Israel’s New Social Contract for Growth, Inclusiveness and Community Building

This document offers a comprehensive conceptual framework for achieving Inclusive Growth in Israel, in order to leap the quality of life of all its citizens.

Executive Summary

  1. The challenge of high and inclusive growth within the ISRAEL 15 Vision 1. The ISRAEL 15 Vision sets the goal of turning Israel into one of the fifteen leading countries in terms of its citizens' quality of life. To fulfill this goal, Israel must experience an economic and social leapfrog that results from rapid and sustained growth at a minimum annual real rate of 3.5%. In order for this growth to be inclusive, and for the existing gaps in Israeli society to narrow, the weaker societal layers and the geographically peripheral areas must grow at an annual rate of at least 5%.
  2. The ISRAEL 15 Vision, originally espoused by the Reut Institute since 2006, is now a formal national objective. However, while Reut emphasizes the need to appreciate Israel’s standing through the complex indicator of ‘quality of life’, which refers to available income and quality of public services and sphere, the government focuses on the simpler statistical indicator of per capita income.
  3. Leapfrogs are a rare phenomena and a result of a 'perfect storm' of successful economic policy, societal, political and ideological ripeness; leadership; and strong global trends. The leapfrog phenomenon is meta-economic and, therefore, economic theory is insufficient to understand it and economic policy alone will not generate it. Furthermore, there is no 'recipe' for leapfrogging, and each country that leaped carved out its own unique path. With that, international research and the studying of common traits of countries that have leapt reveal broad common denominators.
  4. A key lesson is that a necessary condition for leapfrogging is growth, which is inclusive and sustainable. In other words, the fruits of growth must benefit the entire society by raising average real income and improving the quality of public services.
  5. Inclusiveness entails providing a fair opportunity for all residents to take part in the growth and enjoy its fruits by accumulating and materializing capital. It is expressed in financial capital, in the form of owning an apartment or a retirement fund; human capital of education or health; or social capital, of personal networks of connections and acquaintances that create employment and business opportunities or political influence.
  6. All countries that have leapt created a unique hybrid of a highly competitive market economy, where the prices of goods and services are determined by forces of demand and supply, and targeted government interventions in a number of fields critical to growth or inclusiveness by means of development policy or regulation.
  7. As such, the challenge facing Israel is to generate such a leapfrog by means of inclusive growth.
  8. In contrast, in recent years societal gaps have widened and the circle of poverty enlarged to the point that Israel's middle class has been eroded and struggles to bear the burden. This distress mounted in recent months and exploded over the past few weeks around issues of housing, food, healthcare, or/and the costs of parenting.

    Inclusive growth in Israel

  9. Israel's economic and social legacy uniquely combines market economy and entrepreneurship with social values of mutual responsibility based on Jewish communal structures of the Diaspora. This legacy dates back to the first and second waves of Zionist immigration (1882-1914), and provided for a powerful force of internal cohesion, prosperity, and resilience of the Jewish settlement in the Land of Israel (the ‘Yishuv’).
  10. During the first 25 years of Israeli statehood, its society and economic life were dominated by large and strong government institutions that espoused socialist values. This model reaped immense achievements and generated a social and economic leapfrog amounting to an annual average of 5.5% per capita, between the years of 1951-1972, while multiplying the population sixfold. This system exhausted itself in the mid-1970s with the political decline of MAPAI, which ruled Israel and the Yishuv since the 1930s.
  11. The 1973 War ushered in a period of stagnation in the form of no real growth, high deficit, inflation, rising debt and declining foreign reserves that peaked with the collapse and nationalization of the banking system, hyper-inflation and near-default in the early-1980s. This period, which is known as the 'lost decade of the Israeli economy', ended with the Economic Stability Package of 1985. It can be viewed as a time of adaptation and transition to a new economic and social approach of liberalism and capitalism, which has since reigned in Israel.
  12. The current economic approach is rooted in the values of liberalism and capitalism and is based on the principles of market economy, a policy of exposure to imports and privatization of public assets and services under the assumption that the private sector is more efficient and flexible than the public sector. This approach, which has been promoted by all Israeli governments over the past 25 years since the Stability Package of 1985, spawned many achievements, but created complex problems:

