"Israel thinks it's an open economy. It isn't"

Claude Giorno  photo: Uriah Tadmor

The OECD's Claude Giorno talks to "Globes" about economic problems the Israeli government would rather deny.

Israel is more expensive than Japan - the message of a series of reports by Channel 2 television came as no surprise to Claude Giorno, senior economist on the Israel desk at the OECD. The report he compiled on the Israeli economy presents the same picture, backed by numbers: the cost of living in Israel is 10% higher than that of Japan, Italy and the US; 20% higher than that of Spain; and 30-40% higher than in South Korea and the countries of Eastern Europe. The report, handed to the Israeli government the other week by OECD Secretary General Angel Gurria, confirms the general feeling among the Israeli public since the social protest of 2011, that not only are prices higher here, but working hours are longer and wages are lower. Talking to "Globes", Giorno explains the reasons for this state of affairs, and what Israeli policy makers can do to change it.

We have become accustomed to reports about the achievements of the Israeli economy; we thought we were the Start-up Nation. How can this narrative be reconciled with your report?

"The story of the Start-up Nation is genuine. You see the impact of Intel, Apple, and all the other international companies that operate here, on exports, for example. But the question is, what do the other parts of the economy gain from this success? The answer is: very little, at least in comparison with other countries. In Israel there is a bigger gap than in other places between the 'global' innovative and competitive sectors and the 'local' sectors."

What causes this?

"We didn't look into that, and so I can only presume that the gap reflects social polarization, with sections of the population detached from one another and a low level of social solidarity. It may be connected to the fact that anyone who does not do military or national service in Israel is not part of the mainstream of the Jewish public and does not have the connections for finding a good job. For its part, the group that did serve in the army says 'I'm not prepared to pay more tax in order to make larger welfare payments to those who did not serve.' In the end, the economy portrays life."

What's the bottom line of your report?

"As the secretary general said, our job is to hold up a mirror to you. It's important that you should have a picture of situation, even if you don't like it. The mirror says that you could improve in regulation, in order to increase your exposure to the global economy. It also says that you have done fine and necessary work in macro-economics, in growth, in reducing the debt ratio. In recent years you have gone with a model of promoting growth and reducing government spending. Thanks to the successful work you have done on the macro-economic side, today you can ask yourselves what's next.

"Growth is only a means and not an end in itself. In the end, a society should offer a better life. Equal and genuine opportunity for all. From this arise such questions as how we improve public services, how we ensure that everyone contributes and receives more equitably."

Thin presence of foreign players

Giorno comes from a Tunisian Jewish family that emigrated to France in the 1950s. He has relatives living in Israel and in the US. He began to work at the OECD nearly 30 years ago, and over the years has covered countries like Greece and Australia. He took on Israel two years ago, and since then has worked on the comprehensive report that was released the other week. The work included several visits to Israel, and series of meetings with all the relevant personae in the Israeli economy. The current report on which he is a signatory together with consultant Jacques Adda, was outstanding for the depth of its understanding of Israel's complex reality and its readiness to tackle sensitive matters such as integrating haredim into general society and old age pensions.

Giorno does not speak Hebrew, but he says that he was helped a great deal by the insights of his relatives who live here. "I was an insider," he says with a smile.

The report punctured one of the main concepts in the Israeli economy. Since the deregulation of the 1990s, economists have described Israel as a small, open economy, that is, an economy with high exposure to world trade. "Israel is not an open economy," Giorno says categorically, "or to be more precise it is no longer such an economy."

What was the response to this finding?

"When I presented the report to the Ministry of the Economy, they told me 'That can't be, there must be some mistake here, perhaps you forgot to include imports in the calculations.' But the numbers are very clear. The value of Israel's trade in relation to the economy is 50% lower than the average for the other countries [in the OECD, A.B.]. It's true that in 1995 you were a fairly well-integrated country in relation to the global average, but since then the average has risen in line with the advance of globalization since international companies developed global production and assembly processes, such as smartphone manufacturers, for example. Israel, by contrast, declined, not just in the relative degree of its exposure to global trade, but also in absolute numbers."

