Israel in a Nutshell

A Different Introduction to Present Day Israeli Society and Economy

Shlomo Swirski

May 2011

Israel, established in 1948 and presently (2011) with a population of 7.75 million, has
been known at least since 1967 as a strong military power. In the last decade it gained
renown for strong economic performance as well and especially for leadership in hi
tech research and development. Israel recently joined the prestigious "rich countries
club," the Organization for Economic Cooperation and Development (OECD). With a
GDP per capita of $29,500 (PPP) in 2009, it ranked 24 out of 34 OECD members. But
it ranked higher - 15 out of 169 countries (in 2010) - on the United Nations Human
Development Index, which takes into account not only economic performance but
also performance in the fields of health, education and gender equality. It commands
advanced technologies – it has several civilian and military satellites circling Earth.
Internationally, it enjoys a strong alliance with the United States and preferential
treatment by several EU countries.

But Israel is a classic case of a country whose macro-economic indicators are good
but most of whose households are not invited to the end-of-year celebration. Israel has
one of the highest poverty levels in the OECD, one of the highest levels of inequality,
and one of the lowest achievement levels in international school tests. How can we
explain these apparently contradictory indicators?

Perhaps the best point to start is the fact that Israel has yet to settle its century-old
conflict with the Palestinians. In 1918, when the British took Palestine from the
Ottoman Empire, the Palestinians were a majority: 650,000, compared with 50,000
Jews. But the British had promised the land to the Zionist movement; as a result, by
1948, the figures were 1.1 million Arabs and 0.6 million Jews. The United Nations
voted to divide up the land into a Jewish and an Arab state. The Palestinians opposed
the decision and took up arms. In the war that ensued, the Jews were the victors, and
most of the Palestinians fled or were expelled from the areas that came under Israeli
control, creating a huge refugee problem that still lingers on. In the same war, Israel
defeated the Syrian, Iraqi, Jordanian and Egyptian armies that came to the aid of the
Palestinians. With some or all of those armies it fought again and again in 1956, 1967
and 1973.

The first positive change came in 1979, with the signing of a peace treaty with Egypt,
the major military adversary. Then in 1993 Israel and the Palestinian Liberation
Organization recognized each other and signed the Oslo accords that established a
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Palestinian Authority in the Gaza Strip and the West Bank. The next year Israel
signed a peace treaty with Jordan. Those two treaties helped improve Israel's
international standing and expand its international trade. But the Oslo accords did not
lead to the establishment of a Palestinian state nor to the end of the Israeli occupation
and colonization of Palestinian territories conquered in 1967: Israeli settlements are
now home to about 300,000 Israelis, not counting the Israeli population of the
Palestinian areas of Jerusalem unilaterally annexed by Israel in 1967. The conflict is
expressed in almost daily small-scale confrontations, but it also led to two large-scale
Palestinian uprisings, the first intifadah in 1987 and the second one in 2000.

The ongoing conflict has high social and economic costs. Each of the two intifadahs
was accompanied by increased misery for the Palestinians but also by economic
downturns for Israel: the second intifadah resulted in two years of negative GDP
growth. The incessant hostilities led to high defense expenditures: in the mid-2000s,
these reached 7.3% of GDP, placing Israel 6th on the CIA World Factbook list (8 of
the top 10 countries are Arab) regarding outlays on defense. The burden on the Israeli
budget is somewhat eased by the fact that the United States funds about one fifth of
Israel's defense budget.

The high defense expenditures funded not only a large and modern army but also the
growth of a sophisticated military industry, now accounting for about 10% of all
Israeli exports. In the early 1990, in the wake of the collapse of the Soviet Union,
some of those industries were privatized and some of the accumulated knowledge
civilianized, leading, among other things, to the flourishing of hi tech industries and
services. Israel is best known for its research and development capabilities, which
often produce innovations that are sold to international IT giants. Those giants -
Microsoft, Intel, HP and others - have also established their own R&D centers in
Israel. In fact, most Israeli R&D workers are employed by multinational corporations.

