The 34 Club

Israel’s admission into the OECD is a boon to the economy, but also holds it to higher standards.

By ZIV HELLMAN
yuval steinitz 311 (photo credit: Ariel Jerozolimski)
yuval steinitz 311
(photo credit: Ariel Jerozolimski)
Sometimes, peer pressure can be so desirable that entire countries seek it out. The OECD (Organization for Economic Cooperation and Development), considered the club of the world’s economically “most advanced” nations, voted to accept Israel, along with Estonia and Slovenia, as new members on May 10.
Israel’s acceptance into the OECD, which will now expand from 31 to 34 members, was praised in the highest terms by Prime Minister Binyamin Netanyahu as a major milestone, representing a “seal of approval” for the economy that would attract financial investors in droves. Finance Minister Yuval Steinitz and the Governor of the Bank of Israel Stanley Fischer, who had worked for a long time towards the goal of obtaining OECD membership for Israel, spoke in similarly glowing terms. Stocks surged on the Tel Aviv Stock Exchange at the news the next day.
A unanimous vote was required for Israel to join. There had been concern that unanimity might not be attained, since Switzerland, Ireland and Norway had expressed reservations in connection with Israel’s inclusion of figures from settlements in the West Bank and the Golan Heights in its published statistical data. This matter was resolved to everyone’s satisfaction by an agreement that any OECD publication involving Israeli statistics will include a disclaimer that the OECD’s use of such statistics “is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank.”
A twelfth-hour attempt by the Palestinian Authority to delay Israel’s accession to membership also failed. A letter sent by Palestinian Foreign Minister Riyad al-Malki to the foreign ministers of all the OECD countries calling for the vote to be delayed because Israel infringes on Palestinians’ human rights had no effect on the outcome of the vote.
The OECD will welcome the three new members at a special ceremony during the annual meeting of the OECD Council on 27 May in Paris, chaired by Italian Prime Minister Silvio Berlusconi. The formal process of joining the organization will be completed when the Knesset votes to approve Israel’s membership, which is expected to be a formality. The recognition of Israel as an advanced economy is considered particularly impressive given how close the country was to bankruptcy in the mid-1980s, with hyperinflation and a deep crisis in the balance of payments, after which it began a concerted effort to adopt more free-market oriented policies and run a more fiscally sound state budget.
But the curious thing is that despite all the excitement, it is difficult to point to a direct and immediate economic benefit that membership in the OECD grants a country. The OECD is not an organization such as the International Monetary Fund, which has the authority to give money to countries in financial straits. At best, the OECD, as its own publications state, “provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.” And for that privilege, member countries pay a lot of money. The annual OECD budget is currently 328 million euros, all supported by contributions paid by the OECD members, according to a formula based on their national incomes.
So what good is it? The answer, according to experts, is that simply belonging to a prestigious club of advanced countries becomes a self-fulfilling prophecy: the more others perceive you having that position, the more you act the part. “The person on the street will not immediately feel an effect,” says Yoav Soffer of the Bank of Israel. “But by joining the OECD, we will have a seat next to economic decision makers from advanced countries at the organization’s forums. And it is the peer review we will get from those meetings that will contribute to strengthening our economy.”
“Once you become a member, people assume that you will behave by a certain set of rules,” adds Ezra Gardner, managing partner of Omnium Capital Management in Tel Aviv. “That makes them more likely to trust you, and that way you can attract more capital. It then becomes a virtuous circle: to live up to that trust, you behave by the rules, which leads them to trust you even more.”
The OECD got started in post-war Europe, in an earlier incarnation as the Organization for European Economic Co-operation, formed to administer aid under the Marshall Plan. After outliving that role, it became the OECD in 1961, with the mission of helping member countries achieve sustainable economic growth and employment. Over time, because of the composition of its original membership, which included the wealthier West European states and the United States and Canada, it developed the reputation of being “the club of developed countries,” and it became standard to compare developing nations against the standards of the OECD countries, which with the latest additions only includes 10 non-European members.
The OECD secretariat, located in Paris, is comprised of a staff of 2,500, mostly economists, lawyers and scientists. It mainly provides a setting where governments can compare policy experiences, compare common problems, identify good practice and coordinate domestic and international policies. One of the most important roles it has is as one of the world’s largest sources of comparable statistics and economic and social data, covering a large sweep of subjects such as the environment, agriculture, trade, taxation and technology.
