Commentary Magazine


Topic: Israeli economy

Bibi, Inequality, and the Israeli Economy

The conventional wisdom about Israel’s elections is that Prime Minister Benjamin Netanyahu will lose tomorrow because he has not paid sufficient attention to domestic and economic issues while concentrating almost completely on the need to address security, specifically the nuclear threat from Iran. Considering that he has spent the last few days of campaigning speaking even more assertively about refusing to make concessions to the Palestinians, Netanyahu clearly disagrees with that conclusion. But that’s the point that New York Times columnist Paul Krugman makes in his pre-election column in which the economist and former Enron advisor (as the Wall Street Journal’s James Taranto never tires of calling him) damns Netanyahu’s handling of the economy which he says has bred more inequality. There is some truth to Krugman’s analysis of what is wrong with Israel. But that answer to a very real inequality crisis is the opposite of what he thinks: more capitalism, not more statist economics. And that is why, despite his lack of emphasis on the issue, Netanyahu has a better grip on the problem than Krugman.

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The conventional wisdom about Israel’s elections is that Prime Minister Benjamin Netanyahu will lose tomorrow because he has not paid sufficient attention to domestic and economic issues while concentrating almost completely on the need to address security, specifically the nuclear threat from Iran. Considering that he has spent the last few days of campaigning speaking even more assertively about refusing to make concessions to the Palestinians, Netanyahu clearly disagrees with that conclusion. But that’s the point that New York Times columnist Paul Krugman makes in his pre-election column in which the economist and former Enron advisor (as the Wall Street Journal’s James Taranto never tires of calling him) damns Netanyahu’s handling of the economy which he says has bred more inequality. There is some truth to Krugman’s analysis of what is wrong with Israel. But that answer to a very real inequality crisis is the opposite of what he thinks: more capitalism, not more statist economics. And that is why, despite his lack of emphasis on the issue, Netanyahu has a better grip on the problem than Krugman.

Though references to Israel’s economy in the mainstream media often assume it is a mess, Krugman deserves some credit for pointing out that this is simply untrue:

Israel’s economy has performed well by the usual measures. It weathered the financial crisis with minimal damage. Over the longer term, it has grown more rapidly than most other advanced economies, and has developed into a high-technology powerhouse.

But, as Krugman is quick to point out, many Israelis are deeply disturbed by what they see as rising inequality with the people at the top doing well while poverty increases. But the main source of dissatisfaction is that the middle class is increasingly squeezed by the high cost of living, especially with regard to a shortage of affordable housing in the country’s main population centers.

But, as Krugman rightly notes, the sort of rhetoric that we are used to hearing about inequality from American liberals carrying on about the “one percent” who enjoy riches denied others doesn’t really apply to Israel.

At the other end, while the available data — puzzlingly — don’t show an especially large share of income going to the top 1 percent, there is an extreme concentration of wealth and power among a tiny group of people at the top. And I mean tiny. According to the Bank of Israel, roughly 20 families control companies that account for half the total value of Israel’s stock market. The nature of that control is convoluted and obscure, working through “pyramids” in which a family controls a firm that in turn controls other firms and so on. Although the Bank of Israel is circumspect in its language, it is clearly worried about the potential this concentration of control creates for self-dealing.

Still, why is Israeli inequality a political issue? Because it didn’t have to be this extreme. …

Meanwhile, Israel’s oligarchs owe their position not to innovation and entrepreneurship but to their families’ success in gaining control of businesses that the government privatized in the 1980s — and they arguably retain that position partly by having undue influence over government policy, combined with control of major banks.

Krugman is right about this. When Israel began to privatize its bloated and mismanaged government-run industries after it woke up to the reality that its founders’ belief in socialism was misplaced, what happened bore a resemblance to the aftermath of the collapse of the Soviet Union and with similar consequences: the creation of a very small class of moguls who benefitted from the windfall.

But the implication here is that somehow this is Netanyahu’s fault. He’s been prime minister a long time, but not that long. Most of the blame for the distribution of goodies to the elites belongs to the previous generation of Israeli leaders, especially Shimon Peres and the late Yitzhak Rabin.

But though Krugman complains that Israel doesn’t do enough for the poor, even he has to acknowledge that high poverty rates are mostly the function of the problems of the country’s Arab minority and its ultra-Orthodox Jewish population. Many Arabs remain trapped in a cycle of poverty that is rooted in the conflict over Israel’s existence and cultural problems that are seen in surrounding Arab countries. Many ultra-Orthodox men don’t choose to participate in the work force out of a misplaced belief that it is wrong for them to do so rather than to engage in religious studies.

