[MUSIC] Welcome back. When Jews started to arrive in Palestine for Zionist purposes in the 19th century, the country was poor and underdeveloped. Under the Ottoman Empire, agriculture was the main economic field and local Arab peasants supplied cheap labor for both Arab and Jewish landowners. Most Zionist immigrants who followed did not bring any capital with them and found it very difficult to compete with the Arabs well-adjusted and cheap labor. Employment was sparse and with very few natural resources, international economists who were to assess the countries economic prospect were not very optimistic. To deal with this devastating situation and to provide for the growing Jewish population in Palestine, the labor movement strived to develop a separated a collectively owned Jewish economic sector. The capital that the Jewish diaspora around the world donated was utilized to buy the land and equipment that collectives of Jewish immigrants would use. In constructing this collectives, first in the field of agriculture and then in industry and commerce as well. The Zionist movement created the labor market in which Jewish workers did not have to compete with Arab ones and jobs were created. To provide other services to new immigrants at the time, semi-state apparatuses were established In the fields of health, education and welfare. These pre-state apparatuses later constituted the infrastructure for the Israeli state welfare regime. Today, Israel is no longer a developing country. It is now a member of the OSCD and is often regarded, as an economical miracle known for its high-tech industry. For all intended purposes, Israel's economy is a role model for fast growth and successful integration into the global economy. Yet, this brief transformation has not come without a cost. In today's lesson, Professor Michael Shalev will talk with us about this transformation and its social consequences. Michael Shalev is a professor of sociology and political science at the Hebrew University of Jerusalem. During his 36 years at the Hebrew University, she love has had three main interests. The comparative political economy of rich democracies focusing on social democracy, well for state and gender and equality. Electoral politics, political economy and the welfare state in Israel and diverse questions regarding the politics of inequality and the massive social protests in Israel and Southern Europe in 2011 their causes and composition. >> This is a class about the economy in Israel, but it's not a class in economics. It's more about how the government in Israel interrelates with economic actors, firms, workers, interest groups and how that has changed over the years and has changed Israeli society in fundamental ways, but I'm going to begin with some information about the Israeli economy. And we'll start with a chart that will show you what's been happening to the Israeli economy in the last five to ten years using conventional economic indicators. I should begin by saying that these data are produced by the Organization for Economic Cooperation and Development, the OECD, which is an organization of 34 rich countries. The most affluent countries in the world and five years ago, Israel joined this quite exclusive club. One of the most basic measures of the economic performance of the country is the size of the economy divided by the number of people who live in the country, it's called GDP per capita. And in the chart, you can see how much GDP per capita has been growing or declining over the last decade or so. And as you well know, that period includes some difficult times from most countries. In 2008 and to 2009, economies around the world declined drastically as a result of the financial crisis and what came to be called the great rescission. What you'll notice in the chart is that although the Israeli economy and it's growth also declined, Israel remained far above the average OECD country in the level of growth and this has been the case throughout the period almost that you're looking at. So, we see that the Israeli economy is actually performing better than the average OECD economy. It was less hurt by the financial crisis. One other thing we should notice though, that since the financial crisis and the Great Recession, the gap in Israel's favor has been declining. And we see in the last few points, the years to come including 2017, nobody knows really what's going to happen in that time, but the OECD expects Israel to remain hid. So we see an economy that seems to be performing well, better than most was not vulnerable to our financial crisis. There are also other things we should know about before we go to our core topic that have to do with the economy. Prices in Israel are high. Actually, among the highest in the world. Higher than the USA or Japan, for example. Secondly and more seriously, poverty and inequality are extremely high in Israel. The OECD in its publications praises Israel's economy for its growth, but criticizes Israel and encourages it to act to reduce poverty. And then equality, which are as high in Israel. Poverty is even higher than the most notoriously unequal country in the world of Epiland states, and that is of course, the United States. Still, just one to more indicators employment something has been very serious in some countries, especially for young people. In Israel Is around 6% in recent years, which puts Israel below the US and Canada where unemployment has been around 7%. And far below European countries like France or the crisis hit countries of Greece and Spain. One other thing that should be mentioned about the Israeli economy is that it [COUGH] devotes a fair amount of its resources to military spending. You won't be surprised to hear that. Recently, about 6% of GDP, has