Centralization,neoliberalism,and housing policy central–local government relations and residential development in Israel

Abstract

In recent decades, many countries have experienced decentralization and neoliberal processes. The literature usually refers to decentralization as an outcome of growing neoliberalism, but are these two processes analytically connected? This study answers the question by examining the relationship between central and local government in Israel in the context of housing policy. It focuses on a housing policy called Heskem Gag (“umbrella agreement”), an agreement between the government and local authorities to rapidly increase the supply of housing units. Whereas Heskem Gag might seem an act of decentralization, in-depth analysis paints a mixed picture: although some terms of the agreement promote fiscal and administrative autonomy, others curb it and have a strong centralizing effect. The study discusses the possibility of a hybrid model of neoliberal centralism, and its problematic ramifications for the interests of local residents, especially the disadvantaged. Although the findings are based on the Israeli case, they are relevant to many countries with a neoliberal economy that have undergone decentralization in recent decades, especially at times of national crises.

Keywords

Neoliberalism centralization decentralization housing policy Israel

Introduction

In recent decades, many countries have experienced decentralization and growing neoliberalism. Decentralization in general involves the transfer of authority and responsibility for public services from the central government to subordinate or quasi-independent government organizations, or to the private sector (Rondinelli, 1999). Such trends have been observed in developed Western countries such as France and the United Kingdom and, also in developing countries such as Bolivia, Cambodia, Ethiopia, Indonesia, Peru, and Uganda (Faguet, 2014).

Neoliberalism has also spread in many countries and is characterized by economies dominated by a free market, operating in a deregulated and privatized environment (England and Ward, 2007; Harvey, 2005; Peck and Tickell, 2002; Turner, 2008).

The literature recognizes the relation between these two trends. In fact, studies refer to decentralization as an outcome of growing neoliberalism. Accordingly, the literature suggests that societies with strong neoliberal tendencies are more likely to transfer political power from the central government to the local government, resulting in autonomous and self-reliant local government (Peck and Tickell, 2002; Topal, 2013). Social-democratic welfare states, on the other hand, are identified with centralized political systems, where local government serves merely as a provider of services (Razin, 2003; Sellers and Lidstrom, 2007). But are the two processes – decentralization and neoliberalism – analytically connected? Does a strong neoliberal trend necessarily lead to decentralization?

This paper seeks to answer these questions by examining the relationship between central and local government in Israel in the context of housing policy. Israel is an interesting test case for this issue, for three main reasons. First, it is a democratic country with an advanced economy that ostensibly has always had a high degree of centralized policymaking, especially with regard to land policy and land use (planning) policy (Alterman, 2002: 47–58). Since the 1980s, like many countries worldwide, Israel has experienced growing neoliberalism, yet remains fairly centralized (Alterman and Gavrieli, 2008; Shalev, 1998). There have been decentralization reforms, including severe cuts in government funding of local authorities and broadening of the responsibilities of local planning committees, but the legal and practical relations between central and local government remain highly centralized, as well as Israel’s land policy and land-use planning policy. Second, it is a small country (21,500 km²) and densely populated (395 per km²,¹ ranking 29th of 245 countries), with a population growth rate (2%) higher than the average (0.7%) in countries with a developed economy.² Consequently, the demand for housing requires special attention. Third, like many other countries, in the last two decades Israel has experienced a housing crisis. However, differently from elsewhere, Israel’s crisis was expressed by a sharp rise in housing prices rather than by a decline (Benchetrit, 2014; Gruber, 2014): Between 2007 and 2015, the cost of both new and secondhand housing rose 70% (State Comptroller’s Report, 2015).³ The sharp rise in housing prices necessitated government intervention to increase the housing supply in the short term.

