August 25, 2011
Opinion: Democratizing capital in Israel: Head stands in Israel
In Shai Agnon’s short story, “Peace Everlasting,” the following process unfolds in the Land:
“… they appointed measurers for the entire country, to measure the length and width of the land, and they selected a committee to … weave a carpet the size of the country. They selected another committee to gather all of the country’s carpenters to make poles to hang the carpet. Another was a committee of forcers who know how to give advice on how to force poles into the ground. They selected another committee to supervise the workers. And then they made just an ordinary committee, which was divided into two sections, ordinary committee A and ordinary committee B. After all the committees had been appointed, they appointed a committee committee.”
There is great goodwill in this good land with its strong tradition of committees, including goodwill among both the members of Rothschild Committee appointed by the country’s Prime Minister and from the anti-Rothschild Committee appointed by the country’s protestors. Somewhere within, between and beyond them both, perhaps the hard simplicities of democratizing capital can relieve the overwhelmingly crushing costs of middle-class living. The protests could yet liberate the Israeli economy to accelerate growth and equity—financial and policy innovations that would bridge the social, economic, educational, housing and regional gaps that could tear the country apart from within if left unattended. As the most recent slogans from the protestors read as the rockets once again began to fall after this week’s terrorist attacks, “Personal security is impossible without social-economic security.”
These recent protests have stood the nation’s policy priorities on its head. No longer are military security measures at the top of the list nor what the Palestinians will or won’t do this month or the next (or the one thereafter). Social and economic concerns trump all other priorities, even as rockets fall from Gaza. This is a country defended by its children. When they come home, they want to build, not surprisingly, a home. The tent encampments and mass demonstrations over the past month represent not the margins of Israeli society but its mainstream: the slight majority of the population that works, defends the country, and pays taxes. And yes, they are all on Facebook. They suffer (or enjoy) claustrophilia, love to be together and talk a lot. The tent encampments and demonstrations have provided a wonderful setting for inter-generational and regional bonding. That is their social capital that could yet yield lasting financial and economic gains for the majority of Israelis.
Middle-class Israelis demonstrated over the past month that they are tired of being the beast of burden for an economy that, while successful and sometimes driven to excessive self-congratulation, has not been successful enough to outgrow increasing poverty rates and regional and social gaps that challenge the cohesion required to keep the country safe, retain jobs and keep its next generation at home.
People do vote with their feet. Without access to capital, jobs, and relief from high tax rates, foreign markets will continue drain Israeli talent and capital. Everyone knows the drill here: negative outmigration from the North, South and Jerusalem to Tel-Aviv and then from Tel-Aviv to overseas. The pattern of brain drains and capital flight (both financial and human) are well known. Human capital is enormously footloose in this global economy. Members of this productive core of the Israeli population and workforce became sick and tired of the rising cost of living and decided they wouldn’t take it anymore. Education, housing, affordable social services, transportation and infrastructure all rose to the top of the national agenda. The start-up nation wants to build from within and outwards to become integrated in the global economy and known as a laboratory of future solutions, not constant problems.
The lessons of the high-tech sector need to be duplicated beyond the 8-10% of that highly compensated workforce (which itself represents only 57% of the working age population, compared with the 70% workforce participation averaged in most of the developed world) that produces the lion’s share of GDP growth, income, foreign exchange reserves. These lessons must be applied to the emerging sectors (cleantech, life sciences, alternative energy) and to the traditional sectors (water, agriculture, food processing, and manufacturing), where more competitiveness is needed.
Simply put, Israel’s uneven growth rate is inadequate and shared unequally. This has enormous implications for sustaining aggregate demand-driven growth to make the country sustainable and affordable for the majority of its inhabitants. Most macroeconomists here have agreed that the historical aggregate growth rate of 3-4% is insufficient to bridge productivity and investment gaps to create economic security. An annualized aggregate growth rate potential of 6-7% can be achieved that would narrow income and wealth disparities through activist public and private investment policies that the government started and should be enlarged.
Israel must double its growth rate to build out the country and reduce its current peak rates of income and wealth inequality, the highest in the developed world. This can only be done by increasing job creation and capital access for emerging and renewing industries. Clean technology, health, education, and other cutting edge solutions to global problems are the core of Israel’s new industrial policy.
The longing for social solidarity by the tent encampments did not begin with this generation but was a core belief of Israel’s founders. These are Ben-Gurion’s children. It was his recorded voice that was broadcast at many demonstrations, reading the Declaration of Independence in 1948 or remembered and recited in his words on the 10th anniversary of the State’s founding: “ … there is a mutual influence between our economic position and our political status, on one hand,” he said, “ … and our capacity for spiritual and social advancement on the other … matter and spirit are not two separate realms.”
