(photo credit: INGIMAGE / ASAP)
Economists at the Organization for Economic Cooperation and Development (OECD) had good news and bad news for Israel in reports released this week.
First the good news.
For more than a decade, economic growth rates have exceeded those in most other member countries in the OECD, an exclusive club of the 34 most advanced economies in the world. For the past 13 years, gross domestic product growth has averaged four percent annually.
In addition, at just 5.2 percent in 2015, unemployment is low. So is inflation. Public finances are in relatively good shape thanks to fiscal discipline. And Israelis are personally more satisfied with their lives than people in nearly all other OECD countries. Israelis rated their subjective well-being at 9.61 on a scale of 0 to 10 compared to an OECD average of 6.64.
But there was also plenty of bad news. As was the case in previous OECD reports on Israel, the matter of poverty and income inequality was raised in the OECD’s Economic Survey of Israel. Besides Mexico, no other OECD country has a higher poverty rate (the US was ranked third after Israel). Israel ranked fifth after Chile, Mexico, Turkey and the US in income inequality.
As OECD economists have noted in the past, large segments of Israeli society are not fully integrated into the labor market. Two groups – the haredim and the Arabs who combined are expected to make up half the population by 2060 – register low levels of participation in the labor market, low levels of education and high levels of poverty.
What was new and refreshing – if somewhat depressing – about the report, however, was the amount of space devoted to a field in economics not usually dealt with by the OECD: political economy. Powerful interest groups are using their political clout to carve out sectors in Israel’s economy that are characterized by low levels of competition, particularly in the fields of food, electricity and banking. Poultry growers, dairies, the Israel Electric Company’s powerful labor union and large retail chains are either sheltered from foreign competition by customs barriers, use their control over an important utility to block reforms, or enjoy oligarchic control over the market.
As a result, “The cost of living is 20% higher than in Spain and 30% higher than in Korea,” noted the report, “both of which have similar per capita GDP to Israel…” The report went on to say, “Israeli product markets are characterized by: (i) relatively low foreign trade exposure; (ii) oligopolies and monopolies in several markets; and (iii) regulations that are far from best practice.”
In other words, too many Israeli industries take advantage of Israeli citizens and charge them a premium because they have managed to manipulate the political system to their benefit.
OECD economists also had recommendations such as to cut tariffs and non-tariff barriers; to force competition on the food industry; to allow new competitors in the retail banking sector; and separate the different functions of the IEC.
The problem is that there are vested interests in maintaining the status quo and these interests are very powerful.
In contrast, the regulatory bodies are weak. Part of the reason is because the public servants expected to be the watchdogs of big business inevitably find work in the private sector when their stint as regulators is over.
This phenomenon is most pronounced in the Finance Ministry where one high-ranking official after another leaves public service for a lucrative job in the banking sector or at one of the large corporations that thrive on a lack of free market competition.
Only a grassroots movement similar to the one of the summer of 2011, but with clearer objectives, can hope to bring about real change.
There is little room for optimism. Other than on security and diplomatic issues, Israelis do not have a strong track record for civic engagement. Indeed, the OECD report ranked Israel 33 out of 34 when it comes to civic engagement.
When Israelis have demanded change, however, they have succeeded. Reforms in the cellular-phone market that brought prices down dramatically were the result of public pressure. Will Israelis force politicians to listen to the OECD? They should.