    • On the one hand, Israel extracted itself from the ruins of the economic crisis that lasted from 1974-1985, returned to a path of growth and economic and fiscal stability, suppressed inflation, alleviated the debt burden while keeping unemployment low;
    • On the other hand, this policy increased societal gaps, eroded the middle class and enlarged the circle of poverty, and failed to precipitate a leapfrog. In other words, not only is Israel not growing fast, but its growth is not inclusive.
  13. The sustained systematic erosion in the quality of life of the majority of Israeli citizens in recent years stems from a triple whammy of deteriorating real wages; rising cost of basic services and products e.g. housing, food, education, parenting, health, pension, financial services or communication; and declining public services. Hence, most Israelis need to do much more with unchanging means.
  14. Children are the silent victims of this reality: The growing financial challenges of many households and the erosion of public services compromise the education, health, and future assets of Israel’s next generations, and, consequently their ability to participate and compete in the labor market and provide for their future families. The long-term implication hereof is not only declining human capital, but also erosion of solidarity with and loyalty to the State of Israel and its institutions.
  15. The underlying trends, incentives and institutions that are driving these outcomes are the following:

    - Globalization, which generously benefits the ‘global class’ marginalizing unskilled labor, thus amplifying societal gaps; exerts harsh pressures on individuals and businesses to continuously learn and update their professional and personal skills, which many find unbearable and drop out;

    - The continued crisis in the capacity of the Government of Israel to govern i.e. to sustain multi-agency collaboration in designing and executing policy toward complex societal challenges, which has been lingering for nearly 35 years;

    - Population growth at annual rate of 1.8%, which renders Israel the only developed country with a fast-growing population. Most of this growth emerges from the socioeconomically weak stratum of society, namely Arab citizens and the Jewish ultra-orthodox (haredim);

    - The Government of Israel's policies in a range of areas such as taxation; privatization of public services; land use and housing, under-compensation for key sectors, such as social workers and police; and conservative policies towards small businesses;

    - Israel’s national labor union (The Histadrut), and especially the powerful unions which increase labor-market inflexibility, decrease productivity, shortchange non-unionized workers, perpetuate monopolies that increase the cost of living and harm services;

    - Corporations and individuals (so-called tycoons) that have gained monopolistic positions, primarily in the markets of basic products and services, extracting extraordinary profits by limiting competition. Israel’s ‘tycoons’ often control both financial institutions and real operations and enjoy disproportionate access to capital;

    -Israel’s security burden and the disproportional political power of sectoral groups of the Haredim and the settlers;

    - The high-tech sector has been a growth engine has not propelled inclusiveness. While it increased GNP and exports, drew foreign investment to Israel, improved the balance of payments and provided for Israel’s technological edge, the high-tech sector also increased societal gaps, and failed to contribute to overall national productivity or to create new jobs in recent years.

  16. As such, the erosion of the middle class, the growing poverty and widening societal gaps are the inevitable outcome of Israel’s present social and economic ecosystem. The remedy requires a systemic approach and a joining of forces by government, civil society, the Histadrut, the corporate and business sector, and academia. In the absence of such a response, these issues will escalate and will ultimately compromise not only social and economic stability, but also the political system. Hence, turning a corner requires vision, leadership, determination, consistency and creativity.


    Israel’s New Social Contract

  17. The urgent need for a New Social Contract, which will articulate the principles of the revised social and economic approach and outline its realization, stems from the combination of the following:

    - The need to avoid near-term escalation and possible bloodshed, as well as intermediate-term stagnation as a consequence of on-going social unrest and political instability. Israel’s last transition required the ‘lost decade’ of 1974-85 and near collapse to coalesce the forces of necessary reform;

    - The complexity, interdependence, cost and duration of the reforms, which may even last a decade (Israel’s last transition entailed at least 15 years of reforms beginning in 1985). Hence, the new social contract can rebuild toward a vision of inclusive prosperity.

  18. Hence, Reut views the New Social Contract as an essential and urgent platform at this moment. Its purpose is to outline over-arching principles – agreed upon by the government, labor unions, employers and the public – that will offer a unifying vision and serve as a force-for-good that contributes to pragmatism on all sides, helps avoid escalation and violence and prevents deterioration into chronic instability. In addition, this contract should establish trust and bridge this moment of great social unrest and distrust with the longer-term vision of Israeli society that will take a decade or more to establish.
  19. The principles of the social contract are: Inclusive growth toward realizing the ISRAEL 15 Vision is Israel's national goal; Communities are the foundation and building blocks of Israeli society; Shaping the future of Israeli society requires a partnership among government, local municipalities, and civil society; Mutual commitment to long-term savings and building human capital; Free market and fair competition; The IDF, national service, colleges and universities will remain engines of inclusiveness; Flexible labor market and a learning society; Basic package of goods and services will be guaranteed for all.
  20. The New Social Contract is a first step and the platform for a series of reforms that will span a few years and will focus on three primary goals: Raising real disposable income (personal income that remains after direct taxes and government charges have been paid); decreasing prices of basic goods and services, primarily by ensuring a truly free market competition; and improving public sphere and social services.



