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.

All Israeli markets are basically distorted. Government owns 93% of land. A self -serving, often corrupt government Land Authority and multi-layered planning authorities do not release enough land to accommodate growing demand, so prices keep soaring. It takes ten years to get a building project through the maze of planning authorities. Monopolistic construction unions and building materials manufacturers also greatly inflate prices. Housing is, as a result, beyond the reach of most young couples. Israel’s real estate is in a permanent artificial bubble created by a bank duopoly that, through its control of an assessors’ guild, keeps real estate valuations highly inflated to shore up the value of real estate and mortgage loans that constitute a large chunk of the banks’ balance sheets.

Besides the government domination of the economy, and the huge intrusive bureaucracy it spawns, the lower productivity of Israeli workers is caused by private monopolies that do not have to compete or be efficient, and therefore do not invest in better plant technology or in improving management and work practices.  This, plus major distortions in the allocation of credit to cronies by a monopolistic financial sector riddled with nepotism, directs most Israeli savings to highly leveraged and speculative investment in foreign real estate ventures (most ended disastrously). Here are the major reasons for the lack of domestic investment.

Labor markets also suffer from the extreme politicization of the workplace by highly corrupt monopoly labor unions. They prevent good management and interfere with work practices and discipline. A lot of work time is wasted on brutal union squabbles and internal union power struggles. They incite unnecessary strikes that cut productivity and damage the economy.

Poor high school and university education in Israel is a major threat to its future. Israel’s education is in a sorry state, as comparative international tests show, not because, as some claim, Israel is not spending enough per student. Government spending on education is second only to defense and parents have to shell out additional large sums on private tutors to repair some of the damage done by “public,” namely government, education. Moreover, as has been well established, money alone is not a major factor in teaching quality. A major reason for the poor quality of Israeli elementary and high school education is the prevalence of poor teachers. Two powerful teachers’ unions protect bad teachers from dismissal.


As the level of teaching, and therefore of student interest and discipline, declines, so does the status of teachers. Fewer talented people join the profession, so the quality of teaching keeps declining. A highly centralized and bureaucratized government educational system, controlled by an overstaffed army of bureaucrats and educational “experts,” chokes innovation and initiative as it does in other countries, only worse. This is because of the high degree of centralization and government control of everything in Israel, especially education.  The poor educational results of Israel’s governmental system are not surprising. What two thousand years of exile and oppression did not manage to do to make Jews poorly educated, a government educational system managed to do in only sixty years.

The universities, much more than in the US, are dominated by radical leftist faculties in the liberal arts and social sciences (not in the science faculties where Israel still excels). The tenure system has enabled a cabal of post modernist and Neo-Marxist professors — many trained in America by leftist American professors through the Fulbright educational exchange program — to totally dominate these departments by excluding anyone who does not hew their line. They brainwash their students’ minds by not allowing them access to any knowledge except that prescribed by their dogma. Israel’s best capital, its human capital, is being trashed by this mostly useless dogmatic university “education” that turns out students that can pontificate on Deride and Lacan and their anti-capitalist anti- Western dispensation, but lack even elementary knowledge and skills that can secure them useful employment in a modern economy.

In its first decade of the state, when Israel, with a poor population of 600,000, had to absorb hundreds of thousands destitute Holocaust survivors and over a million Jews that were deported penniless from Arab states, welfare assistance may have been necessary. But the continued dependence on government handouts, which never seem enough to advocates, even though transfer payments and welfare policies consume about 14% of the government budget, has caused more harm than good.

While perhaps helping the poor to keep ahead of the highly inflated prices of consumer goods , the welfare system has spawned armies of bureaucracies and a costly, wasteful and corrupting “welfare culture” with many advocates in academia, research institutes and the media. It is financed not only by citizens’ taxes but by huge contributions from American Jews through the UJA and other agencies. Since most of these funds are dispensed through government and The Jewish Agency — highly politicized and immensely inefficient bodies — they lack any accountability. Also, they are poorly managed and often result in wasteful and corrupt practices.


There may be more than a grain of truth to the charge that the well meaning aid given Israel by the UJA and by such welfare organizations as the Joint Distribution Committee has impacted negatively on Israel, in a similar way that foreign aid corrupted African or Latin American countries. Funds put at the disposal of the political classes and their associated elites allow them to totally dominate the economy and the culture and to exploit such charitable funds for nefarious political practices, damaging not only the efficiency of the economy but the respect for decency and honesty.

