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Israel’s Greatest Challenge: The Economy

26 March 2003

By Yisrael Ne’eman

The greatest worry of the average Israeli has little to do with Iraq and in recent months the conflict with the Palestinians has dropped into second place.  First prize goes to economic woes and Finance Minister Netanyahu’s plan for domestic recovery.

Two years ago Israel’s economy was worth $100 billion, today it has shrunk by 2% and continues its downward spiral.  Overall the idea is to cut the public sector while encouraging private investment.  4,000 public service workers are to be fired and those remaining are to have their gross salaries cut, the average loss coming to 9 – 10%.  Social benefits will also be sharply reduced.  The previous child allowances given for the fourth child onwards are to be pared down substantially, maternity payments trimmed and even many small yeshivas and yeshiva students over the age of 22 will lose all or partial funding.  And this is the short list.

The tax ceiling is to be brought down to 49% (it was 60%) to encourage the wealthy to reinvest in the economy.  No doubt the plan is fairly anti-social, will drive many under the poverty line (at least temporarily) and favors the upper class sectors involved in private enterprise.  Histadrut Labor Union leader Amir Peretz is promising a fight.  The question is, “What alternative exists?”

Some say raise taxes on the rich.  But it is clear they will pull out their investments and/or leave the country or live off their investments abroad.  Israel must attract foreign investment from abroad, meaning it needs a skilled work force willing to take very moderate salaries.  With tourism on its deathbed due to Palestinian violence and the Iraqi situation, unskilled and semi-skilled labor has very little outlet unless one wants to work in agriculture and construction where most of Israel’s foreign workers are employed.

Israel’s unemployed stands at a quarter million while foreign workers (both legal and illegal) number some 300,000.  Many Israelis refuse to take jobs they consider beneath them and the minimum wage they receive is surprisingly too high when compared to world standards.  Foreign workers take less than minimum wage, which is plenty when they send the money back to Africa, Latin America, China, Thailand, the Philippines or Romania.  Guest workers must be paid more and unfortunately minimum wage must be dropped, while overall baseline level social benefits must be guaranteed. 

The bottom line is Israelis must go back to work for less and produce more.  The government will help with infrastructure projects and job training while the private sector is expected to do its part.  It is going to be tough for two to three years but the economy should revive. 

Cutting social benefits is not the long answer, but rather a production driven economy.  Then the social benefits can be returned.