Article Library / 2015

2014-2015 Annual Assessment

Israel’s 2015 election as it played out might be seen as struggle for message control. On one side were parties seeking to make the issue of security paramount in the minds of voters while others laid more emphasis on economics, quality of life, and issues of burden sharing. On the face of it, the struggle appears unequal. Although Israel has faced existential threats since its foundation, current turmoil and geopolitical developments seem to emphasize this all the more. On the other hand, its economic achievements since the end of the Second Intifada appear quite enviable. This is especially the case in relative terms. Israel’s recent economic performance in aggregate measures such as unemployment and gross domestic product (GDP) growth compares favorably to that of almost any nation in Europe during the seven years since the most recent global economic crisis began.

Yet, the level of discontent over pocketbook issues in Israel is such that the idea of framing an electoral campaign around them did not appear quixotic. The demonstrations during the summer of 2011 by middle class citizens over social and economic issues (principally burden sharing and food and housing costs) revealed a deep discontent. As in any country, there had always been a concern over matters of domestic economy in Israeli politics, but few expected such a vocal and muscular manifestation of distress. One result is that the election of 2013 was unusual in the extent to which economic concerns assumed a large role in both party platforms and rhetoric. The emergence of Yair Lapid’s Yesh Atid party with its 19-seat Knesset bloc bore testimony to the latent power of such concerns. And in the March 2015 election results, both Yesh Atid and the Kulanu party formed around former Likud minister Moshe Kahlon, each of which tended to emphasize the economic concerns of Israel’s middle class, scored 21 seats between them.

So which view is correct: the one that sees Israel as an island of economic strength enduring the worst that a global financial crisis could throw its way, or the view that Israel’s middle class is struggling against economic currents that are eroding the foundations upon which their lives are built?

The best answer is that both contain elements of truth and therefore support alternative interpretations of Israel’s economic well-being.

The national-level economic data appear compelling. The most recent Bank of Israel estimate of GDP growth in 2014 was 2.9 percent.3 This was a decline from the levels of previous years, themselves showing an overall declining trend, but was also recorded in a year that saw a 50-day war with Hamas in Gaza with resulting negative consequences for Israel’s production, trade and, most clearly, its tourism industry. While it was feared that the war might have hastened a recession in Israel, a direction toward which it had already seemed to be headed, the latest estimate of GDP growth in the second half of 2014 was an annualized rate of 2.3 percent, in part owing to a strong rebound in the fourth quarter.4 By comparison, the average estimated GDP growth among OECD countries was 1.9 percent for 2014.5

The data for other important aggregate measures show similarly positive relative performance. In the latter part of 2014, Israel’s unemployment was 15 percent lower than the OECD average. In early 2015, while average inflation was running below 1 percent among OECD countries, it was actually into negative bounds in Israel.6 And the tax wedge (the ratio between the amount of taxes paid by an average single worker and the corresponding total labor cost of that worker) was only about 20 percent in Israel compared to an OECD average of close to 40 percent.7

So one may present a credible case that concern about Israel’s economy is misplaced when looking at the country as a whole. Most tellingly, median income, the income of households at the 50th percentile, has been increasing. But this perspective is only one way of building a case to be judged by voters at the polls. More frequently, political platforms are not built upon economic aggregates. Particularly when intended as means for mobilizing people with similar concerns into a bloc, relative household positions as assessed by individuals may prove more salient. Moreover, it has been noted many times in the past that the situation that leads to greatest political ferment is not one of general economic decline but rather when economic prospects are generally good but fall short of either the experience or expectations of individuals and identifiable groups within the population.

In 2011, Israel’s year of mass public protest over cost of living, the price level in Israel was 5 percent above that of the OECD on average. In 2014, the difference had risen to 12 percent, as calculated by OECD, despite high profile efforts to deal with systemic causes of high prices, such as the limited number of competitors in the distribution chain for consumer goods or the release of more land for housing. Surely, a major contributory factor to this rise has been the increasing price of housing.

Just prior to the 2015 elections, State Comptroller Joseph Shapira released a report on the country’s housing crisis.8 Between 2008 and 2013 the cost of buying an apartment rose by 55 percent in relative terms, with rental prices up by around 30 percent during the same period.

