Spring 2007

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A Nation Unprepared

By Sharyhar Minhas
Introduction:
Between 2001 and 2003, Israel’s “GDP fell by 7%, an unprecedented downturn”, leading to a period of “record unemployment in the Israeli economy.”[1] This downturn had dramatic effects on Israeli society – rising rates of suicide, poverty, and army refusals.[2] In response, Finance Minister Binyamin Netanyahu slashed welfare payments, cut taxes, and privatized many state-owned companies.[3] Before his dismissal, his plan led to a “NIS 11.4 billion cut in government spending; 8 percent cut in public sector wages; layoffs of approximately 4,000 state employees in 2003; the increase of the pension age to 67,” and the cancellation of aid to university students from impoverished households.[4] Although the plan met with much opposition, its results have been a striking success for the overall market: “those who bought shares in the country’s 25 leading companies in 2004 [gained] returns of 25% during 2005.”[5] Netanyahu’s economic program represented a market-oriented ideology that has heavily influenced government policy since the 1980s. Michael Sarel, head of the Economics and Research Department for the Ministry of Finance, said “We think the best way to help the economy is through… reducing the size of the government, by reducing the tax burden” in order to attract greater investment, which in his mind is the key to alleviating poverty.[6] With the upbeat economic news in 2004, the National Insurance Institute (NII) also released a report documenting a continued rise in the 20% Israeli poverty rate.[7] Since the 2004 NII report, the Israeli poverty rate has shown no significant decline, and it is apparent that the rising economic prosperity has not had the desired trickle down effect for those most afflicted by poverty.[8]
In 2005, the poverty rate in Israel was over 21 percent, this figure is relatively high compared to poverty rates in other industrialized states such as (17.8 %) and in France (6.5 %).[9] Poverty in Israel is a result of many factors. For one, many immigrants have not adjusted to the more market-oriented economy, and much of that population suffers from dependency problems due to the generous welfare benefit policies of past governments. Low infrastructure development, especially in the Arab community, and pressures upon the Israeli economy as it integrates into the global economy are also contributing factors. The transformation of the Israeli economy from an industrial to a global high-tech economy has had adverse effects upon those unqualified for the new jobs available. Though poverty does cross many ethnic boundaries, it disproportionately affects the Haredi (Ultra-Orthodox) and Arab segments of the population. Lifestyle choices are a major cause in both of these communities – larger families, low workforce participation for Haredim men and for Arab women – yet government policy in relation to these two groups and certain other immigrant groups has also raised the poverty rate.[10]

