Mideast Briefing: Understanding Israel’s Social Unrest

Ed Rettig, Director, AJC Jerusalem

August 10, 2011

Saturday night saw the third consecutive weekend of large-scale tent-city demonstrations throughout Israel with estimates running as high as 400,000 participants. “An outburst of frustration with housing prices”; “the revolt of the middle class;” “an ‘Arab Spring’ in Israel;” “a return to socialist democracy”—some of the descriptions pundits apply to the phenomenon—are at best only partially accurate, and in the case of the so-called ”Arab Spring,” deeply misleading.

The current unrest is a product of widespread middle-class frustration over two major developments, one international and the other internal. 

Internationally, it is important to compare income distribution in Israel to that in other countries. The recent Taub Center Report on Israeli socio-economics (presently available only in Hebrew) reports that inequality rose from 2006 through 2009, with GINI coefficients—a mathematical expression of inequality—growing from 38.2 to 38.9 over those years. According to the online CIA Factbook, the nation with the highest GINI coefficient is Namibia, with 70.7.  The U.S.A. comes in at about 45. The lowest is Sweden, with 23. While the level of inequality in Israel is only moderately high, the direction is worrying. OECD (Organization for Economic Cooperation and Development), which consists of 34 market-economy democracies, reports that Israel is in a group of member countries whose GINI coefficient has gone up by more than 4 percentage points since the mid-1980s. 

OECD further reports that growing disparities in these countries are fed by three factors: globalization, changes in family formation and changes in tax/benefit systems. We see rising wage differentials between the highest paid employees and the lowest, as globalization drives higher competitiveness. A minority rides the wave to a higher standard of living but many, perhaps most, do not. Thus to some extent Israel’s problem is shared by other economically advanced countries.

But a local cause that was probably more important in bringing so many out to the streets, even though it is not as widely discussed: the dysfunction of Israel’s parliament, the Knesset, which has created a political vacuum.  For decades coalition politics has failed to protect the level of services offered to the working majority. The most economically productive segment of the economy has felt for a long time that while its labor makes economic growth possible, the benefits go elsewhere.  Theoretically, the Knesset represents the citizens and their interests, and should ensure that the vast working segment of society receives fair value for the taxes it pays. But the Knesset is in fact chronically manipulated by small groups that hold the balance of coalition power, and so it fails to fulfill that function.

The current countrywide demonstrations represent the first true exercise of power by the working middle class since the Israeli economic miracle began in the last decade. It has taken quite a bit of provocation to get these people into the streets, and the non-violence of the demonstrators has been notable.

The grievances that brought the middle class out to demonstrate are real, although they need to be understood in the context of Israel’s overall economic miracle. Israel’s score on the United Nations Development Program’s 2010 Human Development Index is very high, 15th of 169 countries.  Still, as in so many countries of the OECD, the benefits of enormous economic growth have not been spread widely.

The direct provocation that led to the demonstrations was the unwarranted (and possibly price-fixed) rise in the cost of an Israeli breakfast staple, cottage cheese. Hundreds of thousands joined in an organized Facebook boycott that forced the price back down.  That seems to have released the genie from the bottle. The direct reason given by so many of the tent city demonstrators for their participation is the sharp rise in the cost of housing. Central Bureau of Statistics figures show that since about 2008 the real price of housing has risen approximately 37%, taking the dream of homeownership out of the reach of many hardworking people around the country. There are widely held suspicions (think of it as the “cottage cheese syndrome”) that contractors are supporting the price rise by slowing construction in the hopes of greater future profits.

Israel has never been an inexpensive place to live. The famous “McDonald’s Index” shows that a combo meal in Tel Aviv is 35.44% higher than in New York City. However the combination of an expanding economy, relatively fixed salaries for the majority of employees, conspicuous consumption by some newly prosperous members of the top decile, rising prices for basic commodities like dairy foods and apartments, coupled with privatization of much of the public service and rising expectations, are proving a potent mixture.

