Mediocrates
02-19-2004, 07:22 AM
http://www.jpost.com/servlet/Satellite?pagename=JPost/JPArticle/ShowFull%26cid=1077164217245
A tale of two countries
Dan Ben-David , Feb. 19, 2004
The very fact that modern Israel arose against all odds shows what a group of determined people – the country contained only 672,000 Jews in 1948 – with incredible resourcefulness and a remarkable ability to think outside the envelope can achieve.
Instead of drowning in a sea of immigrants, the many disparate talents arriving on our shores were channeled into strong currents of creativity and prosperity. Israel had one of the world's highest degrees of income equality, while boasting one of the highest economic growth rates.
In areas crucial to its survival, the Jewish state continues to shine. Its universities are at the world's frontier. Some of our graduates led a hi-tech sector that produced one of the most innovative and successful revolutions outside Silicon Valley, while others in the field of medicine are among the world's leading researchers and physicians. The Israeli army is one of the best; its fighting techniques are copied abroad, and its weapons are sought after by other armies. This is a country that has not merely managed to survive, but has become a symbol of excellence, creativity and daring.
Over the years, Israel has become one of the least economically equitable countries in the West, with poverty and income inequality rising steadily year after year, decade after decade, with no signs of slowing down on the horizon - let alone signs of the trend changing direction. A population that in 1998 was 2.2% the size of America's was able to produce only 1.2% of what the US produced. In other words, Israel's GDP per capita – which represents the average income per person – is considerably lower than in the States.
Israel's per capita income in 1950 was only 37% of America's. It managed to close the gap throughout the fifties and sixties, reaching 61% of the US level in 1972. But since 1973, we have been falling farther and farther behind. As the year 2003 came to a close, our standard of living had declined to 47% of America's (i.e. American incomes are currently more than twice as high as Israeli incomes, compared with being "just" 65% higher in 1972). We have fallen back, in relative terms, to where we were in 1960.
WHAT HAPPENED?
This is more than an academic question aimed at explaining one of the greatest socioeconomic anomalies in the world. It is a question for which we must find the answer before we pass the point of no return, lose this country's most valuable human assets, and fall into a terminal abyss.
On the face of it, Israelis' latent abilities could turn this country into one of the world's wealthiest. But we have tried to pander to every political, ethnic and ideological sector while not being able to draw the line between their many varied desires and the nation's limited resources.
This inability to make decisions and resolve issues, along with a culture of non-enforcement when it comes to laws and ethical norms have led to a gradual squandering of our scarce resources, and is reducing the likelihood of our ever being able to agree on policies that will bring a change in direction.
Why do we produce less than Americans? Two simple comparisons provide a hint at the answer. First, Americans work more than us. They don't work more hours – the length of the average US work week in 1997 was identical to the Israeli average. The difference is that 20% more working-age Americans actually participate in the work force.
The prevalence of non-work lifestyles is expensive, as more money must be taken from those who do work to support those who do not.
We also lose what those people could have produced, had they worked. If the labor participation rate in Israel rose to US levels, our GDP would increase by an additional NIS 47 billion.
More people working would provide only part of the additional output that Israel could attain. The second factor is productivity. The average American worker produces 20.5% more each hour than his Israeli counterpart, and this is not due to any genetic deficiency in Israeli workers.
THE PRIMARY problem is that this country is simply choking its inhabitants. For example, Israel places citizens in what is referred to as the "periphery" without supplying them with the minimal tools and conditions needed for survival in a modern and competitive world.
The problem begins with the disgraceful physical infrastructure that inhibits the free flow of workers and goods, and extends to the neglected human capital that is not provided with the necessary skills. The wonder is not that we compare so badly vis- -vis the United States, but how we manage to do as well as we do. But we are letting a large and growing percentage of Israeli society wither on the vine, and this is becoming a burden that the rest of society is slowly collapsing under.
The solution must be system-wide, with two primary targets:
(1) a reduction in gross income inequality and poverty, and
(2) faster economic growth.
Improving education in the periphery, for example, without providing other important local infrastructures, will lead to a further weakening of the periphery towns as the newly educated leave, instead of strengthening them as inexpensive places that are worth investing and living in.
