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Last Updated: Monday, 27 March 2006, 09:20 GMT 10:20 UK
Economic boom belies Israeli poverty
By Jorn Madslien
BBC News business reporter

A luxury car on display at a business conference in Tel Aviv
Israel's rich are getting richer as economic growth remains strong

A seemingly insatiable appetite for shopping and a booming financial services sector offers visible proof of what economists and politicians have been saying for some time: Israel has bounced back from recession.

Last year, the economy expanded at its fastest rate in years, bolstered by healthy growth in exports, strength in the technology sector and a healthy investment climate.

This year, economic growth is expected to remain strong.

Yet, beyond the conspicuous displays of prosperity it is also becoming clear that the benefits are not shared by all.

Israel's economic growth has forged a wider gap between the rich and the poor, and in so doing the otherwise welcome prosperity has had the peculiar effect of undermining some of the values that used to unite the country's people.

The government's own figures reveal that one in three children in Israel live in poverty, an indication that values such as social justice and solidarity are being eroded.

And the situation is getting worse.

The overall proportion of poor people in Israel has risen from 15% during the 1990s to 20% now, according to figures from Israel's National Insurance Institute.

Israel now ranks second after the United States in the table of inequality in developed countries, and there has been a parallel fall in solidarity among workers in the country.

"In the past, about 80% of Israel's labour force belonged to trade unions, but this ratio has shrunk to about 30%," observes the Economist Intelligence Unit (EIU).

"To be poor among the poor is not so bad. Being poor in such a consumer-oriented culture as there is now creates a lot of problems," says Tel Aviv University lecturer Yosi Katan.

Tackling poverty

Israeli Arabs and ultra-orthodox Jews, who tend to have large single-income families, are strongly represented among the poor, and thanks to some of their religious leaders speaking out, their plight has become one of the key economic issues raised during the election campaign.

Homeless man in Tel Aviv
The proportion of the Israeli people living in poverty is rising

Interim Prime Minister Ehud Olmert, of the centrist Kadima, has said poverty could have "destructive consequences", while Labour leader Amir Peretz has vowed that "with us, there will be no hungry children".

One economist, Daniel Gottlieb, who works at Ben Gurion University and is an adviser to the Bank of Israel, even believes the government should consider poverty as a potential security issue.

"I think it has the potential to threaten Israeli stability if we do not take care of it," he says.

Such talk of action might do much to mollify Israel's prosperous middle classes, but given that all candidates agree that poverty is a problem it does little to sway their votes.

Few voters are expected to look beyond the headline figures, which show that Israel's gross domestic product (GDP) expanded 5.2% in 2005, a sharp acceleration from 2004 when it grew 4.4% and 2003's growth rate of 1.7%.

Underlying strength

This year, the rate of growth is expected to be lower than last year's, with economists pointing to the Hamas victory in the Palestinian elections in January as one likely cause.

Kadima leader and Acting Prime Minister Ehud Olmert
Interim Prime Minister Ehud Olmert wants to help the poor

But although the election result caused much uncertainty about the future, not least because the Israeli and the Palestinian economies are closely linked, it would not be the only cause of an anticipated economic slowdown.

Israel is also vulnerable to economic weakness in its main export markets in Europe and the USA.

But this is not to say that the Israeli economy is in a bad way.

No one is talking about a return to the desperate conditions of 2000 when a Palestinian uprising sparked a slump.

Instead the economy should continue to expand at a healthy 4.5% this year, the EIU predicts.

The investment bank Merrill Lynch is somewhat less optimistic, predicting economic growth of 4.2%, while the Bank of Israel's estimate is 4.3%.

Palestinian poverty

Nevertheless, the overall picture is one of optimism: Not as good as last year, but pretty good nevertheless.

Not only is the Israeli economy set to continue motoring ahead. It should do so without sending inflation higher, according to Merrill Lynch's prediction.

This should help create a healthy environment for Israeli companies to thrive, Merrill Lynch says, hence the country's unemployment, which has come down to below 9%, is set to stabilise.

If the performance of the country's stock exchange is anything to go by, many investors are optimistic too.

Those who bought shares in the country's 25 leading companies in 2004 will have clocked up returns of 25% during 2005.

And yet, some insist Israeli companies remain undervalued, mainly because concerns about terrorist attacks undermine investor confidence in companies that are otherwise well run.

Few expect such a "terrorism premium" to go away, at least not as long as Israel's Palestinian neighbours continue to live in poverty considerably worse than that suffered by Israel's own poor people.

Israel's own poverty line for a single person is 1,700 Israeli shekels ($363; 210) per month. By comparison, in Palestinian territories 43% of families live on less than $2 a day.

For any victorious government, such headaches mean the management of the Israeli economy will remain a resource-intensive exercise, which again means it could prove tricky to push for further cuts in government spending.

This, in turn, could make it hard for an Israeli government to further reduce the national debt, which stood at 99% of GDP by the end of last year.

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