Monday, March 27, 2006

Israel Second Most Unequal Developed Economy

According to this BBC News story Israel have the second highest level of inequality among all developed countries (after the United States). This is quite interesting given how Israel have a level of government spending relative GDP comparable to the level in Sweden. By contrast, relatively low-spending Japan have a level of income inequality similar to that of Denmark and Sweden, illustrating that limited government and high income inequality need not be associated with each other.

Even so, this high level of inequality is damaging for the chances of Israel's most free market oriented politician, Likud leader Binyamin Netanyahu, whose limited free market reforms of Israel's statist economy during his previous terms as Prime Minister and Finance Minister, is widely blamed for the widening income inequality. But without further free market reforms, Israel will not be able to significantly raise its currently relatively low level of per capita income, which is less than half of that in the United States.

The primary cause of both the high level of inequality, the high level of government spending and the low level of per capita income is that significant porions of the Israeli population consists of families where there is only one who works outside the home, usually in a low-paying job (at best, but particularly among ultra-Orthodox Jews it is common for the father to be living off the state as well), while the mother takes care of the very many children. These families are mostly Arabs or ultra-Orthodox Jews. Now, if these families simply made a choice with their own money to abstain from a high level of material standard of living in favor of having a large family there would be nothing wrong with that. But the problem is that the Arab and ultra-Orthodox Jewish voters vote for and receive massive subsidies from the economically productive secular Jewish parts of Israel, something which greatly inhibits Israel's growth potential and makes Israel anything but appealing for gifted Jews (of which there are quite a lot), something which in turn of course means that Israel's economy will operate far beloe potential. One illustration of this point is that both of Prime Minister Ehud Olmert's sons have emigrated from Israel (one lives in New York, the other in Paris).

So even though the level of relative poverty among Israel's Arabs and ultra-Orthodox Jews is basically self-chosen within the context of a welfare state which allows them to live off the productive work of others, it is used as a argument against cutting back on that welfare state.


Blogger J. said...

Hi Stefan, I was impressed by your blog and this entry. Do you think that the "non-productive" sectors of Israeli society are the chief reason for a low GDP? What about high defence spending and the lack of regional stability which deters foreign investment? Also, are the United States the right benchmark of comparison? What about comparing Israel's GDP to Spain, Greece or Portugal?

8:42 AM  
Blogger Avi said...

You leave out the horrendously low salaries in Israel. 8000 NIS (less than $2000) is a good salary here. It's not just the ultra-Orthodox and the Arabs, there are also a lot of uneducated people in manual labor jobs and a lot of the good jobs don't pay due to the economic burden of its benefits. What can be done?

11:00 AM  
Blogger Avi said...

I have analysis on Israel's economy from a free market perspective at I'm an American immigrant in Israel trying to push a free market.

11:01 AM  

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