This record is a partial extract of the original cable. The full text of the original cable is not available.

S E C R E T SECTION 01 OF 04 TEL AVIV 007022 
 
SIPDIS 
 
E.O. 12958: DECL: 12/19/2015 
TAGS: ECON ECONOMY AND FINANCE ISRAELI SOCIETY GOI INTERNAL
SUBJECT: POVERTY HYPE REFLECTS DECLINE OF SOCIALISM IN 
ISRAEL 
 
Classified By: Charge d'Affaires Gene A. Cretz for reasons 1.05 (b and 
d). 
 
 
----------- 
Summary 
------------ 
 
¶1.  (S) In advance of the upcoming elections, many politicians, 
reporters, 
and advocacy groups have been trumpeting "poverty" as the most 
important 
issue facing Israeli society.  In reality, apart from a few isolated 
pockets, Israel does not face grinding "third world-style" poverty as a 
systemic problem.  What it does face is a slowly growing gap between 
the "haves" and the "have-nots," which has been exacerbated somewhat in 
the last two years by the implementation of the economic reform program 
of former Finance Minister Netanyahu.  People in the lower 
socio-economic strata have had their government benefits cut, but the 
economic recovery has not yet been able to provide enough good new jobs 
to compensate. The recovery has been strong in high technology and 
finance, but anemic in traditional industries such as food and textiles 
keeping the unemployment rate at a still high 8.9 percent.  The attacks 
charging Netanyahu and his reform program with responsibility for a 
dramatic increase in "poverty" in Israel are misleading, at best, and 
demagogic, at worst.  They are really an attack by entrenched economic 
interests on Israel  shifting economic priorities.  These interests, 
primarily the labor unions and others who hearken back to Israel 
socialist 
past have lost the fight to control Israel  economic future. 
 This loss has generated a backlash, which has turned into a political 
battle over those who are still "left behind" by the recovery. 
 Regardless, the furor over "poverty" is bringing attention to the 
growing inequality in the society, and any government formed after 
the March 28 election will have to address the issue.  End Summary. 
 
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Inequality the Issue, Not Poverty 
------------------------------------------ 
 
¶2.  (S) The issue of "poverty" has taken center stage in the Israeli 
election campaign, especially since the election of Amir Peretz to head 
the Labor Party.  Former Finance Minister Netanyahu has become a 
lightning rod for criticism, even from within his own political party, 
that his policies were "heartless" and dramatically increased poverty. 
 Several NGOs have recently issued reports to demonstrate an increase i 
poverty, which the press highlighted with alarmist headlines.  This has 
surprisingly, kept the election campaign more focused than usual on 
economics, even with the recent terrorist attack in Netanya and the 
furor over claims by a Sharon adviser that Sharon would eventually 
divide Jerusalem and withdraw from 90% of the West Bank.  However, the 
true message of the poverty reports is not that many Israelis live in 
abject poverty, but that the gap between the "haves" and the "have-nots 
has widened as wealthier sectors of society have benefited more quickly 
than the "poor" from the economic recovery. 
 
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 Bachar Committee on Poverty Formed 
--------------------------------------------- ------ 
 
¶3. (S) Even before Peretz  election, the issue of poverty was becoming 
increasingly important in the Israeli political arena, to the point 
where then Acting Finance Minister Olmert, upon succeeding Netanyahu in 
office, made repeated statements about the need to increase spending to 
address the issue.  Olmert had fully supported the Netanyahu reforms 
while serving in the Sharon government, but sensed that their impact on 
the lower socio-economic sector was becoming a major political issue. 
 While the government has promised to continue to adhere to the Loan 
Guarantee Agreement terms, which call for a budget deficit maximum of 
three percent of GDP and a maximum increase in the rate of expenditure 
growth of one percent, Sharon and Olmert felt enough heat on the issue 
to appoint the "Bachar Committee on Poverty."  The committee, named 
after its chairman, Finance Ministry Director General Yossi Bachar, was 
tasked with generating ideas on ways to alleviate poverty.  The report 
on its conclusions was supposed to come out at the end of November, but 
committee member Karnit Flug, Director of the Bank of Israel Research 
Department, told econoff at that time that the committee had not yet 
completed its work.  On December 18, the Committee met with the PM and 
the Finance Minister to discuss its preliminary findings.  According to 
the websites of the PM and MoF, they discussed a recommendation for a 
seven year NIS 14 billion ($3.04 billion) plan.  The PM and FM asked th 
committee to devise a specific plan with timelines for implementation. 
 In addition, they also asked to hold a meeting within the next month t 
discuss the possibility of adopting an earned income tax credit.  (Note 
The PM  December 18 stroke casts doubt on when/whether this meeting 
will take place.  End Note) 
 
