Inclusive growth

The wave of layoffs at Office Depot, Bazan and Teva is a reminder that we live in an increasingly globalized and competitive world economy.

November 19, 2013 22:38
3 minute read.
Teva Pharmaceutical plant is seen in Jerusalem

Teva 311. (photo credit: REUTERS/Ronen Zvulun)


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After hemorrhaging an estimated daily loss of between NIS 140,000 and NIS 170,000, and after failing – at least as of press time – to reach an agreement with businessman Ronen Levi of Retail 3000, Office Depot was pronounced bankrupt. As a result, all of the chain’s stores will close and about 800 employees will be fired.

Office Depot’s apparent demise is the latest in a series of ominous signs that our economy is running into difficulties. Last month, Teva Pharmaceutical Industries announced it planned to fire hundreds of workers and Bazan Oil Refineries will make about 1,000 workers redundant. This week, the Central Bureau of Statistics announced that economic growth slowed to a 2.2 percent annual rate in the third quarter of the year. Lower exports caused by a strong shekel, which makes Israeli products and manpower relatively more expensive and less competitive compared to the products of countries with weaker currencies, were the primary cause of the slowdown in growth. And the OECD lowered Israel’s GDP growth forecast for 2013 from 3.9% to 3.7%.

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It would be premature to diagnose an economic recession. These are still impressive growth rates. And the OECD lowered its unemployment rate forecast for Israel for 2013 from 7.2% to 6.8%. Participation in the labor market, traditionally low in Israel due to low employment rates among haredi men and Arab women, has reached 74.5%, though most of the increase in jobs was in the public sector.

Still, as noted by Bank of Israel Governor Karnit Flug in a speech Tuesday at a financial markets conference organized by the Calcalist newspaper, Israel’s real challenge in the medium- to long-term is to fight income inequality by striving for “inclusive growth.”

The term, used by economists such as Joseph Stiglitz and Amartya Sen who have been critical of neo-liberal economic policies, refers to the sort of growth that lowers income inequalities in countries and between countries instead of exacerbating them.

Increasingly, as higher paying jobs become knowledge- based and as traditional industries relocate to countries with cheaper labor costs or outsource jobs, economic growth has benefited fewer people while income inequality, as measured by the Gini coefficient, has grown.

This phenomenon is not unique to Israel. Almost everywhere, success is inequitably shared. But in Israel the trend is more pronounced. Israel is ranked 28th out of 33 OECD countries when it comes to income inequality (the difference between the income of the top 20% and the bottom 20%).

There are no easy solutions. Attempts to redistribute income do not cure the underlying forces that led to inequality in the first place, requiring still more aggressive redistribution. And redistribution produces resentment and stymies the drivers of economic growth. Using government policy to close the gaps by offering preferential treatment to underperformers inevitably creates a sense of injustice among the rest of the population. And by promoting less-qualified individuals to positions they would never attain in a meritocracy, we undermine the efficiency of the economy and dampen ambition.

In Israel, more can be done to improve free competition and do away with nepotism and with discrimination against Israelis who did not serve in the IDF such as haredim and Arabs. These sorts of discriminatory behaviors – like India’s caste system or the high rates of illiteracy among women in Muslim countries – prevent us from tapping into people’s talents.

The challenge for Israel and other countries is to maintain a level of economic dynamism that will, as much as possible and in the fairest and most equitable way, provide increasing benefits for all while still managing to pay for the social welfare programs required to make citizens’ lives bearable under conditions of increasing income inequality.

The wave of layoffs at Office Depot, Bazan and Teva is a reminder that we live in an increasingly globalized and competitive world economy. Attaining “inclusive growth” has become increasingly difficult. But it is nevertheless a worthy aspiration for it fosters social cohesion, provides citizens with more equal opportunities and fosters political stability.

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