Trouble With Fast Economic Growth: Growing Socioeconomic Gap

Iron Dome military system has implication well beyond a security system

The last two years, Israel's educated middle class started protesting a widening socioeconomic gap. This gap, seem to be widening every day, is more visible in the upper middle classes. Upper classes brought about by strong economic growth in a few small sectors. There are many more luxury apartments going up, more new luxury cars on the street (new Ferrari and Maserati dealerships), and many more shops with items not seen here before. But there are also difficulties to some which are also a new surprise to many. College educated and well trained professionals are no longer assured a well paying job and a comfortable middle class lifestyle. As the number of luxury high-rise apartments is going up at alarming rate, it seems like everybody is enjoying this great economic growth. But as you look more carefully, that's not the whole story. In market segments where the economic growth is concentrated, like construction, high-tech, finance, and luxury retail, the benefactors are not necessarily “yeled tov Yerushalayim” (a good boy from Jerusalem), well educated middle class professionals.

On a recent visit to Jerusalem, I met a woman marketing new apartments. Working with small builders, she sells on her own hundreds of apartments each year, pocketing a small commission on each sale. With steady construction the last decade, she with a small number of builders, architects, investors, and independent Realtors, have pocketed a small fortune. The business in certain niche locations and social segments (i.e. new orthodox Jews in Jerusalem, mostly foreigners) is essentially a small club. Israelis are used small clubby cliques controlling a company or a government department. That part is not strange, although there are critics from the outside, this is still something we see in Israel. The new development is how many of these “new millionaires” are visible (and spending money.) All this spending is also pushing up the inflation rate in some basic consumer goods. These price changes are affecting everyone else, primarily the ones not benefiting from the fast economic growth. There are other fast growing market segments with their own particular flavor. The last five years, financial “gambling / investing” sites, gaming sites, and related services have taken hold in a big way. Israeli companies with help from eastern European workers are supplying about a third of the software for gaming and gambling on the internet. The organization of these groups tend to be around business related functions. A more hidden group of companies is military equipment and services related to new technology developed in Israel. The biggest area today is drones (robotic / unmanned aircraft / UAV). In this sector, Israel is a major international supplier, primarily selling to second tear countries, competing mostly with the US suppliers. Another new area, is active air-to-air command and control using technologies developed for Iron Dome. The systems, developed in collaboration with American suppliers is expected to be the next large technology upgrade in military deployment. There are more small military technology segments which are hidden, yet bring strong economic vitality to the Israel. Besides the expected executive wealth, advisors, marketers, dealmakers and others are benefiting from all this new business developed here.

All these economic changes are showing up in strange, and sometimes difficult to understand places. In other countries (US) economic growth is measured by the price of a major stock index (i.e. NASDAQ, Dow Jones Industrial Average), or the consumer spending index. But in Israel these measures are not that useful. The difference between Israel and other countries, may be in its small size and densely of its population. There is also difference in how Israelis tend to be familiar with their surroundings and comfortable in poking into their neighbor's “business”. The closeness of Israeli society makes for very little privacy. The only relief from prying eyes is to declare a company's work a military secret. This is the state of Iron Dome and military drone products. When a company's business details are hidden, their success is mostly visible through the money its executives spend. This brings the cycle of economic visibility back to the luxury apartments and cars. And here we are again at the beginning of the story. This story is just starting to develop. So we are going to see more noise somewhere in Israeli society. Eventually Israeli society will figure out how to handle economic growth (and success.) It seems like most Israelis will choose a middle ground, somewhere between pure market driven capitalism of the US and UK and Scandinavian socialism. Its nice to see more new Maseratis on Tel Aviv streets, yet there is no reason to leave the less unfortunate behind (economically.)