Poverty in Immigrant Populations
Immigration and capital inflows have driven the economy throughout much of Israel’s history.[11] Israel attracted immigrants not only through the significance of the land for Jews, but also because before 1985, Israel was a very government-oriented economy, with a strong welfare state featuring “a substantial core of redistributive universal transfers (social security), alongside diverse practices that subsidized target populations (new immigrants).”[12] This state subsidization of immigrant populations is most apparent in the case of Ethiopian Jews, who entered Israel toward the end of the 20th century. The Ethiopian Jews quickly became accustomed to and dependent upon this Israeli government’s warm welcome and “cocoon-like protection,” .[13] For a time, the Israeli government proposed a mandate period in which immigrants would receive free housing and medical care. After a certain time, this period was to end and the immigrant population was supposed to have become acclimated to the conditions of the Israeli economy.[14] However, the education system that the Ethiopian students attended focused upon vocational courses (mainly welding, auto mechanics, child-care, and secretarial skills for women), and there was limited demand for these vocations in the job market.[15] This was partly due to the transformation of Israel into a more technology-based economy, and because public expenditure “fell from 75-80 percent to around 55 percent” as a percentage of gross national product.[16]
The transformation of the Israeli economy into a less government-oriented and more market-focused system was partially due to the economic crisis in the 1970s, when Israel entered a period of stagflation. The economic policy of Israel before this time was based on an import-substitution model (ISI), which generated a surplus of government-oriented jobs in the economy. This ISI model led to large deficits and stagnant productivity and concurrently wages were rising, these factors contributed to severe inflationary pressures.[17] In response to these growing problems, the national unity government launched the Economic Stabilization Plan of 1985 – the components of which were “greatly reduced government subsidies, devaluation of currency, restrictions on wage growth, and opening the economy to foreign capital, and privatization.”[18] This marked a major turning point in Israeli economic policy. The Economic Stabilization Plan was part of a grander microeconomic strategy to shift the economy from a traditional low technology base toward a system focused on high-technology sectors.[19]
The development of a high technology industry was made possible by the influx of highly educated Russian immigrants between 1990 and 2000. Although, the previous immigrant groups not prepared for this knowledge-intensive economy suffered greatly in the job market. The reason for this was that as Israel opened up to the global market, it did not have a comparative advantage in low technology industries. Leading many manufacturers to outsource their factories to other Middle and Far Eastern countries where labor was comparatively cheaper. This led to a general decline in employment opportunities for uneducated workers.
One such sector that shifted its production base was textile manufacturing. During this period “some 25 Israeli textile manufacturers… removed their production to areas where the cost of labor was lower: Egypt, Jordan, the Palestinian Authority, Turkey and others.”[20] This was met with a heated social reaction in one textile firm as 1,400 employees, demanding that the government save their company from bankruptcy, blocked a major highway leading to one of the plant for several days.[21] The Israeli government did not intervene to save the firm as it likely would have done in the past, but instead allowed the plant managers to outsource operations. This incident highlights the dependence that many had on the pre-1985 economy. Workers considered the state as their caretaker and relied on it to make the social rather than economic choice. This notion of dependence was further fostered by the ideology of Zionism, where “norms of social righteousness have ancient roots in Judaic doctrines.”[22]
Opening up to the global market not only led to the export of factories, but also to the introduction of cheap foreign labor. Almost 10 percent of the labor force was once composed of Palestinian laborers, but as their influence declined with increased security threats, and as the Israeli economy began “importing cheap labor from East-Asia, Eastern Europe, and South America.”[23] Currently, foreign laborers account for over 14% of Israel’s workforce. Only Switzerland has a higher proportion.[24] This has had an adverse impact upon the employment situation for Israelis, especially in the case of the Israeli construction industry. Between 1996 and 2002, Israeli worker participation in the construction industry fell by over 21 percent, and an increasing number of non-Israeli workers took their place.[25]
Although the above described scenario has provided substantial benefits to the Israeli economy as a whole, this transformation came coterminous with intensive state contraction of its role as “caretaker” of the immigrant population. The immigrant population was not educated enough to benefit from the increased wage per capita offered by the high-tech economy. While they had grown to depend upon the Israeli state for services such as housing and job security, the government chose economic liberalization and ceded its role as a major player in the market. This led to increased poverty rates among much of the Israeli populace, especially from the new immigrant pools. Those immigrants with the lowest levels of education had few job opportunities, as “unskilled and low income jobs were filled by guest workers,” or were outsourced.[26]
Indeed, the former Soviet Union immigrants were the beneficiaries and catalysts of the transformation. Over 960,000 former Soviet citizens immigrated to Israel in the 1990s.[27] Many of them were highly skilled, and they played a crucial role in the transformation of the Israeli economy into a high technology market. However, even these highly educated immigrants were forced to accept menial work as compared to their previous positions in the former Soviet Union.[28] The immigrants were “underrepresented in managerial and administrative occupations,”[29] and were not paid equivalent salaries relative to their education level as compared to their Israeli-born counterparts. This led Soviet immigrants to rely on allowances and assistance for over 23 percent of their total income as compared to only 13 percent for the Israeli population.[30] Integration for new immigrant groups has been especially difficult among the youth. In 1998-99 over 8.4 percent of former Soviet Union immigrants dropped out of Jewish schools as opposed to only 4.8 percent of Israeli students as a whole.[31] Over 15.3 percent of immigrant households were also under the poverty line, and this percentage is an underestimate as “transfer payments to a very large extent reduced the proportion of new immigrants to under the poverty line.”[32] Once the mandated period of acclimation ends for this new wave of immigrants, a greater percentage will likely fall into poverty.[33] Many of these Soviet immigrants did improve the economy and have become better adjusted than some of the previous immigrant groups. At the same time their adaptations to the economy have to an extent contributed to the decline in the economic position of previous immigrant groups.