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Make it Easier for People to Work 
-------------------------------------------- 
 
¶4.  (C)  Flug said that the committee would not recommend radical 
solutions, but would rather suggest incremental ways to help alleviate 
some of the difficulties of those who have not yet benefited from the 
rising economic tide, especially those whose allowances were cut, but 
have not yet found stable employment.  The idea, she said, was to make 
it easier for people to join the work force, for instance, by having th 
government pay for child-care while a mother goes to work.  The money 
spent would more than be made up for in the long-term by successfully 
integrating the beneficiary into the full-time tax-paying work force. 
Another controversial idea under discussion is a U.S.-style earned 
income tax credit, which Flug indicated is being mistakenly referred to 
as a "negative income tax" by the press.  She said that the 
program 
success in the U.S. has brought about an examination of its 
applicability in the Israeli context, although many - including some in 
the Finance Ministry - oppose it as a bureaucratic headache, which will 
accomplish little. 
 
¶5.  (U) According to press reports, other ideas under consideration by 
the Bachar Committee include encouraging the building of factories in 
the Arab sector, providing incentives for Arab and ultra-Orthodox Jewis 
men to find jobs, increasing subsidies for training and education in 
underdeveloped areas, giving incentives to employers to hire new 
workers, increasing assistance to the elderly, and lowering health care 
taxes on low income wage earners.  These press reports substantiate 
Flug  contention that the committee  emphasis is on finding ways to 
make working a more attractive option, and to move people off of 
allowances, rather than to return to the "culture of allowances" that 
had prevailed prior to the reforms. 
 
----------------------------------------- 
IMF: Maintain Fiscal Discipline 
----------------------------------------- 
 
¶6.  (U) The preliminary IMF report on the Israeli economy issued on 
December 12 agreed with the thrust of the Bachar Committee  thinking. 
It recognized that cuts in benefits have harmed certain groups such as 
the elderly and disabled, and those unable to work, and that it is 
necessary to retain a social safety net for their benefit.  But it 
stressed the need to remain within the present fiscal framework, and to 
provide incentives that encourage people to work. 
 
-------------------------- ------------------------------------ 
National Insurance Institute 2004 Poverty Report 
-------------------------- ------------------------------------ 
 
¶7.  (U) The poverty line in Israel is defined as 50% of median net 
income.  In 2004, the line stood at NIS 1,777 (USD 386 at the present 
exchange rate of 4.6) per month for an individual and NIS 4,548 (USD 
989) for a family of four.  These figures are about 25.5 percent and 
65.4 percent of average monthly income of approximately NIS 6970 (USD 
1515).   In August, the National Insurance Institute provided the 
impetus for the increased discussion of the poverty issue when it put 
out a report, which indicated that the number of people falling below 
the poverty line had risen from 1,426,800 in 2003 to 1,534,000 in 2004. 
 In addition, it said that the number of children living in poverty 
increased from 652,400 to 713,600 and the number of impoverished 
families increased from 366,300 to 394,200 in the same time frame. 
 These statistics say that about 22 percent of the Israeli population 
lives under the poverty line, up from fourteen percent in 1990, before 
any attempt had yet been made to rein in the welfare state.  The very 
large number of people living beneath the poverty line now indicates 
that the measure used casts a very wide net, and that many people have 
been hurt by the cuts in government benefits. However, most of them do 
not live in abject poverty and will likely benefit from continued 
economic recovery.  The National Insruance Institute is scheduled to 
issue updated figures soon. 
 