been devoted in Israel to military spending. That's higher than most OECD countries which tend to spend about 1 or 2% of their GDP on military spending. And it's also higher than the USA, which tends to be the leader at least among the larger countries in this area, which spends about 4%. Still, Israel's military burden, the military burden on the economy except in times of military confrontation, war [COUGH], violence between Israelis and Palestinians, and so forth. Which frequently happens. The defense burden on the economy is a lot lower now than it used to be. In the 1970s, Israel used to spend about one quarter of its product on defense. As I said, our emphasis here is going to be historical and it's going to be on how the government has managed the economy or in a way in some periods been managed by it. To get a historical perspective, I'm going to ask you to look at another set of economic figures. Actually, one figure, a very simple one. Which tells us the Gross Domestic Product per capita, which I mentioned at the outset, just means the amount of economic production in a country divided by the number of its inhabitants. And we'll see that for Israel. And for the whole period for data had been collected, the state of Israel was established in May 1948. We have this data from 1950 onwards. And I've divided the chart into three periods which I think will help you follow what's about to come. The first period, we can call the period of industrialization. We see that that was a period for the most part of very rapid economic growth. We see the GDP per capita rising. Particularly, since the mid 50's. There was an interruption in the mid 1960's a very serious one and I'll refer to that later in this class. But we see that after that interruption, growth in the amount of resources in the economy, which translates into the average standard of living, continued and was very high. And then, it stopped abruptly in 1973, where we enter a period that I call the period of stagflation. That period was inaugurated by a very costly and risky war, which is usually known in Israel and in some other countries, as the Yom Kippur War. because it started on that day, October 1973. So the cost of the war to the economy and the cost of the rebuilding and rearming after the war, coincided with a major rise around the world in the price of oil and other basic commodities. And this knocked the Israeli economy hard. And as you can see, GDP per capita was in some years almost stagnant, almost didn't move. In other years, growth was very modest. This period was accompanied not only by economic stagnation, little growth, but also by inflation, which grew, and grew, and grew. And by the end of that period, it had reached a level of 400% a year. This was stopped in 1985 and that's when the third and final period comes in. I call it the Liberalization period. And I'll explain in a while what I mean by that. What I'll say now is simply that we can see that growth recovered in most of this period. As always, the Israeli economy is sensitive to major confrontations in the military field and in the relation between Israel and Palestinian central occupation. And so, we see also a dent in the growth of past that comes as a result of the outbreak of the second Palestinian Intifada in 2000. But the picture is one of rapid growth in the Israeli economy by this time has moved onto a very different footing to what it had before. Now, we turn to the core of this class, which is about the role of the government in the economy. And I'm going to talk about three different models that have kind of paralleled, but not exactly, those three different periods that we saw in the previous chart in relation to economic growth in Israel. But before I get to discussing those three periods. I need to tell you a little bit about what presided the creation of the State of Israel in terms of the role of government of in the economy. It's a complicated story and I'm only going to just mentioned a few highlights. Before May, 1948, when the State of Israel declared its sovereignty, there was half a century of organized Jewish settlement of Palestine. And the critical turning point was when, in World War I, when Great Britain conquered Palestine from the Turks. And it received what was technically called a mandate from the League of Nations to govern Palestine. The simplest and clearest way to think about it is that, de facto, Palestine was a colony of Great Britain. But it was an unusual colony because the British had promised the Zionist movement which is the movement of Jewish people worldwide who supported creation of the state for Jews in the territory of Palestine. So Great Britain, after it got control of Palestine, promised that Jews would be able to immigrate there and set up some kind of autonomous community. It wasn't clear, it was left ambiguous, what exactly that was going to be. And the British were also concerned that the Palestinian-Arab population, who were by far the majority, should not suffer as a result. Key point is that the British government of Palestine was a laissez-faire government. That means that they tried not to intervene in the economy except in order to ensure that holding Palestine as a colony didn't cost them too much money. They did not grant citizenship to the citizens, to the population. They did not provide on any large scale services to the population. They were mainly concerned about infrastructure, military bases, and so forth. And they granted the Jews a lot of autonomy. So in this unusual situation, the Jewish community in Palestine and the Zionist movement around the world, which was supporting it, attempted to manage their own economic development. Where the goal was to be able to create a Jewish entity within