Arabs in the Israeli Economy
Arabs comprise approximately 20 percent of the Israeli population[34] and 49.9 percent of Arab families live under the poverty line.[35] Of the 40 towns with the highest unemployment rates in Israel, 36 are primarily Arab.[36] Their underdeveloped economic situation is due in part to government policy. Arabs receive “a disproportionately smaller share of government and public funds… for development, education, housing and other services.”[37] The under-funding of the Arab sector has occurred over a long period of time. Though the Arab population constituted over 10 percent of Israel’s population, it received only 1.3 percent of Israel’s total budget.[38] Israel’s transformation into a high-tech economy has only exacerbated the economic condition of the Arab sector. Presently, “Jews are extremely overrepresented in all white collar occupations, while Arabs are overrepresented in all manual, service, and agricultural occupations.”[39] Arab unemployment has been rising because foreign laborers work for lower wages. A major part of the problem has been the education gap between the Israeli Arab population and the Jewish population. From 1961 to 1990, the median years of schooling for the Arab population increased from 1.2 to 9 years while the schooling for the Jewish population increased from 8.4 to 11.9 years.[40]
There are also significant differences between the education systems of the Jews and the Arabs. A majority of Jewish elementary schools receive nearly a third more resources than Arab schools, and the disparity is as high as 50% in secondary schools.[41] School enrollment within the Bedouin sector of the Israeli Arab population hovers around 75 percent in the 6 to 13 year olds brackets, 30 percent in secondary school, while only 0.6 percent of Bedouin go on to obtain university degrees.[42] Deficiencies in education funding and education promotion within the Arab sector have been a primary cause of poverty within the Arab population.
Another cause of low economic growth within the Arab segment of the population has been a lack of infrastructural development within Arab communities. Usually capital investments flow into those areas where “electrical transmission lines, roads,” etc. already exist, and Arab communities lack that type of infrastructure.[43] Jewish communities have developed due “to a continuous flow of capital and expertise from the Jewish Agency (JA)… from 1948 through 1977 the JA alone was able to give out more than $5 billion to the economic and social development of the Jewish sector.”[44]
Arab communities have not been able to expand as Jewish communities have been able to, “of 104 communities offering government-subsidized incentives to newcomers… only four are Arab.” While land is being sold cheap in Jewish communities, Arab towns are becoming increasingly congested – further restraining the attractiveness of setting up firms in Arab towns.[45] Discrimination is also apparent in the wage disparities. In 1999, an Ashkenazi employee was paid twice that of an Arab employee in the same job.[46] Lastly, because Arabs are not drafted into the military, they are excluded from the benefits that accompany military service.

Haredim in the Israeli Economy
The Haredi situation in the Israeli economy is different from that of the immigrant and the Arab populations. Their high economic poverty rate is primarily based upon their style of living, and the government subsidization of their lifestyle has led to serious dependency consequences. An efficient subsidy promotes a system of “job training” whereby the government and society receive some returns to the economy for the funding that the Haredim receive.[47] However, there has been very little economic return for the state or for Haredim themselves. Rather, the subsidies have acted as a set of disincentives leaving the Ultra-Orthodox dangerously dependent on welfare.[48] In many ways, government policy towards the Haredim actually increases poverty. The government pays the tuition for Haredi heads of household to receive “an average of 23 years of education,” even though the education training they receive does not help them directly contribute to the economy.[49] The Haredim do not even directly contribute to the military in Israel, and the government has advanced legislation where “many in the Haredi population have been kept out of the workforce by a law making it necessary for Haredi men not serving in the army to avoid work from the ages of 18 until 27.”[50]. The Ultra-Orthodox have gained these types of legislations and subsidies due to “their status as a swing voting bloc in the Knesset.”[51] Itzhak Levy, a former Minister of Education and defender of funding to Haredim, was quoted as saying “budgets will be granted even to Hamas if it commits itself to promote democratic values.”[52] As long as Haredim remain a substantial percentage of voters in Israel’s proportional representation system, their flow of benefits will not cease.
However, funding to this segment of the Israeli population is coming with increasing costs, as the current population boom within the Haredi population will lead to a worsening economic situation. At this point, the average Haredi family with about five children at home has a monthly income equal to “42% of the income of the average two- parent Israeli family,” and lives below the poverty line.[53] They are able to survive through the creation of a strong community structure and charity networks.[54] They have also benefited from “extremely high birth rates,”[55] for which the state rewards them through child allowances. However, the government contraction of child allowances begun by Netanyahu led Eli Yishai, the head of the Ultra-Orthodox Shas party, to say that, “Over the last year, the Sharon government has forced even more children in Israel below the poverty line.”[56] This government contraction has come at a time when the growth rate of the Haredi population has been 4-4.5 percent annually.[57] These large family structures and dependence upon generous child allowances is becoming increasingly difficult to maintain.
In response to the decrease in subsidies, the community is undergoing some changes. The ultra-Orthodox town of Modi’in Illit has even been successful in attracting high-tech companies to set up operations. The increased revenue generated by the new firms operating there led the Central Bureau of Statistics to raise the town’s socioeconomic ranking.[58] The employees of the new firms are primarily married women who can supply cheaper, skilled labor. Eli Kazhdan, a business consultant for one of the firms that has set up in the town, remarked that “the dynamics were changing in the Haredi community with its involvement in the work force rising and expanding beyond its traditional focus of education.”[59] The Israeli online Globes site remarked in June 2005 that, “the Haredi sector is willing under certain conditions, to take a little more responsibility for earning its living,” in response to the deep cuts in welfare and child benefits made by Netanyahu.[60] According to recent surveys, approximately 6 percent of the Jewish population describes itself as Haredi, and thus many high-tech firms in Israel are seeing the increasing flexibility of the Haredim towns as a “cheap” untapped resource. Zvi Mandl, the co-chief executive officer of another firm investing in the town, pays an hourly wage of $18, while in Tel Aviv he would pay $40.[61] The Bank of Israel Governor, Stanley Fisher, was also shown a presentation in late November of the increasing willingness to work within the Haredi community, and Kazhdan estimates that, “between 2002 and 2004, the number of Haredi men looking for work rose by 4.4%, while 5% of women moved from part-time to full-time work.”[62]
Even in light of this recent news, however, there is still substantial cause for concern of poverty in the Haredi community. Despite the recent growth, a report prepared by the town council approximated that over 23 percent of the families in the town are beneficiaries of social services, and that there is still “an average of 3.5 new requests for assistance… every week.”[63] Also, unless the male population within the community enters the workforce, it is unlikely that the poverty rates of these towns will improve. And increased male involvement would necessitate a drastic change in the culture of the Haredi community.