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Advocacy Group Says Poor Get Poorer 
--------------------------------------------- ------ 
 
¶8.  (U)  In addition, the ADVA Center for Information on Equality and 
Social Justice in Israel will shortly come out with its annual report 
on the economic situation of the disadvantaged in Israel.  There have 
been numerous leaks to the press about its contents.  The report will 
say that the economy has experienced unbalanced growth, with investment 
and high wages being concentrated in only a few sectors.  According to 
ADVA  interpretation of statistics released by the government  Centra 
Bureau of Statistics, the high technology sector grew its contribution 
to GDP by 100% since the early 1990s, while the insurance, banking, and 
real estate sectors grew by 50%.  In contrast, traditional industries 
such as food and textiles, in which many of the working poor are 
employed, grew by only four percent.   The net result, according to 
ADVA, is that the rich have gotten richer and the poor poorer. 
 
--------------------------------- ------------------------------------ 
"Social" Economist Sees Severe Societal Deterioration 
--------------------------------- ------------------------------------ 
 
¶9.  (S) In contrast to ADVA  conclusions, the real message of the 
statistics is that there has been some temporary deterioration in the 
situation of those whose allowances were cut and who have not yet found 
jobs.  However, other than amorphous anecdotal accounts, there has been 
no documentation to suggest that these people are suffering from true 
abject poverty, and that their children are going to bed hungry.  In a 
meeting with econoff, Hebrew University "social economist" Momi Dahan, 
former Senior Advisor to the Finance Ministry DG, and an advocate of a 
strong welfare state, said that the face of Israel has changed 
dramatically over the past fifteen years.  He described a Dickensian 
society where poverty is rampant, many cannot afford food, and soup 
kitchens are ubiquitous, saying that it reminded him very much of the 
United States.  He gave little credit for the economic "recovery" to th 
reform program, but ascribed most of it to the wind-down of the intifad 
and the return of global prosperity.  He did, however, credit Netanyahu 
with maintaining fiscal discipline, which he said is important.  His 
prescription for dealing with poverty is to keep the deficit under 
control, but reintroduce high taxes to pay for the costs of necessary 
welfare programs.  His main contention was that in welfare states, such 
as Sweden, poverty is not an issue, but that in other types of 
societies, such as the U.S. and Israel (now), it is.  However, when 
asked the source of his information on the spread of soup kitchens and 
other such facilities, he said that the evidence is what he sees with 
his own eyes every day - in other words, anecdotal. 
 
--------------------------------------------- ------------------ 
Growth Will Eventually Reach the Bottom Rungs 
--------------------------------------------- ------------------ 
 
¶10.  (S) Dahan illustrates the "sky is falling" atmosphere prevalent in 
Israel today regarding poverty.  Some, such as Gil Bufman, Chief 
Economist at Bank Leumi, and Yossi Gordon, Deputy Budget Director at th 
MoF, dismissed the poverty issue out of hand in discussions with 
econoff. Bufman said something to the effect that an impoverished perso 
in Israel is someone who does not own a cell phone.  Gordon was 
similarly dismissive.  Both acknowledged that the problem Dahan 
addresses is real, but said that his characterizations of it are 
exaggerated.  Once the economy has the time to work through the 
dislocations brought about by the reforms and the new demands of the 
world economy, the benefits of economic growth are likely to reach thos 
on the bottom rungs as well, whether they be Jews of North African and 
Middle Eastern origin, ultra-Orthodox Jews, Arabs or Druze, or the 
elderly. 
 
