Poacher Turned Gamekeeper

New Israeli finance minister Yair Lapid is learning that it is much easier to be criticising from the sidelines, than it is to be taking action from within the government.  Having spent much of his life as a journalist and TV presenter which had him criticising governments and government policy, his switch into politics has given him the opportunity to prove his own credentials.  The poacher turned gamekeeper is discovering that life in the political goldfish bowl is not quite as easy when he is having to fend off the arrows, as it was when he was shooting them.

Lapid has finally presented his budget for 2013-2014 for government approval.  When he was playing politics from outside governmental circles as a journalist, he was mostly focused on what the government was doing to improve social equality, and to address the needs of the weakest elements of Israel's society.  In his position as the minister of finance, he now knows that this nut is a tough one to crack.  How does a responsible government work to improve social equality, while also working to close the huge budget deficit and finance the mountain of government debt all at the same time?  The resulting budget prepared by Lapid and approved by the Knesset is much more about fiscal responsibility, than it is about helping the poor and the weak in Israeli society.  It includes increased tax rates, increased VAT, increased taxes on alcohol, tobacco and other luxury goods, and huge swathes cut from government spending.  Even the hallowed defense budget had three billion Shekels cut from it.  The result of this is that Lapid's popularity has dropped dramatically since he assumed his job as minister of defense.  In mid-April, Lapid was the most popular politician in Israel, topping even Prime Minister Netanyahu.  By the time May rolled around, Lapid found himself the target of anti-government street protests promoting social equality.  His popularity has steadily plummeted in the process.

The job of Israeli finance minister is something of a thankless task.  This is especially true for a finance minister who wishes both to promote economic stability and growth, while also helping the weak and vulnerable.  The difficulty was emphasised by reports that were published recently about key aspects of Israel's economy.  A report published by the Organisation for Economic Cooperation and Development (OECD) has placed Israel first in poverty rate amongst developed nations.  The report said that one in five Israelis live in poverty, and one in three Israeli children live in poverty.  Israel's State Revenue Administration of the ministry of finance published its own report which showed that half of Israeli wage-earners do not earn enough to pay tax.  Given that the tax threshold in Israel is NIS 4,700 (less than US$ 1,300) per month, this is a sad statement about the conditions that people are forced to work in.  When considering that unemployment in Israel is at a relatively low 6.9%, there is not a great deal of hope that the economic situation can improve dramatically by some miraculous boost to the number of people in work.  The Boston Consulting Group published a statistic of its own when it said that Israel has the 10th highest number of millionaires in the world, when measured as a percentage of households.  Fully 3.8% of Israeli households are millionaires.  This simply reinforces the huge gap between rich and poor in this country.

Many point to the huge military burden that Israel has had to carry over the years as the main contributing factor to the current economic challenges.  It is true that with a defense budget of NIS 50 billion (approximately US$ 13.5 billion) and making up around 6% of GDP, Israel does indeed carry a huge defense spending burden.  This is exacerbated by the fact that the ultra-Orthodox and Arab sectors have significantly lower employment than other sectors of society, and earn substantially less than other groups.  This places a heavy burden on the social services for these population groups, who boast larger families and much lower income.  While addressing the earning power of the ultra-Orthodox and the Arabs will not be a magical solution to heal all Israel's economic woes, this must certainly be one of the actions to help the economy back to full health.

There is no easy fix to the Israeli economy that will give an answer to all the questions in the short-term.  The solution is longer-term austerity and responsible fiscal policy.  Even this will not answer all the economic questions that are being asked of our finance minister, but it is important to create an environment for economic growth.  This will give the best possible platform to provide as many possible answers to the numerous questions being asked.

In 65 short years, Israel has built its economy from zero to one which is now in the elite club of the most developed economies in the world in the OECD.  This is nothing short of a miracle, and has been constructed with no help from natural resources, and with maximum exploitation of human capital.  The enormous economic growth and success that Israel has experienced can be attributed in no small way to the hard work and innovation of the average Israeli.  The time has now come to re-examine this approach, and to reinvent it in order to move forward with the new set of realities.  Israel stands on the verge of a natural gas boom which is set to provide noticeable impetus to the economy.  The ultra-Orthodox community once numbered a few tens of thousands, but is now 10% of the population and growing.  The model adopted by the modern Orthodox community, that allows them to live a traditional Jewish life and work to contribute economically, needs to be expanded to the ultra-Orthodox community as well.  Attention needs to be paid to the growing Arab sector to ensure that it makes its fair contribution to the economy.  Weaker people in our society need help, and those who spend their days working to make a living should be entitled to make a living from the work that they do.  The country needs to be able to continue to protect itself, without the defense budget crippling the economy.  These are only a few of the enormous challenges that need urgent addressing.

With all of this in mind, there are some who wonder why Yair Lapid was so eager to take on the role as minister of finance.  Is he really up to this enormous task, and can he make a real difference?  Time will only tell.

A Country of Working Poor

The Secretary-General of the Organisation of Economic Cooperation and Development (OECD), Mr. Angel Gurria, recently visited Israel as part of Israel's application process to join the organisation. During his visit he issued a report regarding the current state of Israel's economy, and improvements that need to be made to bring Israel into line with other OECD member nations.

