Israel: The Russians Are Coming

When Vladimir Shepkin first thought of immigrating to Israel in 1989, he was convinced that as an electrical engineer he would be sure to find work in Israel's flourishing high-tech industries. After being in the country for more than a year, he is still unemployed, and he lives in a 1½-room rented apartment that consumes 60 percent of his monthly government stipend. "I'm not so sure we were any worse off in Moscow, despite the crumbling Soviet economy," he says.

For increasing numbers of Soviet immigrants to Israel, the future is bleak. Jobs and permanent housing are hard to come by. While government officials bicker among themselves over who is responsible for the mess, the housing shortage worsens and few new jobs are created.

It's easy for Israeli politicians to claim that lack of money is the problem. In its recent spat with the Bush administration over guarantees for $10 billion in commercial loans to finance new housing, the Israeli government complained that any delay would further impede efforts to absorb the immigrants. Israeli officials were indignant that President Bush seemed to attach political conditions to the assistance. Their attitude says much about the way the Israeli government is handling the economic aspects of the massive influx of Soviet Jews to Israel: It is expecting others to bankroll the immigration.

The unprecedented arrival of more than 200,000 immigrants from the Soviet Union in 1990 and a similar number in 1991—with close to a million more expected during the next few years in a country of about 5 million—has invigorated the debate over whether Israel's economy should be directed by government planners or by the free market. Unfortunately, the central planners are winning. From every corner of Israeli society one hears the familiar cry: "The government is not doing enough!"

Mikhail Agursky, a member of the Soviet and East European Center at the Hebrew University in Jerusalem, summed up the conventional wisdom in a Jerusalem Post op-ed piece published in April. He argued that a market economy is incapable of providing the immigrants with jobs and housing; only a "trade-union economy" can handle the task of absorption.

"While the unions are very likely less efficient than the private sector, they nevertheless represent the only chance of solving the problems inherent in immigrant absorption," he wrote. "These simply cannot be dealt with by the private sector."

That conclusion is not based on experience, since Israel's economy does not even come close to a free market. The state consumes nearly 75 percent of the country's $42-billion GNP, and one-third of the work force is employed in the public sector. The government owns nearly 200 companies and directly controls more than one-third of the economy, with the Histadrut, the national trade union, controlling another third. Out of every shekel earned, 56 percent goes to taxes. Trade barriers, price controls, and state-sanctioned monopolies are rampant.

Still, the government is quick to point a finger at the private sector. At the end of 1990, fewer than one-tenth of the 45,000 housing units the government planned to build had been started. The Housing Ministry's chief planner, Uri Shoshani, declared that "if private contractors are unable to respond to the challenge, there may be no other way other than [to] have the government build apartments."

Why isn't Israel's construction industry "responding to the challenge"? For one thing, it takes an average of 27 months to put up an apartment building in Israel—three times longer than in other Western countries. The lag is caused partly by the difficulty of obtaining building permits and partly by state intervention in the credit markets. Because the government keeps interest rates artificially high, contractors get their capital directly from apartment buyers rather than from loans. Since builders routinely get their money up front, they have little incentive to complete their work on time.

The long delays are one reason a simple apartment of 650 square feet costs $65,000 to $75,000 in small towns and much more in major urban centers—around $115,000 in Jerusalem, for example. Another reason is the artificial shortage of building lots. The state owns 93 percent of the land, ostensibly for security reasons; farmers, contractors, and private homeowners merely rent land from the government on 99-year leases. That arrangement allows the government, if necessary, to seize any land needed for a military outpost or air field.

The policy also suits Israel's powerful farm lobby, which has long pressured the government to keep most of the country's land zoned only for agricultural use. Restrictions on the availability of land for residential use have made plots very expensive. In the suburbs of Jerusalem and Tel Aviv, for example, land represents 40 percent of an apartment's price. The Israel Center for Social and Economic Progress, a Jerusalem think tank, estimates that land, taxes, and building regulations account for two-thirds of the price of an average apartment.

