One key to understanding how the Israeli economy (malfunctions is that the Histadrut (The General Federation of Workers in Israel; up to 1965 the “Jewish Workers in Israel”) was never simply a trade union. From its establishment in 1920, the Histadrut was a leading institution in the Zionist settlement and colonization project — “a pre-state state.” In addition to its trade union functions, the Histadrut operated a daily newspaper (Davar), a health insurance fund (Kupat Holim), a sports club, a theater troupe, an insurance company, a bank and a large number of leading cooperative and corporate enterprises in mixed agriculture (the kibbutzim and moshavim), transport and transit (Egged, Dan, Hamovil, and previously shares in Zim and El Al), and construction (Solel Boneh and its many subsidiaries). The Histadrut was the dominant force in the Jewish economy of the mandate period and shared that function with the state itself after 1948.
During the 1950s and 1960s the Histadrut’s economic enterprises accounted for 20-25 percent of Israel’s net domestic product and employed over a quarter of the wage labor force. A substantial part of the working class thus found itself employed by its own trade union. The trade union-cum-employer, of course, rarely saw fit to authorize strikes or other economic struggles against itself. Management of the Histadrut’s economic empire, known as Hevrat Ha‘ovdim (The Workers’ Company), was in the hands of less-than-totally efficient bureaucrats appointed by MAPAI (precursor of Labor).
The Histadrut/state duo had no serious competition for leadership in the Israeli economy because most private capital was in one way or another linked to these institutions. The Histadrut’s economic power was unchallenged as long as the same political party (MAPAI/Labor) controlled both the labor federation and the state, which was the case until 1977. Today, the industrial holdings of the Histadrut are concentrated in an industrial holding company — Koor — which accounts for about 10 percent of Israel’s gross domestic product and has extensive corporate links with American capital.
Gidon Eshet is the economics correspondent of Yedi‘ot Ahronot. Joel Beinin spoke with him in December 1988 in Jerusalem.
Recently Israeli papers have been full of stories of factory closings, increased unemployment, double digit inflation, tremendous debt in the kibbutzim, the possibility of the Koor conglomerate defaulting on a $20 million loan. Is this the balance sheet on the July 1985 economic stabilization program?
The 1985 program was introduced against a background of inflation which averaged 400 percent a year and reached 1000 percent by July 1985. The idea was to reduce inflation without creating high unemployment or a balance of payments deficit. The strategy was to eliminate subsidies within the economy, reduce real wages for a short time, stabilize the rate of exchange, and strictly control prices. This reduced inflation to 20 percent a year. Such a plan works in countries that have a well-developed tax system. High inflation encourages delay in paying taxes, since it erodes the value of a payment. When you stop inflation, the government’s real income increases considerably. If at the same time you can reduce wages and overall demand, you can balance accounts. Between 1985 and 1988 the government carried almost no deficit and that stabilized the situation.
But that was all that happened. You would expect in this situation some real changes in the economy. Businesses make money during a period of inflation from two sources — from production and from inflation itself. Many industries in Israel were showing positive balance sheets. As inflation dropped it became evident that most private sector profits were in fact financial profits. Suddenly a balance sheet became a balance sheet. So balance sheets were in the red but firms readily got loans from the government or the private sector and went along with business as usual. More and more companies assumed enormous debts.
The other factor was wages. In the first six months of the plan real wages dropped as much as 20 percent. Then they started going up again and have moderated only now.
The Israeli economy appears unable to produce effectively. Why?
Most traditionalist economists blame the public sector. “How come Israel was so efficient in winning these wars but it takes three years to install a telephone?” one speaker complained at a conference a few weeks ago. So Eitan Berglas from Tel Aviv University got up and said, “The reason is the defense burden.” Politicians in Israel think we can have a modern welfare system similar to what exists in Western Europe and at the same time spend around 20 percent of GNP on defense, whereas in Europe they spend something like three or four percent. For the last 10 years we have had both, and foreign debt climbed from $10 billion to $25 billion. As long as American banks are happy to hand out the money, we are very happy to live in this kind of system.