Palestine based on purchasing land, based on creating jobs, based on attracting Jewish immigrants that would make it possible, at some future date, to set up a sovereign Jewish State. In terms of the economic situation, it was very precarious. Growth in the economy depended mainly on the quantity of immigrants who were arriving and what they brought with them. If immigrants brought with them enough money to buy homes, set up businesses, the economy prospered. If they didn't, it fell into deep recession. The Jewish community in Palestine was then in an odd situation, in that they didn't directly control the government. They didn't have the powers to tax the citizens, they didn't have the power to force the inhabitants of the land to give it up to them. They basically went on a path of trying to attract enough immigration and enough assistance from the world Zionist movement to be able to support [COUGH] economic growth and the absorption of immigrants in Palestine. After 1948, when the state was created, the situation changed dramatically. You now had an institution that could tax spend, make new relationships with other states with economic implications. Organize immigration, which was limited by the British in the pre-state period. Many, many different implications. And those implications come out in the first period [COUGH] of statehood, which I call The Developmental State Period. Developmental State is a term that scholars have used to describe the role of governments in countries like Japan, South Korea, Taiwan, in promoting economic development. Unlike in some models of economic development, which are seen as depending on open markets where entrepreneurs invest and people make growth happen without much assistance from the state. A developmental state is very controlling. And that's a formula that has worked in the past to produce high economic growth for those countries that I just mentioned, and indeed, for Israel. How did it work in the Israeli case? In the first phase, which [COUGH] parallels the period of industrialization that I mentioned earlier, that part of it that generated high economic growth. So let's say the first two decades of Israel's history from the late-40s to the mid-60s. During that period, the state we could call it a can-do state. It's a state in which the government essentially defied what economists were telling them they should do. Economists said, they should scrimp and save. They should refrain from importing abroad. They should refrain from taking on huge national projects. But the government, being a sovereign government, as I mentioned earlier, had capacities that it didn't have when it was a community institution before the creation of the state. And perhaps the two most important things that the government did, which very dramatically influenced economic development and growth in the young state of Israel, were promotion of mass immigration. And promotion of the receipt of gifts from other states. Mass immigration altered the face of Israel dramatically in the first three and a half years of statehood. Israel doubled its Jewish population as a result of immigration. This created a huge demand for housing in basic necessities, and it also created a supply of people who were desperately in need of work. New immigrants, most of whom arrived here, without economic resources of their own. And who were ready, because they had no choice, to do anything that they were asked to do. And many of them became construction workers, laborers, things they hadn't done in the past. So you had a huge influx of people with needs, and you had an influx of funds that could pay for those needs to be at least minimally satisfied. The funds came from several sources. One very important source was the donations made by Jewish communities worldwide, through Zionist organizations to support the intake of the immigrants. The other even more important source was something called the Reparations Agreement between Israel and West Germany. West Germany agreed to pay Israel a lot of money over the following decade as compensation for the Holocaust. This is different from what individual Holocaust victims were entitled to for their personal compensation, this is a collective grant to the state of Israel. And though I use the word money, what the state received was not actually money by and large, it was goods and raw materials from Germany. Why did this matter? Because it meant that Israel, the government in Israel, could establish factories, could promote industry without having to pay for the machines. And the construction materials and the raw materials that those industries were transforming into products. And so, it embarked on a program of what was called import substitution. Meaning, they aimed to produce within Israel as many goods and services as possible without relying on imports, because the country was desperately short on foreign currency. So here, the state [COUGH] spent huge amounts of quasi-money, we could call it. Because as I said, it came in the form primarily of equipment and materials. It invested all that in creating an industrial base that employed more and more of the new immigrants. So that in the space of about less than a decade by the early 1960s, excuse me, of more than a decade. By the early 1960s, the Israeli economy was booming for a very young precarious economy and unemployment, which had been high was declining. Now, how exactly did this happen? It's complicated, but the big picture is that the government made these gifts available to private and public investors. One of the most important economic enterprises was associated with a labor organization, which had been very important before the state was established. It's called in Hebrew, Histadrut. We'll