rate makes it the poorest of the 34 OECD member states, while its income inequality, as measured by the Gini coefficient, is also one of the highest for developed countries.

These findings aren't new: Israel's economic policy makers and political parties have known about this for years. The interesting thing is that despite the clear trajectory of poverty rates and the gaps between rich and poor, not a single Israeli government has ever made reducing poverty and income equality a central policy objective.

Economic discourse in the past two decades was bursting with concepts such as "growth" and "privatization," but missing in action were equally important ideas such as "reducing poverty," "closing socioeconomic gaps" and "promoting inclusive growth," which benefits the entire population and not just certain segments.

Israeli economic policy in this period was dominated by the "trickle-down theory" and the idea that cutting welfare benefits to the poor will encourage them to join the work force and accept more responsibility for their circumstances. Unfortunately, this did not work.

The 1985 economic stabilization plan was a powerful remedy for the ills of the 1970s and '80s: huge budget deficits, galloping inflation, a bloated public sector, alarming levels of internal and external debt and high transfer payments. The plan was very successful in stabilizing the economy, preventing its collapse and instituting budgetary discipline.

There have been several more significant developments since, such as economic reforms and privatization, the growth of the tech industry, the arrival of more than one million immigrants from the former Soviet Union and the Israeli-Palestinian peace process, accompanied by the war on terrorism. The bottom line is that Israel's economy was rescued from collapse and has ranked relatively well in key parameters.

These developments, however, came with serious side effects that sent poverty rates soaring and created wide gaps between rich and poor. There are at least seven reasons for the rapid widening of these gaps since the 1980s.

1. Israel has two classes of workers, one with too many labor rights and another with too few. The two groups are in fact two sides of the same coin: The proliferation of contract workers is the direct result of the inflexibility of organized labor in the public sector and in state monopolies like the Israel Electric Corporation, the seaports, the Israel Airports Authority, the banks and the defense establishment. While many workers enjoy high wages and benefits, total job security and generous pension plans, a second, inferior class of workers has developed alongside them that receives low pay, minimal rights and no job security.

2. Executive pay has jumped since the early 1990s, in concert with major privatizations and the development of Israel's capital market. In many sectors, such as banking and, until a year ago, the wireless providers, the steep rise in executive salaries was ostensibly the result of "free market" developments that did not make it down to the level of the customers.

3. The growth of high tech, a welcome and important development that provides Israel's economy with competitive advantages, has also created an "exit-enriched" class that includes entrepreneurs, lawyers, accountants, and underwriters.

4. Taxation is a powerful equalizing tool, but Israel's tax system is ineffective. It goes easy on big companies and permits the aggressive use of loopholes that widen income gaps. The black-market economy also works to increase these gaps, although it may also distort the official poverty and inequality figures: Mandatory tax filing would probably result in the reclassification of some people who currently qualify as poor. The dominant school of Israeli tax policy counsels excessive caution in taxing the rich (inheritance taxes are strictly taboo) and excessive enthusiasm in taxing the poor, demonstrated in the ease with which the value-added tax is raised.

5. The low rates of employment among Arabs and Haredim. Although the numbers of the working poor have risen significantly, getting a job is still an important step toward escaping poverty. Since both Israeli-Arab and ultra-Orthodox families tend to be large, poverty in these communities affects children disproportionately. According to the old theories the cuts to child allowances now being deliberated could reduce fertility rates, but in Israel economic concerns often take a back seat to cultural considerations.

6. Inefficient economic structures. Many sectors are uncompetitive and inefficient, factors that ultimately raise living costs. Examples include the mismanagement of state-owned land destined for residential building, the myriad protectionist tariffs and the exorbitantly high salaries of banking and Israel Electric Corp. employees. Reforms could result in reducing the cost of living in Israel especially for lower earners, who spend a disproportionate amount of their income on necessities.

7. The increase in foreign workers keeps poor and unskilled Israelis out of the work force, reduces their earning power and pushes them below the poverty line. The humanitarian discourse on labor migrants is divorced from the discussion of poverty rates, but both factors are tightly linked. Foreign labor may reduce restaurants and hotel prices, but it impoverishes unskilled or semiskilled Israelis by driving down their wages. 

Alex Levac