Economic Crisis in Israel, Other Countries ‘Akin to Great Depression’
Policy experts weigh in on government strategies to help small businesses during coronavirus pandemic
Small businesses around the world face daunting challenges, as many remain shuttered while coronavirus lockdowns drag on.
In Israel, hundreds of business owners across the country have launched protests in recent weeks, demanding that the government help them – and fast – to weather the storm brought about by the pandemic. They add that they have received little to no financial assistance thus far.
Small and independent businesses have been especially hard-hit, and some economic analysts believe that much of the world has already entered the worst economic crisis since the Great Depression.
Prof. Zvi Eckstein, dean of the Tiomkin School of Economics and head of the Aaron Institute for Economic Policy at the Interdisciplinary Center Herzliya, was deputy governor of the Bank of Israel during the 2007-2008 global financial crisis. He argues that Israel and others are currently in uncharted territory, with GDP for March and April expected to contract dramatically.
“There is no comparison,” Eckstein told The Media Line, referring to the 2007-2008 crisis. “First of all, in 2008, the only crisis we had in Israel was due to international markets and their implications. There was no financial collapse.”
At the time, Israel was able to manage the challenges fairly quickly. The unemployment rate rose from roughly 6% to just 10%.
“This time, we started with 4% unemployment and within a few weeks jumped to 25%,” he said. “There has never been a chart like this for the Israeli economy. It’s the same with a lot of Western economies – and the same size as the Great Depression. In the US during that period, there was 25% unemployment.”
On the bright side, he added, Israel entered the coronavirus outbreak with a robust economy and a relatively low debt-to-GDP ratio of about 60%, giving the country and the government a significant advantage in terms of being able to support businesses in the long run. Nevertheless, the recovery is expected to be very slow until a vaccine becomes available, since governments will remain cautious about relaxing restrictions so as to avert a resurgence of infections.
“Because of all the uncertainty, business and demand will be slow,” the veteran economist explained. “In the best-case scenario, if we get to the end of 2020 and cut unemployment by half, it will be a great success.”
While the pandemic undoubtedly represents an unprecedented shock to the global economic system, Eckstein stresses that governments can mitigate the fallout by deploying a number of strategies and aid packages, including the deferment or even reduction of rents and taxes.
In Israel, one of the challenges facing business owners is a lack of clarity on unemployment benefits, financial aid and the country’s exit strategy, according to Eckstein. This uncertainty makes it nearly impossible for them to make medium-term plans.
Another issue is rents, he said, adding that the government could broker some kind of emergency agreement between property owners, occupants and banks.
“The [Israeli government] needs to reduce real estate, municipal and corporate taxes at least until December,” he argued. “The other issue is that if you are a [business] owner, you have your own salary, and initially in Israeli law [such people] were not able to get unemployment compensation…. But according to economic theory, there shouldn’t be any difference between someone who is self-employed and a [salaried] employee.”
Others disagree, saying the government has the ability to eliminate the lack of clarity.
“Things are remaining vague, and there’s a good reason for that,” Prof. Alex Cukierman, a research fellow at the London-based Center for Economic Policy Research, told The Media Line.
“The reason is that the decision-makers are unsure about how long this will go on… and whether there’s going to be a rebound in the number of coronavirus patients,” he explained. “In that case they will have to tighten the lockdown again, and there will be more closures. So the Israeli Treasury is apprehensive in terms of committing very large amounts of money immediately. One can understand that position – as well as that of small business owners.”
Cukierman, who for 30 years was an economics professor at Tel Aviv University as well as a member of the Bank of Israel’s Monetary Policy Committee, is writing a research paper about how to pay for the coronavirus crisis. He concedes that there is some inefficiency in the Israeli system, adding that institutions were not prepared for an event of such magnitude.
“There are trade-offs here. The Israeli government can do a lot of things and it can spend more money. There is no question about that,” he stressed.
“In a period like this, you don’t want to raise taxes. In fact, you want to reduce them and then increase expenditures, which means that there’s going to be a deficit in the government budget,” he continued. “So the Israeli government can finance the deficit by [increasing] debt.”
Cukierman added, however, that the government is worried not only about small businesses, but also large ones that are crucial to country’s national and security interests.
“One of them is El Al [Israel Airlines], which has thousands of workers, and they basically have no income right now because the skies are closed,” he said. “You don’t want a company like El Al to disappear altogether. You want to maintain businesses that are viable in the long run as long as possible.”