just call it the labor organization. It's like a big trade union organization, but it did many other things beside. And one of the things it did in the prestate period was it set up economic enterprises, if what factories it created cooperatives. The famous the agricultural cooperatives communes were associated with the Histadrut. After the state was established and the gifts started coming in the government channeled many of them to the Histadrut and it established factories and other business enterprises in Israel. Some of it was used by the public sector, the government sector itself to create national enterprises owned by the state. And some of it was given to private investors who were encouraged heavily subsidized like the public investors to accept the goodies that the government had obtained from abroad and turn them into jobs, and production. And as you can see from the chart, this worked very well until about 1965. When by that time, immigration had declined, actually falling down to virtually zero and the reparations agreement had come to an end, so that the gifts that the government that was using to promote the economy were no longer available. And the country, the economy fell into a deep recession, which the government actually did a lot to encourage, because they felt they could no longer finance this model of economic growth, which depended on massive influx of population and massive influx of gifts that enable economic development to take place. The big recession that happened in the mid 60s ended when the so-called Six-Day War, the brief war of June, 1967 between Israel and Egypt, Jordan and Syria. When that war was over, Israel had occupied the territory. [COUGH] On the West Bank of the Jordan River between Israel and what today is the State of Jordan in a very large Palestinian population of former refugees living in those areas became under Israeli control and that had important economic implications. Because Palestinian workers who were very cheap workers who were looking desperately for work came into the Israeli labor market and there was a big mass of consumers that some Israeli friends could profitably sell their products to. And in addition, because of the victory in the war, the military became bigger, stronger, more prestigious and Israel began to export arms to other countries and that became a major part of the economy. Some were exported, some were sold to the government of Israel, which was keen to beef up its military capacity. This model whereby the government was assisting economic growth indirectly through the occupation and through its military activities worked. What as we could see from the chart earlier, it worked for a while. But in 1973 with the Yom Kippur War, it collapsed. And as we saw earlier, the economy moved into a period of stagflation. Meaning, stagnation plus inflation. So if the first era, sub-era we'll say of the developmental state was mapped by a Can-do State, which would defy the economists and said no, the state can do it against the logic of competitive markets. It was followed by a second sub-era of the developmental state, which we could call the Captured State. And you'll see in a second, why I'm calling it the Captured State. And this is in a way the revenge of the economist, because now they could point a finger at the government and say, we told you so. You can't spend beyond your means, it won't work. Now it came true, because as I mentioned earlier, the war of 1973 and the oil crisis, which came in its wake when the price of oil and other basic commodities skyrocketed. And imposed a burden on all countries, except the oil exporters, of course. But the burden on Israel was especially high, because it depended on oil heavily. And because it had just prosecuted an expensive war followed as I said, by massive rearmament. So, Israel entered a period of very low growth. And increasing inflation but why do I call this the captured state. I call this a period where the state was captured because in effect the developmental state, the can do state, had created arrangements between the government and economic actors, which gave the economic actors increasing power over the government. In a sense, captured it. So, I already mentioned that, big businesses, owned by the labor organization, owned by the government, owned by private investors, were heavily subsidized by the state, especially using the reparations. But not only. The government had made a series of arrangements under which it gave subsidized credit to investors, big investors only. And this was very, very profitable to those big investors. And it later put the government in the position once growth stopped, and the war and the oil crisis arrived. The government was no longer able to subsidize these businesses as lavishly as it had before. It didn't have the means. But on the other other hand, there wasn't going to be any economic growth at all. The unemployment would have risen and the governments of the day would have had difficulty holding on to their positions. Without some kind of discipline, let's call it, of those same businesses that had previously been so heavily subsidized. This was also true of some groups of workers. It wasn't only the capitalists. Who had captured the state. It was also some groups of strong workers, some of them, many of them, most of them were in the public sector or in working for large businesses that were heavily subsidized by the state. They included the largement of holistic banks in the country. They included big industries owned by the labor union. They included infrastructure, like electricity, transportation. And this created a situation where both big labor and big business, had in effect the state in a situation where it couldn't say no to