Israel's Government Policies

Israel’s Political Structure

Israel is one of the few countries in the world without a written constitution (blocked by religious political parties after the state’s formation in the late 40s, which instead opted to use their “11 Basic Laws”; laws based on individual liberties that were outlined in the Israeli Declaration of Independence). However, attempts by the parliament to draft a constitution began in 2003 with the formation of the Constitution by Broad Consensus Project, but the project continues to this day.

Interestingly enough, Israel has a unicameral legislature, the Knesset, which leads to more efficient lawmaking. This happens because the legislative process is much simpler (there is only one chamber where the decisions have to be approved) and there is no possibility of deadlock. This single chamber system also has allowed Israel to reduce costs, since there are fewer institutions to maintain. However, this unicameral system has also led to a lack of restraint on the majority party in the parliament, which has affected several sectors of Israel’s society, which are not adequately represented. Take for instancer the ultra-Orthodox section of Israel’s population, which has been able to dominate state policy on issues of religion in the public sphere, despite only making up around 10% of the public.

However, Israel’s combination of a national list of election and a very low minimum threshold (Article 4 of the Basic Law: “The Knesset establishes that the Knesset is to be elected in general, national, direct, equal, secret and proportional elections. In order to be represented in the Knesset, a list which takes part in the elections must pass the qualifying electoral threshold, which is currently 3.25%”) practically guarantees the need for a coalition government in a very fragmented Knesset. This has led to “a fluctuating structure of political parties with mergers, splits, and creations almost as a permanent part of the political scene” (Roger Darlington, “A short guide to the Israeli political system”). Taking this into account, it is no surprise that the ideological cleavage between the largest political parties in Israel is considerably big (mainly left vs right-wing parties), especially regarding issues like security or religion. However, Israeli politicians have been able to make fundamental agreements and pacts regarding their economy, to ensure the well being of the state as a whole, and its continuous growth throughout the years.

Law of Return and Immigration Impact on Economic Growth

Implemented in 1950 and modified again in 1970, this law establishes the right to enter the country and establish in Israel to: All Jews, people with one Jewish grandparent, and people who are married to a Jew. For immigrants, this creates a rather attractive situation, allowing them to “directly impact the political process. The Law of Return allows Jewish immigrants to have full citizenship, including the right to vote and to run for office, from the day they arrive in Israel” (Benjamin Powell, Economic Freedom and Mass Migration: Evidence from Israel).

Since the implementation of this law, immigration has become prominent in Israel, with most immigrants arriving from the former Soviet Union (see below).

These immigrants have since played a huge role in Israel’s institutional evolution. According to Benjamin Powell, (director of the Free Market Institute at Texas Tech University and Professor of Economics at Texas Tech University), the immigrants “influenced electoral outcomes through the creation of their own immigrant parties, while not being averse to switching loyalties between the main pre-existing parties in order to increase their political leverage. By 1996, an immigrant political party was part of the ruling coalition government. However, rather than import their origin country’s institutions to Israel, the immigrants’ political participation coincides with a large move in Israeli institutions toward free-market policies and away from socialism” (Economic Freedom and Mass Migration: Evidence from Israel).

Thanks to mass migration from the former Soviet Union, Israel has been able to increase its Index score from 3.7 in 1980 to 7.53 in the 2019 report, reaching an all time high score of 7.6 in 2005. This period of mass migration in Israel came along with a huge increase in economic freedom, allowing the country to move from 15 percent below the global average to 12 percent above it. However, the same immigration policies that helped Israel grow as a Nation, are now beginning to threaten its economy, as seen in the slow but steady decrease in their economic freedom score since 2005. The same laws that allowed Jews all over the world to arrive in Israel, are now more than ever, restrictive. The immigration rates are now at an all time low.

Discovery of Natural Gas

Israel has discovered two major offshore natural gas reserves, two big fields, Tamar (305 billion m^3) and Leviathan (580 billion m^3) to supply the country for 50 years. Tamar is nowadays the only reserve being exploited, covering almost the nations demand and increasing the GDP by 1.1%. Leviathan’s exploitation will start this 2019, and in the long-term it will be focused on the exports to Jordan, Egypt, Turkey and EU countries. Contracts have been already signed. These profits will be placed in a forthcoming dedicated sovereign fund and could represent 10% of the countries GDP in 2040.

Education Policies

After school, male and female students normally enter the Israel Defense Forces at the age of 18 and start University at the age of 21 or 22. Higher educational institutions offer Israel’s students multidisciplinary programs, providing the world with striking studies in the most different intellectual disciplines such as physics, mathematics, chemistry, computer technology, engineering or medicine among others.

Nevertheless, there is a large public transport deficit in Israel, which means that many cannot access to education and labour market in this country, most of them living in isolated zones. They normally belong to the Israeli-Arabs and Haredim ethnic groups, who, because of these facts, are paid very low as they have very low productivity and whose members are predicted to constitute Israel’s half population by 2059. Ensuring these points, as well as other reforms and more public investment in education, would probably help ensure stronger growth, more inclusive and more sustainable by boosting productivity. Increasing the supply and quality of human capital and infrastructure requires both structural reforms and additional financial resources, which can be funded while maintaining prudent fiscal policy.

Israel’s strength in innovation notwithstanding, the Samuel Neaman Institute found that the rate at which research output grows in the middle-east country is lower than in similar small, high-innovation countries like Belgium and Singapore.

