The latest OECD report on the Israeli economy, published earlier this year, finds unequivocally that Israel's economic growth is far from being inclusive - that is to say, not all the population benefits from it equally. The report warns that unless this situation is corrected soon, within a few decades the income of Israelis will lag the OECD average by some 30%. That will be the price of the discrimination, of leaving entire groups behind, and of faulty long-term planning.
The stress laid by the OECD, but not just by them, on inclusive growth is one of the chief results of the financial and economic crisis that broke out in 2008 and led to a fundamental change in the perception of the meaning of growth by the main economic organizations. The International Monetary Fund, the World Bank and the OECD are not satisfied with economic growth, but point out that growth needs to be inclusive, such that all of society benefits from it, rather than it leading to wider economic gaps.
Warning
The OECD report, released in March, does heap praise on Israel's growth and employment performance, but it also expresses concern and criticism about social gaps, the poor state of infrastructures, the standard of education in Israel, and the low level of social services provided to Israeli citizens. The organization warned that the standard of living in Israel would be harmed unless there was swift change in economic and social structures.
The OECD's warning raises two questions: What are the processes leading us to a situation in which we fall behind other countries in the long term? And can these processes be changed through policy changes and reforms?
How do you determine whether growth is inclusive? The OECD has three criteria. The first is the extent to which growth contributes to reduction of poverty and greater equality in income distribution, and, beyond that, how much it contributes to social solidarity in each country. The second is to what extent growth benefits all geographic areas in a country and narrows gaps between different areas. The third and last is the extent to which growth is balanced with regard to the various sectors of the economy, between the part that operates in the domestic market and the part that is overseas-oriented, between different industries, and between industry, trade, and finance.
Anyone familiar with the data on the Israeli economy and Israeli society knows how far we are from fulfilling even one of these criteria. Growth in Israel has not contributed to reducing poverty and inequality, and it could be argued that it has even increased them. Israel's outlying regions remain behind, both in terms of per capita income and in terms of quality of services. The labor market is characterized by extreme polarity when it comes to technology, productivity and wages, while the education system perpetuates this situation and creates huge gaps in the acquisition of skills.
If Israelis want a concrete example of what an ideal country looks like according to these criteria, they can examine the World Economic Forum Inclusive Development Index, according to which Norway has the most inclusive economic growth, thanks to the structure of its labor market, its high quality education system, its sovereign wealth fund, and so on.
Social shifts
Any report on the Israeli economy in recent years, including the annual report by the Bank of Israel, immediately identifies the groups being left behind in Israeli society: Arabs and haredim (ultra-Orthodox Jews). The incidence of poverty in these two groups is very high: 45% among haredim, and 49% among Arabs. These rates turn Israel into the country with the highest incidence of poverty among the OECD countries. The OECD's economists have no difficulty in identifying the source of the problem: a very low level of skills taught to children in these groups, and the lack of any genuine programs for improving their capabilities.
The causes of the situation of these population groups, however, do not lie in some policy that can easily be changed. The fact that Israeli society is organized in "sectors", and not on the basis of citizenship or residence, is a result of deliberate policy that goes back decades. The question is whether the political will exists to abolish the situation in which the "sector" is responsible for mediating between government policy and the citizens of the country.
All this means that narrowing the gap between the real and the ideal is not simple, and the question arises whether it is possible to adopt the OECD's recommendations for Israel, such as imposing the core school curriculum on the entire haredi population, or ending the 70-year old policy of excluding Arab citizens from large parts of the Israeli labor market, through an active policy of skills training and substantial improvement in the teaching of Hebrew. The present government has allocated NIS 15 billion for a five-year plan for the Arab sector, but this sum does not provide extra budgets to correct the discrimination that has prevailed up to now, but is only intended to provide budgets in accordance with the proportion of Arabs in the population.
For the present, the answer to the question is negative, at least to go by the declarations of government ministers and the heads of the coalition parties. The tendency is to say that, excluding Arabs and haredim, our situation is excellent. The upshot is that the government prefers the risk of the standard of living in Israel falling behind to a political and social shake-up.
The fact that the government refrains from making the required changes in the Israeli economy does not necessarily rule out the possibility of steps in the desired direction. It may be that the markets and the public will adopt behavior that helps to make growth more equitable and inclusive. Such things have happened in the past, the outstanding example being the continuing reduction in gaps between Jews of different origins in Israel, despite the efforts of the media and of some academics to maintain them in the public's mind.