Hi tech has given Israel the shining image of A Start-Up Nation, to use the title of Dan
Senor and Saul Singer's book. Yet hi tech industries and services hardly represent the
nation as a whole, as they employ not more than 10% of the Israeli civilian work
force. Furthermore, most of them are located in the center of the country, in and
around Tel Aviv. They employ mostly graduates of the best high schools and top
universities. The lucky ones can earn millions of dollars if and when they make a
successful exit – selling their product to US giants. But regular work is also well
remunerated: average hi tech salaries in 2010 were about NIS 18,000 per month –
around $ 5,150, or $ 62,000 per year (at May 2011 exchange rates). This is lower than
the equivalent pay in the US, but enough to place a family with two earners making
that sum in the upper decile of the Israeli household income scale.

For Israelis lucky enough to make those sums, this is of course a welcome change.
But there is little room for hope that the elevation of this stratum is the harbinger of
things to come for the rest of Israelis. Among other things, because new privilege is
accompanied by new walls of protection and exclusion, such as public schools made
exclusionary by self-imposed, parental out-of-pocket payments. The government, for
its part, ensures privilege by making consecutive cuts in personal income and
corporate taxes, the proceeds of which could serve, among other things, to improve
education for those left behind.
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Less well-off Israelis may attempt to imitate the privileged, in what Joseph Stiglitz
aptly calls "trickle down behaviorism," but their chances of success are slim: 75% of
Israeli employees earn no more than one-third of high-tech salaries, that is, NIS 6,000
a month, or $1,700 (at May 2011 exchange rates). Israel has always had a low-wage
economy. In the 1980s, the fledgling hi tech and financial services created, for the
first time, a platform for an Israeli Western-style upper-middle class, but that class is
small. The main task facing Israel is, thus, to lift a sizeable chunk of the rest to a
similar level of income and life-style.

Who are "the rest"? In 1948, the vast majority of the 600,000-strong Jewish
community consisted of European Jews, presently sharing the collective appellation
Ashkenazi. Most hailed from Eastern Europe, the popular base of Zionism; another
sizeable contingent came from Western Europe, mainly from Germany, after Hitler
assumed power. Within one decade after the war of 1948, approximately 900,000
Jewish immigrants had arrived, about 45% of them Holocaust survivors from Europe
and some 55% Jews from Arab countries. By then, the veteran, pre-1948 community,
was firmly ensconced in all the important political, economic and cultural positions.
All new immigrants found absorption conditions difficult; but Holocaust survivors
shared with the pre-1948 Jewish community language (Yiddish, Hebrew, or at least
one of the major European languages), history and culture. Eventually, they blended
in with the veteran Ashkenazi Jews.

The adjustment of the Jews from Arab lands, whose ranks were to be reinforced by
subsequent waves of immigrants, was more problematic: with some exceptions, they
spoke Arabic (or, in the case of Jews from North Africa, French), while the foreign
language taught in Israeli schools was English. Most had not been active Zionists, and
their communities had been enervated by an abrupt uprooting from the Arab
countries. Most families ended up spending many years in transitory camps. They
were eventually settled in peripheral areas of the country, where they suffered high
levels of unemployment throughout the 1950s. It was only when Israel embarked on a
course of rapid industrialization that they were finally "absorbed," at the cost of
collective proletarization. All of which served to cement an enduring social, economic
and cultural cleavage between Ashkenazi Jews and Mizrahi Jews, the latter
appellation reflecting the common fate experienced by communities as disparate as
those of Moroccan, Iraqi or Yemenite origin.

Social and economic gaps between the two groups remain a defining characteristic of
Israeli society. Mizrahi Jews constitute around 45% of first and second generation
Israeli Jews (statistics are not available on the ethnic origin of third-generation Israeli
Jews). Many still reside in peripheral areas – in so-called "development towns" in the
Galilee (north) and the Negev (south), and "south of the tracks" in big cities like Tel
Aviv and Jerusalem. Urban Mizrahi employed persons (second generation) earn, on
average, about 40% less than their Ashkenazi counter-parts; Mizrahi high schoolers,
on average, do worse than Ashkenazi ones in matriculation examinations, and fewer
of them attend colleges and universities.

Mizrahi Jews have mounted some of the most outstanding social protests in Israel,
most notably the protest movement that began in the Wadi Salib neighborhood of
Haifa in 1959 and the Black Panthers' movement that formed in Jerusalem in 1971. A
decade later, the Mizrahi plight gave rise to Mizrahi political parties, the most
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successful of which is the ultra-Orthodox Shas party, presently (2011) holding 11 of

the 120 Knesset seats. Mizrahi Jews have also given massive support to the right-wing
Likkud party, up until 1977 the major opposition party to Mapai (Labor), the party
that dominated most state agencies at the time of the arrival of the Mizrahi Jews.

