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The OECD report is like a mirror of the Israeli economy: expert commentary

Sunday, January 31, Secretary General of the Organization for economic cooperation and development (OECD) josé ángel gurría presented the Prime Minister of Israel Binyamin Netanyahu and Finance Minister Moshe Kahlon survey report on the Israeli economy.

Full-length comprehensive report on the Israeli economy was prepared by OECD experts at the request of the government of the country. In General, it does not contain information about which was not known previously. However, its simultaneous publication of an influential international structure not associated with the Israeli political and economic leaders and unrelated to organizations dedicated to solving the Palestinian-Israeli problems, is as close as possible to the ideal mirror for the government of Israel and Israeli society.

The following short overview of the headlines of the Israeli media shows that anyone who speaks English or Hebrew, it is advisable to read the report prepared by the OECD in the original, and only then proceed to reading the interpretations, since each stakeholder may find in this report anything she wants.

Some of the headlines of Israeli media report on the OECD

«Israel is a corrupt, poor and happy» (ynet), «the OECD Report shows our economic power» (NRG), «a Strong economy, poverty, inequality and low efficiency of labour» (The Marker), «Despite economic conditions, Israelis satisfied» («Israel and Yom»), «the Graph tells the sad story of the Israeli housing market» (The Marker), «Quality of life in Israel – one of the lowest in the West» (The Marker), «In Europe, gladly would have changed places with us» (NRG), «Israel holds the record for the bloated housing prices» («Globes»), «the Feeling of self-security of the Israelis is higher than the average in the West» («Maariv»), «OECD supports gas deal» (The Marker), «Contracts for gas from the Tamar field are too expensive for the Israeli economy» (information).

A brief summary of OECD report

Due to responsible monetary, fiscal and financial policy of the government of Israel, the country’s economy for 13 years, growing at a rate greater than GDP growth in most developed countries. To this must be added the ever-expanding market of employment, low inflation and good foreign trade balance and acceptable fiscal performance. At the same time, although the level of GDP per capita is close to that of most developed countries, Israel’s economy has a low labour efficiency. First of all, this applies to sectors with low competition and a high level of regulation, such as food processing and agriculture, energy and banking sector.

Israel has a high level of poverty and social inequality and low redistribution. Particularly pronounced this problem is pronounced in the elderly, Israeli Arabs and ultra-Orthodox Jews. The high level of housing prices severely limits economic opportunities, including for the middle class. High prices in the sector of food products significantly reduce the living standards of socially weak segments of the population.

Tax burden, government spending on civilian needs was relatively low, and the level of income redistribution is limited. Despite recent growth, expenditure on education based on each child are kept low. Poor infrastructure, primarily transport, to cause considerable damage to production efficiency in the private sector. Limitation of public expenditures in the civil sector under the strategy of debt reduction will limit the ability of the government to Fund important projects.

The recommendations of the OECD

– Continue to conduct expansionary monetary policy (low interest rate, increased money supply), taking stabilization measures in case of threats to the financial system from the real estate market.
To reduce the structural budget deficit and to continue the gradual reduction of public debt by increasing income. Preference to be given to the abolition of inefficient tax privileges, such as exemption of fruit and vegetables from VAT, and the introduction of environmental taxes.
– As far as possible, to decrease military spending and debt service costs, increasing civilian spending on education, infrastructure and reducing inequalities.
– To reduce the burden of regulation on the market of goods.
– To continue the reduction and the abolition of protective duties and enforcement of import policies into line with measures adopted by the European Union, especially in the field of food and agriculture. Protective duties and fixed prices to replace direct subsidies to farmers.
– Complete program of introducing new players and increased competition in the market of banking services for the population, especially in the sector of non-Bank lending.
– Structural reform of the electricity market, transferring functions to an operator of power plants the new structure.
– Toughening of the antitrust policy and the penalties for harming competition.
– To create independent regulators in the fields of communication, postal services, gas.
– Substantially increase the expenditure on education for the socially weak segments of the population. To form a programme of professional internships for graduates from the training of young people.
– To obligate ultra-Orthodox schools to teach math, science and foreign languages.
– To expand the policy of negative income tax and assistance in finding employment.
– To introduce a mandatory alternative service for all citizens, not passing military service in the army.
– To reduce the time of approval of construction of residential houses.
– Continue the development of public transport to reduce housing prices and increase employment opportunities for residents of the periphery.
– Seek the possibility of increasing old-age benefit without creating incentives for not working.
To mitigate the impact of relatively high pension contributions on the current net incomes of workers with low income.
– Gradually raise the retirement age for women to 67 years.
– To oblige the pension funds and the default cash to offer clients low commissions.