There are still many Israeli policy makers who hold the mistaken belief that a country can't take care of its needy and grow at the same time.
Those policy makers are under the impression that one must come at the expense of the other, and that the goal is therefore to find the optimal point of balance between the two.
What is the source of this mistake? If there is an emphasis on poverty, then this is taken to mean that welfare payments must be increased, which implies that taxes must be raised, and this in turn will act as a negative incentive to investment, which in turn harms growth.
But this is only a treatment of poverty's symptoms. The alternative is to deal with the sources of poverty, and one important key – though not the only key – in this regard is education, which is also an important factor driving economic growth.
A growing economy undergoes a process of structural change that requires a work force which is continuously becoming more educated and skilled. That is why, as education levels increase, so do incomes and the chances of finding work. As a result, the number of people who even bother looking for a job declines the lower their level of education.
For example, out of a working-age population with 0-4 years of education, 89% do not try to look for work. Of the remaining 11%, 14% are unsuccessful in finding employment. Fortunately for Israel, this is a relatively very small group, but the relationship between education, unemployment, and participation in the labor force should be clear.
We can divide Israel's population into two main groups: those with up to 12 years of education, and those with more than 12 years of education.
The two groups are of nearly identical size, but they are substantially different in their incomes and job prospects. Herein lies one of the main keys for reducing poverty and inequality, and for hastening growth.
Policies that contribute to the higher education of a sizable proportion of the unemployed population will contribute to a lessening in income inequality along three main routes. First, those who make the move will benefit. Second, there will be an improvement for those with up to 12 years of education as a result of reduced competition with other relatively low-skilled workers.
Of course, it should be noted that we are talking about a normal country – one that is not losing its collective mind by adding hundreds of thousands of low-skilled laborers from Thailand, Rumania and elsewhere. Third, an increase in the number of people with more than 12 years of education will moderate the wage increases in this sector. In other words, this is similar to a pincer movement that should lower both income and employment gaps.
But a policy that increases the overall level of education also increases a nation's ability to assimilate, utilize and develop new technologies – and this is one of the keys to increasing economic growth.
A tale of two countries
Dan Ben-David , Feb. 19, 2004
The very fact that modern Israel arose against all odds shows what a group of determined people – the country contained only 672,000 Jews in 1948 – with incredible resourcefulness and a remarkable ability to think outside the envelope can achieve.
Instead of drowning in a sea of immigrants, the many disparate talents arriving on our shores were channeled into strong currents of creativity and prosperity. Israel had one of the world's highest degrees of income equality, while boasting one of the highest economic growth rates.
In areas crucial to its survival, the Jewish state continues to shine. Its universities are at the world's frontier. Some of our graduates led a hi-tech sector that produced one of the most innovative and successful revolutions outside Silicon Valley, while others in the field of medicine are among the world's leading researchers and physicians. The Israeli army is one of the best; its fighting techniques are copied abroad, and its weapons are sought after by other armies. This is a country that has not merely managed to survive, but has become a symbol of excellence, creativity and daring.
Over the years, Israel has become one of the least economically equitable countries in the West, with poverty and income inequality rising steadily year after year, decade after decade, with no signs of slowing down on the horizon - let alone signs of the trend changing direction. A population that in 1998 was 2.2% the size of America's was able to produce only 1.2% of what the US produced. In other words, Israel's GDP per capita – which represents the average income per person – is considerably lower than in the States.
Israel's per capita income in 1950 was only 37% of America's. It managed to close the gap throughout the fifties and sixties, reaching 61% of the US level in 1972. But since 1973, we have been falling farther and farther behind. As the year 2003 came to a close, our standard of living had declined to 47% of America's (i.e. American incomes are currently more than twice as high as Israeli incomes, compared with being "just" 65% higher in 1972). We have fallen back, in relative terms, to where we were in 1960.
WHAT HAPPENED?
This is more than an academic question aimed at explaining one of the greatest socioeconomic anomalies in the world. It is a question for which we must find the answer before we pass the point of no return, lose this country's most valuable human assets, and fall into a terminal abyss.
