Haaretz: Reut Calls for a New Social Compact for Inclusive Growth

In the thick of the social protest, the Reut Institute has presented a new vision for Inclusive Growth so that the entire population benefits from Israel's economic growth. A key part of this vision is to develop the country's communities, "the building blocks of society".

Think tank calls for social compact between state, people, industry

Covenant would bind gov't to provide for welfare, says Reut Institute.

By Lior Dattel, Haaretz News paper, 10/08/11.

In the thick of the social protest, the Reut Institute has presented the government and decision makers with a document analyzing the failures resulting from governmental policies over the past three decades. Such policies included hands-off approaches to education, welfare, health care, employment and housing. The results can be seen in the dozens of tent cities that sprung up around the country over the last three weeks.

The institute proposes a solution to end the crisis based on a 15-year binding social contract between the government, social organizations and associations, the business sector, the academic world and the Histadrut labor federation. Its results, according to the institute, would enable the entire public to enjoy the fruits of economic growth.

According to the institute, the government should adopt a policy integrating growth based on market forces and the setting of prices according to supply and demand, together with aggressive governmental intervention against market failures, to guarantee a basic basket of goods according to the average national wage. The institute suggests that price controls be used only as a last resort.

"The social protest of 2011 could mark the end of an era in Israeli economics and society because it exposes part of the economic and social policy failures of the last decades," the proposal states. "Experience shows that a protest like this can't end empty-handed: If a fundamental solution isn't reached in this round it will erupt again with even more intensity.

"Without changes to the economic and social system currently in place, there won't be a solution to these problems, and they will escalate," the proposal continues. "Only a new agenda based on a number of publicly-accepted principles, and integrating various forces in society, can change current trends and ensure that the entire population will benefit from growth."

Gidi Grinstein, founder and president of the Reut Institute, says they realized implementing their vision meant providing for growth across the economic spectrum.

"But we also realized that in Israel there aren't any means to ensure reaching all parts of society," he said. "Problems need to rooted out at their source. Without a package deal the downward spiral will continue. With the protesters needing, and demanding, immediate achievements, it's too easy to spend money to technically repair a problem without rooting it out. And then in a few years the crisis will return with greater intensity."

Grinsteins says it will take several complex reforms to get to the bottom of the mess.

"This isn't a short term operation," he said. "The proper way is for all the players in the economy to agree on a covenant: As soon as agreement is reached it can be implemented."

Think of the children

The work published by the institute warns of a catastrophic future if steps aren't taken soon ensuring long-term changes to secure the wellbeing of the population. The coming generation could end up bearing the brunt of non-action.

"The children and the next generation are the victims of processes occurring in Israel," the institute stated. "In many cases the difficulties parents have in making a living and the erosion in public services have a harmful effect on childrens' education, their health, and on future assets accumulated for their benefit. As a result, their future ability to compete in the marketplace and make a decent living is being impaired, bringing severe and sustained damage to Israel's future human capital."

The institute surveyed changes to Israel's economy since the 1980s, explaining that "the systematic and continual erosion in the quality of life of most Israeli citizens stems from a combination of floundering inflation-adjusted wage levels and a significant rise in the cost of living in real terms."

This is in addition to the erosion in the quality and quantity of public services provided by the government, they say.

"The previous transition between economic systems entailed a lost decade, and that was followed by 15 more years of reform," Grinstein said. "In our opinion, if the change in the economic system isn't done wisely, the country could be faced with another lost decade."

The institute is trying to map out the factors leading to the present situation. Among these it notes the shifting of considerable resources to the armed forces and special interests, like the ultra-Orthodox and high-tech industry.

The latter, although serving as a critical growth engine, also "widened social gaps, doesn't contribute to raising productivity throughout the economy, and hasn't increased the number of jobs in the last few years," the institute says.

According to the institute, one of the main culprits for the situation is the Histadrut labor federation and the large trade unions that "reduce flexibility in the labor market and thereby hurt productivity, oppress non-organized workers, widen the wage gaps, and perpetuate monopolies that push up the cost of living or harm services provided to the population.

"The government and Histadrut influence the wage levels of half the workers, impede improvements to productivity, and sentences thousands of families to lives of misery. For example, the level of wages and benefits of non-organized workers is low compared to those of members of the large unions. Wages in the social work system, police, education and foreign service are also low compared to wages in the defense establishment."

The institute adds that the tycoons sitting at the head of large conglomerates also managed "to grab monopolistic profits and win the lion's share of financing available from the banks."

Start with a vision

Leading off, the solutions proposed by the institute as a first step is implementing a compact between the government and the people. The compact would include a vision to turn Israel into one of the top countries in terms of quality of life, right to a decent living, development and encouragement of long-term savings, development of corporate social responsibility, providing the needy with a basic basket of essential products, and the inclusion of the entire public in growth through the Israel Defense Forces, national service and educational institutions, among others.

The institute also recommends promoting a package deal, including reforms, between the government, employers, workers and the public with the aim of raising the disposable income of households after taxes and basic expenses, along with improving public services and government responsibility in education and health care.

"Israel's middle class is hurt by a combination of three forces: Stagnant income, a dramatic increase in the cost of a basket of goods, and cutbacks in public services," says Grinstein. "Not only does consumption cost more, we now need to consume more services."

The institute claims that action is needed, among other things, to improve the quality of workers and integrate the Haredi and Arab communities into the workforce, along with increasing flexibility in the labor market.

The institute, however, acknowledges that these actions will restrain the level of reward to educated and talented workers. It therefore recommends that the government lower the cost of basic goods and services, especially housing, food, transportation, education and child care, health care and pensions. They also call on the state to adjust the package of reduced-cost goods to the average wage and use this measure to periodically update prices.

Another recommendation by the institute is to concentrate on developing the country's communities, "the building blocks of society."

The institute says the core institutions in the communities, like community centers, sporting associations, Tipat Chalav well-baby clinics, schools and youth movements, should be identified and their presence established alongside establishing the involvement of social organizations in the community.