‘Small Businesses are the Engine of the Global Economy’
One reason analysts say it is important for governments to focus a significant part of their aid efforts on small businesses is the crucial role that such firms play in the global economy.
In fact, according to the World Bank, small and medium-sized enterprises account for the majority of businesses worldwide and are significant drivers for job growth and economic development.
“The COVID-19 pandemic has taken a heavy toll on the economy, affecting lives, societies and companies of all kinds, but particularly those with smaller operating margins, such as micro, small and medium-sized enterprises,” a spokesperson for the World Bank told The Media Line in an email. “Small businesses account for two-thirds of the globe’s jobs and half of its GDP. In [the Middle East and North Africa], they contribute up to 90% of all jobs in the region.”
Because of this, the World Bank emphasized that financial institutions need to inject liquidity to help these companies stay afloat. It recently announced that it had raised $8 billion from global investors to support such businesses.
The spokesperson added that the World Bank Group’s International Finance Corporation was working in the region to “support resilience and recovery, and open up new opportunities for private sector investment that creates much-needed jobs for the region, especially its youth and women.”
In Israel, small businesses, defined as firms with up to 100 people, provide employment for 40-50% of the workforce, according to Eckstein.
“Usually, what happens in all countries when emerging from a crisis is that small businesses are the engine of growth,” he said. “They are more flexible, innovative and extremely important.”
A report published earlier this week by the Startup Genome research firm said that 41% of start-ups could close their doors within three months if they cannot raise additional funds.
The survey, which included 1,070 respondents from over 50 countries, found that four out of 10 start-ups had only enough money to last a few more months at best. Thirty-eight percent of the start-up owners interviewed said they had not received government assistance and did not expect any.
Israel, known as the Start-Up Nation for its high concentration of innovative tech companies, could also see many of these go bust, although Eckstein believes that the ecosystem will not disappear entirely because of growing demand for new technologies. Still, the government should consider “innovation funding” to help the sector in the immediate future, he said.
What Are Other Countries Doing?
Other countries, especially in Europe, have opted to help business owners directly by paying their employees’ wages.
The Danish government has vowed to pay private firms between 75% and 90% of their workers’ salaries − up to $4,000 per month per worker − in a bid to prevent layoffs. The Dutch government, meanwhile, has promised to cover employee wages for three months in companies reporting a 20% drop in revenue since the beginning of the outbreak.
Many European governments are also shoring up businesses by buying shares of companies, as well as temporarily nationalizing profits and losses.
Johan Bjerkem, a policy analyst who specializes in industry, single markets and trade at the Brussels-based European Policy Center, told The Media Line that the current crisis already has had a “colossal effect” on the continent’s economies.
“European countries have supported employers and business owners differently,” he said.
“Most countries, including France and Germany, have put in place short-time working schemes where employees work less, which makes it possible for their employers to pay them less – e.g., 20% – [and] the rest of their salary is paid by the state,” he explained.
Bjerkem notes that additional policies have been put in place to postpone or cancel taxes for businesses.
Even though no country was prepared for the current crisis, European nations might recover faster than the US thanks to their welfare-state model and social policies that allow for more flexibility, he asserts.
“Most workers will still be partially employed, and it will be easier for their employers and businesses to return to work,” he predicted. “Obviously, however, the economic cost for European economies and public debt will be massive. This is a price that most European governments have been willing to pay.”
Dr. Jorge Núñez, an expert on public finance and EU economic strategies at the Brussels-based Center for European Policy Studies, where he is a senior research fellow, said that while some in the bloc were able to pay a share of employees’ wages, other countries had less fiscal capacity.
Like Bjerkem, Núñez believes that European countries are better prepared than the US and many other countries not only because of existing systems, but also because their populations are used to having a broad social safety net that includes universal healthcare.
“EU countries have a deeply rooted political culture on the essential role of the state in health and social policy that makes this easier and more acceptable than in the US to deploy it,” Núñez told The Media Line.
Eckstein believes that while Israel has lagged in the implementation of some of its economic policies, over the short-term, its government is making commitments that are on par with other countries.
“In terms of the overall budget allocated, Israel and the US are very similar,” he stressed. “The key difference is that in Israel, it is less obvious what the medium- and long-term commitment of the government is. Most other governments have really solved the tax and rental issues.”
Eckstein believes that economists will have a lot to say about the COVID-19 pandemic in the coming years.
“There will be a lot of PhDs in economics about this period,” he prophesized. “The trade-off between health and economics: How much should you suffer economically in order to save one person who is 80 years old with prior health problems? It’s a big question.”