Israeli Economy’s Growth Engine Is Breaking Down

The economy is moving backward compared to other developed countries. Politicians are afraid to do the right thing, preferring to grovel to the public and get reelected.

Unemployed Israelis
Emil Salman

As happens every year, just before Independence Day, the Central Bureau of Statistics published a raft of positive data on Israel’s economy. It always does its bit to make the birthday festivities merrier.

The stats bureau said Israel’s population now stands at 8.5 million, compared with just 800,000 in 1948. A 10-fold increase! GDP per capita in 2015 reached 132,000 shekels ($35,000), compared with 19,800 shekels in 1950 – 6.7 times higher.

And to really reassure us that living standards have gone up, the bureau noted how in 1956 only 12 percent of Israeli households had a washing machine, compared with 96 percent today, and how only 37 percent of households had a refrigerator, while 57 percent used an ice box. Today, everyone has a refrigerator.

The bureau also tells us that in 1950 Israel had 1,600 college students, compared with 310,000 today. Also, in 1951, a car was a rare sight, with only 34,000 private cars on the road. Today there are 3 million. I still remember my father going to work every morning on his bicycle.

There are more achievements. Inflation is at zero, a huge socioeconomic accomplishment compared to the hyperinflation of the early 1980s. We also have a low unemployment rate of 5.3 percent, and exports are topping imports – a dream come true.

The state’s 68 years can be divided into two eras. The first 37 years were years of centralized socialism. Three large entities ran the economy: the government, the Histadrut labor federation and the banks. The private sector was small and weak compared to the large and dominant public sector.

The government printed money like there was no tomorrow, created massive deficits and raised taxes. It decided on everything: how many dollars you could buy for travel abroad, and how much credit you would get to start your business.

The economy was closed to competing imports, which led to high prices, mediocre quality and a low standard of living. Exports meant Jaffa oranges, and every other day we were told of yet another crisis in the balance of payments, which led to currency devaluations.

In July 1985 came the economic revolution that launched the second era. Thanks to a long list of reforms, we shifted from centralized socialism to a competitive market economy.

Money was no longer being printed willy-nilly, the budget deficit was brought under control, the government privatized a bunch of state-owned companies, the Histadrut sold all its businesses, food subsidies were canceled, and the economy was opened to competition from imports (though high taxes on food imports meant these remained expensive).

Meanwhile, the capital market was liberalized, making it possible to obtain loans without political connections, and foreign currency controls were eliminated. The result: a steep rise in the standard of living.

So does that mean everything is fine; we keep moving full-steam ahead? Well, not quite. The transition to a market economy and a competitive economy has been grinding to a halt in recent years.

Populism has reared its ugly head. The politicians are afraid to do the right thing, preferring to grovel to the public in order to get reelected. Key reforms aren’t being made, and pressure groups are holding on to their privileges. The public sector is getting fatter again, the government is increasing spending and expanding deficits, and taxes are on the rise again.

The result: low annual growth of just 2.5 percent, which effectively means no growth. The economy has stopped moving forward. It’s moving backward compared to other developed countries.

Funny how the stats bureau just happened to leave out the disappointing indicator of low growth. Why spoil the party?