Our examination will focus on a housing policy called “Heskem Gag” (HG), Hebrew for “umbrella agreement”, an agreement between the government and local authorities, which aimed to increase the supply of housing units rapidly. It is a leading government policy for dealing with the national housing crisis, which has expanded substantially since it was made in 2013. Currently, 28 local authorities signed a HG, bringing the number of housing units to be built under such agreements to a total of over 400,000. This is a significant addition (17% of the current total housing stock⁴) in a short time, especially for a small country like Israel. Therefore, it is important to examine these agreements and their impact on central–local government relations, as well as on local residents’ interests.

Although the HG might seem to be an act of decentralization, in-depth analysis paints a different picture. Research findings show that not only has the HG failed to strengthen the power of local government vis-à-vis the central government, it may even have weakened it.

In the next section, we present an overview of the literature regarding the relationship between central and local governments, followed by an examination of the relationship between central and local government in Israel. In the next sections, we introduce the HG, describe our methodology, and then analyze a particular HG signed in 2014 with the local government of the Israeli town of Rosh Ha’ayin. This town of 40,600 residents in the center of Israel is expected to double its population in less than ten years as a result of the HG. Conclusions and discussion are presented in the final section.

Our findings indicate that a neoliberal economy such as Israel’s does not necessarily lead to substantial decentralization and that it is possible for a state to combine neoliberalism with centralization. Although these findings are based on the Israeli case, they are relevant to many countries that have a neoliberal economy and have undergone decentralization in recent decades.

Central–local government relations

In general, the literature differentiates between two main models of local government: local government as the delivery arm of a centralized welfare state, and the decentralized, self-government model.

The welfare-state model views the local authority as essentially a provider of services to its residents, with limited autonomy in determining local priorities and acting upon them. In many cases, a major part of the local budget is funded through grants from the central government, and so the local government effectively adheres to the central government’s dictates, providing to its residents a package of services decided upon by the central government (Pickvance, 1997; Razin, 2000). Thus, local residents are in effect excluded from significant decision-making, and responsibility for the efficiency and quality of the services delivered is assigned to the central government. The main advantages of the welfare-state model are said to be equality, social justice, and distributive justice. Because the central government is responsible for providing the services and for their diversity and quality, government grants may reduce differences between local authorities and may make the quality of services provided independent of the level of local taxation. Centralized systems tend to be broader and more comprehensive, and therefore more likely to promote social values such as equality and welfare (Hananel, 2013a; Razin, 2003; Sellers and Lidstrom, 2007). This model is found mainly in the social democracies of Western Europe (Pickvance, 1997).

The self-government model, in contrast to the welfare-state model, preserves the local government’s political and fiscal autonomy: Because the local authority’s budget is largely based on its own revenues, the model strengthens local democracy, empowers the local community, and provides substantial latitude for decision makers there to determine their priorities. The necessity to generate revenues drives local authorities to compete with each other and become more efficient. It also encourages revitalization and local entrepreneurship. The downside of this competition is that local authorities tend to prefer construction of revenue-generating land uses, such as industrial and commercial zones. In residential areas, local authorities prefer the development of housing for wealthy households, which generate higher property taxes and raise the locality’s socioeconomic level, to the development of affordable housing. This model is typical of the United States (Hananel, 2013a; Pickvance, 1997; Razin, 2000). As we shall see in the next section, the relationship between the central government and local government in Israel has characteristics of both models.

The common description of the two models suggests that decentralization processes are analytically connected with neoliberal and privatization trends. According to the literature, a neoliberal economy is dominated by the free market. It operates in a deregulated, privatized environment in which governments reduce their regulation of the private sector; sell state-owned enterprises, goods, and services to private investors; and cut expenditure on public services (England and Ward, 2007; Harvey, 2005; Peck and Tickell, 2002; Turner, 2008). The most prominent example of the pairing of neoliberalism and decentralization is the Eastern European experience of local government reforms that coincided with the change of regime in the 1990s (Pickvance, 1997). Under socialism, the government in many Eastern European states was extremely centralized, but the introduction of neoliberalism was accompanied by decentralization of political power, the transfer of greater responsibility to local government, and the enactment of free elections in local authorities. This process can be described as an axis going from a socialist-centralized pole towards a neoliberal-decentralized one. The theoretical reasoning for this pairing is that it is easier to achieve the objectives of the welfare state, such as equality and distributive justice, through central planning and budgeting, whereas delegating the responsibility for social service to local government (i.e. decentralization) forces the latter to place many of these services in private hands.