Five years ago, Prof. Momi Dahan published the results of a study in which he examined the issue of wage gaps between Israelis of ashkenazi and of sephardi and eastern origin in 2011. Dahan showed that from the mid-1990s the gap between the two groups began to close, reaching 27% at the end of the period, down from 40% at the start. Moreover, Dahan found that the proportion of sephardi and eastern Jews in the top 10% of wage earners had for the first time become the same as their proportion in the population. Dahan's explanation for these phenomena was that the high return on educational qualifications drew young sephardi and eastern Jews to invest more in education, including in higher education.
Talking to "Globes", Dahan stressed that the expansion of the higher education offering in Israel, through the colleges of further education, had made a decisive contribution to this development, and had enabled many young people to take advantage of the greater return on academic qualifications. Dahan further stressed that the narrowing of income gaps had continued after 2011, and that among women it had shrunk to a few percentage points.
Another change that has taken place through the initiative of the citizens themselves is the sharp fall in the birthrate among Arab families in Israel. Israeli Arabs began to change in their perception of the desirable size of a family back in the 1960s, and the average number of children per Arab woman has fallen from nine or more to an average of 3.3 today, about half the number of children per haredi woman.
Haredi society is also undergoing big changes, with greater participation of both women and men in the workforce. Some of these changes are hard to estimate, but it can be presumed that tensions within haredi communities in Israel are growing. Research by Alex Weinreb and Nachum Balas of the Taub Center for Social Policy Studies published last May showed a trend of a shift of haredi children from schools belonging to this sector to state schools, indicating a decline in willingness to comply with haredi behavior patterns.
These changes could have a bearing on long-term projections of the size of the haredi community and the behavior of individuals belonging to it. The forecast that haredim will represent a quarter of Israel's population could prove to be exaggerated, or alternatively it could prove to be accurate, but the rate of employment among haredim will become equal to that among the population at large. A change in their employment characteristics could be a result of government policy, but also, as we have suggested, a result of processes that start from below, such as the desire of some of this population to escape a life of poverty.
Productivity, polarization, and class divides
Even if the ethnic issue has become less acute, and major social changes are taking place, the Israeli labor market continues to manifest great inequality and huge gaps in productivity between different industries. The problem is not ethnic gaps, but gaps between classes that threaten the economy's productivity and social solidarity, and could lead to the dismal outcome that the OECD report points to. By the same token, the problem is not just "Arabs and haredim," who aspire to change, as can be seen from the birthrate figures in the Arab population and the switch of haredi children to state schools. The problem is structural, not sectoral.
The structural problem surfaces in the findings of two Taub Center researchers, Gilad Brand and Eitan Regev, who examined developments in productivity and wages in the different sectors of the economy. They found that starting from the 1990s there was a shift of workers who had been laid off from traditional industries with low levels of technology to manufacturers and service industries that were not in competition with corresponding companies overseas. The result was a disconnect between these sectors and sectors based on advanced technology. Mobility of workers between one part of the Israeli economy and the other was practically zero.
On the same subject, it is worth citing the conclusions of an article published two years ago by two Haifa University researchers in the journal "Israeli Sociology". According to Dr. Tali Kristal and Dr. Alina Rosenfeld-Kiner, a process of polarization has been taking place in the local labor market since the mid-1990s, parallel to similar processes in most industrialized economies. "Polarization" refers to a situation in which there is a substantial decline in the supply of mid-range salary jobs in the economy, and a rise at the two extremes of the wage distribution curve.
According to the researchers, technology explains only part of the polarization phenomenon, because unlike in countries like Israel, the US and the UK, where polarization has been swift and sharp, in countries with strong trade unions, comprehensive government employment policy and enforcement of labor laws, polarization is more moderate. The polarization phenomenon does partly stem from the entry into the workforce of workers with low levels of skills and low wages, but that reflects the existence of two economies in Israel: a high-tech economy; and a traditional economy with low productivity. As mentioned, mobility between the two economies is limited, and so in this respect changes and shifts beneath the surface in haredi and Arab society will probably not suffice.
To judge from current economic policy, the bipolar structure of the Israeli economy will not disappear in the near future. Moreover, Israel, like the other industrialized countries, is entering into the new digital revolution as artificial intelligence takes hold, replacing workers with machines. The fear is that this will mean a loss of jobs at all wage levels, but particularly in the mid to low range. The Israeli economy is not close to being ready for this. Perhaps in the future government ministers will claim that, discounting computers and robots, our situation is excellent.
Published by Globes [online], Israel business news - www.globes-online.com - on July 2, 2018
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