Israel’s economy – half term report, June 2011

Israel’s economy continues to bubble along.

Happy times it would seem.

It is the job of the governor of any central bank to point out the potential dangers around the corner. Israel’s Stanley Fischer is in the middle of an apparently successful campaign to dampen the housing bubble. And at the end of last week, in an interview with the Financial Times, Fischer questioned the Finance Minister’s propensity to spend.

Fair enough. Just as worrying is the potential fall out from the Greek financial crisis and, in parallel, from the so-called Arab Spring. If Europe is sucked down by Greece, Portugal et al, Israel’s economy will suffer. For example, the UK alone is one of Israel’s strongest trading partners.

Similarly, once the troubles in Libya, Syria and elsewhere have finally evaporated, the results will necessarily bring stability to the region. We can already see how Egypt will almost certainly raise the price of its gas exports to Israel very sharply. The weakness of the Damascus regime has seen one border incident with Israel, provoked by Iranian revolutionary guards, and we have probably not seen the worst of the violent disorders.

In the words of Niall Ferguson, a leading economic historian:

Beware the economic consequences of the Arab Spring. ….(Once the) euphoria phase” of revolutions is over, economic disaster such as higher prices, greater uncertainty and capital flight always follows. …And the magnitude of capital flight from Egypt right now is roughly 10 times the aid promised to Egypt by the United States and Europe combined.

There is a third issue, ignored by the foreign media, but felt daily by the Israeli public. I am talking about the silent stranglehold of key monopolies.

About two weeks ago, the price of cottage cheese, a staple item for many families, rose yet again. A simple facebook campaign backed by a howling media smelling blood resulted in a backdown. Dominant local manufacturers, protected by tariffs, which were imposed by politicians linked to interest groups, had been free to do what they had wanted for far too long. Amazingly, there has rarely been much variation in price between the “competing” firms.

But it does not stop there. The fruit and veg market is also protected by tariffs. Mobile phone charges are expensive compared to abroad. Petrol and cars are similarly overpriced. It is a rip off, according to one newspaper.

You could ask why nobody has shouted earlier that parts of the economy are simply old-fashioned monoliths, designed for the benefit of a few. For me, a more worrying issue has been the role of the civil service. Why was this huge mass of people not able to teach the politicians how the public had to and still suffers?

So while the stats look rosy, is Israel’s full economy still a story of what could be?

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