The Prevailing Ideology
There are two general policies being advocated to alleviate poverty in Israel. One is the market oriented approach that would further the neo-liberal trend that we have seen in government policy since 1985. The other is a return to a more government-oriented economy. However, the latter is not likely to resemble the government’s economic policy pre-1985, as Israel is too integrated into the global economy and its economy is too export-oriented to switch back without substantial microeconomic restructuring.
The United States government will be a determinant of Israeli economic policy as it already has influenced the economic path of Israel. During talks on Netanyahu’s economic recovery plan in 2003, the United States government said that the “$1 billion military grant and $9 billion in loan guarantees over three years… were conditioned on implementation of the economic plan.”[64] The United States’ influence on Israeli policy-making has nudged the government onto a more neo-liberal path. Israel, not surprisingly, undertakes these recommendations because the United States is Israel’s biggest ally, export partner and supplier of approximately $2 billion dollars in annual military aid.[65]
Success as defined by neo-liberal path requires an economic policy focused on increased investments through a reduction in marginal tax rates and labor market reform in order to raise labor market participation.[66] This falls in line with what the Finance Ministry Media Consultant, Amir Gilat, stated, “the move toward a work-oriented culture and aid for those who cannot work… is the way to beat poverty.”[67] This is based upon the expectation that the way to fight poverty is to first accelerate economic growth, and then to let the prosperity trickle down into the lower income groups.[68]
Israeli Prime Minister Ehud Olmert has stated that he believes poverty can have “destructive consequences” to the economy,[69] and in response he has focused on boosting pre-school education by providing a long school day for kindergarteners. This has a twofold positive effect on the economy, as it has already helped “Arab women increase their participation in the workforce,” and it has also likely boosted early childhood development.[70] This investment in education might also increase Arab and immigrant participation in later stages of the education system, thus leading to a more modernized Israeli Arab sector. At the same time, this does not solve the problems in Haredi communities.
Though the government has invested a greater amount in education, it has also cut government spending through reductions in social services and defense. Eli Yishay of the ultra-Orthodox Shas party has even said that “attacking government [welfare] allowances is like disconnecting the poor from a respirator,”[71] and in some ways the government is attempting to do that. That the Haredim and Ethiopian immigrants have depended so much on the state is problematic. Michael Sarel, director of Finance Ministry’s department of research and economics, states that the elimination of this dependence is essential in combating the “poverty trap.”[72]