The literature generally accepts this analytic link between neoliberalism and decentralization, but a few studies contest it. Sellers and Lindstrom (2007) argue that decentralization does not necessarily weaken the central government and that a strong role for local government can coexist with strong national policy. Consequently, they suggest a decentralized welfare state, which does not exist in the single-axis model. A different criticism of the single-axis relationship can be found in Bennett (1997), which shows that in many countries the sharp transition to neoliberalism⁵ was not accompanied by a change in the centralization of political power. Another, more theoretical argument is offered by Peck et al. (2009), claiming that the project of neoliberalization entails the constant engagement of the state “dedicated to the ongoing tasks of market making and market-guided regulatory restructuring” (p. 109).

To accommodate those views, we break down the single axis described above into two separate axes perpendicular to each other. One axis refers to the dominant political economy (social-democratic welfare state vs. neoliberalism) and the second to the relationship between central and local government (centralized or decentralized), as presented in Figure 1. The breakdown into two axes allows for four combinations: centralized welfare state, decentralized welfare state, centralized neoliberal state, and decentralized neoliberal state.

Figure 1.

The alternative twin-axis illustration.

The findings of this study show that despite three decades of neoliberal privatization in Israel and some decentralization over the years, with regard to housing policy Israel is an example of the centralized neoliberal variation. However, before analyzing Israel’s housing policy, one must examine major changes in the relationship between central and local government.

Central–local government relations in Israel

Israel was established in 1948 as a social democratic state with a progressive welfare policy. According to the literature, this definition was relevant during Israel’s first three decades (1950s–1970s), when the Labour Party headed the government (Doron, 2003; Doron and Kramer, 1992; Gal, 2004).⁶ In the 1980s, Israel’s general political ideology changed from that of a social-democratic welfare state with a collectivist and centralized structure to one dominated by a neoliberal economy (Nitzan and Bichler, 2002; Ram and Yiftachel, 1999; Schipper, 2015; Shalev, 1998).⁷ These changes were expressed in Israel’s housing and planning policy and in the relations between central and local government (Alterman, 2003), both of which are at the heart of this study.

Since 1948, and in many respects to this day, central–local government relations in Israel seem to fit the welfare-state model. Local government is highly dependent on, and closely regulated by, the central government (Hananel, 2007; Razin, 2003). The local authority is often viewed as a subcontractor, as it were, of central government, functioning merely as a service provider with limited political autonomy (Deri, 1994; Razin, 2003). This is true both financially and administratively, because according to the Municipalities Ordinance (first enacted in 1934) almost every act of local government requires the approval of some central-government agency.

With regard to land use planning policy, Israel has a centralized, hierarchical statutory planning system (Alexander, 2007). The Israeli Planning and Building Act of 1965 created a hierarchical system of planning institutions. At the top is the National Planning Board, the supreme planning body in Israel. Second in the hierarchy are the district commissions, and at the lowest level are the local town planning committees whose function is to prepare town plans (requiring approval by the district committee), and to grant construction permits on the basis of those approved plans (Hananel, 2009, 2013b; Rosen and Razin, 2009).

Israel’s land policy is also very centralized, because 93% of the land is nationally owned. These lands are administered by a government agency, the Israel Lands Authority (ILA), and its land policy is shaped by the decisions of a statutory body, the Israel Land Council (ILC) (Hananel, 2013b; 2015; Hananel and Alterman, 2015: 71–86; Rosen and Razin, 2009).

Since the 1980s, as part of the neoliberal trend, gradual changes have occurred in central–local government relations, as well as in the land use planning policy. First, there has been a major change in the fiscal dimension. Whereas until the 1980s about 70% of the local authorities’ budgets depended on government grants, since then government participation has shrunk to 30%, and local authorities have had to increase self-generated revenues, mainly from industrial and commercial zones, to continue providing public services (Blank, 2004; Hananel, 2007).

