Apr 2010 Journal

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Letter from Israel:

Been there, done that. Why was Israel not affected by the global economic crisis to the same extent as some other countries, specifically the US and the UK? It was probably due to a number of factors.

In the 1980s, due to a combination of ideological rigidity and economic mismanagement, Israel experienced galloping inflation. This was accompanied by a major banking crisis, triggered in part by the banks’ manipulation of their share prices. There are only five major banking groups in Israel and just two of those are really large, so that they essentially operate as a cartel. In 1985 the government bailed out all the banks, i.e., nationalised them, in order to prevent the entire banking system from collapsing. Private assets and savings were frozen for several years, the local currency was devalued and the entire economy was revamped through the concerted efforts of the government, the Histadrut (National Federation of Labour), and the Employers’ Association. Most significantly, strict controls on banks’ activities were put in place, with particular reference to the Basle Banking Supervision Regulations.

Since then, the socialist ideals that motivated Israel’s founding fathers and dominated its political and economic thinking have been gradually replaced by an awareness that in the long run the capitalist model has more to offer. Even the kibbutzim, the last stronghold of the socialist ethos, have been privatised to a great extent.

There are, of course, other factors at work. As a country with little or no natural resources, Israel has had to rely on its only comparative advantage - its people. Israeli brainpower has given the country high-tech and bio-tech industries that are considered among world leaders. In fact, one of Israel’s foremost exports in recent years has been its start-up companies, which are often bought by foreign companies, thus bringing in large amounts of foreign exchange, enriching Israel’s treasury through taxation and creating a thin stratum of extremely wealthy people.

But buyouts apart, there are other reasons for Israel’s relative immunity to the global crisis. Israel has no pretensions to being an international financial centre, it has focused on niche markets and its fiscal and monetary policies have been reasonably sensible. Thus, the budget deficit and government expenditure are kept low by law, and taxes are relatively high. There is an extensive welfare system, and anyone seeking a mortgage must provide adequate proof of payback ability. Government intervention in the currency and financial markets has been drastically reduced and funds are channeled more to R&D and less to propping up unsustainable industries.

Bankers’ bonuses exist in Israel, but a relatively small number of people are involved and in recent years there has been greater transparency in this regard. High-tech companies also hand out bonuses to employees, but no one seems to begrudge these. The one public institution that pays its employees a decent wage, the Bank of Israel, comes under criticism for this but justifies it on the grounds that its employees are of a higher calibre than the average civil servant and that it has to compete with the banking sector, where wages are higher than average. It is only fair on my part to admit that, as a former employee of the Bank of Israel, I may be biased on this point.
 

Dorothea Shefer-Vanson

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