Yet that doesn’t gainsay the fact that the country has a real problem with a cost of living and the lack of social mobility for the middle class. Angst about this is exacerbated by the country’s long embrace of egalitarian ideals. It is also true, as Krugman says, that there wasn’t much inequality up until the early 1990s. But that was because before that point Israel was operating on a socialist economic model that made it difficult for anyone to make money. If historically capitalism invented an awareness of poverty because before its appearance almost everyone was poor, the same applies to any discussion of income inequality In Israel prior to the reforms that were instituted.

But contrary to Krugman, the cure for this isn’t a retreat from capitalism. Netanyahu was primarily responsible for saving Israel’s economy in the early 2000s when, as finance minister in Ariel Sharon’s first government, he spearheaded reforms that helped make it possible for it to become the “Start-Up Nation” that is the envy of the world’s high-tech centers. As the primary advocate in Israel of what Krugman correctly calls “free market economics,” Netanyahu is competing against a generation of fellow politicians who remain mired in the rhetoric of entitlement and big-government solutions. Their talk pleases those who are nostalgic for the Israel that was egalitarian but was so economically backward that visitors were asked to bring jeans and consumer goods with them. That is a path to more problems, not greater and more widespread prosperity.

If the next Israeli government strays from free market policies, the result won’t do much to make it more egalitarian. But it will be poorer. And that is something that even Netanyahu’s critics won’t applaud.

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Natural Gas Strengthens Israel, But It Won’t End Conflict

Give the New York Times credit. Though much of the rest of the journalistic world has long ago given in-depth coverage to the story of how Israel’s development of natural gas fields is in the process of making it an energy superpower, the so-called newspaper of record eventually got around to it. In a story published today, the Times discusses how the development of the offshore Tamar field and the even larger Leviathan site is making the Jewish state energy independent and putting it in a position to become a major source of gas for neighboring Arab nations and eventually Europe. This is an enormous achievement. But despite the implications of this event, the Times is unfortunately exaggerating one aspect of it. While the gas may make Israel even stronger and solidify its ties with moderate Arab nations, it won’t end the conflict with the Palestinians or the rest of the Arab and Muslim world.

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Give the New York Times credit. Though much of the rest of the journalistic world has long ago given in-depth coverage to the story of how Israel’s development of natural gas fields is in the process of making it an energy superpower, the so-called newspaper of record eventually got around to it. In a story published today, the Times discusses how the development of the offshore Tamar field and the even larger Leviathan site is making the Jewish state energy independent and putting it in a position to become a major source of gas for neighboring Arab nations and eventually Europe. This is an enormous achievement. But despite the implications of this event, the Times is unfortunately exaggerating one aspect of it. While the gas may make Israel even stronger and solidify its ties with moderate Arab nations, it won’t end the conflict with the Palestinians or the rest of the Arab and Muslim world.

The development of the offshore fields turns the old joke about Moses leading the Jewish people to the only country in the region without oil on its head. As Arthur Hermann wrote in the March issue of COMMENTARY, these new sources of energy have the ability to make an already growing and strong Israeli economy even greater. Though there are serious questions about Israel’s ability to, even with the help of foreign investors and contributors like the Texas-based Nobel Energy Company that runs Tamar, properly exploit this bonanza, there are also reasons to be concerned about whether the rising tide of hate for Israel in Europe and elsewhere will interfere with the ability of global investors to help fund the effort.

But even the most gloomy pessimist about Israel’s prospects must concede that the energy boom has the ability to both further energize the Jewish state’s economy and to provide a basis for solid economic partnerships with Egypt, Jordan, and the Palestinian Authority.

But some of the optimists quoted in both the COMMENTARY feature and in the Times need to scale back their expectations with respect to the connection between natural gas and peace. Anyone who thinks the prospect of profitable economic partnerships with Israel will convince Palestinians to give up their fight to destroy it have not been paying attention to the history of the conflict.

From the earliest days of the movement that saw the Jews return to their historic homeland, Zionists have dreamed about economic cooperation providing the magic formula that would persuade the Arabs to accept the new reality. In particular, the pre-state Labor Zionist movement was heavily invested in the notion that the Palestinian working class and agricultural laborers would find a common bond with their fellow workers among the Jews and reject the calls for violence from their leaders who came from the local landowners. But this hope went unfulfilled. Far from seeing the obvious benefits to their livelihood that ought to follow from the work the Zionists did in developing the country, Arabs viewed each new economic achievement or infrastructure developed as a threat. The Arabs may have wanted more prosperity but they valued their conception of national honor—which viewed any thought of Jewish sovereignty over even an inch of the country as an intolerable insult and injury—far more than their pocketbooks or the wellbeing of their families.

That trend continued through the period of the pre-state era past the creation of the Jewish state and to the present day. Indeed, were the welfare of individuals or even of plight of the 1948 refugees and their descendants a national priority, the Palestinians would have long ago given up their futile calls for a right of return that would destroy Israel and instead concentrated their efforts on resettlement and acceptance of peace offers that would give them a state on almost all of the land outside of the 1967 lines they claim.