Significant changes also took place at the political and administrative levels. As early as 1975, the Local Authorities Act (election of mayors and deputies) determined that mayors would be elected directly, thereby weakening the national parties’ control over them (Razin, 2003). Neoliberal trends of the 1980s led to fewer government-provided social services, leaving a void to be filled by local government. This happened when the budgets of local authorities were shrinking, forcing many of them to create partnerships with private entrepreneurs, developers, and contractors with regard to local development (Ben-Elia, 2004; Razin, 2003).

Decentralization processes have also begun in land use planning policy (Charney, 2017). In 1995, Amendment 43 of the Planning and Building Act was enacted, mainly to simplify and improve the planning process by shifting authority from central government (primarily from district planning offices) to local government (Alterman and Gavrieli, 2008). Amendment 76, passed in 2006, continued this decentralization trend and substantially broadened the powers of the local committees in matters such as authorizing detailed plans, enlarging housing units, and adding uses to approved plans (Hananel, 2013b). Amendment 101, in 2014, further broadened the jurisdiction of local committees, giving them almost complete authority to approve local plans.⁸

One might therefore conclude that in Israel, as elsewhere, neoliberal trends were accompanied by decentralization and with the strengthening of local authorities (Blank, 2004). In the bi-axial illustration suggested earlier, this view would be represented by a shift from a centralized welfare state to a decentralized neoliberal state, as depicted in Figure 2.

Figure 2.

The process suggested by the literature – neoliberalism and decentralization.

However, despite the decentralization and privatization described above, Israel is still considered a highly centralized state in every respect (Alterman and Gavrieli, 2008). Moreover, scholars emphasize that many changes in the central–local government relationship were not accompanied by comprehensive legal reform, and some had no legislative basis at all. This led to a situation in which local authorities took on responsibility for social services, without either formal and legal authorization or the fiscal and human resources to maintain them (Ben-Elia, 2004; Razin, 2003). Indeed, several attempts at a comprehensive and coherent reform of the Municipalities Ordinance were never carried out, and the changes implemented in the legislation to meet the changing reality were sporadic and incremental (Blank, 2004; Hananel, 2007). This raises a question: To what extent was local autonomy strengthened by the decentralization trends described above, especially in matters of urban planning and housing construction?

To address it, we analyze an HG in the next section. The HG is one of a series of policy decisions the government made to battle rising housing prices. This particular policy reflects the complex relations between central and local authorities in Israel with regard to housing policy and land use planning policy as described above.

The housing crisis and the HG

During the summer of 2011, demonstrations and protests were held throughout Israel, sparked by concerns about the high cost of living, and especially the high cost of housing and the lack of affordable housing (Alfasi and Fenster, 2014; Charney, 2017; Hananel, 2015).⁹ A 2015 report by the state comptroller devoted to the housing crisis notes that from January 2008 to December 2013 the real price of housing (both new and secondhand) in the center of the country increased by 55%. In other districts, the increase was even greater. The report indicated that the increase in housing prices and decline in the average real wage substantially increased the burden of housing costs.¹⁰

Following the 2011 protest, housing issues moved to the top of the public and the political agenda. Consequently, since the summer of 2011 the Israeli government has made a series of policy decisions to deal with the housing crisis. These include establishing a National Housing Committee to speed up planning procedures, setting up a government-owned company to build housing for long-term rental, and changing the terms under which state-owned land is sold to developers, to lower prices. Charney (2017)¹¹ called these steps “supertanker”, because they involved massive intervention by the central government and were carried out solely by the central government. The only policy that considered local government as a possible partner in solving the housing problem was the HG, which is at the heart of this study. Hence, analyzing this particular policy may shed light on the complicated relations between central and local authorities in general, and in relation to the housing crisis in particular.

