Why Has Israel Missed Out On the Global Economic Boom?
LANDAU, PINHAS
The question becomes more insistent because of the contrast: The Western world has never had it so good. Capitalist economies have experienced their longest period of uninterrupted economic growth...
...There was no pro-business policy that gave entrepreneurs the incentive to get on with generating new sources of wealth...
...When confidence returned, so did the money.* The official figures for capital flows show the pattern, but these figures reveal only the visible part of the iceberg...
...it knew that achieving wage reduction through a recession would be politically disastrous as well as socially destructive...
...An increase in the share of national resources going to the business sector can only come about through a cut in real wages or a reduction in government spending...
...Capitalist economies have experienced their longest period of uninterrupted economic growth in modern times, perhaps ever...
...From that point on a process started...
...South Korea and Taiwan, as well as the more mature Japanese economy, have vaulted over successive hurdles...
...But the secret of its success does not really lie in its economic policy measures...
...But for people prepared to focus on how the real Israel is to make its way in the real world, the prospects are much more promising than the current gloom suggests...
...Their economic structure was unsuited to handling the force behind the boom...
...The Jews will see to the rest...
...government to stop making Israel an aid junkie...
...Israel missed out on the global economic boom of the 1980s because its economy was incapable of participation...
...This meant not only restructuring, but also the inevitable bankruptcy of many inefficient firms and even whole industries...
...Real wages (pre-tax) fell 9 percent in 1985, but increased nearly 8 percent in 1986 and another 8 percent in 1987...
...The outbreak of the intifada at the end of 1987 ensured a worse recession than would have otherwise occurred...
...The force behind the boom was the technological progress that instigated competition in research, manufacturing and marketing...
...The effort to avoid South Americanization was eventually successful...
...When people saw that the government's actions were consistent with its talk, their initial skepticism of the ESP was replaced by acceptance and the people made it work...
...In the end, the corporate sector contributed the resources that allowed the government to stop overspending.** Through higher business taxes and higher wages to employees, the business sector was forced to pay for nearly the entire ESP program...
...There is also the labor drain as a result of army service and reserve duty...
...These trends, combined with improved professional standards and techniques that are being forced upon Israeli management, will provide a sound basis for a renewal of growth and prosperity in Israel's economy and society...
...But these traditional economic power bases, and the politicos and lobbyists who represent them, are now firmly on the defensive...
...The professors of economics advised the government that it needed to reduce people's real wages...
...The only countries that shared in the boom were those whose economies allowed market forces to work and where individual and corporate economic activity was powered by the profit motive...
...The benefits accruing to businesses from higher sales and profits, however, were squandered on higher real wages, finance costs and taxation...
...How is it that the same kinds of Jews—often brothers, cousins or ex-neighbors in the old country—achieved such stunning success in New York, Toronto, London, Melbourne and elsewhere, and failed so miserably in Tel Aviv, Haifa and Jerusalem...
...The bottom line actually shrank...
...hence, the balanced budget...
...With business profits being hammered down from all sides, it should come as no surprise that as soon as the consumer spending boom wore off in the second half of 1987, the economy lost direction and a recession set in...
...We are impressed with the net worth of an individual or family only when the number reaches heights that not many years ago would have been considered mind-boggling...
...Israel, however, spent the first half of the 1980s trying to avoid becoming a South American-type economy and the second half trying to face up to an economy built on lines much closer to the East European than the West European model...
...The socialist Zionist tradition that dominates Israeli life regards the accumulation of personal wealth as socially wrong, if not actually immoral...
...In most key areas...
...Hyper-inflation was eliminated at last in 1985, when, after a few false tries, the government hit on the right formula contained in a policy package called the Economic Stabilization Plan (ESP...
...in fact, they found that deep-rooted deficiencies in their economies were exposed by rapid progress elsewhere compared to stagnation at home...
...However, the ESP was not completely successful...
...Occupations that Jews have traditionally excelled at, and that have been the arena of so many Diaspora Jewish business achievements over the last ten years—areas like trading, financial innovation, and, above all, genuine risk-taking in every field from real estate development to personal computers-are disparaged...