    Quality of life: Real available income and public sphere


  21. Quality of life in Israel is a product of a combination between real disposable income, the quality of public services and the public sphere, as well as of the spiritual, ethical and cultural environment, e.g. deriving a special spiritual value from living in the Holy Land.
  22. Therefore, realizing the ideal of inclusive growth requires increasing real disposable income and significantly improving the quality of social services and the public sphere in order to increase the financial, human, and social capital of Israelis.
  23. The conundrum of disposable income in Israel stems from the quality of its work force. The excess of talent and of skilled and educated workers suppresses compensation, particularly in the absence of a concentrated effort to turn Israel into a global high-end service and R&D center. The desired integration of the Orthodox and Arab sectors into the labor market exacerbates this problem.
  24. Still, the government can increase real disposable income by decreasing costs of basic products and services and by increasing productivity. However, in order for growth to be inclusive, the following actions should be emphasized:

    - Decreasing costs of basic products and services and correlating it to average income;

    - Encouraging the accumulation of financial capital of households through pensions, home ownership, and long-term savings for the benefit of children;

    - Developing Israel's peripheral regions by leveraging their unique assets;

    - Incentivizing small and medium-size businesses and traditional industries;

    - Promoting 'flexicurity,' i.e. greater flexibility in the labor market and more earning-security through professional training that ensures life-long learning in order to increase overall productivity and growth. Special effort should be directed to reforms in the civil service;

    - Integrating the Arab and Orthodox sectors into the workforce, as well as other excluded populations, such as the elderly or disabled;

    - Reforming the tax policy to relieve the burden from the middle class.



    Community-building and improving services and the public sphere

  25. Israel’s conundrum of disposable income requires focusing in parallel on improving social and community services such that they are able to support or ensure a basic basket of goods and services, accumulation of financial, human and social capital and a better quality of life. Reut views communities as key to local prosperity, inclusiveness, and resilience and the building block of Israeli society. Communities not only shape the public space where children are raised but also contribute to the quality of life of adults. Reut calls this perspective: the community-building approach, and its principles are:

    - Ensuring eight 'platforms', which are core institutions that are the basis of a prosperous, resilient, and inclusive community. Institutions become ‘community platforms’ if they meet certain criteria, primarily substantive flexibility, civic leadership and physical infrastructure. The platforms are Community centers (MATNASIM), early childhood centers (Tipat Halav); sport and recreation frameworks and facilities; culture, art, and music centers; schools and other educational institutions; medical centers (Kupat Cholim); youth movements and centers; and parks and public spaces. Each of these platforms needs to be comprehensively reformed, their presence in the community formalized and regulated, and cooperation among them incentivized;

    - Improving services that are critical to prosperity and inclusiveness
    , such as education, vocational training, healthcare and preventative medicine, home economics, and financial education;

    - Security, accessibility and opportunity with an emphasis on community policing, intra-regional and intra-community transportation, and availability of finance for small businesses;

    - Civic leadership
    by elected representatives of local stakeholders that will assume responsibility for shaping the platforms such as in school boards or in community centers. In this context, Reut recommends designating a 'Civil Society Day', in which local community representatives will be elected.

  26. The vision: a network of prosperous and resilient communities – One outcome of the community-building approach is that the vision for the Israeli society is of a network of communities, whose interconnectedness enhances local prosperity, inclusiveness and resilience, and, consequently, quality of life; a sum that is greater than its parts.


    Principles and guidelines for realizing the vision

  27. Concluding and realizing a new social contract requires a long process of dialogue and deliberation among the government; a wide range of relevant civil society associations such as the Histadrut, the Industrialist Association or the Chamber of Commerce; the business sector; various non-profits and academia.
  28. Such a process will inevitably require top-down legislation, policy and resource-allocation, as well as bottom-up local leadership and initiatives that provide a creative response to unique local needs.
  29. The Jewish world can play a central role in realizing the vision of inclusiveness and the community-building approach by nurturing direct connections among Diaspora and Israeli communities. In addition, the platforms and their civic leadership can carry content of religion and spirituality.
  30. The Reut Institute will initiate a cross-Israel campaign of meetings with a variety of stakeholders in order to present and discuss these ideas, and to mobilize community members and public sector professionals towards endorsing this vision and realizing it.