On the face of it, Israelis' latent abilities could turn this country into one of the world's wealthiest. But we have tried to pander to every political, ethnic and ideological sector while not being able to draw the line between their many varied desires and the nation's limited resources.
This inability to make decisions and resolve issues, along with a culture of non-enforcement when it comes to laws and ethical norms have led to a gradual squandering of our scarce resources, and is reducing the likelihood of our ever being able to agree on policies that will bring a change in direction.
Why do we produce less than Americans? Two simple comparisons provide a hint at the answer. First, Americans work more than us. They don't work more hours – the length of the average US work week in 1997 was identical to the Israeli average. The difference is that 20% more working-age Americans actually participate in the work force.
The prevalence of non-work lifestyles is expensive, as more money must be taken from those who do work to support those who do not.
We also lose what those people could have produced, had they worked. If the labor participation rate in Israel rose to US levels, our GDP would increase by an additional NIS 47 billion.
More people working would provide only part of the additional output that Israel could attain. The second factor is productivity. The average American worker produces 20.5% more each hour than his Israeli counterpart, and this is not due to any genetic deficiency in Israeli workers.
THE PRIMARY problem is that this country is simply choking its inhabitants. For example, Israel places citizens in what is referred to as the "periphery" without supplying them with the minimal tools and conditions needed for survival in a modern and competitive world.
The problem begins with the disgraceful physical infrastructure that inhibits the free flow of workers and goods, and extends to the neglected human capital that is not provided with the necessary skills. The wonder is not that we compare so badly vis- -vis the United States, but how we manage to do as well as we do. But we are letting a large and growing percentage of Israeli society wither on the vine, and this is becoming a burden that the rest of society is slowly collapsing under.
The solution must be system-wide, with two primary targets:
(1) a reduction in gross income inequality and poverty, and
(2) faster economic growth.
Improving education in the periphery, for example, without providing other important local infrastructures, will lead to a further weakening of the periphery towns as the newly educated leave, instead of strengthening them as inexpensive places that are worth investing and living in.
There are still many Israeli policy makers who hold the mistaken belief that a country can't take care of its needy and grow at the same time.
Those policy makers are under the impression that one must come at the expense of the other, and that the goal is therefore to find the optimal point of balance between the two.
What is the source of this mistake? If there is an emphasis on poverty, then this is taken to mean that welfare payments must be increased, which implies that taxes must be raised, and this in turn will act as a negative incentive to investment, which in turn harms growth.
But this is only a treatment of poverty's symptoms. The alternative is to deal with the sources of poverty, and one important key – though not the only key – in this regard is education, which is also an important factor driving economic growth.
A growing economy undergoes a process of structural change that requires a work force which is continuously becoming more educated and skilled. That is why, as education levels increase, so do incomes and the chances of finding work. As a result, the number of people who even bother looking for a job declines the lower their level of education.
For example, out of a working-age population with 0-4 years of education, 89% do not try to look for work. Of the remaining 11%, 14% are unsuccessful in finding employment. Fortunately for Israel, this is a relatively very small group, but the relationship between education, unemployment, and participation in the labor force should be clear.
We can divide Israel's population into two main groups: those with up to 12 years of education, and those with more than 12 years of education.
The two groups are of nearly identical size, but they are substantially different in their incomes and job prospects. Herein lies one of the main keys for reducing poverty and inequality, and for hastening growth.
Policies that contribute to the higher education of a sizable proportion of the unemployed population will contribute to a lessening in income inequality along three main routes. First, those who make the move will benefit. Second, there will be an improvement for those with up to 12 years of education as a result of reduced competition with other relatively low-skilled workers.
Of course, it should be noted that we are talking about a normal country – one that is not losing its collective mind by adding hundreds of thousands of low-skilled laborers from Thailand, Rumania and elsewhere. Third, an increase in the number of people with more than 12 years of education will moderate the wage increases in this sector. In other words, this is similar to a pincer movement that should lower both income and employment gaps.
But a policy that increases the overall level of education also increases a nation's ability to assimilate, utilize and develop new technologies – and this is one of the keys to increasing economic growth.