Another factor contributing to high apartment prices is regulation of the market in building supplies. Nearly every building material—glass, paint, aluminum, cement, wood—is sold by a government-protected monopoly or cartel. The sole Israeli producer of cement operates plants that are so inefficient that the fuel used to make one ton costs as much as the finished product does in some countries. Israeli-made cement costs $72 per ton, compared to $40 for European cement. Structural steel, another monopolized building material, is produced in equally inefficient factories, and it costs 40 percent more than European steel.

The government also restricts foreign competition in the cement and steel markets. Cement may be imported only by a state-approved monopoly, which also happens to be the sole domestic producer. Structural steel may be imported only by a state-approved cartel.

As a consequence of such policies, the cost of Israeli dwellings is simply too high for most immigrants. The government offers each family $38,000 in the form of a subsidized mortgage, but that is not enough to cover today's prices. As an incentive for builders, the government has offered to purchase any unsold units at prices of up to $110,000 each—a policy that will encourage slipshod development in low-cost areas where demand for housing is low.

One alternative is prefabricated homes, which cost about $30,000 and can be erected in a matter of months. The government could supply the land and infrastructure. At this price, private contractors could build the homes and either sell or rent them, not only to new immigrants but to young Israeli couples as well. Given the minimal need for insulation in Israel's warm, sunny climate, prefab structures should be a common method of construction.

But tariffs and import restrictions have discouraged their use. Although the government has ordered some prefab homes as part of its absorption efforts, those imports are actively resisted by the Histadrut, which considers them a threat to the domestic construction industry. In 1990, Haim Haberfield, chairman of the professional unions division of the Histadrut, announced that workers would use any means necessary to disrupt the unloading of prefab housing components in Israeli ports.

The problem of job creation is more complicated than the housing shortage. A Bank Hapoalim report estimates that, given the influx of about 200,000 immigrants a year, the Israeli economy will have to create nearly 6 percent more jobs annually just to prevent the 10-percent unemployment rate from rising. The Ministry of Industry and Trade has responded by establishing a $1-billion fund to subsidize new and existing factories that hire immigrants.

There's a better alternative to simply transferring money from one group of individuals and businesses to another. Rather than trying to create jobs directly, the government should focus on removing the barriers to job creation. For example, stringent labor laws—including a minimum wage, a 4-percent employer's tax, and restrictions on dismissal of employees—discourage entrepreneurs from hiring workers. Paying dues to the Histadrut is a requirement for those practicing many trades. The permit process for small businesses is lengthy, labyrinthine, and expensive, costing thousands of dollars. Protectionist laws restrict the locations of businesses—you can't set up shop too close to a competitor—and the merchandise sold.

Furthermore, current subsidies and regulations irrationally favor manufacturers and penalize service providers. For example, the government grants "approved enterprise" status—which includes exemption from payroll taxes, easy access to low-interest loans, and subsidies for land, water, and electricity—only to manufacturers and exporters. Yet it's in the service sector where Israel's greatest potential for growth lies.

Consider the qualifications of the Soviet immigrants. As a group, they are highly educated; the proportion of academics and scientists among them is four times that among the general Israeli population. About 11 percent are engineers. And 60 percent are between 30 and 40 years old, in the prime of their working lives.

Many of the newcomers could help develop trade between Israel and other countries. Some of them are experts in the legal aspects of Soviet foreign trade, for example. Others were involved in international trade in the Soviet Union and have valuable business contacts throughout Eastern Europe. Having been cut off from the West, the Soviets need information on differences in standards between East and West for raw materials, labor methods, and machinery. Soviet Jews in Israel could serve as "bridge consultants," offering engineering services to both sides. But the consulting business is handicapped by the special burdens the government places on the service sector: taxes and regulations that "approved enterprises" escape.

The Soviet-Jewish immigration could prove to be a turning point. "Until the ghosts of defunct socialist ideologies are laid to rest, and until we understand which system provides the best incentives and discipline necessary to make the economy productive and equitable, Israel's economy will continue to flounder," says Daniel Doron, executive director of the Israel Center for Social and Economic Progress. "The success of Soviet-Jewish immigration and the reform of Israel's economic system are part and parcel of the same problem."

Joel Bainerman is an Israel-based journalist who specializes in Middle East political and economic affairs.