Israel’s New Social Contract

  • High and inclusive growth is Israel’s shared national goal, with the objective of becoming one of the 15 leading countries in terms of quality of life. The test of progress will be the accumulation of financial, human and social capital by all citizens and particularly children.

  • Communities are the foundational unit of Israeli society and the basis for local prosperity, resilience, and inclusiveness. Vibrant community life is the basis for the individual to form his or her identity, realize capabilities, and accumulate capital, and therefore, must be available to every citizen. Each community should be entitled to all platforms and to a standard of resources and services. Micro, small and medium enterprises and initiatives are an inseparable component of a vibrant and prosperous community with the active support of the government.

  • Locally elected civic leadership has a right and an obligation to participate in shaping their community and its local institutions, together with the municipality and Government of Israel. The Knesset and the government will regulate, broaden, and incentivize civic involvement herein, primarily in schools, community centers, youth organizations, sports associations, and arts and culture institutions.

  • Long-term saving and investments are a shared responsibility of the government and households. The state will incentivize individuals to accumulate financial capital for their children through pensions and long-term investments designated for home ownership, education or entrepreneurship.

  • Free market and fair competition are the foundations of the Israeli economy and society. Government intervention will take place in market failures that compromise rapid and inclusive growth.

  • The IDF, National Civil Service, universities and colleges are engines of inclusiveness. The state will broaden programs that support the involvement of weaker populations in these frameworks.

  • Flexibility in the labor markets and life-long learning of professional skills are shared national goals which are essential for productivity and high employment. Government will improve transportation and communication infrastructures, as well as employment incentives for hired and independent workers.

  • Israeli society will be a working society, in which wages ensure dignified living. The national goal is a full integration of two-thirds of the labor force in an appropriate employment framework. The average salary will be higher than the cost of basic goods and services. The government will utilize the tools at its disposal to lower the price of basic products. Educated and skilled civil servants will be entitled, at the minimum, to the average salary in the market.

  • Corporate Social Responsibility will expand to include the value of inclusiveness by enhancing the human capital of employees, restraining monopolistic conduct in basic products and services, providing equal employment opportunity to excluded populations, operating fairly vis-à-vis providers, and preserving the environment.

  • The basket of 'basic goods and services' will be determined in a shared process and will represent the right to include the following components: Housing, education, transportation, cost of raising a child, food, communication, health, water, electricity, and banking. This basket shall be the right of every citizen.

The Reut Institute Team

Gidi Grinstein, Founder and President; Roy Keidar, Chief Executive Officer; Omri Zegen leads the ISRAEL 15 team and Reut’s HR Development; Martin Ben Moreh is the Director of Judaism, Renewed Zionism and Israeli society programs; Yael Weisz leads a team devoted to the challenge of building resilient and prosperous communities; Noa Ecker Amrani leads the Israel 15 team; Amit Granek leads Reut’s effort on regional development; Yuval Holzmam, Ayala Vlodavsky, Shay Maoz, Anat Horowitz-Harel, Abed Assli, Yael Brendel and also Elad Leshem are team members.

Partners

Reut Institute's primary partner in mobilizing ISAEL 15 vision is Mrs. Raya Strauss Ben-Dror. Raya is the central donor to this effort and our partner to many activities within her role as the international co-chair of Partnership 2gether of JAFI, and her commitment to the leapfrog of the Western Galilee.

The central content partner of the Reut Institute is the Research, Planning and Training Division in the Ministry of Social Affairs and Social Services, headed by Mr. Yekutiel Sabah.

Donors

The Reut Institute thanks American Friends of the Reut Institute (AFRI) for its support for the project, and in particular The Russell Berrie Foundation.

Acknowledgements

The Reut Institute thanks the following people, who generously contributed their time and good will:

  • Prof. Ricardo Hausmann, Director of the Center for International Development at the Kennedy School of Government at Harvard University.
  • Mr. Nitai Shreiber, CEO of 'Gvanim', Sderot.
  • Mr. Ido Shelem, CEO and founder of 'Bridge to the Future', Bet Shean.

Nonetheless, the ideas presented in this paper reflect only the stance of The Reut Institute.

For the full document (in Hebrew), click here.