Israel’s Protests Show Need to Mix Growth With Equity: View

Aug. 18 (Bloomberg) -- It’s hard to figure out what Israelis are so upset about. Israel’s economy is performing better than those in most of Europe and much better than that of America.

Growth in the second quarter of 2011 was 3.3 percent on an annualized basis, July inflation was less than 3.5 percent compared with a year earlier, and the unemployment rate was 6 percent in the first quarter. Americans can only wish they had such problems.

Then why did an estimated 300,000 Israelis join protest marches earlier this month, and why are thousands more living in tents in Israel’s major cities? And why are more protests likely? The answers might be found on many of the protesters’ signs: “The people demand social justice.”

It isn’t clear if the demonstrations are a final expression of Israeli social welfare, or a turn against the conservative economics that have dominated Israeli policy for much of the past 15 years.

From its founding in 1948 until 1977, Israelis cherished communal values and viewed their country as an extended family. Ostentatious displays of wealth and class distinctions were discouraged. Taxi passengers routinely rode in front next to the driver, as did the few Israeli businessmen wealthy enough to afford chauffeurs. And Koor Industries Ltd., once the country’s largest conglomerate, was owned by the trade union federation.

The Israeli Labor Party, whose leaders were in the socialist mainstream, ran the government. Residents of kibbutzim, Israel’s communal farming communities -- never more than 5 percent of the population -- enjoyed a disproportionate influence in politics and the military. And the government offered citizens generous subsidies for basic foods, mass transit and university education.

Even when the Labor Party lost power in 1977, this system didn’t change. Menachem Begin, Israel’s first non-Labor prime minister, famously urged his finance minister to base economic policy on “being kind to the people.”

In the 1980s, a time of stagnant growth and 400 percent inflation, Israel began transitioning toward a more market-based economy. The current prosperity resulted in large part from budget discipline, begun in 2003 when Benjamin Netanyahu was finance minister and continued during his present term as prime minister. Netanyahu lowered income taxes and made up for the lost revenue by cutting social spending and subsidies and by increasing indirect taxes.

The Israeli economy, particularly the high-technology sector, has never been more stable. Companies such as Check Point Software Technologies Ltd. and Teva Pharmaceutical Industries Ltd. have become world leaders. Israel has more companies traded on the Nasdaq than any other country, except for the U.S. and China, and it has the world’s largest number of startup companies per capita. Many Israelis are living more prosperous lives than ever before.

Why then are they in the streets demanding change? One reason is that the same market-based economy and restrictive fiscal policy that have led to economic growth and stability have also produced rising prices for formerly subsidized items such as housing, education, child care and transportation. Housing prices have increased 40 percent in the past three years, pushing young couples and much of the middle class out of the market.

Israelis have also seen an increased concentration of wealth, and much greater income disparity. (Israel’s Gini coefficient for family income, a measure of inequality, rose from 35.5 on Dec. 31, 2001, to 39.2 at the end of 2008.) Income distribution is now more unequal than in any other developed country except America. Many middle-class Israelis believe their quality of life is eroding and that the quality of public services they depend on, such as primary and secondary education, have declined.

Some protesters have pointed to a deeper cause for middle-class anger. Amos Oz, a prominent writer and leftist activist, recently wrote, “The heart of this protest is the affront and outrage over the government’s indifference to the people’s suffering, the double standard against the working population and the destruction of social solidarity.” Many Israelis are uncomfortable with the new emphasis on individual prosperity rather than the communal good, and see it as a change, not for the better, in Israel’s core values.

It’s encouraging that Netanyahu said he understands the protesters’ distress and is prepared to change his economic policy. In doing so, he should reject a return to deficit spending and government management of the economy, and instead allow the market to operate more efficiently. The rising cost of housing can be brought down by breaking the government’s stranglehold on approving construction projects. Prices for many consumer goods can be reduced by eliminating bureaucratic barriers to competition.

A change in priorities might also be required. Manuel Trajtenberg, the chairman of the committee that Netanyahu appointed to look into policy changes has rightly said he will examine raising corporate and income taxes, reducing levies on fuel and lowering the price of electricity and water.

One universal lesson from the Israeli protests might be that economic prosperity for some, at the expense of social inclusion for many, is a nonstarter in a democratic society. Finding the right balance will be difficult, but Netanyahu has no choice.

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