Allow the private sector to revive the Israeli economy

Whenever officials try to rigidly manage complex systems, the results are the same: The negative consequences of intervention will explode, while the benefits are minimal at best.

Tel Aviv, Sept. 10, 2020. Photo by Miriam Alster/Flash90.
Tel Aviv, Sept. 10, 2020. Photo by Miriam Alster/Flash90.
Dennis Mitzner

Only a year ago, Israel’s economy was one of the world’s most prosperous. Today, harsh lockdowns and other policies meant to combat the spread of COVID-19 have led to Israel’s worst economic downturn in 45 years, matched only by the collapse that came in the wake of the 1973 Yom Kippur War.

Its gross domestic product plunged by nearly 30 percent in the second quarter of 2020, and, according to the country’s Central Bureau of Statistics (CBS), private consumption shrunk by more than 43 percent as a direct result of lockdown measures imposed throughout March and April. Imports also dropped by a similar amount. Collectively, improperly thought-out government restrictions have wiped out four years of economic growth.

The unemployment rate is perhaps the starkest indicator of all. Before the crisis, Israeli unemployment stood at a record low of under 3.5 percent. In the six-month period from February to August, ineffective COVID policies and improper economic management brought the number of jobless to a staggering 11.5 percent; many more have been furloughed. It’s also predicted that 20 percent of businesses will fail by the end of the year.

Stories of Israel’s small business sector collapsing are everywhere. Many have been widely reported on national media and social-media platforms. One case in particular has become a symbol for the nation’s crisis as a whole. Four months ago, Yuval Carmi, a falafel-shop owner in the city of Rechovot, was interviewed on primetime news. During the interview, Carmi broke down in tears, telling the crew how his business had collapsed overnight. “I’m embarrassed to face my children, to tell them I have nothing I can buy for you. I have nothing to give them. I have nothing to give them to eat. I don’t know what to do,” he said.

Israelis across the spectrum resonated with Carmi, knowing that his story was that of the country as a whole. The 56-year-old food stand owner was later hospitalized due to heart complications doctors attributed to stress.

To make matters worse, many of the measures taken by the government to maintain some semblance of economic stability have largely failed. Long after the program was put into place, it was reported that only 3,000 of 41,000 requests to the government’s small business loan fund were actually considered, and fewer than 2,000 approved. Similarly, stimulus aid to independent workers has had a few glitches in its disbursement. While many independents were promised installments of NIS 7,500 ($2,195), reports have surfaced of those eligible receiving half that amount or even no payments at all.

But perhaps the biggest failure in the government’s response is its complete disconnect with the commercial and business landscape it claims to seek to rehabilitate and protect.

Roee Cohen, president of the Israel Chamber of Independent Organizations and Businesses, known as LAHAV, put it most succinctly: “The weird plan that was developed in the Finance Ministry reflects its unreceptive nature and lack of understanding of the scale of the crisis in the business sector. … There are no other words but to say that the Finance Ministry and the Budget Department are leading us to an unprecedented economic catastrophe.”

Cohen’s words dovetail with what researchers into the adverse effects of lockdowns have been pointing to for the past several months. The sheer scale of the market impacts caused by lockdowns means that governments simply cannot supplement the losses. Showing just how far off the mark governments have been in staving off economic collapse, the ones affected the most by this downturn—being bereft of basic necessities and cut off from supply chains—have been the lowest strata of societies and the poorest countries in the world.

Moreover, from a pure public-health perspective, the long-term efficacy of lockdowns in preventing the spread of the disease is far from certain. While lockdowns have the immediate effect of minimizing infections, this only slows the rate of the spread and cannot keep it at bay permanently. This has been one of the central points argued by former Health Ministry head Yoram Lass, a fierce critic of the government’s current policy track. As Lass warned back in March, lockdowns are not a complete solution.

“Whoever thinks that the government ends viruses is completely wrong,” stated Lass emphatically.

Alternative voices

As data on the pandemic piles up and our understanding of the disease develops, many on Israel’s political scene have offered common-sense alternatives to solving the crisis. Entrepreneur-turned-politician Naftali Bennett, the head of the Yamina Party, has been a strong proponent of targeted measures to quell breakouts while keeping the bulk of industry and the country’s economy open. To date, he argues, blanket restrictions on the whole country have been illogical, only bringing damage to the society without any positive effects. Knesset coronavirus committee head Yifat Shasha-Biton raised the same issue in her criticism of recommended restrictions back in July.

After exposing the holes in data the government claimed supported lockdowns, Biton rejected wholesale restrictions on businesses such as restaurants and gyms. “The committee cannot vote on anything that we cannot explain to the public,” she said to reporters.

Biton’s position followed that of her predecessor, opposition lawmaker Ofer Shelah (Yesh Atid) who back in April published a scathing report contending that the government’s public health policies could cause “irreversible” economic and social damage.

These officials, originating from across the political spectrum, understand that the government’s failure in managing the pandemic stems from a fundamental mistake in its approach, namely, the attempt to micromanage a global crisis. In all cases in which officials try to rigidly orchestrate complex systems, the results are the same: the negative consequences of intervention will explode, while the benefits will be minimal at best.

Perhaps the most noticeable example of this is seen in the dynamics of the current unemployment crisis. Instead of encouraging Israel’s markets to adapt and grow, officials have created, either directly or through incentives, a situation in which the country is experiencing self-imposed atrophy.

After an extensive tour in Jerusalem in recent weeks interviewing business owners, Bennett was bemused at how many were struggling to hire, as furloughed workers preferred to remain on unemployment benefits, which have been guaranteed until June 2021. This is creating an “insane situation that even though unemployment is at an all-time high […] business owners can’t find workers,” Bennett told the media.

Further highlighting this argument is the fact that the longer restrictions persist, the harder it will be to return to economic normalcy. After a year without a job, the average worker will find it harder to come back. Already the sentiments of many workers support Bennett’s prediction. According to Israeli media, nearly a fifth of those currently furloughed due to the coronavirus have no interest in returning to their previous jobs due to worsening conditions and pay cuts.

For Bennett, the endgame is all about economic revival—namely unleashing the country’s private sector. Much of his strategy involves the private sector leading the COVID battle, while also paving the road for the next phase of the country’s startup boom.

Unlike the targeted lockdowns, however, even the simplest attempts to harness private sector assets to provide solutions have been thwarted. For instance, MyHeritage, a genetics firm based in Or Yehuda, was expected to conduct and analyze 20,000 tests a day, an initiative pushed by Bennett to expand testing capacity. However, the Health Ministry never followed through.

The government, mired in petty infighting and early election talk, is simply incapacitated, and arguably too inept to devise a coherent strategy. For Israel to overcome the pandemic and unleash its economy, an entrepreneurial mindset is what is needed. With this, Israel can become, as Bennett puts it, “a better, more innovative version of itself.”

Dennis Mitzner is a Tel Aviv-based writer and entrepreneur. Follow him on Twitter at @DennisMitzner or connect with him on Linkedin.

The opinions and facts presented in this article are those of the author, and neither JNS nor its partners assume any responsibility for them.
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