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The Fight is Over How to Divide the Pie 
--------------------------------------------- -------- 
 
¶11.  (C) The situation of most of the "poor" has remained fairly static 
in recent years, while the well-off have experienced a period of 
prosperity.   However, as written on December 13 by the economics 
reporter for Ma riv, Moshe Perl, the issue is the need to "understand 
the difference between the battle to increase the size of the cake and 
the battle over how it is divided up.  The furious socio-economic 
controversy taking place here now does not succeed in making that basic 
distinction. People who are not satisfied with the manner in which the 
fruits of economic growth are being divided have launched a public 
campaign against the very methods and the plans which made that growth 
possible . .  . . 
 
Under no circumstances must we do away with a policy which has made 
growth possible just because it emerges that its benefits are not share 
as we would wish."  In a December 12 ruling, the Israeli Supreme Court 
rejected an appeal by numerous advocacy NGOs demanding that the Court 
order the government to reinstate the allowances that were cut.  The 
Court said that the country has an obligation to take care of those in 
need, but it is up to the elected government to decide how money should 
be spent. 
 
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Peretz Will Not Bust the Budget Framework 
--------------------------------------------- ------------- 
 
¶12.  (S) However the March 28 elections turn out, Amir Peretz and the 
Labor Party are likely to have great influence, certainly more than 
they have had in the recent past.  The PM  health problems also point 
in that direction.  When Econoff posited to several economists the 
likelihood that Peretz could end up as Finance Minister in a government 
headed by Kadima/Sharon, they agreed that it was a very realistic 
scenario.  They added that regardless of whether or not Peretz holds th 
Finance portfolio, his (mostly unknown) economic views will likely have 
great influence on the policies of the next government.  Momi Dahan was 
very enthusiastic about the prospect.  Daniel Doron, Director of the 
Israel Center for Social and Economic Progress, and a contributor to 
some of Netanyahu  reform plans, said it would be a "disaster." 
 However, the consensus among those econoff talked to (excluding Doron) 
was that Peretz is beginning to gather knowledgeable industrialists and 
economists around him, such as Avishai Braverman, the President of Ben 
Gurion University, and Benny Gaon, a respected businessman.  Both Dahan 
and Bufman (of Bank Leumi) said that Peretz will quickly understand, 
once he is in a position of power, that there are limits to what he can 
change - the market will only allow him to go "so far, and no further." 
 He will be constrained by the LGA terms and will not likely attempt to 
bust the budget framework. All agreed, however, that he would insist on 
drastic cuts in areas such as defense in order to finance considerably 
increased social spending. 
 
--------------------------------------------- 
Economic Reform Had to Happen 
-------------------------------------------- 
 
¶13.  (S) Israeli society has experienced tremendous upheavals during 
the past two decades.  First came the first intifada in the late 1980s, 
the mass immigration of about a million people from the former Soviet 
Union and Ethiopia, the Oslo Peace Process, and the hi-tech bubble. 
 Then came the second intifada and the global hi-tech bust, both of 
which severely affected the Israeli economy, and forced changes in the 
old ways of doing things.  Israel  socialist heritage, the vestiges of 
which still maintained strict controls on foreign and domestic 
investment, and conferred enormous power on large unions and 
publicly-owned companies, had to give way to the modernized system that 
is being created by the reforms.  Trade is Israel  lifeline, as it has 
no resources other than its people.  Without reforming its economy and 
opening it up to the world, it would not be able to compete. 
 
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Socialism Writ-Large is Dead 
-------------------------------------- 
 
¶14.  (S) With every upheaval, there are winners and losers.  The 
losers, in this case those associated with the large unions, the 
kibbutzim, the large government-owned companies, and many who were 
simply raised on the ethos of "Socialist Zionism," have been fighting a 
rearguard action to maintain their influence.  Exaggerating the issue o 
poverty is one of the weapons they have used.  However, barring a retur 
to violence, a continued economic recovery will eventually reach many o 
those who remain left behind.  Regardless of the relative popularity of 
the populist Amir Peretz as the head of the Labor Party, the "poverty 
mongers" understand that the decline of the socialist ethos in Israel, 
which began with the Labor Party loss in the 1977 elections, is now ver 
advanced - thus the severity of the reaction. 
 
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