Israeli Voters Don’t Care About the Economy. They Should.
Despite high inequality, lagging productivity, and serious long-term challenges, the current election campaign has barely mentioned economic policy.
When the economy of a country has faced excessive government intervention alongside high deficits, debt crises, inflation, and severe recessions in the past, as well as high cost of living and rampant inequality in the present, one would expect that economic policies would be the focus of an election campaign. But that’s not the case in Israel—a country where the economy continues to be a second- or even third-order issue. The main issue for Israelis voting on Sept. 17 is whether you’re for Prime Minister Benjamin Netanyahu or not.
Israel, now known as the “start-up nation” and an investment magnet for hundreds of leading global firms, was not always the envy of many. Over the past 70 years, the Israeli economy has gone through many rocky episodes. From its beginning, Israel was known for having socialist-minded policies and institutions at its core: state-owned enterprises monopolizing certain industries, large cooperatives, very influential labor unions which were intertwined with the ruling party, as well as hundreds of collective farms known as kibbutzim which received state subsidies. Either directly or indirectly, through these institutions the government controlled many aspects of daily life.
The economy hit a wall following the global recession in the aftermath of the 1973 Yom Kippur War: no growth, high inflation, and high levels of debt. It was Prime Minister Shimon Peres who came to the rescue and saved the Israeli economy when elected in 1984, through a stabilization program that became the first step in converting Israel into the free-market economy that it is today. Peres reduced government expenditures and allowed for the independence of the central bank. Further pro-market reforms continued in the years that followed.
Following the recession caused by the Second Intifada of 2000 to 2005, Netanyahu continued the reforms in his capacity as finance minister in the government of then-Prime Minister Ariel Sharon. Netanyahu cut welfare programs and slashed taxes, incentivizing labor participation. These reforms arguably set the stage for stability and robust economic growth.
Yet while these reforms made the Israeli economy stronger, ordinary Israelis remain plagued by high inequality and poverty rates—among the highest of nations in the Organisation for Economic Co-operation and Development (OECD)—high and increasing housing costs (Israel remains as one of the countries with the highest cost of living in the developed world), congested infrastructure alongside faulty public transportation systems, excessive red tape in public-sector services, to mention only a few issues. These very important socioeconomic problems—which threaten Israel’s future growth—have become more and more prevalent under Netanyahu’s leadership over the past decade, because his government didn’t prioritize these issues.
These are problems that the average Israeli cares and complains about: A 2018 survey shows that socioeconomic issues are considered a top issue by the Israeli public, together with security and corruption, as was expressed in the massive protests demanding social justice in 2011.
Despite the public’s concerns, there has been a dearth of detailed economic platforms on the Israeli electoral stage. That’s because of a curious electoral paradox: While the Israeli citizen seems to care about the cost of living and inequality, the Israeli voter seems not to. When they enter the voting booth, other issues matter more.
Not only do voters care little about economics when casting their ballots, they might even punish those who focus “too much” on economics. Indeed, there seems to be a curse for parties that double down on economics. Moshe Kahlon, who founded the party Kulanu after gaining widespread popularity for dealing with monopolies in the telecommunications sector and considerably lowering prices, found his way back to his old home in the Likud party in these elections after realizing that his now defunct party won’t make it past the 3.25 percent electoral threshold.
The Sephardic ultra-Orthodox party Shas appear to have lost ground among traditional—and even secular—middle- and low-income Israeli Jews, who often voted for them on the basis of their pro-welfare policies, and the party is thriving only thanks to its ultra-Orthodox base.
Yesh Atid, the party led by Yair Lapid, who originally sold himself as the champion of the middle class, has merged with Benny Gantz’s Israel Resilience Party under the umbrella name Blue and White. But their main electoral promise is to replace Netanyahu. The economic plans of Blue and White—especially when it comes to lowering the cost of living and improving the health and education systems—are secondary. Most strikingly, the Labor Party, whose precursor, Mapai, founded the state of Israel, is on a path toward oblivion after years of explicitly focusing its message on strengthening the welfare state to combat poverty and inequality.
Opposition parties have focused their message on Netanyahu’s numerous corruption cases. For many Israelis aiming to oust Netanyahu, these corruption charges are important fuel in a campaign opposing him, but also may be a signal of the existence of other possible obscure deals—involving favors to business magnates and redirecting funds to coalition partners at taxpayers’ expense—which would limit Netanyahu’s ability to govern and to tackle the country’s problems.
