Prof. Sam Lehman-Wilzig – Israel’s Economy: The Best of Times, The Worst of Times
Israel used to be poor and egalitarian. The good news: it is no longer poor by any standard. The bad news: it ranks very high among the major OECD countries in the socio-economic gap between rich and poor. How did it get to this point? And how can it lower its inequality to a reasonable level?
The accepted index for measuring national economic inequality is called the GINI Index of coefficient (named after the Italian statistician Corrado Gini). It runs from 0 (total equality i.e., everyone has the same income – probably never achieved in world history) to 1 (very few mega-rich people while the masses are all dirt poor). The latter is a situation found in world “leaders” today such as South Africa, Namibia and Zambia, all with a GINI between 0.5 and 0.6, pre-Corona. While there isn’t (and can’t be) any consensus regarding what’s an “ideal” GINI, it is generally agreed that anything below .3 is quite an egalitarian society, like all the Scandinavian countries.
Among all OECD countries, Israel ranks 30th out of 39 i.e., a very high level of inequality. Even worse, among the really advanced world economies, only the U.S. has a higher GINI measure than Israel which has reached the nothing-to-brag-about index of 0.39 – even higher than all five of its decidedly non-rich neighbors: Lebanon, Syria, Jordan, the Palestinian Authority, and Egypt. Again, GINI does not measure a country’s overall wealth or poverty, but rather the internal gap between the richest and the poorest people in any given society. Wealthy and underdeveloped countries alike can each have a high or low GINI coefficient.
Israel’s present inequality wasn’t always the case. Until the 1980s Israel was indeed quite economically egalitarian – but also not very wealthy. The Likud’s coming to power in 1977 began to change all that, albeit by first utterly destroying the economy through hyper-inflationary policies (in 1984, inflation reached an annual 400%; that’s not a typo: four hundred percent inflation!). However, once its liberalization policy was put in the hands of the Treasury Ministry technocrats in 1984 (not the politicians), the economy began to take off. This ultimately pulled a large part of the citizenry into the middle class – but also left behind a not much smaller lower class that remained just around the poverty level.
With Israel’s “Start-Up Nation” evolving in the twenty-first century through a fast-growing high-tech industry, the gap between the wealthy and those with limited means grew steadily. Today, Israel’s GINI ratio constitutes nothing less than an economic siren that matters are reaching dangerous levels. This is ironic and also hard to fathom, given the macro-economy’s great strength.
How so? Israel’s shekel is astoundingly one of the strongest currencies in the world today (measured by purchasing power and currency appreciation over the past few years). Its high-tech export industry is booming. The Bank of Israel holds over $200 billion (yes, dollars) in its reserves. Inflation is very low (except for housing prices).
What’s the problem with an economy like that? There are two. First, economic research has shown that ultimately a high GINI index leads to economic weakness as it causes social turmoil and political instability (Israel already has the second: four elections between 2019-2021; its first serious rumbling regarding the first problem occurred in the 2011 “Tent City”/Social Justice protests in Tel Aviv and elsewhere). Furthermore, at some point the wealthy start changing policy to suit their own interests (e.g., lower progressive taxation), thereby raising the GINI Index even more. Nor do they even have to pass laws; their wealth can cause disruption. For example, the huge salaries and “exit” bonuses that high-tech workers get enables them to buy expensive housing, further pushing up real estate prices to the extent that middle class Israelis can no longer afford to live in the center of the country where most of the jobs are.
If any single person can be said to take credit for Israel’s economic boom – and terrible GINI numbers – it is former PM Netanyahu who pushed a policy of privatization in the 1990s, saved the economy as Finance Minister during the Second Intifada in the early 2000s, and then did nothing at all to ameliorate the growing socio-economic fault lines that clearly emerged in his decade-long second tenure as PM from 2009 onwards.
What can be done to metaphorically put GINI back in the bottle? There are three sectors that need uplifting. First, Israel’s Arab sector. Here some tectonic shifts have started to occur, with RAAM in the present government pushing hard for policies that provide more resources and fairer policies for its Arab constituents. Second, the ultra-Orthodox (haredi) sector. Here too (but with their leadership outside the government), there are moves afoot on the part of the governing coalition to break the rabbinic stranglehold in key areas so that more haredim can get a better education, be drafted into the army (where many can learn a useful trade or at least be hired later in sensitive civilian jobs), receive high-tech vocational training, and in general become more integrated (not necessarily assimilated) into Israeli society – all trends that will reduce poverty with declining birth rates, just as has occurred to many modernizing Arab-Israelis over the decades.
The third sector, though, is the largest and hardest nut to crack: Jewish Israelis of all stripes and ethnicities. To be sure, very few people in Israel are starving to death, homelessness is nothing like the phenomenon in the U.S., and everyone has very good health care, regardless of their economic situation. However, quality education lags seriously in the periphery and poor urban neighborhoods, and with the economy becoming more and more driven by higher education, those who can’t (or won’t) continue their education after high school are in serious trouble (not just in Israel, of course).
The new government has begun to address some of these issues, especially by raising social service transfer payments (for the handicapped, elderly etc.), and heavily investing in public transportation to help those who can’t afford a car. Nevertheless, it will take a comprehensive policy over many years to raise this third sector to the point where Israel’s GINI begins to seriously lose altitude.
As Dickens once wrote: “It was the best of times, it was the worst of times.” That was the opening line of his masterpiece A Tale of Two Cities. Israel’s tale is not of two cities but of two economies. One hopes that its economic story ends in a much more positive fashion.