their demands. Because if it said no to their demands, there would be no economic growth. When I say the state was captured, I should really distinguish between the two entities, the most critical ones of any state in relation to the economy. One is the elected government, and the other is the bureaucracies that actually manage the economy. Meaning in Israel, the Ministry of Finance and the Central Bank, the Bank of Israel. Another important entity, in the period I'm talking about right now, was the Ministry of Industry and Commerce. Which directly channeled investments to industrialists and capitalists. Now both of these, arms of the state, were very weak, by this period of stagnant elation. And they were greatly weakened by it. The government was weak, because the old model of economic growth, the can do state, had been very, very successful for the governing party, which was the Labor Party. Associated with the big labor organization, the Histadrut and that party had been the most important political party in the Jewish community of Palestine even before the state was established. After the state was established it continued to be the dominant party. But after unemployment fell and prosperity grew in the 1960s many groups of voters who had supported the Labor Party began to leave for alternatives because they no longer were dependent on Labor Party operatives and Labor Party officials. To get them jobs, and get them housing, and make sure they had health care. They could compete in the labor market and in other markets. And, as I say, they became more independent. And the Labor Party began to face opposition,from especially to its right. By what became the Likud party, the party that has most often formed governments in Israel in recent decades. And as a governing party that faced severe competition it couldn't afford to offend powerful groups. In the meantime the state bureaucracies that had been managing the arrangements under which the government directed the economy gave incentives to investors, protected workers from unemployment or from [COUGH] calamities of life, disability, illness, retirement and so forth. The agencies that were responsible for the economy and for the welfare of state became dependent and very much limited in the degree to which they could say no. And this was particularly as I already said in relation to big business and big labor. They had established arrangements with the governing economic bureaucracies which guaranteed that they could only profit. One such arrangement was subsidized credit for investment to big investors where the government, its contribution, was linked to inflation, but the repayments were not. And as inflation grew those industrialists who received these grants, these subsidized grants, profited more and more. Similarly, large sections of the middle class in Israel enjoyed mortgages that were subsidized by the government in the same way. The mortgage itself, the value of the mortgage was kept. Despite inflation. But the payments were not linked to inflation. So they became smaller and smaller in real terms. So interest groups developed. That had an interest paradoxically in the continuation of inflation and the exacerbation of inflation. And the government agencies found themselves in the position where they couldn't take unpopular steps because the governing party was weak. Because the industrialists were very strong. Because the labor organization was strong in it itself. Had business enterprises that were being subsidized by the state. Under these circumstances, the government's hands in both wings, the political and the bureaucratic, were tied. In theoretical terms, the state lost its autonomy in relation to societal actors, business and labor. And it wasn't until the situation reached a crisis proportions, truly crisis proportions, when stagnation continued but was accompanied by tremendous inflation. And there was chaos in Israel because people didn't know from one day to the next, how much their salary was going to be and if they would be able to cover their expenses. And this was true of businesses and this was true of households. And in July 1985, after a prolonged crisis which also had to do with security matters, Israel invaded Lebanon, then was unable to find a way to withdraw its troops back again. And so the government elected, in fact, in 1984, had to deal with a double crisis, hyperinflation and getting the troops back from Lebanon. And miraculously, a very broad coalition was established. Miraculously, because it could have easily been one party government but the two largest parties, Labor and Likud, decided that since neither of them had an advantage, they would form a national unity government. And that gave the government the ability to say no to strong interest groups of different kinds. And it gave the bureaucrats the ability to change the rules fundamentally. And so, in July 1985, the government adopted what was called the emergency economic stabilization plan. And that included a number of different measures to stop inflation, which actually did work. But the most important thing for us, since we're not economists here, what we want to understand is the role of the government. The most important thing was that the stabilization plan and new policies adopted after the stabilization plan were directed towards giving the state back the autonomy that it had lost in relation to businesses. And in relation to strong groups of workers. And in relation to mortgage owners. And a whole bunches of groups who had been prospering through the government's subsidies and the resulting inflation. And the plan in relation to the bureaucracies of the state had radical implications. It gave the Ministry of Finance tools to basically bypass