Housing costs, which increased, on average, 2 percent annually between 1967 and 2008, grew by an annual average of 9 percent from 2008 to 2013. In practice, this requires an Israeli to pay the equivalent of 148 months’ salary to buy a home, compared to 76 in France, 66 in the United States, and 64 in Britain.9

The state comptroller warned of deleterious consequences for both the middle class and the disadvantaged: “The burden of housing expenditure may have far-reaching implications for the life and well-being of the individual, and his economic robustness. If these trends continue, they could adversely affect the whole economy.”10 The report stated that ministries acted without a multi-year strategic plan and without setting policy goals.

Similarly, the aggregate economic data of GDP growth and low rate of unemployment mask growing disparities in Israel. In 2011, the last year for which comparable data exist, only Chile, Mexico, Turkey, and the U.S. scored higher than Israel in measures of income inequality. In terms of disposable income inequality, after government taxes and transfers, Israel is second only to the United States among the 34 OECD countries. The ratio of disposable income between an individual in the 90th percentile and an individual in the 50th percentile (i.e., the median) in Israel is 2.32, the highest of all 34 OECD countries. Similarly, the ratio between an Israeli in the 50th percentile and one in the 10th percentile is 2.75. Here as well, Israel tops the list in terms of the largest gap between the two.11
These reports and findings suggest that one way to resolve the paradoxical result of having two different narratives being derived from the same set of economic statistics is to look deeper into matters of definition. Looking at aggregates and median values provides convenient shorthand for economists who find it expedient to term the groups lying between the 25th and 75th income percentiles as middle class. But this artificial construct differs from how sociologists or demographers might group households for comparisons of well-being.

Instead of grouping by post facto economic outcomes, social scientists have an interest in understanding how such outcomes may result from deeper proximate causes. In particular, households may be separated into groups by relevant characteristics shown by empirical studies to have influence on earnings. These would include the age, educational attainment, occupation, and ethnicity of household heads. Having done so with U.S. data, a recent paper from the St. Louis Federal Reserve Bank showed evidence of more downward economic pressure on households expected to be likely middle earners than revealed by standard measures of income and wealth.

A similar effect may possibly be at work in Israel as one of the most heterogeneous societies in the world. Even within just its majority Jewish population, the dimensions of economic, cultural, educational, and social difference are staggering. If there are those who because of age (the young everywhere are low income earners and are notoriously disadvantaged in today’s housing market in Israel,) education, profession and ethnicity feel themselves increasingly to be squeezed by economic conditions running counter to their own ability to thrive, the effect may both be real and a cause for further attention despite the economic prosperity Israel has experienced as a whole.

The figures on increasing income disparity in Israel suggest that a larger number of households may be finding themselves losing ground while a relative few are gaining. The more Israelis who find themselves shut off from the benefits of prosperity, the greater the political pressures may grow in years to come for policies to enhance competition at the expense of cartels, liberalize the banking and construction markets, improve transportation infrastructure further, and increase access to educational and economic opportunity.

The coalition agreement between Likud and Kulanu, led by Moshe Kahlon, shows the incoming finance minister’s focus on three major issues: housing, the banking system and food prices. Kahlon wishes to break the governmental near-monopoly and redistribute lands to rental housing agencies and the Jewish National Fund. Moreover, according to the agreement, all public tenders of state land must be done in the framework of the government’s mekhir lamishtaken (“price for new residents”) affordable housing program (In the beginning of July 2015, the special ministerial Housing Cabinet has approved this step).12 In addition, 80 percent of the resulting homes will be reserved for first-time buyers. The agreement also outlines ways to eliminate impediments in urban renewal projects and to reduce construction costs.13

Kahlon has also pressed for the separation of banks from credit card businesses. Credit card companies in Israel now only offer high-interest loans that do not pose a real competition to bank loans. Kahlon has argued that credit card issuers need to compete with the banks for making consumer loans. He is also examining ways to promote competition in credit issuance such as establishing an independent credit rating system or “banking ID card” and launching the use of debit cards in Israel.14

There have been plans dating back as far as 1966 to establish a central food authority to replace 15 government bodies currently monitoring food making and sales. The goal is to bring down prices and improve quality by eliminating agencies that often compete with each other and claim overlapping authority. The proposed food authority, an idea that was raised after the social-justice protests in 2011, would set standards for growing, selling, transporting, and storing food.15