Just as important is the peer review the organization enables, through mutual examination by which the performance of individual countries is studied, to identify and disseminate best practices. OECD discussions sometimes evolve into negotiations for agreements on “the rules of game” for international trade and cooperation. These may lead to formal agreements, or produce standards, recommendations, and guidelines.
The OECD expects member countries to provide active input into the mutual strengthening of member economies. In its May 10 announcement regarding the acceptance of its three newest members, for example, the organization cited the contribution each is expected to bring by sharing its experiences: Estonia in e-government and e-commerce initiatives, Slovenia in public sector information accessibility, and Israel in scientific and technological policies, producing “outstanding outcomes on a world scale.”
Israel’s leadership has been making efforts since the 1990s to gain membership in the OECD, and the country was invited to participate in some OECD forums as an observer as early as 1994, but it was only in May 2007 that the organization invited Israel to begin the official process of accession.
The process is not short or easy. It involved several trips to Israel by OECD delegations to speak to Israeli counterparts, and the organization demanded that several Israeli laws be re-written to tighten rules for combating corruption (especially aimed at reducing long-standing practices by some Israeli defense companies doing business abroad to acquiesce in paying bribes to foreign governments for contracts), stopping money laundering, protecting intellectual property rights, and ensuring high standards of corporate governance.
In the eyes of some observers, that in itself has already provided a net benefit for the country, leading to expectations that compliance with the norms and standards of the organization will further act as a watchdog on the activities and policy-making of the government.
“Ultimately, this is more political than economic,” says Gardner, who does not believe that the statistical gathering alone of the OECD will make much difference for investors in Israel, since major statistical gathering takes place in any event independently of a country’s membership in the OECD. “The OECD has emerged as the organization setting the set of behavior for globalization. Being a member means being accepted for playing in the sand box. This is positive peer pressure. The more people expect you to behave by the rules, the more likely you are to behave by them, which in turn reassures the others of their trust in you.”
The OECD itself has turned to examples of peer pressure in providing positive change in countries joining the organization. It points to Sweden, which undertook a drive for regulatory reform inspired by OECD work during the 1990s, stimulating high rates of growth amid low unemployment and stable prices. Mexico, which joined the OECD in 1994, shortly after moved to a more open economy based on free market trade.
“In coming to improve Israeli policies, it is important to be able to compare Israel’s facts and figures with those of the OECD countries,” says Soffer. “The OECD is a world champion in figures, surveys, tables, and comparative studies.” An example he gives is in tools the OECD has developed for studying how bureaucratic hurdles, the overall business environment of a country, and the incentives given to investors affect economic growth.
Some have pointed out that Israel enters the OECD ranking in the bottom third of the OECD countries in terms of national income and income per capita. The Haaretz daily newspaper even published an article with the headline that Israel is not only the newest OECD member, it is also “the poorest member.”
Bank of Israel officials take some exception to that, noting that in fact there are several OECD members whose per capita income is lower than Israel’s, which is nearly $30,000, comparable to New Zealand’s. They also tell The Report that Israel’s relative position to OECD nations is clear to everyone whether or not the country is a formal OECD member; the advantage of membership is then that explicit comparisons, clear goals, and the access to OECD discussions and opportunities to learn from best practices give it an opportunity to advance.
Even before formally accepting Israel, the OECD began gathering statistics comparing Israel’s performance to OECD standards – and the results were sometimes not pretty. In January, the OECD produced a report indicating that Israel has extremely wide social gaps. The report prompted a visit to Paris by Industry, Trade and Labor Minister Benjamin Ben-Eliezer, Social Affairs Minister Isaac Herzog and Minority Affairs Minister Avishay Braverman to present the OECD with Israel’s response, and the social and economic policies it intends to undertake to reduce inequality.
The report indicated that the extent of poverty is more widespread in Israel than in any OECD country. Every fifth Israeli is twice as poor as the average person in OECD member states, where poverty is defined as a household with income less than half of the national median. This leads to a situation in which almost one in three children in Israel live in poverty, compared with an OECD average of just 12 percent. Around 40 percent of people of working age do not work in Israel, compared to about 33 percent in OECD countries. More than half of Israelis are paid less than 4,000 shekels a month. In Israel, 23 percent of older people are poor, compared with an average in OECD countries of 13.3 percent.