The year 1948 created another line of cleavage, between Jewish Israelis and Arab-
Palestinian Israelis. Of the approximately 1.3 million residing in the former territory
of the British mandate in 1949, between 600,000 and 700,000 fled or were expelled
from areas that came under Israeli control. This was the beginning of the Palestinian
refugee problem. Some 150,000 Palestinians remained within the borders of Israel. At
the present time, Palestinians who are citizens of Israel number 1.2 million.

Israel's Palestinians fared badly, compared to Jewish citizens. For two decades, up to
1966, they were under military administration which restricted their movements. Most
of their lands were confiscated and given over to Jewish villages, towns and
development projects, transforming the mostly peasant Palestinian community into
hired hands. Little government money came their way: for decades, their villages saw
little if any investments in infrastructure and industrial development; governmental
services such as education and health were poor. As a result, Palestinian Israelis find
themselves at the bottom of almost all social and economic indicators: school
attendance, high school graduation, university and college enrollment, hi tech
employment, infant mortality, poverty, crime, imprisonment. Urban Arab employed
persons earn about 30% less than their Mizrahi and about half of their Ashkenazi
counterparts. Worst off among Arabs is the formerly nomadic Bedouin community in
the south of the country, and especially those who live in the so-called "unrecognized"
villages, which have no access roads, no municipal infrastructure, and no
governmental services like education.

The Yitzhak Rabin cabinet (1992-1995) put an end to some forms of overt
discrimination and began investing in Arab communities, especially in school
construction. Recently, prominent Israeli hi tech leaders have been discussing hiring
larger numbers of Arabs and promoting Arab entrepreneurs. The government itself is
beginning to employ more Arab employees.

Palestinian protests have focused mainly on land confiscation. On May 30, 1976,
Palestinians came out en masse to protest the confiscation of lands in the upper
Galilee. Six protestors were killed by Israeli security forces. May 30th became an
annual day of protest, under the name of "Land Day." Palestinian citizens of Israel
also instituted May 15 as the "Day of the Nakba," in commemoration of the
catastrophe (Nakba) that befell them with their defeat in the war of 1948.

In the first decades after 1948, the only political party that spoke openly of the plight
of Palestinian citizens of Israel was the Communist party; in 1977 it gained 51% of
Arab votes. Since then, the political scene has diversified, and at the present time
(2011), there are 18 Arab members of Knesset (3 more are Druze, a subdivision of the
Arab community that is closely identified with the Israeli state), 10 of them
representing three almost exclusively Arab parties.
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The Ashkenazi/Mizrahi and the Arab/Jewish cleavages, while the major ones, are not
the only ones. Another major line of cleavage is that between secular Jews and
Orthodox ones. The Orthodox community is a descendant of a reaction movement of
the traditional, devout European Jewish community to the enlightenment and
secularization movements. Orthodox Jews, Haredim in Hebrew, are easily
distinguishable by the black attire of the men and the head-coverings of the women.
They live in separate neighborhoods, send their children to separate schools, and are
represented by separate political parties. Together with Shas, they have 16 Knesset
members. Haredim have the highest rate of poverty, higher than that of Israeli Arabs;
one of the reasons for this is the low rate of participation of Haredi men in the work
force. The Haredi community makes up for the lack of earned income with state
subsidies that are offered to men enrolled in religious educational institutions.

Immigrants from the former republics of the Soviet Union, about one million in
number, constitute another distinguishable group. They are spread throughout the
country, but they still maintain Russian-language newspapers, and Russian-language
television and radio stations, and they have a representative political party, with 15
Knesset members. Though many immigrants from the former Soviet Union have done
well, especially those who joined the high tech industry, others are still over-
represented among low wage earners and under-represented among high wage
earners.

Jewish immigrants from Ethiopia, about 100,000 in number, are in many ways
distinct from all the rest. They live in Ethiopian-majority neighborhoods, study
(mostly) in Ethiopian-majority schools, hold mostly menial jobs and despite heavy
governmental aid, especially in the areas of housing and higher education, the vast
majority of them are poor. University graduates have a hard time finding jobs, with
many ending up in NGOs or government departments dealing with Ethiopian
immigrants.