If economic development meant anything to Palestinian public opinion Israel’s retreat from Gaza would have turned out very differently. Though foreign investors purchased the greenhouses to be left behind by departing Israeli farmers, the structures were all torched within hours of the retreat in an orgy of destruction. Nor would former Palestinian Authority Prime Minister Salam Fayyad have found himself a man without a party or even a constituency when he pushed for good government measures and an end to the official Fatah corruption that blights the West Bank.

The natural gas fields do have an indirect impact on the chances of peace. By making Israel stronger, they give the Jewish state the ability to hold on rather than making rash concessions that will only allow the Palestinians to continue the conflict in the future on even more advantageous terms. The “iron wall” that Ze’ev Jabotinsky wrote about in the 1920s when he dissented from Labor’s optimism about peace with the Arabs continues to be the only factor that can persuade Arabs to end the conflict as it did with Egypt and Jordan’s governments though most inhabitants of either country are implacably hostile to Israel.

Friends of Israel should be heartened and its foes discouraged by the development of the gas fields. But so long as Palestinian nationalism remains inextricably tied to the cause of eliminating the Jewish state no matter where its borders are drawn, they won’t end the conflict. Nor will they make it easier for Europeans who believe the lies about Israel being a colonial, apartheid state to merely do businesses with it rather than aiding those working for its destruction.

Israel must stand up for its right to its land, not merely its right to security or the possibility that it can help supply Europe with an alternative to Arab or Russian energy sources. If it doesn’t all the natural gas in the world won’t stop the international community from seeking to destroy it.

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The Markets Vote For Netanyahu

Israelis go to the polls tomorrow and, as we’ve noted previously, there’s not any doubt about who will lead their next government. The voters appear poised to give Prime Minister Benjamin Netanyahu a qualified endorsement, and while his own party appears to be getting fewer votes than expected, the factions that made up his current government will collectively get what amounts to a landslide victory over the prime minister’s left-wing and Arab critics in the Knesset. But the financial sector’s approval of his performance in office appears nearly unanimous. As Bloomberg News reports, the country’s bonds have gone up 36 percent in dollar value since he took office in 2009 as opposed to a 22 percent average rise for global government debt. The shekel has also gained 13 percent against the dollar in that period and is, according to financial experts, the second-best performing currency in Europe, Middle East and Africa during this time.

That’s a message that gets drowned out by complaints about the rise in the cost of living that generated street protests in Israel in the summer of 2011. Yet for all of the country’s problems, including a deficit that is fueled by Israel’s need to spend a disproportionate amount on defense, there’s little doubt that Netanyahu’s administration has been economically sound and that the country’s economy has grown by leaps and bounds under his leadership. His commitment to maintain the Jewish state’s commitment to a free-market model and the stability that his leadership has given the nation are not the only factors behind the growth numbers, but Israel has become an even better bet for investors in the past four years. The near-certainty that he will stay in office will ensure that this will continue.

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Israelis go to the polls tomorrow and, as we’ve noted previously, there’s not any doubt about who will lead their next government. The voters appear poised to give Prime Minister Benjamin Netanyahu a qualified endorsement, and while his own party appears to be getting fewer votes than expected, the factions that made up his current government will collectively get what amounts to a landslide victory over the prime minister’s left-wing and Arab critics in the Knesset. But the financial sector’s approval of his performance in office appears nearly unanimous. As Bloomberg News reports, the country’s bonds have gone up 36 percent in dollar value since he took office in 2009 as opposed to a 22 percent average rise for global government debt. The shekel has also gained 13 percent against the dollar in that period and is, according to financial experts, the second-best performing currency in Europe, Middle East and Africa during this time.

That’s a message that gets drowned out by complaints about the rise in the cost of living that generated street protests in Israel in the summer of 2011. Yet for all of the country’s problems, including a deficit that is fueled by Israel’s need to spend a disproportionate amount on defense, there’s little doubt that Netanyahu’s administration has been economically sound and that the country’s economy has grown by leaps and bounds under his leadership. His commitment to maintain the Jewish state’s commitment to a free-market model and the stability that his leadership has given the nation are not the only factors behind the growth numbers, but Israel has become an even better bet for investors in the past four years. The near-certainty that he will stay in office will ensure that this will continue.

Those who only know Israel through stories about the conflict with the Palestinians see the country through a prism that doesn’t take into account the amazing progress it has made in recent decades, as it was transformed from a third-world economy to one of the most dynamic markets in the world. It may be that not all of this has trickled down yet to many of Israel’s citizens who rightly complain about crony capitalism and high prices. But Israel’s strength is not only measured in the vaunted abilities of its armed forces. If it has been able to shrug off the disappointments of a peace process in which the country traded land for more terror rather than peace, it has been because its start-up nation economy has become a model for the world in terms of innovation.