The report also contains a subjective assessment of the perception of Israelis of different aspects of life. In particular, the Israelis are very satisfied with life in General, the level of personal security and the health system, moderately satisfied with the balance of work and rest and social connections, and dissatisfied with income, housing prices, government and ecology.

Review economic observer Michael Def

OECD is an international technocratic structure created for the analysis of information and development on its basis of recommendations for development of economy of countries-members of the organization. That is why it is estimated in such matters as the regulation of the gas market, pension insurance or taxation, should pay more attention than reports and statements of other structures, both external and internal.

Hardly any other structure could make a categorical recommendation to oblige all Arab and Jewish ultra-Orthodox youth to perform alternative service. Interestingly, this recommendation included not only the full English version of the report, but also translated into Hebrew the abstract, was completely ignored by the Israeli media, who published per day, more than 200 different materials on the report.

At the same time, it must be emphasized that Israel is a unique state in which to live two large minority (Israeli Arabs and ultra-Orthodox Jews), very different from the majority of the population in the socio-cultural aspects and in terms of the consumer basket. Not to forget, reading the chapters of the report devoted to poverty and some other aspects of the economy.

One of the largest articles of consumption of the average Israeli are children nanny, kindergarten, after-school care, summer camp on vacation («kaytana») become essential articles of consumption, the majority of Israeli families. Not everyone has broken grandma, can help in the care of children. In ultra-Orthodox Jewish community, a significant portion of these costs is saved due to the presence of extended family and community support. In addition, ultra-Orthodox Jews are very different from the rest of the Israelites in the consumption of goods such as clothing or electronics, and even in the rental or purchase of housing. A significant portion of the Israeli Arab community is also different from the majority of the population’s consumer habits.

Therefore, standard calculation of poverty (or social inequality) solely on the basis of income does not reflect the real situation.

With regard to poverty among the elderly, by level of pension benefits, excluding state benefits, the situation in Israel is better than in many OECD countries, however, the level of benefits in Western countries is significantly higher.

The report points to the high cost of housing, but recommends the continuation of a stimulating monetary policy, which is one of the causes of rising prices. Solutions to curb the rising cost of housing encourages OECD to look into reducing bureaucratic procedures, infrastructure development and public transport.

In other respects, hardly anyone surprised by the recommendation to invest in the development of public transport infrastructure or education.

According to the forecast of OECD, Israel should not fear the declining share of Jewish population, but its composition will undergo significant changes: the share of «haredim» in the next 50 years will be doubled. That is why it is important to pay attention to, ultra-Orthodox education system and to encourage the entry of men representing the sector on the labour market.

I want to sincerely hope that the Minister Naftali Bennett will take note of the recommendation on introduction of ultra-Orthodox schools teaching math, science and English, and will not allow the coalition partners (SHAS and «Aadat a-Torah») to cancel the reform, approved by the previous government under pressure from the party «Yesh Atid».

In export-oriented segments of the Israeli economy the level of efficiency of work not inferior to Western standards. The main problem for this indicator in sectors with low competition. There you have to seek the roots of that part of the cost of living, which is not connected with housing.

It is hoped that in the coming years the situation will gradually improve. The final stretch goes approval banking reform and reform of non-Bank lending market, certain measures to lower prices for foodstuffs has entered into force, part will come into force during 2016.

And yet breakthrough is not worth waiting as long until the government and farmers to agree on the transition from protective duties and price controls to direct subsidies, as is done in all developed countries. At the moment it is known that the parties have reached a basic agreement, but no official documents have yet been published.

On the issue of gas deal angel Gurria expressed support for the agreement with the gas consortium, although he criticised the system of binding tariffs, in contracts Israel electric company with the consortium «Tamar». The damage from the next zigzag of the authorities may significantly outweigh the drawbacks, that are made in the agreement.

Special attention should be paid to extremely high levels of environmental pollution. On air pollution among developed countries, worse than in Israel, the situation in South Korea.

Interestingly, among the threats to the stability of the economy, the OECD experts, in addition to geopolitical disasters and social unrest, mention the discovery of new oil and gas deposits (in Israel or in the neighborhood), and a new wave of repatriation of Jews from Europe against growth of anti-Semitism.

The OECD report is like a mirror of the Israeli economy: expert commentary 01.02.2016

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