Business ethics 88.
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Earlier this week, Prime Minister Ehud Olmert announced a new war on poverty. Reducing poverty has been part of the guidelines of every government for the past several decades, yet little specific action has been taken and certainly no progress was made. But there is reason to hope that this time intentions will be translated into more effective action.
For one thing, the current government gave the poverty situation a higher profile from early on. Early in his elected tenure, Olmert announced the creation of a special commission to deal with the issue, to be headed by Professor Manuel Trajtenberg. A few months later he actually did establish this commission. (The execution was delayed by the war in Lebanon, which naturally took precedence.) I heard a detailed summary of the council's work in early January from Professor Trajtenberg, and I was impressed by its thoroughness and seriousness.
Another encouraging sign is that the current plan involves a concrete target for the poverty rate. As I wrote in a previous column ("Social policy target a good idea," The Jerusalem Post, May 19, 2006), policy targets were a central element of two very successful reforms in Israeli economic policy: reducing inflation and cutting deficits. Israel's outsize poverty rate is an obvious candidate for further reform. Olmert suggested a target of a reduction of about one percentage point a year in the poverty rate over the next three years, though final details remain to be hammered out.
Additionally, the program addresses the particular roots of the Israeli poverty problem: first a very low work force participation rate (among the lowest among developed countries) and second a very high number of low-wage workers among those who do work.
Low work force participation is dealt with by an explicit plan to increase work force participation among Haredi men and Muslim women. Official participation rates for these groups are from a third to a half less than those of the general public.
Regarding low wages, the program includes a step forward and a step back. The step forward is introducing what is known as a "negative income tax." This idea, championed 40 years ago by free-market evangelist Milton Friedman, involves giving a government-paid raise to low-wage workers. This is just an extension of the idea of a progressive income tax. In a progressive tax, the more you make, the higher your tax rate is. If you extend this idea all the way down the ladder you can end up actually having a "negative tax," or stipend, on very low incomes. The main attraction of this idea is that it provides aid only to those who work, and so does not encourage idleness. The US employs a version of this known as earned income tax credit.
One facet of the controversy over this policy is that it would have the effect of taking some of the responsibility for poverty relief from the National Insurance Institute (Social Security), which oversees stipend payments (the main current form of poor relief) and transfers it to the Treasury, which will most likely oversee the negative income tax. Such a turf war could play an important role in the political battle over the new poverty policy.
The step back is that the Prime Minister stated that further reforms in the economy will be put on hold for a few years. The process of liberalization and privatization has greatly encouraged growth in this country and, in my opinion, its continuation is necessary for wage growth at all levels. Professor Trajtenberg opined that concentration on reforms has distracted policy makers from the poverty problem; this may be true but ideally reform and poverty policy should proceed in tandem.
In the Fall, I produced a working paper advocating a numerical target for poverty reduction, specifically focused on increasing work force participation rates in the affected sectors mentioned in the current plan. I am gratified that the policies makers in the current government have adopted a similar diagnosis of the problem and strategy for alleviating it.
One additional note: the current poverty rate is really a measure of short-term economic inequality, and is actually a poor measure of what most of us think as "poverty." This leads many to belittle the alarming poverty statistics as being based on a misleading measure. The criticism of the measure is partially justified, but the sad fact is that while a number of better measures have been proposed, most of them show similar trends. Basing a target on a more informative poverty measure would improve monitoring and just as important deflect criticism. Remarkably, steps are being taken on this front, as well.
An inter-ministerial working committee was recently formed to consider creating a new poverty measure for policy purposes, and is currently reviewing a variety of proposals for reform. The choice of measure seems like a mundane and technical issue, but particularly when there is a target it becomes a fulcrum of policy, so this committee's work deserves attention.
The writer is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.
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