The new 10-year plan of the military establishment asks for something like 15 percent more money in the next 10 years. The economists in the finance ministry or the Bank of Israel know the defense budget has to be reduced considerably. But the chances of this happening are very poor.
Why did Bankers Trust decide that Koor can’t pay its $20 million loan?
The problem is not $20 million. The problem is Koor. After Likud won in 1977, and especially after they won again in 1981, when it became evident that Likud was not just a fluke but something we were going to live with, the Histadrut decided, OK, they’ll run the government but we'll run the economy; we’ll buy and build everything in this country. Every private business in difficulty, real or imagined, they bought. Koor now controls 10 percent of the GDP.
If you can do this without paying, that is OK. The Labor governments in Israel had allowed the Histadrut zero interest financing for all its projects. In 1979 the Likud took a decision which no one at the time thought was important and which took a few years to implement. They decided that the Histadrut would no longer get zero interest financing. That coincided exactly with the expansionary policy of Koor and the Histadrut. This was not such a problem when inflation left the balance sheets looking OK. Then in one year it went from plus $10 million profit to minus $300 [million]. Why? No inflation. You could no longer make money on government bonds and financial transactions. And at the same time you had to start paying back the debts which financed the expansion. Suddenly Koor found itself with debts which it could not finance and with a lot of industries it had bought but which never made much economic sense.
It has been Likud policy that the government should not invest in the economy because the public sector only wastes money. So there is no investment. But even if they changed the policy there would not be any resources because the military takes all the resources. They could perhaps go on borrowing, but our debt is so high and everyone understands that there is a problem here. Bankers Trust is not only a signal to Koor; it is a signal to the whole country. So it is true that Koor has a $1 billion debt and therefore Bankers Trust is very worried, but Israel has a $25 billion debt and I am sure that other bankers are just as worried.
One remedy is to sell off these firms or lay off workers. Twenty-three enterprises laid off 1400 workers in November; over 950 were laid off in October and already in December more than 700.
This is the biggest problem Israel faces. In the US, where you have a firm losing money, its value would be low and someone would buy it cheaply. The previous owners would take a capital loss and the new buyers would start with a small investment of their own capital. Israel is such a small economy that there is no one around to buy Koor out. Koor has shares in a chemical company called Teva. So the government tells Koor, “Why don’t you sell Teva? Maybe you can sell it for $25-30 million and you will have the money to pay off Bankers Trust.” The government is pushing Koor to sell its profitable businesses to finance its loss-making ones. Koor prefers to keep the profitable concerns and reduce operations and employment among the ones that lose money. In the last 10 months the number of people drawing unemployment benefits has increased by 15 percent.
What is the actual unemployment rate in Israel?
The rate of people who are not working but seeking work is around eight percent, something like 100,000 people. The number of people who are getting unemployment benefits is smaller. It is not a question of the actual size but of the trends. The trend in the last 10 months is really shocking.
The big debate now is about the minimum wage. Today it is around $400 dollars per month. Economists and the Bank of Israel think this is too high, that it creates unemployment.
Last year, when they tried to close Alliance Tire in Hadera, there was a major workers’ resistance movement. What is going on among workers in response to the rising unemployment and the efforts to cut back the economy in this way?
Alliance is typical of the projects Koor bought in the good old days from the private sector. Alliance was in trouble and Koor decided to reduce the workforce by one quarter, reduce wages and change the whole system of paying bonuses. The workers, against the advice of the trade union part of Histadrut, resisted. The ownership part of Histadrut declared Alliance bankrupt and handed it to receivership by the court. The court decided to close it down unless workers conceded to management, which they refused to do. Then the receiver announced that he was willing to take back 70 percent of the workers on different terms altogether, and he got back 70 percent.
Has there been any indication of a more successful approach by trade unions and workers’ movements?