I was very surprised to discover that, when Israel joins the OECD, it will be the poorest member country of the OECD. A statistic that was quoted is that 20% of Israel's population is more than twice as poor as the average citizen of the OECD. For me, these statistics were surprising and somewhat frightening. I have always viewed Israel as an economically developed country. Israel has an average GDP (Gross Domestic Product) per capita of more than $28,000 per year which places it 36th on a list of over 200 countries around the world. Somehow, this does not seem the same country that will be the poorest in the OECD when Israel is admitted, hopefully later this year.

This seeming inconsistency has forced me to think a little more about the Israeli economic reality. There can be no doubt that, economically, Israel has produced a miracle in achieving all that it has in the short space of 62 years since independence. In 1948, Israel was a backward, small, underdeveloped country with no economy to speak of. It was reliant upon funding from the Jewish Diaspora and other sources of income from abroad for even the most basic requirements. During the last 62 years , Israel has developed a sophisticated banking and economic infrastructure including sectors and companies that are at the leading edge of their respective fields, and highly sought after around the world. All of this has been achieved while being forced to spend tens, and even hundreds of millions of Dollars on defence and security just to keep the state alive.

On the other hand, there are many in Israel who find making a living an impossible task. The fact that more than half of the work force is paid less than NIS 4,000 (a little more than US$1,000) per month is a frightening statistic. In certain social segments, more than 60% of citizens are living below the poverty line. These are numbers that cannot, and should not, be tolerated in a developed modern society. So even if the average GDP is highly respectable, this average hides a very nasty and important piece of information which is size of the gap between the rich and poor. It is true that the gap between rich and poor is expanding in most countries, and Israel is no exception. The problem is that Israel seems to have a much wider gap, and a much more urgent need to address the problem.

It is a well-known fact that making a living in Israel is harder than in many other countries. This is partially because of the Middle Eastern culture which is very obvious in the business and work environment. Things that are taken for granted in the western countries, from which many of us hail, are not necessarily regarded as normal behaviour in Israel. Add to that the highly bureaucratic way of doing things and the fact that each and every action requires lengthy negotiations and explanations, to contribute to a highly frustrating atmosphere. The punitive tax regime is also well-known, with Israel appearing 34th on a list of those countries having the highest tax burdens. The defence spending, it seems, is being financed by the average worker. A joke which is often told by new immigrants to Israel turns out to be true: How do you make a small fortune in Israel? Arrive with a big fortune !

The thing that bothers me most about the financial hardships suffered by many Israelis, is the fact that Israelis are not generally lazy people. Most of those struggling to make a living are employed, sometimes even working more than one job. The problem is that employees are often not earning a living wage, even to live at a very basic level. The cost of living in Israel is much higher than the average person can afford. Tel Aviv is the 17th most expensive city in which to live in the world according to the Economist Intelligence Unit's 2009 Cost of Living Survey. This effectively makes Israel a country of working poor.

One of the criticisms of Israel mentioned by the Gurria report, is corruption. Although Gurria refers specifically to the arms and weapons industry in which Israeli companies are very active, the truth is that corruption in Israel goes a great deal further than this. Israel is a small environment where everybody knows everybody, and those who have the right contacts and know the right people seem to be the ones who make a better living. The ordinary man in the street, who works a hard and honest day, does not always seem to come out with enough money to live on. So those with the connections get richer, and those without connections get poorer. This is endemic in Israeli society from the top down. Many well-known politicians and leaders of business and industry have been proved to be acting in a dishonest manner for the purpose of enriching themselves. On many occasions, these individuals are well-off to begin with, so their corrupt behaviour seems difficult to justify. Behaviours and business practices which would never be acceptable in other countries, seem to be absolutely normal in Israel. The corruption and mutual back-scratching that goes on at the upper echelons of society, seem to come at the expense of the ordinary man, whose only objective is to make enough to feed his family.

Despite the financial hardships that plague many people, Israeli society is a surprisingly happy and positive place to live in. The advantages of living in a Jewish environment seem to outweigh the disadvantages for many people. To survive, people show a level of flexibility that appears unparalleled elsewhere. This is epitomised by the Russian immigrants who arrived in Israel with very high levels of training in fields which could not be put to use upon arrival. There were too many scientists, doctors and musicians to employ in a country the size of Israel. So those who could not find jobs in their fields became cleaners, supermarket shelf-packers and anything else that they could find. Many people with second jobs are also working in their spare time on a pet project that they hope will be the next big thing in the Internet or high-tech field. There are numerous non-profit organisations out there helping to make life easier for as many families as they can help. Although this should not be necessary in a country like Israel, it is uplifting that there are so many who go out of their way to help others enjoy an easier life. The proof is in the result, which shows many Israelis returning to live in Israel from abroad, and many new immigrants continuing to make Israel their new home.

The benefits for Israel of joining the OECD have been presented as greater international acceptance, and involvement with a respected international organisation. It is my hope that membership of the OECD may go further, and somehow help the ordinary Israeli. In order for this to happen, institutional corruption needs to be rooted out of Israeli society. In addition, the amount that people earn for a hard day's work needs to be sufficient to allow an average family to live on. When this happens, Israel will make the real economic progress that is so badly needed to add even more to the quality of Israeli society.