Solutions for the growing gaps that strain Israel’s economic survival
Our recent Financial Innovations Lab® report on financial inclusion could not be timelier as Israel seeks new ways to keep economic growth alive. After years of annual growth rates above 5 percent, with science and technology sectors as the main driver, Israel’s economic expansion is slowing. This is due to declining labor productivity in 80 percent of the workforce and to the need for Israel to extend its high tech mojo to sectors beyond its successes in technology, food, energy, health, and water. In order to keep its current pace of growth, the country must address increasing cost of living, financial concentration, rising income inequality and, of course, geopolitical risks.
Addressing the costs of inequality in the months ahead is essential to sustaining growth and was a resounding theme in the country’s recent election. While Israel has grown more rapidly than other advanced economies, with 10 percent of the workforce in the high tech sector generating over 50 percent of industrial exports, the disturbing transformation of its income distribution and society has made Israel one of the most unequal societies in the world. A post-partisan, national consensus has emerged: financial inclusion is central to sustainable economic security for the country as a whole.
As Paul Krugman recently pointed out, according to the Luxembourg Income Study data, the share of Israel’s population living on less than half the country’s median income has more than doubled since 1992, from 10.2 percent to 20.5 percent. Even more disturbingly, the share of children living in poverty quadrupled over the same period, from 7.8 percent to 27 percent. Relative poverty and wage disparity continue to grow. The need for a bridge to the middle class for young people has become glaringly obvious, with housing prices having increased more than 68 percent over the past nine years, and an astounding 70 percent of workers earning below the average wage rate.
In this context, Israel’s poor—the unbanked and underbanked who remain on the fringes of traditional credit and savings sources—now comprise 21 percent of the population. Additionally, 40-50 percent of the population lives in asset poverty (the inability of a household to provide for its basic needs for three months using liquid assets). While micro and small businesses constitute 96 percent of the businesses in Israel and employ 60 percent of the workforce, they receive only 20 percent of bank credit.
With the Citi Foundation and others, we gathered experts from Citi’s Community Development Unit in the UK, along with U. S. representatives from the National Federation of Community Development Credit Unions, the Corporation for Enterprise Development, Accion (microcredit network) together with Israelis from the Bank of Israel, the Ministries of Economy, Justice, and Welfare, the National Insurance Institute and the National Economic Council. At our Financial Innovations Lab in Jerusalem, we charted the credit analytics and policy innovations for the path ahead.
The resulting report, Capital Access in Israel's Underserved Markets, will now act as a roadmap for the new Finance Minister, whose constituency and priorities must focus on the growing gaps that strain the social cohesion necessary for the country’s survival.
Our report identifies regulatory barriers that can be dismantled along with financing strategies for new facilities for credit and community development, and a structure for community banking and lending. These improvements can accelerate economic growth for distressed communities and help move them into the mainstream of an increasingly inclusive growth economy. New financial technology, community-based financial services, tools for individual savings accounts, and social investment platforms will all combine to carve new channels for growth for people in these underserved communities.