...Of course it didn't want to do this...
...They raise basic issues that many people— especially in the "Establishment" that built Israel and that continues to view it as its private fief—would rather avoid...
...Layers of regulation by national and local governments as well as by numerous quasi-governmental bodies control every business of whatever size...
...Israel's ESP closed the budget deficit mainly by freezing exchange rates, by increasing the real value of taxes (especially business taxes), by making slight cuts in the value of subsidies and transfer payments to the general public, and by slashing the value of loan subsidies and other business-sector benefits...
...Ironically enough, the intifada has catalyzed some of the structural changes that were long overdue and that would otherwise have occurred over a longer period...
...Israel's ESP is now regarded as the classic model of how to tackle hyper-inflation...
...Equally important is the need for major reforms at the micro-economic level: Sectorby-sector deregulation, accompanied by the aggressively pursued sale of state-owned corporations and other assets...
...On the one hand, it displays aspects of a mixed, West European economy, and it trades extensively with the West...
...But at the grass-roots level things are beginning to happen and over the next year or two the recovery should assert itself...
...Many countries—for example in South America and Eastern Europe—were left out...
...Inevitably, business profits were clobbered.*** This couldn't last, and it didn't...
...Now, smart foreign money (yes, mostly Jewish) is nosing around for bargains...
...As happened elsewhere, Israeli unemployment is shooting up to levels previously considered unimaginable (now about 10 percent...
...Israel's economy has always been a bit schizoid, which is perhaps why it is so difficult to understand...
...On the contrary, the government held on to its share of the national pie and workers actually increased their share after an initial fall...
...This situation was too much even for the collective genius of several million Jews...
...The economy began to slide into total chaos...
...In 1988, the increase was nearly 6 1/2 percent...
...Perhaps even more ironic, Diaspora Jews have shared disproportionately in the boom...
...That led directly to the next major effort now under way— changing Israel's economy from the "second world" model of centralization to the "first world" model of a free market...
...Their inherent inefficiencies are now fully exposed, and the worldwide trend toward freer economies is increasing the pressure for reform...
...This date marks the key event in Israeli economic history in the 1980s...
...In this atmosphere, the government and Histadrut bureaucrats face an uncomfortable choice between supporting reforms that will put them out of business, or being seen as clinging to obsolete, and self-serving, structures...
...And the budget deficit simply got worse because the government was unable to curb its own spending...
...Moreover, the private sector is only a small part of the business sector...
...But this can be done only by cutting government spending if we are to maintain the budget at or near balance...
...Today, the Jewish millionaire is commonplace...
...You can't pinpoint or quantify these things yet, but "the nose knows...
...For that to happen, however, a number of reforms have to be made so that the economy can realize its full potential...
...The rise in defense and social welfare spending in the 1970s went beyond the government's ability to pay...
...For the economy to move into a phase of sustained growth, the rate of return on capital—the incentive to invest in productive enterprises—must improve significantly...
...July 1, 1985 was the date ESP was put into effect...
...How do we know the people had lost confidence in the government...
...The Israel approach may be slower because it must overcome fierce resistance from vested interests, but it is also more likely to succeed...
...it's called capital flight...
...Some might even call it perestroika...
...Finally, the government was forced to admit that the whole thrust of its economic policy for the preceding decade had been wrong, useless and highly damaging...
...Economically, the ancien regime is falling apart, but people can't see what will take its place...
...Why is it that the Israeli economy has been, and remains, totally out of step with the world economy...
...But the government never realized real wage reduction, except in the short term...
...Even in the so-called "private sector," officially sponsored (or at least tolerated) monopolies and cartels abound...
...Eventually, in 1983-1985, the economy reached hyper-inflationary levels of 500-1000 percent per year...
...The organization of the country's labor force is also debilitating...
...Old systems and ideologies began to crumble and the economy entered a period of restructuring...
...Israel was not in this category...