There has been only one interesting case. Another might be developing. In Beersheba, the Histadrut owned a brick and ceramics plant called Hasin Eish. It was losing money and the Histadrut wanted to close it down. The workers said, “Don’t close it down; give it to us. We will run the business by ourselves.” Yesterday they distributed the first bonus to the workers. A similar thing might be happening in the Histadrut newspaper Davar, which is also losing money. It is not easy. The whole concept of self-management is an affront to the Histadrut. The Histadrut is paternalistic. The whole system is built on the idea that “we know what is best” for the workers. That explains a lot of the resentment workers feel towards the Histadrut.
What about the kibbutzim, the vanguard of the socialist Zionist movement which are collectively in debt to the tune of $4 billion?
They were relatively dependent on agriculture. They are very efficient and were doing well, but agriculture has its limits. The more mechanized you become the less people are employed in that sector. So they started investing in industry and every kibbutz of 200 or 300 people put $5-$ 15 million into an industry. There are 300 kibbutzim in this country. You can expect that in any economy, out of 300 projects 20 percent will go down the drain. They just looked around and if they could find something for $15 million they bought it. Many of these industries were not successful.
Another factor was that much kibbutz agriculture was concentrated in cotton. There is no way that Israel can compete in subsidizing cotton the way the US does. Under pressure, the government decided to reduce subsidies a little. At the same time, the US subsidies increased and many other countries have gone into cotton. Israel sold cotton production techniques to China, which became a net exporter of cotton. So cotton, the main profit center of many kibbutzim, became a less lucrative enterprise. The area devoted to cotton has been reduced by one third.
Add a third crucial issue, which is that in many kibbutzim they had the idea that kids should be educated together in the large sense of the word. Not only do they go to school together, but they also live together. A baby after six months was taken to live with all the other kibbutz babies. Many parents resisted this, and in the last 10 years there has been a shift to raising kids at home. A kibbutz family used to live in a little house with one-and-a-half rooms. People in the kibbutzim have high birth rates — four to six kids, while in the cities you have one, two, three at most. If the kids go to live with their parents, you have to add two or three rooms to every house. For a whole kibbutz this is a huge investment.
Add to this the fact that Israel — and this has to do with Koor — was fixing the rate of exchange by the central bank of Israel. If you want people to hold local currency and not start buying foreign currency, you have to do that by having very high interest rates? — something like 30 percent in US terms. If you take out a loan to enlarge your house, or to buy an industry like Koor did and you have to pay 30 percent interest, there is no way you can do it. So the very high interest rates which have been with us since 1985 have also increased the debt of the kibbutzim, the moshavim, Koor and private industry.
Why doesn’t the health care system function in Israel?
It does function, similar to many other countries. The Israeli population, which had been a relatively young population, is becoming older. The health bill is getting higher. Israel is trying to support a modern health system equivalent to that in Western countries. They want CAT scanners in every hospital. The only way to pay for that in a nationalized system is by higher taxation. But in the last two or three years the government decided it would not collect more taxes, so the health services would have to pay the bill. Now we want a mixed public sector with private financing: people, although they are insured, will pay additional funds to get health services. Since there is a great demand for health services, the doctors, nurses and other workers in the health services want higher wages.
The government, though, doesn’t want capitalism to work suddenly. They are trying to restrain wages and introduce private payments into the system. Demand is increasing, service is deteriorating, and thus you have an underground economy. The Histadrut and the Labor Party want to go on having the whole system run by the government. The Likud wants private medicine on government property. People with means who come into the system with their money find private medicine; they pay for it and they get it. The rest of the population has to queue. You have a battle of ideologies here and the system collapsed.
The lack of resources is due to the military and the occupied territories. Shamir, who wants to have a coalition with Labor but doesn't want to be dependent on Labor, negotiates with the religious parties and the extreme right parties. The extreme right parties support a 500 million shekel bill (something like $300 million) to expand roads and settlements in the occupied territories. $300 million would cure the health services’ problems for the next 10 years. The problems of the health services in Israel are measured in sums like $50 million per year. Instead we are talking about putting $300 million into roads and settlements in the occupied territories. Maybe when Labor joins the coalition this money will be cut to some extent. But this is a political decision. We, in order to form a government, are willing to pay for settlements and are not willing to pay for health care.