Middle-class Israelis speak of two major dysfunctions that block a more equitable distribution of the nation’s growing economic resources: concentration of wealth in the hands of widely resented “tycoons” and the large distribution of welfare payments to the Haredi and Muslim Arab communities.  In addition, some who object to the settlements also resent the high costs of the settler communities (although, with the exception of poverty-stricken Haredi settlements like Betar Ilit and Modi’in Ilit, these are generally middle-class communities of two-earner families).

Dr. Yuval Steinitz, the minister of finance, speaking at Haifa University last November, noted that 80% of Israeli poverty is found among the Muslim Arab and Haredi populations. Current estimates put Haredim at about 8.5% of the population. Muslim Arabs make up about 16%. OECD Secretary General Angel Gurria, speaking at the same conference, noted that their poverty is directly correlated to culturally determined decisions to have only one wage earner and large families. The impoverished components of these two populations pose unique socioeconomic challenges that do not lend themselves to short-term solutions.  Both groups have relatively low rates of participation in the work force and consequently high rates of poverty. Haredi culture encourages males to study Torah until well into the fourth decade of life. While Muslim Arab culture is undergoing important changes, it continues to encourage women to stay at home. Since both subcultures encourage large families, the result is self-perpetuating, unsustainable poverty that must be supported at the expense of the working middle class. Here is where parliamentary governance has failed. Rather than develop incentives to expand the work force in these communities through education and preparation to join the modern economy, Haredi MKs work to provide ever larger government transfer payments that necessarily come at the expense of other government outlays.

Israeli experts like Taub Center director Dan Ben-David have been warning of the consequences for years. Professor Ben-David makes the important point that civilian expenses (government outlays minus security costs and interest on loans) have been remarkably stable in Israel since the country overcame the hyperinflation of the 1970s and 1980s. So while the size of the pie has stayed the same, larger slices have been delivered as transfer payments to the underemployed poor. One result has been the growing privatization of government services, transferring costs directly to the working middle class whose salaries have not risen proportionally.

The sticking point is that the underemployed poor populations can only be weaned off overdependence on public transfer payments through long-term processes of education and social change. Simply cutting off funds would generate intolerable suffering.

As for the tycoons, these talented entrepreneurs have done much to create the new wealth in the Israeli economy. However they also dominate the allocation of credit in ways that do not necessarily serve the broader Israeli public. Writing in the Wall Street Journal, the conservative Israeli economist Daniel Doron pinpointed the problem: “… a tiny fraction of the population still uses a third of all credit, which they leverage into highly risky investments, mostly in foreign real estate. Small and medium-size businesses, the most productive enterprises in the economy, are credit-starved, as are the outlying areas of the Galilee and the Negev.” This could be dealt with by a government initiative to generate funds for economic development in the short term, without breaking the budget.

Putting it all together, several tentative conclusions suggest themselves.

The government can do things to correct the distorted credit market that is throttling economic development. It can find ways to free up more land for construction while cutting red tape and bringing down the cost of housing. It can open the market to greater competition by removing import restrictions (on dairy foods, for example). But the sad fact is that three decades of welfare dependence on the part of between a fifth and a quarter of the population cannot be reversed overnight. That places the government between a rock and a hard place, as there are few short-term tools to address the chronic underfunding of the needs of the middle class without breaking the budget in ways that may not be sustainable in the current international financial crisis. Long-term changes—and a good deal of political courage—will be needed to address the economically unsustainable subcultures that teach behavioral norms that generate poverty for large swaths of the population while demanding that the general public subsidize them.

The argument that proponents of the tent-city demonstrations want to take us back to a social democratic, highly centralized economy is off the mark. To be sure, some of the ad hoc leadership expresses that political orientation, but anecdotal and journalistic evidence suggests that most demonstrators do not want to dismantle the structural changes that have made the Israeli economy so much more efficient and competitive. They seem more concerned with the question of how the distribution of investment (government and private) can be reformed within the new structures, for the good of more citizens. 

To date, the “Arab Spring” analogy is misplaced. The tent cities of Israel are the product of a thriving democracy, not a demand for it as in the demonstrations in the Arab world. They are a magnificent exercise in petitioning the government for redress of grievances. At a time when some in the Israeli Knesset have been busy pushing undemocratic bills, they provide an invigorating push back.

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