Fiscal Policies

Israel’s debt has been reduced from 100% of its GDP in the year 2003 to 75% of the GDP in 2016 (OECD). Several fiscal policies have been carried out: a prudent budgetary framework, thanks to the normal deficit-growth dynamics, which combines both an expenditure-based fiscal rule with deficit targets, and a robust growth performance. An amortization of mortgages granted to the public until the early 2000s. Sales of government land as well as the shekel appreciation (1 shekel = 0.29 US. Dollars). Currently, the annual real spending-growth ceiling is set at 2.6%, and the deficit targets are 2.9% of GDP (2017-19) and then 2.5% and 2.25% of GDP predicted for 2020 and 2021. This framework has recently been strengthened to ensure better compliance with these rules. A multi-year defence plan is also to be mentioned, in order to lower fiscal uncertainty in this field and also to reduce expenditures, although it has not worked as expected due to conflicts with Palestine.

Housing Policy

Apparently, Israel has a strong housing demand, but its policies and constructions are insufficient in this matter causing shortages and high prices. Reforms have been already planned and introduced in order to improve housing supply. Residential projects were approved in 2014, willing to supply the nations demand by 2040. 15 billion New Shekels (NIS), will be invested to promote economic development of the Arab sector. This plan will also reduce housing tensions in Arab localities, building around 40.000 new dwellings. Foreing housing companies will also be set to enter the Israeli market, in order to boost competition and productivity in the construction sector and with the intention of reducing construction costs. Authorities have also raised taxes on real investment, which had sharply risen in the year 2007 and increased in 2015 again. Both finally carried a property tax on owners of three or more dwellings, which was adopted in 2017.

Social Policies

Inequality and poverty remains high in the Middle East, despite an improvement resulting from a rising employment rate and recent measures to address the problem. According to the Gini coefficient (a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents), inequality has decreased from 0.36 in 2011 to 0.34 five years later. One of the main reasons of poverty in Israel is the low level of social transfer.

Policies on Improving Product Market Regulation and Lowering Trade Protection

Since 2011, there have been many measures implemented to improve the regulation of the market and opening it to other countries in order to achieve an improvement in almost each factor of production. Measures have been introduced, for example, to promote competition in banking and to increase domestic market exposure, via Internet. Some products, such as food, have seen their import tariffs reduced and import procedures have been simplified. Cutting the regulatory burden on businesses by 25% by 2019 (a government measure, in which cooperation is fundamental), has no results yet, but the price stability is an encouraging sign. Adding on, trade-facilitations will reduce the costs by 12%, and the reduction of import barriers and regulatory barriers for personal imports could facilitate trade and improve the market.

Infrastructure Policy

Israel’s government has been developing several recommendations on infrastructure during the last few years, which many of them have taken action since 2016. One proposal, which has an impact on the technology, is to create a new and separate infrastructure operator and turn the “Israel Electric Corporation (IEC), into a holding company, and create a wholesale electricity market. A further strategy is to apply an agreement between the government and the Noble-Deck (Israel’s natural gas extraction company), thanks to which 12.75% of Tamar’s Noble leases have been transferred to other companies (among other actions taken). Another policy taken into consideration is the one, willing to develop gas distribution networks in order to push household demands.

Environmental Policies

After the 2015 United Nations Climate Change conference in Paris, Israel has designed a plan, in order to reduce greenhouse gases by 26% by 2030. Energy efficiency programmes have been assigned, with the intention of increasing the share of renewables from 2.6% to 17% by 2030. These measures are not expected to rise electricity prices too much, if well implemented, and will definitely have an impact on the labour and on the capital stock. In addition to this, we must also consider that air quality is low in Israel (below the OECD average). Therefore, the government discusses to develop a mass transport system and increase the rail network, which would be beneficial, both for labour and environment.

Improving the Stability and Efficiency of the Financial System

In November 2016, the “Capital Market, Insurance, and Savings Authority” (CMISA), was separated from the Ministry of Finance and was established as an independent authority. The question now is if it should be necessary to create a Financial Stability Committee. Another proposal was to strengthen mechanisms for dealing with banks in difficulty and to create a deposit insurance system. By 2016, the Bank of Israel, the Ministry of Finance and the Ministry of Justice, achieved to gather together to start several discussions on setting up a deposit insurance scheme. Furthermore, the Economic Arrangement Law, allowed credit unions to enter credit market and in January 2017, credit card companies separated from the two largest banks in the country and a new central credit register was approved.

Productivity

Despite the continuous growth of the Israeli economy, in terms of labor productivity, or GDP per work hour, Israel lags the majority of OECD countries, meaning that the living standards for the Israelites are well below those of other people. According to the OECD, the productivity levels for Israel in 2017 were around 1%. This low level of productivity respond to the problematic level of the countries human and physical capital infrastructure. The country’s small domestic market is concentrated in the hands of too few individuals, with too much regulation, and insufficient competition – a crucial factor in spurring physical and human capital investments necessary for productivity grow.

If Israel needs to overall improve its education system, ensuring that it is provided at a high level in all of the country’s schools to all of its varied populations, and, in addition to boosting its human capital infrastructure, Israel also needs to substantially improve its transportation infrastructure (poor state of roads and railroads). These measures would contribute directly to the country’s overall capacity to assimilate and implement new ideas, thus obtaining the key to innovation, and the heart of productivity improvements.