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Israeli Capitalism: Time to Shift Leftwards

 

23 September 2008

By Yisrael Ne'eman

The era of boorish capitalism is drawing to a close as markets around the world are shaken by the American sub-prime disaster. The ripple effect not only collapsed such enormous investment houses like Lehman Brothers but also threatened Merryl Lynch, the insurance giant AIG and the mortgage companies Freddie Mac and Fanny Mae. In today’s global village no one works in a vacuum. As we all know the US administration has begun a $700 billion bailout.

Not long ago communism/socialism came crashing down, not only with the end of Soviet domination of Eastern Europe and the unraveling of the Soviet Union from 1989-91 but with the defeat of much of the social welfare system worldwide. In many cases the former Russian satellite nations and republics became overwhelming in their capital incentive policies while Great Britain in particular replaced a collapsing socialism with hard line capitalism led by Margaret Thatcher in 1979. The United States, never a bastion of the welfare state became even more capitalist with the election of Ronald Reagan in 1980. Western Europe followed suit. For almost 30 years capitalism washed socialism aside and today we are paying the price of that massive victory.

Israel is no different. In some ways similar to Eastern Europe but also following socialist and mixed economy policies of many developing countries (often known as “state capitalism”) the Jewish State underwent several economic reforms from the 1980s onwards. Dead wood socialism where people went to their jobs but did not work, gained tenure over the years but could not be fired affected not only the public sector but the semi-private sector led by the Histadrut Labor Union. The Union represented the workers but also owned the factories or “means of production”. With declining productivity and massive managerial incompetence this socialist pillar of the economy was in decline in the 1970s and finally collapsed by 1988.

The entrepreneurial Likud led by Menachem Begin won their first election in 1977 and attempted a capitalist reorganization under finance minister Simcha Erlich but due to structural problems, incomplete planning/execution and Histadrut objections the blueprint failed and left the country with an inflation rate of 450% by the mid 1980s. The New Economic Policy of 1985 led by Labor Prime Minister Shimon Peres and Likud Finance Minister Yitzchak Moda’i during the period of national unity governments crushed Histadrut objections and brought about the rush towards big capital. Such a move was imperative to bolster Israel’s economy.

Capitalism became the new byword as the policies continued into the 1990s especially when seeking foreign investors. Opportunity presented itself during the Rabin-Peres Labor regime (1992-96) when economic barriers fell and Israel cashed in on the “peace dividend” of the Oslo Accords. Despite diplomatic setbacks in the peace process with the Palestinians the economy overall thrived and was further capitalized by Benyamin Netanyahu’s government in the late nineties and up through 2000 when Labor PM Ehud Barak was at the helm.

The final dismantling of most of Israel’s social welfare system took place in the past decade, not so much out of want but out of necessity. The Wall Street crisis of March 2000 and the Palestinian Low Intensity Conflict beginning half a year later brought about a massive economic crises leading to over 11% unemployment and the economy shrank by 1.9% in 2002. Social welfare benefits were cut back beyond the minimum, but most agreed that there was really no choice. Netanyahu as finance minister under PM Ariel Sharon was the architect of such widely approved planning. By 2005 the economy was booming again with growth rates in excess of 5% annually. Capitalism was seen as the great savior.

And it was – but only in the short term. Since then Israel is the western country with the largest gap between rich and poor, at least according to the official statistics. The “off the books” black economy is estimated by the respected economic journalist Sever Plotzker to be at least 15% but many believe it to be well over 20%. Not only the rich manage it but many in the middle class and especially working classes moonlight and supplement limited incomes. But despite such an officially unrecognized development there are more poor who are in a dire situation than there have been in two generations.

By the mid 2000s Israel’s stock markets took off with the wealthy attaining greater economic power while the poor sank into a morass. This trend has crashed to a halt with the global economy heading into a tailspin despite the American government’s best efforts to save the situation. Even the Republicans are in effect “nationalizing” major financial institutions as mentioned above.

This round of uncontrolled capitalism is finished. In Israel many believe elections are just around the corner. Whether it be the Likud, Kadima or even Labor, all followed similar policies to jump start the Israeli economy over the past 20 years or so. Lately Labor took a step back and introduced a pension plan for all workers, to get around the fact that most are no longer unionized and in the past decade have been terribly exploited. On the economic front the next government must ensure at least a minimal leveling of the playing field for the working public. Like the health care reform led by Haim Ramon in the mid 1990s there needs to be a socio-economic reform leading back to the welfare state in a nation resting on a mixed economy.

When socialism overtook the economy the price was paid by the workers swept out with the dead wood economy. Now it is time to partially re-regulate as far as capitalism is concerned. Best to learn from the American and British experiences before it is too late. Despite it all (including a massive slide by the Tel Aviv stock market this year) the Israeli economy is doing well and the government holds a fair amount of foreign reserves. A growing social gap will certainly bring about domestic instability. The time has come to implement a policy of social justice in an effort to close the gap, something all the economists of the leading parties know to do. We should begin with a return to partial state capitalism in the form of increased government investment in state infrastructures and the encouragement/regulations necessary for a mixed economy. It is just a matter of courage and the will to action.