American Jews, as well as British and European Jews, have played a crucial role in the establishment of Israel and its protection. Despite the puzzling infatuation of many American Jews with “Liberalism” and with Obama, who out of love, no doubt, puts Israel in mortal danger, they are still Israel’s greatest defenders and allies. But they totally failed Israel by ignoring the grave internal problems that plague its polity and its economy. They even thoughtlessly promoted and aggravated these problems by supporting Israel’s left-leaning ruling elites, especially its political class, even though it was becoming obvious that the social and economic system they erected was causing grave economic and social harm to Israel.

A welfare culture, with its incessant drumbeat of a putative “equality” that inflames envy and division, as well as the annual anti-poverty festivals extolling the welfare state and demanding ever higher taxes, exact a punishing cost also from the poor. It has helped fashion a distorted, laggard economic system of the kind that government-run welfare systems inevitably spawn (extensive welfare cannot be managed without heavy bureaucratization and high taxes that shift resources from productive to anti-productive uses). It has been critically slowing economic growth, denying the poor the opportunities offered by a growing economy, as well as the dignity of earning their own livelihood. The welfare system has not improved the state of the poor in Israel. It condemned them to perpetual penury and dependence for three generations now. It is still doing so, with all the attendant social ills it foments: envy, bitterness, dependency and passivity.

Worse, welfarism, which succeeded decades of an even more disabling socialism and the nationalization of almost everything (including land, water and electricity), has perpetuated an economic culture where people prosper and become millionaires, even billionaires, not by serving people’s needs as in a competitive market economy, but by exploiting their political clout to gain monopoly powers and to extract huge monopoly rents that rob consumers, especially the low income ones. It has turned Israel’s financial sector into a great nepotism-riddled destroyer of wealth, and Israeli industry — with the exception of its hi-tech sector — inefficient and non-competitive (hi-tech prospers within a sort of competitive market bubble because it raises capital abroad and sells its products on the world markets, while enjoying the privilege of not being unionized).


Israelis are gradually, painfully realizing that their social and economic system has inflicted great harm on them and that they must change. Because of the security threats from abroad, their internal problems make them miserable and endanger their future. After the Bank of Israel 2010 report on the damage inflicted on the Israeli economy by the economic-political concentration of power in the hands of a few tycoons and their political allies, a young man from the Orthodox community Itzhak Elrov began a nation-wide protest when he opened a Facebook page in June of 2011 calling for the boycott of cottage cheese that sold then in Israel for double the price it sold in America (as did most consumer items, especially food items).

He received 100,000 likes and launched a major social protest, the greatest Israel ever had. Unfortunately, his protest was usurped by a group of leftist activists funded by the radical anti-Zionist New Israel Fund in an effort to exploit it to topple Netanyahu’s government. When the public realized that the protest was used to serve a controversial radical agenda, attendance at its rallies fell from 500,000 at its peak to a few thousands in the last rally, and petered out.

Still, the protest left a legacy demanding change. The new Netanyahu government that was just elected, against many odds and all the prognostications by the pollsters, seems determined to implement several vital reforms regarding the forbidding cost of housing, the high cost of living and the strategic monopolies in the financial sector. Finance Minister Moshe Kahlon, a former Likud minister of communications, who made himself a name by reforming the telephony sector and reducing its costs dramatically, ran in the last elections at the head of an independent list dedicated to economic reform. He won ten Knesset seats that gave him the political clout to be appointed to the key job of finance minister. Since Prime Minister Netanyahu has long advocated the reform of the Israeli economy, and has himself initiated some key reforms in financial markets, he helped Kahlon assemble, under his jurisdiction, key government agencies that will help him facilitate the hard to do reforms.

Reform will not come easily, however, since the power of the tycoons, the banks and their allies in the Knesset and the government bureaucracy is immense, and they also control most of the media. Reformers will need all the help they can get from the public and from independent pro-reform think tanks that can help inform the public about the need for reform and galvanize public opinion to apply pressure on Knesset members to assist, or at least not resist, reforms that serve the common good.


But the daily struggle to make ends meet in Israel and the need to participate in the defense of a country that is constantly under mortal threat limit the time and energy that Israeli citizens can devote to this urgent task. Also, their educational and political system and their media keep misinforming them and plant grave doubts in their mind that there is any need or hope for change.

American friends of Israel could help provide reform oriented institutions with resources and with information that can help them educate their fellow Israelis. The present political constellation provides a unique opportunity for change. It should not be missed


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