Conference on the Balance of National Strength and Security

25 May ’04

ICSEP helped initiate and implement the conference, attended by over 500 people from the highest echelons of the military and the defense establishments.

In particular, ICSEP organized two panels: on Economics & National Strength and on Technology & National Strength.

With 10 sessions over two and a half days, the Conference on the Balance of National Strength and Security at the Center for Policy and Strategy at the Herzliya Interdisciplinary Center’s Lauder School of Government was attended by over 500 people from the highest echelons of the military and the defense establishments. Extensively covered by the media and discussed everywhere, the hugely success conference was a rare opportunity to consider just how critical economic growth is to national strength.

ICSEP helped initiate and implement the conference and organized two of its panels: on Economics & National Strength and on Technology & National Strength. Attendance at these sessions, where ICSEP Director Daniel Doron made the closing remarks, was standing room only.

Closing remarks:

“A strong social and economic infrastructure is essential for national strength. Therefore, enhancing our security requires strong economic growth. The question we have tried to answer in our session on Economics and National Strength is what has to happen in the Israeli economy in order to enhance growth, so that Israel can, among other things, bear a greater share of its defense expenditures, which are bound to grow, especially in light of the threat from unconventional weapons.

“The more precise measurement of economic growth is the rate of growth in productivity and not the Gross National Product, which measures many non-productive activities, and even wasteful public sector ones. Had productivity growth reached in the last decade a normal average of 3% per annum and not stopped at only 0.6%; had the capable Israeli worker reached the average output of the American worker, and not about half of it; had Israeli participation in the workforce equaled that of Western Europe, Israel could have produced during this period, by conservative estimates, another 100 billion dollars of goods and services, the equivalent of about one year’s GNP. This is to say, that because of the malfunctioning of the Israel economy, expressed in its laggard productivity growth, Israel has lost an enormous amount of resources, the equivalent of fifty years of US military aid! My colleagues at this conference could have probably found very beneficial ways to strengthen Israel’s strength with such a huge treasure; by investments in industry and infrastructure, in security, in education etc.

“We have focused, then, this session on how to overcome the low productivity problem, since it is, let us reiterate, the overwhelming problem affecting all else, including our national strength.

“Productivity, economists claim, is dependent especially on two factors: capital and manpower.

“The serious problems afflicting the Israeli financial markets that are extremely over concentrated and inefficient have been extensively researched and documented. There is no Western economy in which such a harmful concentration of economic power and monopolization exist, particularly in financial markets. Over the last decade, there were many commissions that addressed this problem, and many reform and legislative proposals, some good and some less, were formulated and some even executed. But there seems to be a lack of political will or ability to complete the task, although it is urgent and most vital. Strong and effective resistance by powerful interest groups and their allies in the bureaucracy has stopped reform in its tracks.

“The second element affecting productivity, the Israeli labor market has, amazingly, never been properly studied. There is no reliable information on what transpires there, and why it results in such low productivity. This is particularly surprising in view of the fact that the labor market is obviously very problematic, especially in the public sector. It consumes enormous resources, about half the GNP, without proper return. Generally, the labor market is inflicted with high chronic unemployment, overt and covert, while employing hundreds of thousands of foreign workers, many illegal. It is also typified by bad work ethics and relations, again especially in the public sector, and by frequent conflicts that express inherent problems.

“This is why we have concentrated in our session on the problems of the labor market, defining some of them, and suggesting possible solutions.

“There is an additional element, perhaps a crucial one, that has not been properly considered. It is the institutional factor, namely, the organizational arrangements in such key systems as the law, governance education and such. It is becoming increasingly clear that in addition to the important role of labor and financial markets, institutional arrangements can critically affect not only the direction and rate of social and economic development, but also the prospects of growth and even of survival.

“The history of technological developments offers some interesting insights about the crucial role of institutions. Medieval China was by far the leader in technological innovation. Yet lack of institutional support (no laws of incorporation i.e.) prevented their utilization. Seventeenth century France and Germany were ahead of Britain in technological development, yet the industrial revolution was launched in England because it had a better institutional framework, and gradually adopted free trade.

“Or take a current Israeli example. Israel is blessed with an exceptional human capital, that has enabled it to establish a first rate knowledge based industry. It has also recruited plenty of capital. Despite this, Israel may not be able to fully benefit from its relative advantage in technological development, because of negative institutional constraints such as bad tax and incorporation laws. There may even exist the danger that Israel will lose the considerable assets it has already created.

“Everybody knows, of course, that without a proper legal framework and decent rules an economy will not develop properly. Many have come to realize that in most cases, government intervention in the economy is detrimental, and the more it interferes the greater the damage. But all this knowledge is not internalized, and is certainly not translated into action. The by now classic Brodet Report on the concentration in the Israeli economy was very incisive and clear, and supported by fact and trenchant analysis. It also offered recommendations on what should be done. But very few were implemented.

“Out of the various analyses, dealing with the many subjects this conference tackled, we can draw one clear conclusion: most of our problems, and not only economic ones, are self-generated. They result from government meddling on an unprecedented scale in a Western-like economy. This despite the nonsensical claim that Israel’s is a market economy, a Thatcherite one at that, and that everything is being privatized. True, many government assets have been sold to private parties. But the central purpose of privatization, increased competition, has not been achieved. In fact, economic concentration and lack of competition may have even increased, since most privatized assets have been sold to a small a number of families and their entities.

“There is another way to illustrate the dysfunction of the Israeli economy. Israel can be compared to an enterprise in which over one hundred billion dollars were invested. It also enjoys the most outstanding human capital. What is its output? An average salary of less than 2000 dollars a month. This is a very dismal result. In every self-respecting enterprise it would lead to the replacement of the management.

“It is claimed, of course, that unlike a business enterprise, Israel was meant to supply needs that cannot be economically measured. We aspired to establish in Israel if not a model society, at least a very equitable one, a society that enables its members to make a decent living that provides good living conditions and human relations. But we have not met these goals either, so it seems. Here too our failure was not dictated by outside circumstances, difficult, as they may have been, but again by our institutional arrangements. They bring out the worse even in the best.

“We cannot, of course, ascribe all the blame to institutions and the bad arrangements they employ. Behind every institution there are people who operate it and decide its direction.

“So if after more than fifty years we still have in Israel Development towns inhabited by so-called weak strata; if these weak strata are mostly Sephardi Jews, the Orthodox and the Arabs; if these low income groups have to pay monopoly rents on all consumer goods (estimated as between 30 and 50 percent!) that accrue to the favor of a certain social class; if despite huge outlays all our public systems are dysfunctional, including the legal, the educational and the health systems; if success and mobility are dependent largely on how you are connected and to whom all these express a failure not only of institutions and their arrangements, but also the human and moral failure of all of us, all the best and the brightest people who lead the this country and its economy. It is a comment on our leadership qualities that is not exactly flattering.

“So while it is good, even very good, that we have assembled here to seek ways to improve our national strength‚ and we shall no doubt hear very important and wise advice, the question is what is to happen after this conference adjourns? Shall it be business as usual? Shall we sink again into our wearisome daily routine protecting our personal and sectarian interests?

“Or will this conference mark a new beginning of involvement and accountability? Will some of us, those who believe that the status quo is dangerous, be able to organize and form a lobby for change that will seek to implement at least some of the good recommendations formulated here?

“This will be our true test, and that of our conference. Will it be remembered as another talkaton or will we succeed in creating a lever for change, and a new beginning.”

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