Finally, there are large numbers of non-Israelis in the labor market. Starting in 1967,
Palestinians from the occupied territories began commuting to Israeli agricultural
settlements and urban construction sites. In the late 1980s they numbered about
150,000. The first intifadah caused the government to restrict their entry. Instead, the
government permitted entry of migrant workers from outside the Middle East. There
are now some 300,000 migrant workers – Filipino females caring for the elderly,
Chinese and Romanians working in construction, and Africans working in restaurants
and hotels. Needless to say, none of the non-Israeli workers is protected by Israeli
unions, nor do inspectors from the Ministry of Labor see to it that their employers act
in accordance with Israeli labor laws.

Does the state-run social security system provide where the labor market does not? By
the 1980s, Israel had developed a European-style safety net, with old age insurance,
child allowances, unemployment insurance, long-term care, disability insurance,
income maintenance, maternity leave, and more. However, allowances are much
lower than their Western European equivalents. Another distinguishing feature of
Israel's social security system is that while workers' monthly payments to the Social
Insurance fund are equal to those in OECD countries, employers' contributions are
only about one-quarter of the OECD average, which explains the great discrepancy in
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the size of benefits between Israel and Western European countries, making those
who need to rely solely on Social Insurance payments, in effect, poor.

Let us now turn to macro-economic policy. During the first three decades after 1948,
Israel was characterized by a developmentalist agenda, whereby the state controlled
most capital flows, directed investments, orchestrated rapid industrialization,
developed infrastructure and housing, aimed for full employment, and instituted
universal elementary, followed by secondary, education. During most of those years,
GDP growth registered 10% on average. The development of the military-industrial
complex rode that wave of state-led developmentalism. In 1985, following a severe
economic crisis, Israel changed course, guided in large part by the evolving
Washington Consensus. From then on, emphasis would be placed on economic
growth, with less attention being paid to full employment or upgrading the labor
force; the business sector, not the state, would be at the helm of economic growth; and
the state itself was downsized. The state became preoccupied with reducing its
borrowing in order to expand and cheapen business credit, with privatizing many of
its own enterprises, with cutting the cost of labor, and with aiding business exports.

Within a decade or so, Israel saw the rise of a clearly identifiable business elite, which
slowly concentrated around some twenty major family-owned, pyramidal business
groups that now control a quarter of the companies listed on the Tel Aviv Stock
Exchange. Some of the leaders of those large business groups adorn the list of world
billionaires, which presently (2010) counts 16 Israelis. The top business groups
include Israel's major banks, insurance companies, hi tech industries and services, and
real estate firms. Their executives are well remunerated: the cost of the top executives
in the 25 largest public corporations was (in 2010) more than 90 times the average
Israeli salary. The major business groups have gained considerable political clout,
giving rise to legislative attempts to at least separate financial from industrial and
commercial holdings.

The problem is, the new economic policies, based as they are on the goal of
maximizing business-led growth, have resulted in the marginalization of large chunks
of the Israeli population. Business investments are concentrated in the center of the
country and in a few industries: high tech, finance, and real estate. The Tel Aviv
district and the Central district attract the bulk of new investments; the north of the
country and its south, and even the Jerusalem district, receive much less. The same
country that has some of the most advanced R&D facilities in the world is home to
towns that are still stuck with low-tech, low-wage, low-mobility industries established
in the 1950s. With the state down-sizing itself and with the business elite going
global, there is little prospect that the near future will see a dramatic change in the
situation of those who find themselves outside the global economy.

Throughout these developments, Israeli workers have been losing their collective
power. Union membership, which stood at 70% in the 1950s and 1960s, is down to
25%-30%. The Histadut, once one of the strongest union federations in the world, was
shorn of its powers: it sold most of the firms it once owned, including the largest
bank, Hapoalim, and the single largest industrial conglomerate, Kur. It lost control
over Israel's largest HMO (Health Maintenance Organization) – once the largest
source of income to the Histadrut, as HMO membership fees were passed on to the
Histadrut. It also lost its pension funds. Pension fund monies, which once served to
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finance Histadrut enterprises, now serve to finance the privately-owned business

groups.

The Histadrut, which never managed to overcome the national, ethnic and other
cleavages within the Israeli workforce to form a country-wide coalition of labor, now
represents a relatively small number of strong unions, mainly in the public sector. The
60% of Israeli workers who earn less than 75% of the average wage, including the
40% who earn less than half the average wage, have no strong voice representing their
case. In the last few years a more militant unionizing campaign is being lead by a new
organization, Koach LaOvdim.