the democratic process and decide what budgets were going to be, who was going to get what. And to force government ministries and elected politicians, not to spend or to spend on, projects that the Ministry of Finance thought were economically viable. At the same time, the central bank, the Bank of Israel, which had played a supportive role in promoting inflation, without, of course, wanting or intending to do so. But by continuously devaluing the currency, and by providing the government with cover for any budget deficit, the bank had no autonomy of it's own. It had been basically priming the inflation repump. And so, the Bank of Israel, pressed for and managed and succeeded in getting a reform that gave it autonomy in relation to all other parties. The banks, the elected government, and the Ministry of Finance. It and only it could decide what the interest rate was going to be, and what the exchange rate was going to be. You now had these two key state agencies, the Ministry of Finance and the central bank, that had the ability, to a large extent, to determine economic policies. And what they did was, they liberalized. And this leads us to the third and final period of Israel's economic history that we encountered at the beginning, the liberalization period. What did it mean? It meant liberalization first of all in relation to the world economy. Meaning that many protective customs, duties, and taxes that were designed to protect local producers and not allow competition from abroad were gradually eliminated. It meant that many, not all, local monopolies were forced to compete with foreign producers or suppliers of services, and they lowered their prices to Israeli consumers. It meant that within the country, while I'm talking about opening up to the global economy, it was not only in term of imports, it was also to encourage Israeli exporters to export. And part of that had to do not with economic policy, it had to do with foreign and security policy. And specifically with Israel's relations with the Palestinians. And in the beginning of the 1990s, the Israeli government decided that they would recognize the Palestine Liberation Organization. And agreements were reached for a peace process that was supposed to produce a Palestinian state alongside Israel. And many people, including myself, believe that a major reason actually for that peace process was in order for Israeli producers to be able to sell their products and invest freely abroad. Because there was a boycott against Israeli products and investment in many countries due to pressure imposed by Arab states on those countries not to have economic dealings with Israel. So through a combination of changes in economic arrangements, and a peace process, Which even though it was [COUGH] derailed and to this day has not come to completion, it produced this opening up of Israel's economy to the global economy and foreign investors began to invest in Israel on a large scale. Israeli investors began to invest abroad on a large scale, trade increased greatly. So opening up to the world economy was one side of liberalization and the other side was changing the rules and they wish the state and the economy interact. And I've already mentioned the autonomy in the Central Bank, the concentration of control over economic policy in the hands of economist and bureaucracy. In the ministry of finance a large number of reforms took place, but I'll just highlight very briefly two areas of reform. One is in the capital market, so if in the era of the developmental state, a government had provided funds for investment in firms, businesses and production by entrepreneurs of different kinds as a result of liberalization, the government promoted stock exchanges, bond markets, insurance companies. All kinds of instruments and institutions that would channel investment funds from investors presumably based on the merits of those investments and not directly subsidized by the state. In the labor market there were also radical reforms. Workers had been broadly protected by collective agreements and by unions. It was a very unequal protection. Some groups much stronger than others, as I've already hinted. But they were basic rights to the majority of workers. And in the new era, since 1985, many of these rights have been withdrawn. If not the [FOREIGN], then defacto. That is if not by changes in the law, then in practice. And as a result of that, we have larger and larger numbers of workers who are temporary, who are working for man power agencies. Who lack [COUGH] any kind of basic conditions and rights. And the government itself led by the Administer of Finance has been leading agency in making these reforms. So more and more public employment is now outsourced to private agencies. The result of the dual liberalization towards the global economy on the one hand and the tremendous changes in the way that the domestic economy worked was that on the one hand, as I mentioned, the workers were in a weaker position. On the other hand, entrepreneurs and firms that could find a niche in the world economy were in a stronger position. And the result of that was increasing dualism among the workforce and the citizens of Israel. So, some got rich, very rich, some got impoverished. And in the middle, you had a middle class anxious about its future. Now let me just expand on this. So, we have less protection for some groups of workers. Other groups of workers, particularly in two sectors that grew a lot over the last two decades, were actually improving their situation. Those two sectors were the high-tech industries, computing, internet, biotechnology, pharmaceuticals, which have done very well in Israel as exporters. Another area of growth has been in what is called financial