Conclusion
Israel is a country that faces a problem of poverty due to lack of preparedness in certain immigrant groups, lack of infrastructure and education in the Arab communities, discrimination against Arab groups, and a life style choice within the Haredi community. However, the techniques to address the issue must go beyond investment in education and into infrastructure development in the communities where it is lacking. However, it will be necessary to disallow the dependence relations between Israel and the disproportionately impoverished groups as they lead to inefficient economic conclusions. The liberalization plans in 1985 and 2003 did do what was best for the market, but they also left many unprepared for the new economic environment. The goals for the future will be a focus on educating a modern day workforce, the government made a drastic error in educating the Ethiopian refugees for job sectors that were rapidly contracting, and in the future focus should be geared towards educating a workforce relevant to the industries that have arisen in Israel. This must be done in accordance with changes in immigration policy, dependency ties between the government and incoming immigrants should not be the crust of immigration policy. Rather job-assistance programs focusing on job training and job location should be the focus of immigration policy.

[1] The Price of Peace V. the Cost of War, Seymour
[2] Ibid
[3] “Israel: Poverty Could Be Election Capital.”
[4] From State-Led Growth to Globalization, Hanieh, 17
[5] “Economic Boom Belies Israeli Poverty”, Madslien
[6] Economy Is Up, And So Is Poverty, Chabin
[7] “Israel: Poverty Could Be Election Capital.”
[8] “Israel Election Puts Focus on Economy”
[9] https://www.cia.gov/cia/publications/factbook/fields/2046.html
[10] How to Fight Poverty, Dahan, 488
[11] The Contradictions of Economic Reform in Israel, Shalev, 31
[12] Ibid, 31
[13] Ethiopian Jews in Israel, Kahan, 95
[14] Ibid, 95
[15] Ibid, 93
[16] The Contradictions of Economic Reform in Israel, Shalev, 31
[17] From State-led Growth to Globalization, Hanieh, 8
[18] Ibid, 12
[19] From State-led Growth to Globalization, Hanieh, 14
[20] The Promised Land of Business Opportunities, Ram, 231
[21] The Political Economy of Israel, Sharkansky, 15
[22] Israeli Income Equality, Sharkansky
[23] The Promised Land of Business Opportunities, Ram, 231
[24] The Price of Peace V. the Cost of War, Seymour
[25] Ibid
[26] Who Benefits the Most, Lewin, 491
[27] The Israeli Economy At a Glance, Ministry of Finance
[28] The Soviet Immigrant Community in Israel, Leshem, 90
[29] Ibid, 94
[30] Ibid, 97
[31] Ibid, 89
[32] Ibid, 99
[33] Who Benefits the most, Lewin, 491
[34] Israeli 2005 Census
[35] The Konrad Adenauer Program for Jewish-Arab Cooperation, Shamir
[36] Ibid
[37] The Arab Minority in Israel’s Economy, Semyonov, 31
[38] Ibid, 31
[39] Ibid, 23
[40] Ibid, 23
[41] Minority Education, 237
[42] Ibid, 240
[43] Arabs in the Jewish State, Lustick, pg. 155
[44] Ibid, 163
[45] Collision Course, Friedman, pg. 20
[46] From State-led Growth to Globalization, Hanieh, 17
[47] Subsidizing Sacrifice, Berman, 19
[48] Ibid, 12
[49] Who Benefits the Most?, Lewin, 492
[50] How to Fight Poverty, Dahan
[51] Subsidizing Sacrifice, Berman, 12
[52] “The Hamas will also get budgets if it promotes democratic values”, Sheri
[53] Subsidizing Sacrifice, Berman, 14
[54] Ibid, 8
[55] Ibid, 10
[56] Poverty Becomes Israel’s New Enemy, Hirschberg
[57] Subsidizing Sacrifice, Berman, 1
[58] “Haredi job growth impresses Fischer”, Krawitz
[59] Ibid
[60] “High-tech Israel taps into ultra-Orthodox talent”, Devi
[61] Ibid
[62] “Haredi job growth impresses Fischer”, Krawitz
[63] Ibid
[64] From State-led Growth to Globalization, Hanieh, 17
[65] http://first.sipri.org/non_first/milex.php
[66] Ibid
[67] “Israel Leads West in Child Poverty.”, Chason
[68] Promise Them Everything, Sher
[69] “Economic Boom Belies Israeli Poverty.”, Madslien
[70] How to Fight Poverty, Dahan
[71] Promise Them Everything, Sher
[72] Economy Is Up, And So Is Poverty, Chabin

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