Israel Surveyed

Each one of the survey books considers the Israeli economy at a different stage of its development, six common themes are as follows: (i) The relevant comparison group for considering the Israeli economy, (ii) The challenges of immigration, integration and inequality, (iii) The appropriate roles of the government and markets, (iv) Openness and dependence, (v) Inflation, crisis, and stabilization, and (vi) Growth.

Rising Cost of Occupation

Since 1967 when Israel when the West Bank and Gaza Strip occupation begun, there has been increasingly taxing social-economic effects on Israel. The second uprising broke out after the collapse of the OSLO agreements, in the early 2002. The Israeli economy was hit twice. It was first hit by the dotcom crash in the US; second, by the 2000-2005 Palestinian . The drastic effects on the Palestinian economy which shortly after split in to two political units (the West bank, controlled by the Palestinian Authority, and the Gaza Strip controlled by Hamas). Especially the Gaza strip economy got down to the level of humanitarian crisis. that the early 2000s shock had relatively small effect on the long-term trajectory of Israel's real GDP. The effect on the Israeli economy of the second Intifada shock was mild, and short-lived. globalization proved to be a “shield” against the Palestinian-Israeli military conflicts and regional trade obstacles for the Israeli economy. This means, that the Israeli economy is exposed, however, to alarming long run risks. If, and when, the Palestinian-Israeli conflict, and the long occupation of the of the West Bank territory would trigger political conflicts between Israel and its trade-and-finance partners, this “shield”, provided by Israel high level of integration with the global economy, may break down.

High Fertility and Anemic Skill Acquisition

Most ultra-Orthodox Jews, a growing percentage of the total population, lack the skills to work in a modern economy, having studied little or no math and science beyond primary school (their curriculum focuses almost entirely on religious texts such as the Torah and Talmud). As a result, more than 60 percent live below the poverty line, compared with 12 percent among non-Haredi Jews. Most also opt out of military service, which is compulsory for other Israelis. The net effect: as the Haredi community expands, the burden of both taxation and conscription falls on fewer and fewer Israelis. Trends towards increased fertility, decreased labor force participation, and increased supply of time to religious studies in the ultra-Orthodox community are explained in terms of the behavior of a “club” that has strengthened its norms of religious stringency in an attempt to brace exclusion. The economic self- preservation of the “club” is akin to the old age security motive of bringing children, where children is a means for parents from their income (female work income, child allowances, and other government subsidies) generating years to their old age unproductive years. The parents to minimize “defection” from the community do not endow the children labor- market skills.

Brain Drain from Israel and Skill-Biased Global Immigration Policy

A more generous welfare state (particularly with an aging population) has financing needs that immigrants could fill. With high-skilled immigrants more likely to pay in rather than draw on the welfare state, more generous welfare states are more inclined to try to attract high skilled. Israel ranks third in the world in the number of university graduates per capita, after the United States and the Netherlands. It possesses the highest per capita number of scientists in the world, with 135 for every 10,000 citizens (compared to 85 per 10,000 in the United States). Israelis took full advantage of the immigration skill bias. When examining the index for educated émigrés, i.e., those with a college degree, the average index is 12.41 and Israel's index is more than three times higher, 41.45. Using this index, Israel is higher than Portugal and the gap between Israel and Ireland (49.09) narrows considerably.

Immigration Wave: Soviet Jew Exodus

The disunion of the Soviet Union and the destruction of communism in the USSR 1987-1991 triggered the recent emigration wave of Soviet Jews to various parts of the world, primarily to Israel. The professional, social, attitudinal and behavioral characteristics of the 1990s Jewish exodus cohort proved to be distinctive. Immigrants came mostly from urban areas, with advanced education systems. Immigration produced massive investments, both in residential structures and in non-residential capital. These investments were so substantial that they increased the capital to labor ratio and facilitated economic growth, aided by the remarkable human capital brought by the immigrants. The massive investments in physical capital and infrastructures were financed by capital imports as immigrants themselves fled their former homes almost penniless and credit constrained so that they hardly saved.