Could that be because its currency strengthened?

"No. The strengthening of the currency cannot explain gaps like these, and if you had a strong currency that ought to have translated into a huge balance of payments surplus, and that is not the case. Anyone who visits here gains an impression of a thin presence of foreign players. Take a sector like supermarkets, for example. Today in France there are German supermarket chains like Aldi and Lidl, and British chains like Marks & Spencer. In Israel there are three or four players, all of them local. There are no foreign players here in other important areas, such as banking."

What's wrong with Israel not being as well-integrated into the global economy as it was in the past?

"It's one of the causes of the weakness of productivity in the Israeli economy, and of the cost of living problem. When an economy is open to the global economy, all sectors strive to become more efficient and improve."

Because they're playing in the world league

"Exactly. Unless a company improves all the time, another company will take its place. What's pretty astonishing about Israel is that it's called the Start-up Nation, and for good reason, but Internet use in Israel is relatively low. Why? Because there is no competition for the companies operating in the local economy, so why should they make the effort? They can take it easy."

Without mentioning it by name, the OECD's report points to the Standards Institute as one of the main factors responsible for the decline in competitiveness and the rise in the cost of living in Israel. "One of the findings that stood out as far as the cost of living is concerned," says Giorno, "is prices of non-alcoholic beverages. In the Ministry of the Economy they showed me a bottle of orange juice. According to the Israeli standard, orange juice must contain a certain concentration of oranges before it becomes permitted to put an orange juice label on it. That's fine. But the concentration level required by the Israeli standard is unique in the world. That means that an importer who wants to import orange juice has to ask the overseas producer to make a special product for the Israeli market, with different labels and in different bottles, and that of course costs much more."

And there's also the kashrut problem.

"True. It's important for me to stress that the problem is not actually the kashrut requirement, because in many countries there are requirements for products to conform to religious law, say in Muslim or Hindu countries. The problem is in in the way things are done, in the absence of transparency. I heard for example a story of an abattoir that sought to obtain kosher certification from a rabbi in Beersheva, but he refused, in order to preserve the monopoly of the rabbinic authorities in Haifa. The problem is more severe when you want to import food from overseas. The question here – and I only raise the question – is whether you have to have local kosher certification for the purposes of, say, importing dairy products."

The rise in real estate prices in Israel was given prominent treatment in your report, unlike in other countries.

"Indeed. Home prices are very high here. In making comparisons with other countries you also have to take into account criteria such as the size of an average home. In the US, for instance, an average home is double the area of an average home in France – and still, prices here are certainly very high."

Is there a home price bubble?

"The general rule is that only in retrospect can you know whether there was a bubble or not. The problem of real estate prices in Israel on the supply side is very much connected to matters such as the availability of land, planning processes, public transport infrastructure. Thanks to the public transport in Paris I can live in the suburbs. I remember that when we bought the house I said to my wife that for the same amount we could buy a toilet in central Paris."

What's your view of the Minister of Finance's measures in housing? How long do you think it will be before we see results?

"It's best not to be in too much of a hurry, in order not to make mistakes. Look for example at the not-so-successful proposal of Mr Lapid for an exemption from VAT. Economic processes take years. Anyone who doesn't have patience usually makes the situation worse, even if he sometimes obtains positive results in the short term.

"I think the steps being taken today are on the right lines: simplifying planning and construction procedures, concentrating control in one ministry. You must however pay attention to the problem that accelerated construction creates at the local government level, because on the one hand the local authorities will have to bear more of a burden of financing infrastructures and services, while on the other hand they do not receive the benefits of the construction."

Published by Globes [online], Israel business news - www.globes-online.com - on February 14, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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Claude Giorno  photo: Uriah Tadmor
Claude Giorno photo: Uriah Tadmor
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