The HG

The mechanism called HG was established in October 2013 as Government Decision 738 “to respond quickly to the growing need of the public, young couples in particular, for available housing in towns close to the center of the country”.¹² The decision mandated the director of the ILA and the Ministry of Construction and Housing (MCH) to formulate agreements with local authorities to sell land for residential purposes.

Initially, the government decision stated that HG agreements would be signed with four local authorities at most. In April 2014, a new government decision (1534) broadened the potential implementation of HG but limited the total production of housing to 100,000 units.¹³ In January 2016 (decision 1028), the number was raised to 275,000, in January 2017 (decision 2337) to 350,000 housing units and in December 2017 to 475,000 (decision 3260).

The agreement was based on four principles:

A minimum project size of 5000 housing units

Accelerated sale and production (a minimum of 2000 housing units per year and a fast track of 90 days for building permits)

Government intervention in the target population through sale of public lands for developers using the MCH special initiatives (such as Target Price and Resident’s Price)¹⁴

Local responsibility for the public services and physical infrastructure required as a condition for building the housing units.

In March 2014, to encourage local authorities to sign HGs, the government (decision 1533) created a financial incentive: For each unit awarded a building permit under an HG, the local authority was to receive NIS 10,000 (∼USD 2800).

Concurrently, HGs were signed with 28 municipalities, encompassing over 400,000 housing units.¹⁵ We decided to look into one of the first municipalities to sign such an agreement, Rosh Ha’ayin, and found this particular agreement interesting for three reasons: First, it stipulated that 13,000 housing units would be built within four years. This would have doubled the town’s population over a short period, making the effect of the HG more drastic there than elsewhere. Second, at the time of writing, 10,000 housing units had already been sold; according to the MCH, this is the largest number among all the HGs signed thus far.¹⁶ This enables us to evaluate some actual effects of the agreement on the municipality. Third, whereas the HG was initially seen by the residents of Rosh Ha’ayin as a municipal achievement, it now faces widespread public criticism.

Methodology

We employed a mixed-research method, involving text analysis and in-depth interviews, to discover whether the HG expresses a decentralization process, that is, the transfer of power from the central government to local government. First, we analyzed relevant policy documents, including the government provisions that created the HG mechanism, the specific agreement signed with Rosh Ha’ayin, and previous agreements regarding the building of new neighborhoods. We also analyzed media reports and the protocols of city council meetings in which the HG was discussed.

The text analysis was based on Rondinelli’s theoretical framework (1983, 1999). Rondinelli divided decentralization processes into four aspects: fiscal, political, administrative, and decentralization from government to private sector. We used three of the four – the fiscal, the administrative, and the political – because the fourth aspect pertains to the private sector, which is not a party to the HG. We tried to separate the three aspects for our analysis, but because they are interrelated, many issues are relevant to more than one aspect (Pickvance, 1997).

Fiscal decentralization is one of the clearest indicators of independence and robustness in local government. It reflects the local government’s ability to control the scope of its self-generated income and to use local resources in accordance with local priorities (Alterman and Gavrieli, 2008; Rondinelli, 1983, 1999). We looked into every article of the HG that mentioned the transfer of funds, and asked whether they strengthened the local authority financially. Did they strengthen its economic independence from the central government? Was the money to be spent at the discretion of the local authority, or was it specifically earmarked by the central government? What were the HG’s expected long-term effects on the local authority’s economic strength?

The administrative dimension of decentralization includes the local authority’s responsibility to supply services and infrastructure. Wherever the HG specified a responsibility or exclusive authority, we asked whether the local government had the power to exercise the responsibility granted to it, or whether, instead, it had to follow central-government guidelines. Because the HG we analyzed dealt mainly with building new neighborhoods, we gave special attention to the local authority’s planning independence, both physical and social.

On the political level, we examined whether the HG increased the political independence of the local authority and its ability to set its own priorities.