Women workers fare the worst. Most low-wage earners are female. Nationally, their
monthly salaries are about 60% those of males and their hourly wages 80% those of
males. The better-off women used to work for the state, as teachers, nurses and social
workers. This was once the territory of Ashkenazi women; in recent years, many
Ashkenazi women have moved into the business sector, where prestige and
remuneration are higher, while Mizrahi and new immigrant women from Russia have
taken their former places, at a time when budget cuts have negatively affected prestige
and remuneration. Arab women's participation in the labor force is very low; among
those who are employed, many work for the state institutions located in Arab
localities. In general, women who are less well-off are employed in clerking, selling
and caring; these are the provinces of Mizrahi and Arab women, new immigrants, and
migrant workers.

Israeli women – Jewish and Muslim, Christian and Druze alike – are subject to
religious institutions in which they have inferior status (to that of men) when it comes
to personal status matters. As a civic category, they have yet to make a breakthrough:
their representation in most political institutions is low compared to that in western
European countries. One area where they have made a significant advance is
education: women have higher high school matriculation rates than men, and higher
representation in the student bodies of colleges and universities. However, their
representation in the ranks of the faculty is still low, especially at the higher echelons.

For Israeli society and economy to move up a grade, three major transformations need
to take place. The first is a political settlement of the Israeli-Palestinian conflict.
This may not allow for an immediate reduction in defense expenditures, but it may at
least prevent routine additional expenditures tagged for "hostilities" in the occupied
territories. Over the last two decades, these expenditures have amounted to more than
the combined annual budgets for Education and Health. A political settlement would
also raise Israel's credit rating and open up new markets in the region. Most
importantly, it would facilitate a major change in the national agenda, from guns to
butter and from the prioritization of military affairs to the prioritization of civilian and
social ones.

The second transformation needed is in the field of education. At the present time,
less than 50% of Israeli 17 year olds receive a high school matriculation diploma, and
only about 30% of the age group enrolls in college or university within eight years of
high school graduation. Down-sizing of the state, which began in 1985, has hit the
budgets of most schools, especially in the social and geographic periphery of the
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country. Parents who can afford it, most of them in the big cities in the center of the
country, improve their children's chances by making out-of-pocket payments for
additional teaching hours inside the schools and private lessons outside of them. And
this, in turn, works to make high scholastic achievements the privilege of a shrinking
sector of the population.

In contemporary Israel, income and wealth are becoming more and more concentrated
- which brings us to the third transformation needed: a long-term investment
policy that centers not only on high-tech and finance, and not only in the Tel
Aviv area. Such a policy change, combined with a long-term educational
transformation, would provide a much larger pool of highly educated persons capable
of functioning in a global environment. This needs to be accompanied by a labor
policy based on workers' rights and strict, universal implementation of labor laws.

Links to some relevant Adva Center publications:

Israel, A Social Report 2010 –
http://www.adva.org/uploaded/social-Eng-site%20final.pdf

Israel's Unbalanced Economic Development

http://www.adva.org/uploaded/investments-eng.pdf

Through a Gender Lens 2011-2012: Looking at the National Budget Proposal

and the Budget Arrangements Law for Fiscal Years 2011 and 2012.
http://wbf.org.il/Uploaded/throughagenderlensENG2011.pdf

Workers, Employers and the Distribution of Israel's National Income, 2010.

http://www.adva.org/uploaded/labor%20report%20in%20English%20press%20releas
e_1.docx

Ten Facts you Probably Did Not Know About Israeli Women
http://www.adva.org/uploaded/10_facts.pdf

The Cost of Occupation: The Burden of the Israeli-Palestinian Conflict, 2010 Report.
http://www.adva.org/uploaded/E-kibush_2010_for%20site.pdf

Separation, Inequality and Faltering Leadership: Education in Israel.

http://www.adva.org/uploaded/education%20English%202009.pdf

Israel's March of Folly

http://www.adva.org/uploaded/Israels%20March%20of%20Folly%20-
%20Shortened%20Final.pdf

Non-discriminatory hiring practices in Israel Towards Arab Citizens, Ethiopian

Israelis and new immigrants from Bukhara and the Caucasus.
http://www.adva.org/uploaded/Affirmative%20Action%20in%20Israel%20in%20the
%20Area%20of%20Employment.pdf