More recently, the beloved Israeli novelist David Grossman also captured that notion: “This is a year,” he wrote, “for renewal and recreation of the ideals that brought the country into being: vision and daring, confidence of purpose and values … (Israel) must struggle endlessly, and not only to keep up its military strength. It must make itself always a place of meaning and not just a refuge or fortress … its inhabitants must feel they belong here not because they have no other choice, but rather because this place speaks to them, quickens them, grants them meaning they can find nowhere else.”
But getting from here to there requires new economically driven policies and programs that drive competitiveness and growth, and not the political bargaining that characterizes debates historically—in short, a headstand. Economics to overcome scarcity must trump traditional geo- and domestic-politics squabbles and focus on how to grow a fair and more equitable economic pie. Access to capital access is the key. As Martin Luther King simply put it: “Capitalism without capital is just an ‘ism’.” Market capitalization has skyrocketed among Israeli firms, but they have sold out too early to foreign competitors, not built diversified economic sectors and global corporations, and limited capital access for new entrants.
Capital access has remained relatively constrained, except for the country’s largest firms. Households comprise over 75% of the profits for the country’s concentrated and uncompetitive banking system. But consumers and small businesses face interest rates that are 2.8 times higher than the average for larger clients. Start-up nation’s small businesses represent 96% of all businesses, more than 50% of GDP and more than 60% of all employees, but they receive only 23% of overpriced bank credit.
It’s not only privately concentrated corporate and banking power that constrain competition, but government monopolies as well. With more than 90% of Israel’s land controlled by the Israel Land Administration, its incentives are to maximize current income aggressively to cover budget gaps and sell off land in auctions (where the government has no retained interest and therefore fails to maximize overall returns to the Treasury) that tend toward luxury housing for foreign buyers (or domestic buyers with foreign incomes, a small percentage of the population). The centrally controlled property tax system is highly regressive, inconsistent and doesn’t reflect values. Many communities with higher market values tax their properties at lower rates. The most socio-economically distressed communities charge the highest real estate taxes. Development fees—mandatory charges by the Israel Land Administration—pass along infrastructure and site development charges, doubling the acquisition cost of land. There is no transfer of development rights to owners (they are retained by the Land Administration), no tax increment financing, and no public finance bond market for commercial and residential affordable housing, community development and urban revitalization. Without new financial tools, it’s hard to build a home in Israel affordably. The numbers necessary to finance the future and fix the housing market don’t add up.
What do you see when you stand on your head and what do you do as a consequence? Where things go from here will be determined by decisions that Israelis will and should make, but the means and methods to steer toward greater economic independence can be crafted from experiences both at home and abroad. Financial toolkits exist that elicit capital from private and public, government and non-profit sources, along with investment from all these sectors to create double bottom lines. These are investments with social and economic returns that can create the next wave of Israeli economic growth.
A few carrots and sticks of financial policy innovation will help. Let’s look at making housing affordable and sustainable:
Housing costs have skyrocketed more that 40% in 3 years. The financial and policy tools to fix this and build an affordable housing industry are easily available—it’s a combination of sticks (regulation) and carrots (tax credits, government and philanthropic credit enhancements, and loan-loss reserves) to carve new channels of capital into a renewed Israeli affordable and sustainable housing market based on public-private partnerships:
1) The Israel Land Administration controls 90% of the land and all of the building rights. By decentralizing and transferring development rights to local/regional authorities and neighborhood residents, asset poverty by low and middle-income Israelis could be overcome. It would be an Israeli “Homestead Act” as described by attorney and developer Shraga Biran.
2) By granting tax credits (like the U. S.’s Low Income Housing Tax Credits and the U.K.’s Community Investment Tax Credit), private investors could lower market entry costs substantially (up to 55%) for both owners and renters and convert tax credits into equity for new owners.
3) With land costs lowered through new, innovative Land Administration policies, and private capital incentivized via tax credits to create equity, financial technologies would make senior and subsidized lending more affordable. Both for-profit and non-profit developers could help create underwriting for home mortgages where folks could rent or purchase housing within their means. U. S. investors and the affordable housing industry could help. Israel’s institutional investors—pension funds and insurance companies—could provide long term returns from this sector to meet pension liabilities.
4) The Central Bank Regulator could adopt Community Reinvestment Act standards and ratings to insure that banks charging fees and collecting deposits are required to reinvest in affordable distribution of housing credit in the communities they serve. In short, force an end to redlining whole regions of the country. It was the Community Reinvestment Act in the U. S. in 1977 (which was inspired by similar struggles for affordable housing) that required banks to reinvest in the communities that provided the deposit base for banking capital.
For rental housing, direct subsidies like below-market second mortgages could attract private bank financing and keep rents affordable. Tools for lowering the cost of home ownership include mortgage guarantees, concessionary construction and mortgage financing, shared equity, tax increment financing, rent-to-purchase conversion, and subordinated lending through properly structured products. Reinventing housing finance in Israel could fix the housing market and generate community stability and national economic security. A popular slogan appropriated from recent wars can be seen in all the encampments and reads, “We’re fighting for our home.” This time, as always, the front is at home.