Trachtenberg, Bare as It Comes

Prime Minister Ehud Olmert and Avraham Hirchson, the finance minister (until this morning) fled at the height of the press conference called on Thursday to present their "Socioeconomic Agenda for Israel from 2008 to 2010". Their premature getaway from an event that had been predated by intensive promos, including sweeping invitations to the press, reflects their position perfectly: neither can stand tall before the public, with such thick clouds of suspicion hovering over their heads.

Substantively speaking, we don't really need to hear what Olmert or Hirchson think about the document.

It was written by a team headed by Prof. Manuel Trachtenberg, the head of the National Economics Council, which operates under the auspices of the Prime Minister's Office. Why doesn't it matter with Olmert and Hirchson think about it? Because neither has the leadership capacity or the legitimacy to lead long-term economic moves.

Actually, the document is merely one result of the last year's leadership vacuum in government in general, and in economics in particular. The prime minister is unsuited for his job. The finance minister is a perennially AWOL appointment born in sin. The Finance Ministry leadership is crumbling. The Bank of Israel is preoccupied with the employment terms of its workers and the corruption discovered therein.

Trachtenberg's plan fails to address some of Israel's most glaring economic problems, which had been pointed out by the former finance minister, Benjamin Netanyahu. These are primarily the pork barrels and pervasive, deep corruption in the public sector, the stranglehold that several monopolies have over the public, and the miserably deteriorating quality of management in the public sector.

Even so, Trachtenberg's paper is one of the most interesting to come out of Jerusalem in years. After reading its 106 pages, one can afford a smidgen of optimism.

Despite its ambitious goal - extracting a quarter-million people from poverty in three years - Trachtenberg's plan offers a degree of modesty, professionalism, originality, and also, it's free of table-thumping jingoism. One can't usually say that about Jerusalemite economic programs.

His plan also confers a message regarding how to manage the process of change at enterprises, including big enterprises like Israel's exclusive. It does not lay down fantastical goals for economic growth or GDP. Mainly, Trachtenberg doesn't indulge in rabble-rousing and naming enemies, which was a weakness of Netanyahu.

The messages

We see three main messages in Trachtenberg's plan.

1. Trachtenberg puts Israel's economic story into proportion. It looks great, growth has been high for three years, inflation is last week, Israel's debt and unemployment are dropping. Yay, by all years. But that isn't the real story: poverty is not just pitiful, it's a ticking time bomb. Poverty threats future government budgets, quality of manpower in five and ten years' time, the quality of healthcare, and future trends regarding violence, crime and social cohesion.

Also, Israel's "terrific" economic performance pales when compared with the rest of the world. For the first time, Trachtenberg presents a graph that TheMarker readers saw last year, but the Bank of Israel and Finance Ministry have been ignoring. The graph shows the widening gap between GDP per capita in the United States and in Israel.

In the last decade, GDP per capita grew by 31% in terms of purchasing power. But in that time, global GDP per capita grew by 51%. In the developed Asian nations, it grew by 109% and in Europe, by 65%. Trachtenberg clearly says what politicians and central bankers haven't wanted to admit for years: In the last decade, global growth leaped a step up. The criteria for judging economic success have changed, and Israel looks more pathetic than ever before.

Trachtenberg looks at the immediate economic threats to Israel in general, and to its hi-tech sector in particular, from the general global revolution, and particularly - from the exploding powers of India and China. Each is producing hundreds of thousands of engineers each year.

Years after the business sector realized that the world really is flat, as Tom Friedman said, Trachtenberg reminds Jerusalem that in a flat world, Israel is more under threat.

The unspoken truth

2. Trachtenberg presents the problem of poverty in Israel using professional tools. He doesn't descend to the ignorant demagoguery of the "right" (the "capitalists") or of the "left" (the "socialists"), which have largely steamrolled the debate. It isn't the "rich" or the "tycoons" who are to blame for poverty, nor "stipends", "parasites" or "sloth".

Poverty is what happens when the proportion of adults who work is too small (we knew that already) and when productivity in traditional industries is too low (that's new in the public debate).

In Israel's traditional industries (meaning, not hi-tech or services), which bear great influence on employment and therefore on poverty, productivity is dismal and deteriorating.

The product per worker in Israel, in traditional industries and services, is 50% below that of the United States and 44% below Europe's. Yes, that Europe we sneer at for being too slow and flabby, with its truncated working week and long summer vacations. Wheezing and indolent, it beats us by a mile.

Once and for all, Trachtenberg bursts the theory of hi-tech powering the Israeli economy. Yes, he says, hi-tech is a terrific growth driver, and an  important one, but it will never manage to lift up the economy on its lonesome. It employs just 7% of the workforce, and what any serious economic program must do, is improve productivity in the non-hi-tech sectors.

3. Trachtenberg suggests a series of solutions to raise productivity and participation in the workforce. Some of his solutions are old hat, like reforming education, limiting the entry of foreign workers, programs like Wisconsin. His point regarding these programs is that they have to be executed perfectly, with integration and synergy between them.

But he and his team have new ideas too. The document suggests solutions for the fundamental evil of falling productivity in non-hi-tech arenas, and also points at an absurdity. Israel is a pioneer in hi-tech and advanced information systems, but its traditional industries are among the most backward in technological innovation.

We export the systems that drive productivity improvement at the best companies in the world. But we don't use them ourselves to innovate in management, production, or marketing.

Rich/poor as a distraction

Instead of penning a heated manuscript featuring rich/poor, gaps and taxes and so on, Trachtenberg provides simple statistics that explain the low wages, the poverty, the phenomenon of "working poor".

Productivity per worker increased by only 35% in the last ten years, compared with 66% in the U.S. and 80% in Sweden. No wonder wages per worker at the bottom of the blue-collar heap are so low, from a worldwide perspective.

The difference between Israel and Sweden, in respect to poverty, social gaps and cohesion, doesn't start with welfare and public services. It starts in productivity: high there, low here.

The people at the Bank of Israel, the Finance Ministry, Jerusalem in general, the "capitalists" and "socialists" will have a blast picking apart the Trachtenberg report. It is indeed a flawed tool, as we noted near the top of this piece. Throughout the discussion on Israel's low productivity in manufacturing and services, there is for instance no mention of the poor quality of management in the public sector; the bloated workforces; the strikes, the rigidity of the labor market, and the monopolistic structures that abound.

But the Trachtenberg report is a giant step forward in Israel's economic debate, in its presentation of the threats and opportunities that Israel faces, and the possible solutions.