This happened for a number of reasons, but the chief one was a commitment by its leaders to shedding the old socialist Labor Zionist model that helped create the nation but ill prepared it to compete in the global economy. Netanyahu played a key role in this change during his first term as prime minister in the 1990s and his years as finance minister under Ariel Sharon. But as prime minister he has continued this progress, keeping a steady hand on the tiller and avoiding many of the problems experienced elsewhere in a challenging environment.

Stuck in a region with neighbors who won’t make peace and still besieged by terrorist movements that launch missile barrages into the country whenever they want to heat things up, Israel doesn’t have a normal economy or a normal political culture. But in spite of that, Netanyahu has received good marks for keeping the economy sound and largely resisted the demands to reverse course. That might have appeased some of his critics, but it would have set the country back. That took exactly the sort of political courage that, according to Jeffrey Goldberg, President Obama thinks he lacks. As Netanyahu embarks on his third overall and second consecutive term in office, the one certainty amid so many variables is that Israel’s finances are in good hands. 

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America’s Not a Kibbutz; Neither is Israel

Mitt Romney is catching some flak today for a statement made yesterday and first reported on BuzzFeed in which he contrasted American society and its economy as being very different from a socialist model. He told the crowd at a Chicago fundraiser:

“It’s individuals and their entrepreneurship which have driven America,” Romney said. “What America is not a collective where we all work in a kibbutz or we all in some little entity, instead it’s individuals pursuing their dreams and building successful enterprises which employ others and they become inspired as they see what has happened in the place they work and go off and start their own enterprises.”

This is being represented in some quarters as a knock on Israel or at least showing that, as BuzzFeed put it, his friendship for the Jewish state, “only extends so far.” But anyone who tries to represent this as somehow qualifying Romney’s backing for Israel or showing disrespect for it doesn’t know much about the real life Israel as opposed to myths from Leon Uris novels. While the kibbutz is an iconic symbol of the state’s beginnings, the collective farm movement is a dinosaur in modern Israel with only a minuscule role in its economy. Many of have gone bankrupt while others have become hotels or factories more than farms. Indeed, Israel’s current economic success is based on its transformation in the last generation into a first world economy rather than one handicapped by the socialist ideology of its founders.

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Mitt Romney is catching some flak today for a statement made yesterday and first reported on BuzzFeed in which he contrasted American society and its economy as being very different from a socialist model. He told the crowd at a Chicago fundraiser:

“It’s individuals and their entrepreneurship which have driven America,” Romney said. “What America is not a collective where we all work in a kibbutz or we all in some little entity, instead it’s individuals pursuing their dreams and building successful enterprises which employ others and they become inspired as they see what has happened in the place they work and go off and start their own enterprises.”

This is being represented in some quarters as a knock on Israel or at least showing that, as BuzzFeed put it, his friendship for the Jewish state, “only extends so far.” But anyone who tries to represent this as somehow qualifying Romney’s backing for Israel or showing disrespect for it doesn’t know much about the real life Israel as opposed to myths from Leon Uris novels. While the kibbutz is an iconic symbol of the state’s beginnings, the collective farm movement is a dinosaur in modern Israel with only a minuscule role in its economy. Many of have gone bankrupt while others have become hotels or factories more than farms. Indeed, Israel’s current economic success is based on its transformation in the last generation into a first world economy rather than one handicapped by the socialist ideology of its founders.

It is true that the kibbutz is, as Buzzfeed put it, “integral to the story of the founding of the state of Israel.” In pre-state Palestine, collective farms were useful in putting down claims on parts of the country at a time when the Jews were returning to their ancient homeland. They were more defensible than individual farmsteads and survived as much on the Zionist and socialist fervor of their members as their economic value. Though always small in number, their members formed part of the Jewish community’s elite and both before and after 1948, they often were disproportionately represented in the leadership of the Israel Defense Force and its precursor the Haganah.

But while Romney is obviously right that the collective idea has no place in America, it is a falsehood to assert that it still has much, if any, importance in Israel.

While collective farms played an outsized role in the formation of the state and its defense, in the long run they were not part of a viable economic model. For generations they have been subsidized by agricultural policies and direct aid from the state, something those who criticize funding for West Bank settlements often forget. But eventually even that wasn’t enough to keep many of them alive. If anything, they are now more of a symbol of the failed socialist economic policies the Labor Party imposed on the country for decades and which have now been replaced by a free market model that turned Israel into an economic powerhouse. The decline of the kibbutz is something of a cliché in Israeli society, and those farms are as out of place in its economy now as the old socialist and labor union monopolies that hamstrung development and a political leadership that refused to allow television until the 1970s. Though there is some nostalgia in Israel for the past, the idea that the country would return to the old East German model is absurd.

What Romney said was no gaffe. America isn’t a kibbutz. It never was and never will be. And Israel isn’t going back to them either.

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