Israel’s Internal Challenges

The deadly security challenges facing Israel, the only country in the world openly threatened with extinction, have obscured other deep concerns about the viability of Israel’s economic system and its very negative impact on Israeli society.

It is seldom reported that besides the dangers from Iran and an inflamed Arab world, Israel also faces serious internal problems created by its dysfunctional political and economic systems. Political dysfunction has created deep divisions in the body politic that make Israel, according to Prime Minister Netanyahu, nearly ungovernable; while economic dysfunction caused by the overwhelming domination of the economy by politics has made a country with perhaps the best human capital, that has a potential to become one of the wealthiest countries in the world, a country where most citizens cannot earn a decent living, and are forced to live in penury.

Despite its justified reputation as a start-up nation with an astonishingly creative high-tech sector (about 20% of the economy) the majority of Israeli workers earn a median salary of about $1500 a month, while the costs of most goods and services, especially housing, are often higher than in New York. Low salaries and lack of chances for professional advancement in a nepotistic business sector, consisting mostly of monopolies owned by a score of tycoons, force many of Israel’s young (by some estimates close to a million in the last four decades) to leave the country because they cannot build a family on their measly salaries.

What is disabling the Israeli economy is the high concentration of political and economic power that was created during the seventy years of total socialist domination of its economy. Most businesses, large conglomerates, were built then either by the government or by the Labor federation, both belonging to Ben-Gurion’s Socialist party -- Mapai. Almost everything in the country was nationalized. Practically all savings had to be held in subsidized government bonds, and government allocated most of the credit. A hostile ideology made the government put every obstacle it could in the way of private enterprise, especially small businesses, reducing them to insignificance both economically and socially.

Eventually the spreading of corruption within the governing Mapai party and in the Labor Federation, and the many economic enterprises it controlled, caused Mapai to lose power in the mid-seventies, to the right-wing Likud party. When Likud stopped massively subsidizing government’s and Labor’s failing enterprises, they went bankrupt. They were then sold for a pittance to political cronies in a phony privatization process. Under the Likud and its statist, welfare-state orientation, the tycoons who took control of these enterprises expanded the dysfunctional system of inefficient price gouging monopolies, further curbing competition, reducing efficiency, and increasing the cost of living.

A Bank of Israel 2010 study reported that "some twenty business groups, nearly all family owned and structured as pyramids, control a large proportion of public firms (some 25% of firms listed for trading) and about half of market share." These business groups, the report warned, have "higher levels of financial leverage -- and therefore also of risk." These mammoth big business enterprises that managed to take control of Israel’s media colluded with politicians in imposing on the economy monopolistic practices that destroyed competition and efficiency, and drove prices sky high, twice, and often three times, prices in Europe or America.

Meanwhile the welfare system expanded . But despite billions of shekels poured into transfer and welfare payments (about NIS 55 billion out of the 400b. in a recent budget) the grave problems of poverty and income disparity in Israel have not been resolved, they have spread.

The major factors, then, that have been inhibiting the growth of the Israeli economy are government ownership of most land and natural resources, dysfunctional monopolistic financial markets, the control of the economy by big business monopolies structured as pyramids, and distorted labor markets. These, and the atrocious performance of the state’s educational system, all result in very low productivity (2/3 that of American workers).

Small businesses, the engines of growth in any economy, have been choked by taxes and regulations and starved for credit (which is the chief reason the outlaying Negev and the Galilee regions remain economically backward). Israel’s tycoons, a score of business operators and their bankers, lawyers and accountants plus tens of thousands of enablers -- politicians, and media persons, academicians, and the many who are provided by the tycoons with extremely high paying jobs, and other great benefits -- live extremely well, while most Israelis can barely make it. The tycoons get access to most credit in unsecured loans. They shamelessly extract astronomical salaries and bonuses, even when their enterprises fail and destroy people’s pensions -- in the billions. Tellingly, the Hebrew language has no word for “accountability.”

Israel suffers from perhaps the greatest income gap in the Western world. It inflames a destructive politics of envy and a general aversion to “capitalism” (which most Israelis believe is what their system is). It makes it difficult for Israelis to overcome their socialist-inherited pro big government and anti-business bias. .

The system pits interest groups against each other in permanent uninhibited struggles to gain government favors. It inflames an obsessive drive for a putative equality that has been used as an excuse to further extend the government’s reach through an extremely costly and wasteful welfare system that only aggravates and widens poverty by limiting economic growth and employment opportunities, keeping productivity and salaries low, and discouraging participation in the workforce.