and business services where people who are intermediaries in the economic process, whether it be banks or consultants. This has expanded massively, this is true of many economies, and those people were either already unionized and stayed unionized like the banks. Or they're able to come on such handsome salaries because of scarcity and because of high profits that they greatly improved their situation. But alongside that, you have groups that have been becoming poorer. And two large groups of Israeli society have become a lot poorer. One of those groups are the Arab citizens, the Palestinian citizens of Israel, who now make up about one-fifth of the Israel's population. And the other group, the ultra-Orthodox Jews known in Hebrew as the Haredi or God fearing Jews who make up approximately 10% of the populations, it’s hard to get those figures exact. These two groups for different reasons have had difficulty in integrating into the economy. In relation to the Arab minority, a lot of it has had to do with historical and continuing discrimination against them and different disadvantages that have plagued them over long periods. And in relations to the ultra orthodox Jews, part of the problem is that some of them prefer to study in religious institutions rather than to work in the labor market. And the government has provided some subsidies that make this possible. Both of these groups have very high fertility rates, very large families, and relatively low rates of labor force participation, particularly of women. So this makes them vulnerable to poverty. But changes in government social policy, particularly cuts in child allowances, and cuts in basic guaranteed income have hurt these groups badly. So when we look now at the third and final chart that I'm presenting here today, we see that over the years since actually about the mid 1990s. Inequality of incomes in Israel which is the measure I've decided to present here, but poverty which show a similar trend has grown rapidly and very sharply. And Israel has now surpassed the United States in the Gini index of income inequality, which is kind of a summary of how much Inequality there is among families in their income. But we see here that the Israeli line if split in two, there's one line for Israel as a whole and there's another line for Israel without those two vulnerable populations, the Arab population and the Ultra Orthodox population. And we see that a lot of the increase in inequality, as in poverty if I was to show you that graph, has been as a result of the increasingly difficult economic situation of these two sectors of the population. At the same time, we see that even If Israel did not include these two vulnerable populations, we would still have one of the highest rates of inequality in the developed world, below the United States, but above just about every other member country of the OECD. So the government's policies then in effect increased poverty. And one of the things that they tried to do is to force more people to work, people who otherwise would be dependent on government benefits. And this has been somewhat successful but without bringing those families out of poverty. And that's a major reason why we have this situation where inequality is increasing and the government is making it increase more. So this is a period of rising inequality. And in the period of rising inequality, we might expect those who most hurt by the results to revolt. What we find in Israel is something very interesting. In the summer of 2011, there was a revolt. There were massive protests in Israel. This was about four or five months before Occupy Wall Street in the United States, but it was shortly after, very large protest erupted in some European countries particularly in Spain and in Greece. And the Israeli situation is particularly interesting because Israel was not in an economic crisis, quite unlike Spain and Greece. In Spain and Greece banks had defaulted, governments were forced to impose austerity policies that made life miserable for citizens and created mass unemployment. In Israel as we saw earlier the crisis did affect economic growth. But we didn't have a financial collapse. And we didn't have an austerity program. And in fact the core of this massive protest came from the middle classes, which is interesting. Why is that the case? So I hinted at this earlier that the middle classes found themselves in between two different forces. One force was the rising impoverished population, so to speak, below them which certainly, we'll focus on those two vulnerable groups, the Ultra Orthodox and the Arab citizens but not. In fact, many of those people who felt that their economic situation had become precarious were children of middle class parents. Children who had expected that they would go to college, acquire a profession, and then be able to have the same sort of living standards as their parents had, meaning the ability to own your own home. And the ability to maintain a high living standard with two working parents. And child care for young children, Israel, their family centered country. And creating and recreating families is central to that. And actually when we look back, and see what happened here over a long period of time in the transition from the captured developmental state, which persisted until the mid 80's to the liberalized state or the liberalizing state of the last 30 years, then we see something every interesting. We see that the role of the government is the middle classes has changed. I alluded to the thing, for instance that in the period of high inflation, one of the beneficiaries were home owners. And particularly home owners who managed to purchase relatively valuable homes that became more valuable over time. People