Most of the poor come from Arab and ultra-Orthodox communities, where poverty rates run as high as 50 percent and 60 percent respectively. Overall, the proportion of Israelis with relatively low earnings, defined as earning two-thirds or less of the economy-wide median, is, like Canada, Hungary, Korea, Poland, the United Kingdom and the United States, in the 20-25 percent range.
But the concentration of Arabs and ultra-Orthodox in these groups is very high – the two groups, which together constitute less than 30 percent of the population, make up more than 60 percent of the poor. Among Israeli Arabs, only about a fifth of the women have jobs. Among the ultra-Orthodox, only about a quarter of the men (and half of the women) have jobs. Moreover, both communities have high birth rates, over time increasing their percentage in the population, leading the authors of the report to ask whether disadvantages will be passed from one generation to another.
The OECD report almost makes Israel seem like three separate countries combined into one. On one side, there is the general Jewish population with poverty, income, and employment rates similar to the advanced nations of the OECD. On the other, are the Arabs and ultra-Orthodox populations, with large families, little higher education, and low employment rates. The report states that “tackling the root causes of such deep inequality would greatly enhance the dynamism of the Israeli economy,” and then goes on to warn that “the consequences of not doing so would be devastating.”
The report includes several recommended remedies. These include greater investment to help workers improve their skills. Welfare-to-work programs are urged to be restructured and extended, including by reducing child benefits paid to families who are able to work but do not, and by increasing the Earned Income Tax Credit to tackle in-work poverty more effectively. Another recommendation is that access to means-tested income supports for the neediest be improved.
OECD notes that Israel has failed to enforce many aspects of its labor legislation, contributing to poor employment conditions for many residents, cross-border and foreign low-income workers. It calls for more enforcement of rules to overcome discrimination against workers and more activism in stamping out illegal hiring and employment practices concerning temporary foreign workers.
Foreign workers are given special focus in OECD reports on Israel. Working conditions of foreign workers are especially likely to be poor, they note. Palestinian workers no longer comprise 8 percent of the workforce, as in the late 1980s, and the figure has fallen to 2 percent today. But workers from elsewhere have taken their place, and now make up 7 percent of the workforce. They tend to be concentrated in jobs in domestic services, agriculture and construction, and suffer poor, illegal employment conditions. Unpaid overtime, especially among domestic employees, is particularly rife. The OECD report blames this largely on underinvestment in enforcement capacity. Sanctions for employers who fail to respect labor laws are also considered weak.
Israel’s investment in active labor-market policies is also givenscrutiny, and found to be tiny. Expenditure on programs designed tohelp get people into work is just 0.1 percent of national income, incontrast to an average in OECD countries of 0.6 percent of nationalincome. Less than 1 percent of the unemployed participate in vocationaltraining, and there are 350 unemployed people for each counsellor inthe public employment service.
Discrimination in resource allocation also plays a role: There isevidence that public spending on education per child in Arab localitiesis about one-third lower than in predominantly Jewish municipalities.Bedouin children, half of whom live in unrecognized villages lackingguaranteed access to electricity, water, sewerage, transport andtelecommunications, are at particular disadvantage.
The OECD has even come close to contradicting the general thrust ofNetanyahu’s economic policies, which call for tax reductions. The OECD,while praising the fact that levels of public debt and expenditure havebeen brought well within the range of OECD countries’ outcomes, alsocautions that “slimmer government also means sharper trade-offs betweenreducing debt, accommodating legitimate spending demands and cuttingtaxes.” It calls for “caution in pursuing further corporate andpersonal income tax cuts,” and recommends that existing rulesrestricting budget expenditures should be replaced by rules related tolong-term debt goals.
In conclusion, the report states that “each country gets the povertyrate it is prepared to pay for. Cutting Israel’s very high rate ofpoverty will only be achieved with extra resources.” At the same time,it recognizes that tackling the causes of such entrenched and wideinequalities as exist in Israel will not be easy, and will require asustained effort across a broad range of policy areas.