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If OECD membership is the soft carrot, where’s the stick?

Israel/PalestineUS Politics
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The Organization for Economic Co-operation and Development (OECD) –a group of 31 governments designed to address economic, social and environmental issues – decided earlier this week to make Israel a full member of the coalition. I’m in Paris right now, and when I heard the news I jumped on the subway and went to the organization’s headquarters in the western part of the city. I was hoping to protest but aside from a heavy police presence, there wasn’t very much going on. It’s possible I was just late to the party (it was around five in the afternoon).

Palestinian and solidarity groups have been engaged in a long-term lobbying campaign designed to undermine Israel’s bid for inclusion in the OECD. It appears that the effort has failed, leaving me both disappointed and puzzled. The disappointment is obvious, but I was puzzled because Israel just isn’t socially and economically fit for membership. In any case, there shouldn’t be any doubt that this is a significant victory for Israel and Benjamin Netanyahu in particular. So, what happened?

The OECD released a comprehensive economic review in January whose purpose was to evaluate Israel’s candidacy for inclusion into the organization. I read the report when it was publically issued and felt afterwards that Israel’s candidacy was weak (I’ve summarized the report below, but it’s worth a read if you have time).  

The biggest issue was that all of the data used in the report was hopelessly unreliable. The authors state that the “review is not intended to cover … the Golan Heights, the Gaza Strip or the West Bank. However … this review uses Israel’s official statistics, which include data relating to the Golan Heights, East Jerusalem and Israeli settlements in the West Bank.” So the economic data which was used to evaluate Israel’s candidacy was seriously flawed and marred by an illegal occupation. Economists don’t like unreliable data, so this was kind of a big deal.

Aside from the data issue, there are real structural, market-based issues with Israel’s candidacy. I don’t think that anyone can plausibly argue that the Israeli economy is not market-oriented; labor Zionism has long since lost out to free market capitalism, something Benjamin Netanyahu virtually guaranteed during his stint as Finance Minster in the earlier part of the decade. Yet, some of the welfare state features of that first economic iteration have persisted into the present day. As you’ll see below, Israel has a 20% poverty level – that’s 50% of Palestinian-Israelis and 60% of Haredim.

Now, two of the OECD’s stated goals are to “boost employment” and “raise living standards.” In the Palestinian-Israeli sector that’s doable (although I don’t think it will be done). If you invest in education and come out strongly against racist Jews-only hiring practices you’ll see marked improvements in employment rates and a corresponding decrease in poverty levels. It’s the Haredi sector that’s really problematic. These are people who not only don’t want to work (in the free market sense of the word), but can’t because of unequal, basically useless (in the context of a market-oriented economy) skills. They only exist because Israel is a welfare state for Haredim. The Haredi problem only gets worse over time because the proportion of working-to-welfare Israelis is shrinking steadily. Some industrious OECD economist can probably identify the point in the future when Israel’s tax base becomes incapable of supporting its welfare-reliant population. For Israel to really improve and fix its economic fundamentals, it has got to take care of its Haredi problem. I don’t think it’s capable of doing that.

I spent twenty minutes on the subway wondering if I’d missed something. Stanley Fischer – Governor of the Bank of Israel – did a good job steering the country away from the subprime derivative and CDO contagion. But skillful economic maneuvering hardly papers over the serious gaps in social equity and education mentioned in the report.

Then I remembered that I recently saw something suspect about Israel pledging not to  building for a couple of years in ‘Ramat Shlomo’ in East Jerusalem. Was this the price for Israel’s complaisance? Is Barack Obama responding to Netanyahu’s intransigence with an endless supply of soft-boiled carrots?

If I was in Benjamin Netanyahu’s position, I’d game the American President for all he was worth. I’d say something like, ‘Hey, listen. You want me to commit political suicide for the sake of your agenda in the Middle East. Well I can’t do that until I shore up my base. You’ve got to help me do that.’ One OECD vote later and Netanyahu’s done just that.

