Behind the Headlines'It's a very unequal crisis'

WATCH: Israel must regain citizen trust to put nation on track, says economist

In online ToI interview, Nadine Baudot-Trajtenberg says uncertainty over length and extent of pandemic is stunting economic stability, expanding wealth gap

The Times of Israel startup and economics editor Shoshanna Solomon (left) interviews Israeli economist Nadine Baudot-Trajtenberg (YouTube screenshot)
The Times of Israel startup and economics editor Shoshanna Solomon (left) interviews Israeli economist Nadine Baudot-Trajtenberg (YouTube screenshot)

The impact of Israelis’ eroding trust over how the government headed by Prime Minister Benjamin Netanyahu is handling the economic crisis generated by the coronavirus pandemic is going to turn out to have important economic reverberations, according to leading economist and former deputy governor of the Bank of Israel Nadine Baudot-Trajtenberg.

“When you are into a crisis, the element of trust is enormously important,” Baudot-Trajtenberg told ToI’s Startup Israel editor Shoshanna Solomon in the new Behind the Headlines online video series. 

The essential question, she said, is “Do you trust that your leaders are taking” difficult decisions? In Israel that trust was already chipped away prior to the coronavirus crisis, as the country struggled to set up a coalition government after three elections in a 12-month period, she said.

When the crisis struck the country was still initially without a government, and then, once the government was formed, its response to the crisis was too little, too late. Now, as the nation tops up its rescue packages and dishes out money to all, rich and poor, the perception is that the new government – Israel’s largest ever – is out of touch with what the people really need and is distracted by other issues, Baudot-Trajtenberg said.

“From the start, every signal that we had [from the government] was a signal that reduced our trust,” she said, starting with the inflated number of ministers during “the biggest crisis we have ever seen” to the fact that the Knesset’s Finance Committee spent three hours discussing whether taxpayers should reimburse the prime minister for his expenses on his private residence, while postponing a discussion about payments for single parents.

Prime Minister Benjamin Netanyahu, left, chairs an emergency meeting of senior ministers to decide on measures to curb the spread of the coronavirus, July 16, 2020. (Chaim Tzach/GPO)

“All of these elements are extremely, extremely destabilizing,” Baudot-Trajtenberg said. “We’re all making a big effort, and many of us also are losing their jobs and their income. And you have a sense that these important discussions are not taking place. So, I think there was an erosion of trust very early on, and economic activity in general requires trust. So, this erosion of trust, I think, will turn out to be very painful economically.”

It is not going to be easy to restore the people’s trust, she said, as tens of thousands have taken to the streets across Israel in protest.

People want to see the government making “difficult decisions, not easy decisions,” she said.

It’s an easy decision to give money to everybody

“It’s an easy decision to give money to everybody,” Baudot-Trajtenberg said. “That does not restore trust. You restore trust if you show you are making a difficult decision.”

“That’s one of the most important things,” she said. “In fact, I would want to see a finance minister that says no, not a finance minister that says yes to everything. That is not restoring my trust in the system.”

Protesters, mask-clad due to the coronavirus pandemic, gather for a demonstration against the government near the Prime Minister’s Residence in Jerusalem on August 1, 2020. (Menahem Kahana/AFP)

The economic crisis generated by the coronavirus pandemic is so much more devastating than other crises witnessed by the modern world because it is not only a global crisis, a rare occurrence in itself, but also a supply and demand crisis, all in one.

Crises, Baudot-Trajtenberg said, tend to emphasize both our strengths and our weaknesses. Israel entered the crisis economically in a strong position, in terms of growth, record-low unemployment and debt-to-GDP levels that now allow the nation to spend on rescue packages, in light of the unprecedented crisis it is facing.

This economic crisis — with the 6% drop in GDP forecast for this year — under the best-case scenario — is the worst ever faced by the nation,  far worse than the crises caused by the Second Intifada and the bubble in the early 2000s, and the Second Lebanon War in the summer of 2006.

Annual GDP percent change in Israel 1964-2020; the economic shock this year is much bigger that those related to past conflicts, data shows (Nadine Baudot-Trajtenberg, Tiomkin School of Economics, IDC Herzliya)

At the same time, crises expose also the nation’s weaknesses, and one of Israel’s greatest weaknesses is inequality, Baudot-Trajtenberg said, the huge gap between rich and poor, the haves and the have nots.

And the coronavirus crisis has hit hardest the poorest and the weakest among us, along with the less productive industries.

“It’s a very unequal crisis,” Baudot-Trajtenberg said, which adds to Israel’s already widespread social inequality.

Kid in a candy store

On a more personal note, Baudot-Trajtenberg said that for an economist, working at the Bank of Israel is a bit like being “a kid getting into a candy store.”

It is “not like any other job,” she said. “For an economist who wants to have an impact on the economy, for someone who wants to be a policymaker, this is, this was, the absolutely best job in the world.”

Former Bank of Israel deputy governor Nadine Baudot-Trajtenberg (Bank of Israel)

“You touch on every topic, of course, there’s a huge responsibility that goes with it. But you work with wonderful people” whose sole focus is “on wanting to do the right thing.”

The job of course is “exacting” in terms of time and energy, she said. “But it’s a bit like a kid getting into a candy store.”

Be prudent, make no rash decisions

Baudot-Trajtenberg’s advice in these crazy times, even if she declines to give specific investment advice, is pretty commonsense: Be prudent, don’t make rash decisions and don’t commit to particularly large expenses for which you don’t have the money.

Governor of the Bank of Israel Amir Yaron attends a press conference on March 31, 2019. (Yonatan Sindel/Flash90)

“Prudence is a very important thing,” she said. And because things are so uncertain and fluid, assets should be “as diversified as possible.”

“That would be my basic, commonsense type of advice, because I don’t think anybody has a crystal ball,” she said.

Policies for winners

If steered correctly, Israel could come out a stronger from this devastating crisis.

“There will be always losers and winners in these things,” Baudot-Trajtenberg said. “I think that, if we make the right policies, we can have lots of winners.”

Education and health are big sectors that will need a huge amount of resources and workers, going forward, she said. So, the government must have in place policies that will allow for more spending there, and for retraining people who have lost jobs in industries that have been shut down and disproportionately hit by the crisis.

Israelis wear protective face masks as they shop for food at the Carmel market in Tel Aviv on August 5, 2020. (Miriam Alster/FLASh90)

Similarly, the government must speed up the digital acceleration that is already happening in all fields of the economy, from businesses to healthcare and education, to make sure everyone has access to this revolution and is digitally savvy.

“It’s not like there’s no future,” post-coronavirus, she said. “There is a future… So, we will be okay.” There will be an economy, there will be jobs. “But in order to get there, we should help with the policies that will help us make that transformation.”

Check out previous Behind the Headlines online interviews:

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