Israel's financial media has lately shown considerable empathy for new Minister of Finance Yair Lapid. Even before the embarrassing affair of "Ms. Riki Cohen from Hadera", the correspondents and commentators started to try and "educate" Lapid, a man who by his own testimony is bereft of economic knowledge. If it seems that the finance minister lacked counselors and advisors, the economic press harnessed itself to the task of advising him on how to shape his policy.
To summarize what the economic press is proposing to Lapid, it is to initiate reforms to deal with what the press sees as the sources of evil in Israeli society and the economy: the existence of rich and authoritative powerful groups which sweep up resources, prevent competition, and distort the allocation of resources. When talking about the rich powerful groups, the intent is usually tycoons and workers committees at big government companies. Some of the writers add the IDF to the list, or at least the general staff, and some also include the haredi (ultra-orthodox) political parties and/or the settlers.
The size of the problems created by what the newspapers call "the incorrect allocation of economic power" is so great that most of the media advises Lapid to devote most of his policy to it. Although this conforms with the function of the media in a democratic society, the problem begins when the press tries to pour content into the word "reform". In other words, what is the socioeconomic regime that ought to replace the current inefficient and unfair regime.
On this matter, we should remind ourselves that the economic regime that we so desperately want to change now is the result of the steps taken in 1985-95 with the support of the same financial press. Conventional wisdom of the time was privatization; i.e. economy recovery was contingent on selling government assets, dismantling the Histadrut (General Federation of Labor in Israel) companies, and reducing the power of organized labor. But what we got in practice was an industrialized economy with high inequality, low productivity, and a very low level of social solidarity. The correspondents and commentators should learn the lesson of what happened then and be careful what they wish for.
We will demonstrate this by showing what happened, and is happening, in the labor market, which was affected by several of the reforms which were implemented. The structure of the market and rules of the game are the main factors which have created the poverty and inequality in Israeli society, and require major policy measures. The relevant questions are whether there is a link between inequality and labor productivity, for example. What is the incentive for workers to be more productive when the fruits of their labor do not accrue to them? What is the incentive for improving procedures if the workers have no job security? People who demand greater productivity should not complain only about the lack of competition, but also about the cannibalization in the Israeli labor market.
These things are relevant in view of the argument that fostering the small and mid-sized business sector is the solution to the economy's inequality and low productivity. But it is precisely in small and mid-sized businesses where job insecurity and the noncompliance of labor laws are more prevalent. People who want an efficient and thriving small and mid-sized business sector must at the same time ensure proper protection for workers and labor conditions in it. People who want labor "flexibility" should also ensure a social safety net and proper system of job training, because without them, workers have no incentive to switch jobs.
In the same context, the question should also be asked whether restricting the power of the so-called "big" workers committees by law will solve these problems, or, in addition to harming organized labor, will also create a situation in the restriction will give the government and employers greater power, which they will abuse, both against the workers at government companies and also against every other worker. In other words, where exactly is the border between what is permitted and what is forbidden for employers to do?
These are only some examples of the need for clear judgment and thought before enthusing over slogans about reform. Israeli society has too many examples of government reforms which won enthusiastic support from the media at the time, but which ultimately had dismal results for the economy and society.
This lesson should not be forgotten when trying to educate the finance minister.
Published by Globes [online], Israel business news - www.globes-online.com - on April 3, 2013
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