social protest, the Israeli government appointed a commission headed by economist Prof. Manuel Trachtenberg, to which it assigned the following tasks:
- Recommend changes in governmental policy priorities with the aim of lightening the economic burden on Israelis;
- Recommend changes in the tax mix;
- Recommend ways of increasing accessibility to social services;
- Recommend ways of increasing competition with the aim of reducing the prices of consumer goods;
- Recommend ways of implementing existing housing projects.
Each and all of the above issues are important, and yet they do not amount to a challenge or even to serious second thoughts concerning the reigning macro-social and macro-economic conception that has been guiding policy in Israel ever since 1985. That was when an emergency economic stabilization program was implemented, designed to deal with the runaway inflation at the time. The problem is that today, most if not all of those in charge of economic decision making and of economic analysis are still adherents of what we might call the “1985 doctrine.”
The main principles of that doctrine were presented by economist Avi Ben Bassat, former CEO of the Finance Ministry, in a book he edited in honor of Michael Bruno. Bruno, the doyen of Israeli economists at the time, who later went on to become head of the research department at the World Bank, was the one who drafted those principles: 1. Downsize the state and its budget; 2. Make economic growth the main goal of economic policy; and 3. Place responsibility for growth in the hands of the business sector, not the state.
The goal of the 1985 stabilization plan was to create an infrastructure to what was then considered the main road to economic prosperity: the existence of a significant group of large businesses that would not depend on government handouts, would enjoy extensive and cheap credit, and would compete in the international marketplace, thus raising the Israeli economy to the level of those of western countries. Up to then, Israel had been characterized by a developmentalist agenda, in which the state led economic and social development. Since then, the bon ton has been reducing the functions of the state, downsizing its budgets, and placing the levers of action in the hands of the business community. Downsizing meant that the budgets of social service ministries – especially education, health and housing — were drastically reduced and the criteria for social security entitlements became much more stringent. One of the levers of action handed over to the business community — insurance companies to be exact – was the distribution of credit, in the form of retirement fund monies, formerly controlled by the Histadrut (general federation of labor unions). Up to then, the state had been in control of major capital flows; since then, those flows have been under the control of a small number of so-called “tycoons” or “oligarchs.” Up to then, public policy had been oriented towards social, educational and economic development; since then, the major emphasis has been on economic growth – and as is well known, economic growth does not necessarily involve the entire society and economy: it can be achieved by pumping resources and credit into a few economic activities, such as the hi tech industries.
The doctrine of 1985 is not a uniquely Israeli invention; it was brought here from the United States and England, where it was labeled the Washington Consensus. That consensus, of course, was never fully consensual: this became clearer during the recent financial crisis, when the business communities, which were supposed to lead national economies, found themselves begging for the support of the various states, which acted as lenders/saviors of the last resort; when it became eminently clear that the exclusive emphasis on pumping up growth has resulted in growing inequality and the debilitation of marginalized economic sectors; and when the policy of downsizing the state had the effect of weakening health and education services, which are supposed to facilitate long-term universal growth.
The true believers in the doctrine of 1985 have some grounds for pride: for example, the development of the Israeli hi tech industries, considered by some as the locomotive of the Israeli economy, symbolizing as they do entrepreneurship, competitiveness, profitability and economic growth. Ironically, Israeli hi tech owes its very existence to massive budgetary outlays made to the military, which first developed the field for its own purposes. With the civilianization of some of those industries, beginning in the late 1980s, state allocations morphed into fat private exits, i.e., sales of the products developed thanks to government funds to foreign, mainly U.S. firms. The hi tech and defense industries, with their accompanying financial services, make it possible for between ten and twenty percent of Israeli employees to lead a life-style similar to that of persons in the upper-middle classes of Western countries. The problem is that together, hi tech and financial services employ no more than 13% of Israeli workers. Thus it came about that over the last decade, households in the upper ten percent income bracket are the only ones who saw their income increase, while all the rest saw it freeze or decrease. The latter owe their present standard of living less to their own income than to the low income of Chinese workers, who produce cheap consumer goods.
The doctrine of 1985 begot a great concentration of wealth; an erosion of the middle class, from one-third of households in 1988 to a quarter in 2009; a doubling of the poverty rate, from close to 10% in the early 1980s to 20.5% in 2010. Close to two-thirds of Israeli employees earn less than NIS 6,000. Labor unions have lost much of their power and hundreds of thousands of Israelis, Palestinians and migrant workers from around the world are employed under lamentable conditions. About ten percent of employed persons work not for the government office or private business where their work is performed, but by manpower agencies that pay rock-bottom wages without fringe benefits.
Parallel to that, the policy of downsizing the state begot an erosion of public funding of public health education, social security and housing services; a veritable “brain drain” to foreign countries; a persistent fiscal crisis for many of Israel’s local authorities; a debilitation of the peripheral areas of the country, due to the flow of most investments to the center of the country – and to financial adventure at home and abroad.
What needs to be done?
- Start a multi-year process of spreading economic growth, so that it is not concentrated exclusively in the center of the country and does not privilege only a thin layer of employed persons. This means, among other things, active involvement of the state in the initiation of economic projects in areas shunned by business people. Economic growth can be distributed, among other things, by returning much of the credit flows, and especially retirement fund monies, to public control, along with the establishment of criteria for the receipt of credit involving proof of the implementation of fair employment policies and the dispersion of investments throughout the various areas of the country.
- Start a multi-year process of raising wages throughout the Israeli economy. Traditionally, Israel has been a low-wage economy. It has one of the highest proportions of low-wage earners in the OECD, “low wage” being defined as not more than two-thirds the median wage (the wage in the middle of the salary scale). Raising wages will involve, first of all, improving the educational achievements of the entire population. It will also involve extending to all workers the benefits of state labor protection laws. Finally, it will involve putting an end to low-wage employment by the state itself, through manpower agencies. After many years of neglect, this last issue is presently being raised by the Histadrut.
- Start a multi-year process of upgrading the education of those two-thirds of Israeli youth who do not receive a quality education. Less than half of Israeli youth receive a high school matriculation diploma, and only slightly more than a quarter enroll in college by the age of 23. Upgrading can be achieved through the program outlined in the Adva Center document: “Making Education Work for All Children.”
- Embark upon a multi-year process of strengthening those state agencies that have been debilitated in the quarter century since the 1985 emergency stabilization program that initiated the processes of downsizing and privatization. State agencies such as the Ministry of Education, the National Institute of Insurance, the Housing Aid Department of the Ministry of Construction and Housing, the Employment Service, and the Vocational Training Department of the Ministry of Industry, Trade and Employment are especially in need of revitalization.. As already mentioned, greater involvement is needed on the part of the state in order to spread economic development and well being to all areas of the country and to all population groups.
Public debate over the demands of the protestors has so far focused too heavily on the technicalities of fiscal policy. The issues raised by the protestors are far more inclusive and cannot be addressed by small increments here and there. At issue is a macro-social and macro-economic doctrine that has led to the advancement of a small section of Israeli society, leaving the majority far behind. What Israel needs to do is to design is a multi-year strategy that aims at universality, equality and social justice.