First Woman to Head Bank of Israel Targets Economic Inequality

Karnit Flug Could Bolster Israel's Minorities

Haaretz

By Ben Sales

Published November 06, 2013.
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After a lengthy selection process in which Flug was passed over multiple times, Israeli Prime Minister Benjamin Netanyahu appointed her to the bank’s top post in October.

Flug has served on government committees on the defense budget, market competitiveness and the National Insurance Institute. She also served on the Trajtenberg Committee, which was tasked with formulating a response to widespread protests in 2011 over the rising cost of living.

The protests were partly a reaction to nearly a decade of privatization and cuts in public benefits. Founded on socialist values, Israel in its early years had a strong safety net and lionized the collectivist ideals of the kibbutz movement. But in the mid-1980s, Israel began to embrace free-market policies and privatize key state-owned companies. The outbreak of the second intifada by the Palestinians led to an economic crisis that prompted the government to cut entitlement spending.

The 2011 demonstrations called on the government to restore the safety net. In its report, the Trajtenberg Committee recommended various measures, including raising the capital gains tax, increasing government aid for housing and free early childhood education.

In her presentation at the Taub Center, Flug recommended against direct government transfer payments to poor citizens, but she is in favor of Israel’s negative income tax, which provides a tax credit to low wage earners. Flug believes the measure incentivizes work.

As governor, Flug’s ability to implement such policies is limited. Like the U.S. Federal Reserve Bank, the Bank of Israel’s function is to set the country’s monetary policy. Taxes, subsidies and incentives for job creation are determined by the Israeli government.

But Flug could still have an impact. Jack Habib, director of the Myers-JDC-Brookdale Institute, a think tank that researches poverty in Israel, said Flug could advocate for reforms that bolster Israel’s minorities.

“There’s a lot more attention paid to social issues, social inequality, poverty and disadvantaged groups,” Habib said. The Bank of Israel plays “an important role in putting these issues on the agenda of the government.”


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