from the middle classes and above. And their mortgages were heavily subsidized by the state. Many of them were state employees who enjoy the old regime of protective employment and strong unions for public employees. And they escaped various kinds of reforms that were carried out in order to save the government money. I could my own example. I'm a professor about to retire from the Hebrew University. I still enjoy a very generous pension plan. Which will support me after my retirement but my younger colleagues are on a much less generous plan. In future generations of academics, of professors, are going to find themselves with even less generous plans. So this is the way it has worked In many countries the implication here was that in effect young adults in 2011 people who were aged let's say 20 to 35. People who already had started families or anticipated that they soon would start families, found themselves in a situation where some of them were earning fabulous salaries in high tech and other booming areas of the economy. And others, for instance, in the social work profession, were working for privatized, outsourced, agencies, some of them NGOs, some of them private companies, who, for instance, provide services to the mentally ill population to disabled groups of different kinds. Those social workers and other care givers are no longer public employees. They are outsourced employees and they work, many of them, for close to the minimum wage. And they rely on parental support in order to have any hope of being able to establish a family, buy a home, etc. Now added to all this was something that, [COUGH] made it much more difficult to buy a home and pushed the prices of rental homes up immensely. Which was a gigantic price rise In real estate, which began just a couple of years before the protest. So you've got kind of a long-term trend, whereby the new liberalized economy has no longer subsidizes the middle classes, and especially its children, as it used to in the past. And you've got a spike in housing prices, which makes it suddenly very, very difficult for young families to be able to buy a home. And those two transformations turned out to be highly combustible. And we had in Israel, something like 20 to 25% of the adult population participated in street protest over a period of two months in the summer of 2011. It wasn't only, obviously given that scale, it wasn't only people from the middle class, it was also people who were above, and below, various groups joined in. But strikingly, there was very little participation by the two groups who I mentioned earlier, who have become poorer and poorer on average. That's the Ultra Orthodox group and the Arab group. And that has to do I think with the politics of a protest like that more than with the economics. It's not that people throughout the society did not feel anger and frustration about their private economic situation, they did. Everybody, for instance, was hurt one way or another by the housing price explosion. It more has to do with who does one feel comfortable with to go out on the streets and protest? And [COUGH] since there's a high degree of separation and mutual suspicion, and political alienation between the Arab population and the Jewish population and between the Orthodox population and the rest of the Jewish population. Those groups didn't feel comfortable in getting up and joining public protests which were organized by a group of youngsters who came from a very different milia from the Jewish, mostly European origin, secular middle classes. So, let's wrap up now. This has been quite a rapid, and in its way long journey. We went from the early years of the 20th century when Jews where struggling to colonize Palestine. Right up to recent years when Israel has been a strong economy with serious problems. And particularly problems having to do with inequalities. We've seen that Israel has been transformed as other countries have from a situation where governments were directly running and managing markets. Yo one in which they take a more hands off position, but are not actually less involved then they were in the past. And American political scientist Steven Vogel used the term in a book of that name, Freer Markets, More Regulation. So freer markets means states are using markets in order to get more autonomy and be less under pressure to subsidize both capitalists, workers, citizens. It doesn't mean that the government is no longer involved in the economy. Certainly not in Israel and not in other places, as well. So, liberalization is a complicated matter. There are beneficiaries and there are losers. And some of the losers, it turns out, didn't expect to lose and get unhappy when they find that they're losing. The winners in Israel include a new class of very, very rich capitalists who owned, privately with their families, the largest enterprises in the country. That in itself was part of the background to the anger that drove the protest of 2011. It remains to be seen where this is going to lead. >> As Shaleb has argued, the transformation of Israel's socioeconomic regime and the growing inequality contributed to the growing discomfort of the young middle class. For a few month in the summer of 2011, it seemed as if this discomfort and the mass protests it brought about would change the political landscapes of Israel. However, despite overwhelming support the protesters enjoyed, when they faced the ballot box less than two years later, Israelis' voting patterns had not changed. So how can we make sense of these voting patterns? How do the conflicts and cleavages of Israeli society that we have discussed throughout this course affect the political affiliation of Israelis. In our next lesson we will try to solve this puzzle.