...In short, the Israeli Jew is hobbled by a socio-political system whose values prevent emulation of the success of his/her Diaspora peers...
...But the positive side to the ESP was missing...
...Of course, this is being fiercely opposed by the vested interests, the monopolies and almost feudal fiefdoms that characterize much of the economy...
...Although both of these have long been considered impossible to achieve, the first, at least, is occurring under the impact of the recession of 1988/89...
...Instead, the prevailing ideology continues to idealize precisely the areas where the Jewish comparative advantage can not be brought to bear, such as basic agriculture and heavy industry...
...The cry is "if it can happen in Hungary, Poland and even in Russia, why can't it happen here...
...So it used inflation as a surreptitious way of reducing real wages...
...however, including production, finance, distribution and of course ownership, it has been highly centralized...
...And pressure from consumers to realize their rising expectations spurred the engine on...
...They are looking toward the 1990s with satisfaction and confidence...
...All it takes is for the Israeli government to get out of the way and for the U.S...
...The government deliberately spawned inflation in the 1970s as a method of financing a chronic budget deficit caused by overspending on defense and social services...
...After the initial trauma of the ESP's shock treatment wore off, an 18-month spending boom ensued—and then the recession, the same recession that the Western world had gone through in 1980-1982, finally arrived...
...Organized labor was always able to make back what the government grabbed—and more, because the demand for labor was always greater than the available supply...
...Inability to accomplish this explains why numerous South American parallels to the ESP have failed...
...The answers are equally unpleasant, at least for those who want Israel to run on the basis of outmoded ideologies...
...The answer is simple...
...With it the government effectively said, "We don't want to be a banana republic, and we can no longer afford to maintain the old system in which the government decides everything and the government takes care of everybody...
...Only half of the working-age population is in the labor force (at least officially...
...Entrepreneurial activity then converted these advances into wealth...
...How can we explain the global boom that occurred outside Israel's front door, and that yet failed to step inside...
...The major beneficiary of the 18-month spending boom—which resulted in increased tax funds from business income due to consumer spending—was, of course, the government...
...These are tough, even nasty, questions...
...This is because of low wages for unskilled workers, the lack of child care facilities and the short school day which results in the employment of fewer women...
...And of the half that works, 30 percent belong to the bloated public service...
...Why can Jews make money everywhere but in Israel...
...What the ESP did was something much more fundamental: It restored the confidence of the Israeli people in their government because the government (a) admitted it had been wrong, and (b) put its cards plainly on the table and stopped Why Has Israel Missed Out On the Global Economic Boom...
...This is proving much harder and will take time, but given the lack of any alternative—other than national economic suicide—the effort, too, is likely to be crowned with success...
...also many men and women are employed in the "black" or underground economy...
...Histadrut, the national trade union federation, owns 25 percent of the productive economy and many large firms are owned directly by the state...
...The Far Eastern countries achieved the greatest leaps forward...
...Until 1985, Israel was engaged in extricating itself from a malignant growth generated entirely at home—runaway inflation...
...PINHAS LANDAU deceiving its citizens...
...But all this is changing...
...Smart Israelis are sniffing out the new opportunities that are going to be the growth areas of the next decade...
...Consequently, it was forced to turn to nonlegitimate forms of taxation—inflation to reduce the real cost of its current spending, and borrowing from future generations to cover its deficit...
...Israelis, like other peoples whose governments were after their money, spirited billions of dollars abroad or held them in cash under their floor tiles...
...A healthier alternative to lowering real wages, especially in the long term, would be to reduce tax levels, especially in the corporate sector...
...The changes, however, are being wrought from below and are engulfing the leadership at the top—the opposite of the Soviet perestroika...
...Over time, the economy developed sophisticated protective mechanisms, in which wages and savings were linked either to prices or to the dollar (when the dollar was still king) so that inflation just fed on itself...
...The government found that its own tax revenues were plunging because it couldn't collect the money fast enough to keep pace with inflation...
Vol. 15 • February 1990 • No. 1