Even so, the actual economic plans of the different parties remain in the background. The usual explanation for this is that Israel’s conflict with its neighbors overshadows every other issue. Traditionally, conflict with the Palestinians and other neighbors was the main lens through which Israeli voters judged politicians. That is part of it, though in these elections, the two main contenders for the premiership are roughly aligned on issues such as Iran, Hezbollah, and the Palestinians.
There is little incentive for politicians to present comprehensive robust plans to tackle long-term economic challenges, in part because Israel remains a place of “tribal” politics. A large share of Israeli voters are loyal voters to parties that, at least on paper, represent their backgrounds and identities. A smaller proportion of the electorate swings between parties. In these elections (and in every election for the past 10 years, for that matter) swing voters care about one issue: ousting Netanyahu. Deviating from the main goal by devoting time to long-term issues, it turns out, might be detrimental on election day.
But the challenges faced by the Israeli economy are significant and will require important policy shifts. Otherwise, Israel could cease being the economic powerhouse that it has become, and which Netanyahu brags about.
What might look like a robust annual gross domestic product growth rate in recent years is doomed to end soon if no structural reforms are enacted. Most of the recent growth, in fact, is driven by increased labor participation of sectors of the population with traditionally low participation rates—ultra-Orthodox men and Arab women—thus growth is naturally capped.
The main engine of growth for any economy, labor productivity, is quite low in Israel, according to studies published by the Aaron Institute for Economic Policy, a leading Israeli think tank. Simply put, the average Israeli can produce about 40 percent less in one hour of work than a worker in other comparable advanced economies (such as Austria, Belgium, Denmark, Ireland, The Netherlands, Finland, and Sweden), mainly due to the inadequate skills of the workforce and low levels of public and private capital.
The Israeli tech sector stands out as being highly productive, but with only 9 percent of the labor force it is simply not big enough to offset the overall trends. Sectors such as construction, commerce, and traditional manufacturing—which combined make up a large chunk of the economy—have low productivity levels.
To reverse the trends on productivity in the long term, education is crucial. Yet the current conditions are particularly worrying. According to the OECD, in 2015, Israeli high-school students scored lower than students from other OECD countries across all categories of the Programme for International Student Assessment standardized test, which evaluates students’ performance on mathematics, science, and reading. In addition, the OECD’s Survey of Adult Skills, another standardized measure of skills in the labor force, shows that the competency of workers in Israel is low compared with other countries, despite Israel having a larger share of academic degrees.
Education spending lags, too. According to the Taub Center, another Israeli think tank, by 2015 public expenditure for primary education in Israel was $7,981 per student versus $8,631 in the OECD (on average). The figures for secondary education were $7,987 in Israel and $10,010 in the OECD.
Israel also needs investment in public goods. When it comes to transportation, the Bank of Israel documents that roads in Israel are three times as crowded as the OECD average. Researchers at the Aaron Institute for Economic Policy, estimate that Israel would need to significantly increase its investment in infrastructure (currently less than 2 percent of GDP) in the following decade in order to close the gap.
When it comes to health, according to World Bank’s World Development Indicators, the number of hospital beds per 1,000 citizens in Israel has halved since 1980, standing at 3.1 (in 2013), below the OECD average. This reflects low government investment in the sector of about $1,800 per capita in Israel, compared with more than $4,000 in other OECD countries such as Austria, Denmark, France, Sweden and Germany. The congestion of infrastructure poses not only direct negative pressure on workers’ productivity, but also indirect pressure, as it reduces Israel’s attractiveness as a hub for foreign investment. Last but not least, Israel’s low levels of competition across almost all sectors directly affect productivity, but also the ability of low- and middle-income Israelis to live and consume without breaking the bank due to the high prices of food and basic services.
These urgent challenges require a serious government willing to stand up to important interests and monopolies, to deal with high market concentration and low import penetration—due to prevalent import tariffs on agriculture, food, and other goods (and lack of market access to some of its neighbors, which would be natural trading partners)—and ultimately bring about real change by lowering the cost of living for the average Israeli. Courageous reforms that sharply reduce regulations preventing faster construction are also needed to tackle the high prices of housing, which nearly doubled over the past decade.
Dealing with these challenges is not trivial, particularly in the context of a significant budget deficit and growing signs of a new global recession. Yet, it requires a serious shift in the order of priorities from the last 10 years of Netanyahu’s governments, under which many of these trends continued to worsen. The security challenges of Israel are well known, but the economic ones receive far too little attention.
Israeli voters must demand clear answers from the candidates, so that whoever becomes prime minister addresses the urgent economic challenges that will shape the well-being and prosperity of their society for decades.
Dany Bahar is an Israeli economist at the Brookings Institution and an associate at the Harvard Center for International Development. Twitter: @dany_bahar