This is all speculative of course. It remains to be seen whether Obama will get his piecemeal peace deal or not. I doubt it. He likelier succumbed to Netanyahu’s superior brand of politicking.

Here’s the summary of the OECD report:

After a period of high inflation in the 1980s, Israel adopted an anti-inflationary macroeconomic policy. Structural reforms continued into the 1990s including “privatisation and regulatory reforms to encourage market competition… and greater use of market mechanisms in other spheres.” While real GDP growth averaged 4% over the past fifteen years – the “6th highest figure when compared alongside OECD countries” – per capita growth was only 1.7% over the same period. This was largely due to the impact of mass immigration from Russia in the 1990s. “On a purchasing-power-parity basis, the level of GDP [Gross Domestic Product]per capita has reached 80% of the OECD average.” However, it has reached only 60% of the United States average. The per capita GDP growth rate, which is lower than the OECD average, implies a widening gap between living standards. By contrast, 5 top GDP growth countries in the OECD averaged 2.5% higher growth than the OECD average.

Israel’s GDP in 2008 stood at 726.9 billion New Israeli Shekels (NIS), or USD $203 billion. Per capita GDP was at 98,572 NIS, or USD $27,534. The US dollar was trading at an average of 3.58 NIS in 2008. Israel receives approximately 4% of its GDP through a net positive transfer balance from Europe and the United States. Military aid from the United States comprises half of that number, with 2% coming from private households and remittances.

Growth prospects for Israel in the two-year term appear positive. OECD projections put growth for 2009 at 0%, but “project growth of 2.2 and 3.3% for 2010 and 2011, respectively.” Israel has targeted an inflation rate range of 1% to 3% since 2003, and it has mostly met that target. However, inflation volatility is high compared to OECD countries. The standard deviation of quarterly CPI inflation between 1999 and 2008 was 2.5%, while it was it was between 0.5% and 1.5% for OECD countries.

The ratio of civilian (i.e. not defense spending or debt service payments) spending to GDP is just 33%, while the OECD average is 41%. Public debt is considerably high, however. Israel’s debt-to-GDP ratio will likely stand at 82% in 2010. In light of this problem, the “government budgeted to keep the central-government deficit (excluding net credits) to within 6% and 5.5% of GDP in 2009 and 2010, respectively, and aims to reduce it to 3% of GDP in 2011.”

Israel has higher levels of poverty than any OECD country. Approximately 20% of Israelis are below the poverty threshold. Two groups account for most of the poverty in Israel. Around 50% of Arab-Israelis and 60% of Ultra-orthodox Jews subsist below the poverty threshold. The Arab-Israeli segment of the population constitutes 45% of the 20% poverty figure, while the smaller Ultra-orthodox community constitutes 15%.

The central bank first began intervening in the foreign exchange market in 1997 with the goal of increasing reserves to match 100% of short-term debt. The bank continued to intervene after achieving that goal and now has a policy of discretionary intervention which is tantamount to a “dirty float” foreign exchange policy. Observers believe that the intervention price is around 3.8 NIS to the US dollar.

Government expenditure as a share of GDP was around 44% in 2008. As a percentage of total expenditures, approximately 17% went to the defense sector, 12% was spent on healthcare, 16% was spent on education, 25% was spent on social protection, 14% on general public services and 16% on other items.

The OECD report issues several recommendations in light of its findings. For instance, “more strenuous efforts are required to level the educational playing field for Arab-Israelis,” and, “more vocationally oriented learning needs to be encouraged in the Ultra-orthodox community.” The report goes on to recommend that the Bank of Israel cease manipulating the exchange-rate to avoid “damaging its credibility.” Additionally, “labour-market regulation should be more uniformly enforced, particularly the minimum wage.”

Ahmed Moor
About Ahmed Moor

Ahmed Moor is a Palestinian-American who was born in the Gaza Strip. He is a PD Soros Fellow, co-editor of After Zionism and co-founder and CEO of Twitter: @ahmedmoor

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