When Mediocrity Rules, Slackness Is King

With all due respect to sheltering mom & pop shops, that terrible norm will destroy the Israeli economy in time.

Israel has a problem with productivity. Nowhere is it more glaring than in the real estate sector, say the nation's productivity experts.

This enormous sector of the economy, representing some 8 percent of Israel's GDP, has been stuck fast for 40 years.

After a nice jump in productivity in the 1960s, Israeli real estate has stayed exactly the same since the 1970s, in stark contrast to Israeli business productivity in general and to real estate sectors in other countries.

In 2011, a committee headed by Prof. Tzvi Eckstein tasked with shaping policy on Palestinian labor in Israel explained that productivity is tied to industrialization, including in the real estate sector. Industrialization allows the same output to be produced by fewer employees; theoretically therefore the employees should earn more. "During the last four decades, construction technology developed by leaps and bounds all over the world but not in Israel," the committee report stated baldly.

As a result of the technological backwardness which led to a profound lag in productivity, the Eckstein committee found - salaries in construction in Israel were the lowest in the developed world, compared with salaries in the commercial sector.

Israeli construction workers earn 85 percent compared to the salaries in the commercial sector versus 100 percent in the developed countries.

The Eckstein committee and other productivity experts in Israel are confident they know why productivity is so low in Israel's real estate industry: foreign labor.

The advent of Palestinian labor into the construction sector in the 1970s, and later of Chinese labor, destroyed innovation. Instead of making an effort to improve, as was done elsewhere in the world, contractors and developers in Israel got used to easy street. They relied on cheap, easily available foreign labor instead of developing skills.

Mediocrity is king

The real estate sector is a mirror of the Israeli economy as a whole. Laziness and mediocrity rule the day.

This doesn’t mean Israelis don’t put in long hours. It means that people here cut themselves slack.

Instead of demanding constant improvements of themselves to become more competitive and efficient, we specialize in slapdash execution, cutting corners, blocking competition, and extorting benefits from the state. We put mediocrity and cutting ourselves slack on a pedestal and then wonder why the productivity in Israel is only one-third of that in the United States.

Israeli mediocrity pummels us from all sides. Eckstein, who currently heads a committee examining the lag in productivity in the Israeli high-tech sector, makes it clear that the productivity problem is not exclusive to real estate, which was examined specifically, or the industrial sector, which is under constant scrutiny. The problem is endemic, Eckstein says, pervading the entire economy, even though most economic sectors are never measured for productivity.

“We have a real problem with productivity even in the top percentiles,” he says, and points to the chronic inefficiency of the public sector and the profound backwardness of our financial sector: The ratio of bank employees to the size of the banks is one of the highest in the world.

Dr. Shlomi Parizat, until recently the chief economist of the Israel Antitrust Authority, points out one reason: “We suffer the disadvantages of being a small, isolated market, meaning that small manufacturers operating locally can allow themselves to be slipshod because there’s no real competition forcing them to do better.”

In fact, Parizat places most of the blame for Israeli workers’ low productivity on the lack of competition.

“The absence of competitive pressure makes it pointless to raise standards and be as efficient as possible. This is apparent throughout the Israeli economy," he says. "Take the supermarket chains. All over the world there are supermarket chains ten, twenty, fifty times larger than in Israel managed a hundred times better. Everything there is measurable. All processes are transparent. At any given moment they know exactly where to find any product in the store. Here, who needs that kind of professionalism? The food manufacturers, the suppliers, the truckers and the store managers – everyone’s faking it.”

The tendency to slapdash execution comes from the top, of course – the public sector. “We’re sloppy and amateurish, and it starts with the public sector,” says Parizat. “Reforms are decided on the spur of the moment. There are no in-depth studies; policies are inconsistently applied and unprofessional. There are no measurable goals in the government. Why, for example, does the state not set itself a clear goal of selling a certain number of housing units with penalties attached to the failure to attain the goal? The reason is obvious: Because then someone would be penalized in case of failure. At the end of the day, this slipshod approach is convenient for everyone, first and foremost for the government because there’s no measuring, no comparisons, no need to pay a price; in a word – no accountability.”

Sloppy government

The government’s sloppiness is manifested in policies that failed through the ages, and in incessant concessions to interest groups.

In 2007, trying to explain why Israeli workers' productivity in traditional industries was only 43 percent of the productivity of their counterparts in the United States, a committee headed by business executive Israel Makov, said: “Refusing to engage in the strategy of innovation may stem from companies’ choice of other strategies that allow them to survive."

In short, the committee concluded, the reality of the Israeli business and political scene is that companies are sheltered: they can continue to profit while being hopelessly uncompetitive.

The government supposedly serves the public by giving in to public pressure to protect companies against competition. But in fact that policy hurts the public in the long run.

Makov, who had been CEO of Teva Pharmaceutical Industries, notes how IKEA's advent slammed small furniture outlets on Herzl Street in south Tel Aviv. The non-competitive manufacturers were used to the low standards of the local market. They simply couldn’t cope with the deadly efficiency of the Swedish furniture giant.

That’s the way it is when mediocrity is the norm.

The sweeping conclusion seems to be that the Israeli economy must be divided into two separate spheres. There’s the competitive sphere made up mostly of exporters and the few branches of the economy exposed to competition from imports: These must withstand the constant test of the global market and are forced to compete and get better with time. This sphere of the Israeli market would seem to be one of the best in the world: Israeli exporters survived the global financial crisis with awe-inspiring success and saved Israel's economic growth.

And then there’s the other sphere: the traditional industries, the public sector, local businesses, the service sector – all those mostly interested in connections, wheeling and dealing, getting government benefits and protection, and zealously guarding the status quo. This part of the Israeli economy apparently lags some 50-60 percent in its productivity compared to the developed world. Before the election next week, we should think about choosing what part of the Israeli economy we would like to promote.