The 2008 Global Crisis and Israel-Economy Resilience

The global financial crisis generated the deepest and longest recession since the Great Depression of the 1930s. The defining event of the 2008 global financial crisis was a “hemorrhagic stroke”: a paralytic implosion of the loanable funds markets. Depression forces such as they exist in the US, Europe, or Japan, do not appear to hold in the case of Israel. Its resilience to the external financial shock during the global crisis is rooted in (a) the absence of credit boom in the wake of the crisis, and (b) the relatively small commercial banks' exposure in terms of toxic assets that for the European countries played a major role. Reacting to the global trade-diminishing shocks, policy makers’ concern was three-fold: First, banks exposures to toxic assets such as mortgage based securities and foreigners’ debt obligations. Partly because Israel skipped the credit bubble, and bank regulations were relatively tight, Israel showed a sound resilience to the global financial shock. Second, Israel export markets softened and demand conditions deteriorated. Third, Israel domestic currency got strengthened. Bank of Israel addressed the last two issues by a massive foreign exchange market intervention to weaken the value of the domestic currency, and stimulate exports. The need to prolong the stimulus policies dissipated relatively fast.

The Great Moderation and Israel’s Disinflation

Big drivers of domestic inflation, as they formulated in the Phillips Curve, are: (1) The price of imports and the exchange rate; (2) capacity pressures and labor market tightness in the domestic economy; (3) Public expectations about future inflation, future exchange rates, and future foreign prices; and (4) The amount of trading world slack. The level of foreign wages are also important for countries open to labor mobility. The 1990s globalization wave, which Israel was a part of through the integration of its financial sector into the world economy, and the massive immigration, helped Israel’s inflation to converge to the developed countries inflation rates.

Understanding Migration and Income Inequality

Because the Soviet-Jews exodus was not foreseen ahead of time, Israel’s migration experience is amenable to the natural-experiment methodology. Disposable-income inequality in Israel, was roughly stable until the beginning of the 1990s, rose sharply following the immigration wave, even though no such change occurs with respect to the market-generated inequality. The chapter develops a stylized general equilibrium model with free migration, where wages are endogenous and redistribution policy is determined by (endogenously determined) majority voting. It address the issue of how migration can reshape the political balance of power, especially between skilled and unskilled and between native-born and migrants, and consequently to political-economic equilibrium redistribution policy of the welfare state.

Swell and Retreat of High Inflation

Israel's high inflation calamity amounted to a crisis of political and economic institutions. Failing economic governance made it essential for the government to raise revenue through money expansion. At the time when the newly elected government was catering to populistic demands, the printing press was used to finance the fast-expanding government spending and transfers. The central lesson from the Friedman (1971) is that steady-state seigniorage from revenue maximizing central bank is small. However, Israel, as well as previous historical episodes, offer a counter example. Inflation spikes can be a significant source for government revenue. Following almost 8 years of the hyperinflation economic chaos, the Israeli voters brought about some major political rebalancing towards the political center. Sargent (2009) argues that high inflation can be stopped quickly, and at a low cost. His argument is that inflationary expectations are quick to adjust when the economic regime shifts considerably. The temptation not to stop inflation in its tracks may be irresistible. Similarly, if the government surprise market participants by abrupt stopping of hyperinflation in the presence of entrenched inflation expectations, the fiscal burden of public sector wage bill and subsidies to basic food must rise. Therefore, the government may hesitate to do so. To overcome this difficulty there must be a full-fledged social agreement between the government, savers (who hold government bonds), public sector wage earners, and recipients of food subsidies. To fix the inflated outlays on debt service, wage bill, and subsidies, some major redistribution of income must accompany the inflation-halting step. This is in essence the lesson from Israel’s inflation stabilization policy.

Epilogue

Some of the powerful forces of globalization—responsible for many inflection points in the history of the economy of Israel—that this book analyzes are immigration waves; inflation-reduction spillovers from the advanced economies during the Great Moderation; foreign direct investment in technology and spillovers from the global information technology revolution; the effects of the large influx of skilled immigrants from the former Soviet Union; the rise in income inequality; the opening to East Asian large markets; and the rising cost of occupation....