As with all research on current public issues, we encountered challenges and obstacles that should be taken into consideration. Because the HG involves a huge project, it can have far-reaching ramifications for the town, some of which will only be apparent in the future. To overcome the obstacles and to examine present and possible future effects of the HG on the local municipality’s independence, we conducted in-depth interviews with key players in local politics, both those who signed the HG and those who opposed it.¹⁷

Analysis of HG with Rosh Ha’ayin

Rosh Ha’ayin is a town of 40,600 residents, in the center of Israel, about 18 km east of Tel Aviv, at the intersection of two main highways. The municipality’s socioeconomic cluster is 6;¹⁸ 72.3% of residents own their own homes, compared with a national average of 65.8%; 81.7% own a car, compared with a national average of 61.8%; and 22.4% of the adult population has one or more college degrees, compared with a national average of 22.9%.¹⁹

Fiscal decentralization

Decentralization is most commonly interpreted as fiscal independence, and the more responsibility given to local authorities in managing their budgets, the more autonomous they are considered to be (Alterman and Gavrieli, 2008; Rondinelli, 1999). Local authorities in Israel, as in other countries, have three main income sources: self-generated revenues (mainly property tax), development fees, and grants from the central government (Ben-Elia, 2000; Deri, 1994; Hananel, 2009). We looked into every article of the HG that mentioned transfer of funds and examined how it affected those three income sources and thereby the fiscal independence of the local authority. We also examined the fiscal effect of the increase in population.

Grants transferred from the central government – As mentioned above, a main incentive for local authorities to sign an HG was a grant from the central government for each unit that received a building permit. Unlike most government grants to local authorities in Israel, these were not earmarked, and the local authority was free to use them as it saw fit, meaning more financial autonomy of the local authority and hence fiscal decentralization. However, because this is a one-time grant, given as an incentive to sign the HG, it has no lasting effect on the local authority’s financial independence and consequently on the general degree of decentralization. Additionally, the HG allocated NIS 83 million (almost USD 24 million) for construction of public facilities such as community centers and synagogues, but these sums were earmarked (an appendix to the agreement listed in detail the facilities to be built), so these grants cannot be seen to increase to the local authority’s financial autonomy.

Development fees – These were paid by developers as part of the cost of acquiring the land from the state. According to the HG, the fees for the housing units planned in Rosh Ha’ayin are to be used to: (a) fully finance the infrastructure for the new residential neighborhoods; (b) partly finance schools and other public buildings in those neighborhoods; (c) partly finance the administration of the project; (d) finance some construction work in the older parts of town (Articles 3.3, 4.11, 5.6, 6.2, 10.2). The sum allocated for each objective is either stated explicitly in the HG (Articles 4.11, 5.6, 6.2, 10.2) or to be calculated according to the government’s guidelines (Article 3.6). The HG stipulates that the government, not the local authority, collect the fees from the developers (Articles 4.1 and 4.9), to be used only for the specific objectives for which they are designated. It even goes on to stipulate that the local authority will establish different bank accounts for each objective (Article 4.3). Thus, the development fees ease the financial burden of building the new neighborhoods and finance some construction in the existing town, yet they are regulated entirely by the government and therefore do not increase the local authority’s financial autonomy.

Property tax – Residential property taxes do not necessarily cover the costs the residents themselves entail (Hananel, 2009). Mr. Benny Beit-Or, incumbent deputy mayor of Rosh Ha’ayin, suggested that in Rosh Ha’ayin, residential property taxes covered only 92.6% of the average costs of residential zones, whereas commercial/industrial property taxes covered 238–263% of the costs of commercial/industrial zones (interview, April 2015). Consequently, an increase of 13,000 housing units without an addition of revenue-generating zones would mean fiscal disaster for the local authority. With this in mind, the HG allowed the local authority to change the zoning of one segment of the planned area from residential to commercial (Article 2.9). The number of housing units was thereby decreased by 610, and a commercial, revenue-generating zone was created. This important revenue-generating zone, though necessary, will clearly not succeed in covering the residents’ expenses. The town council discussed the problem in its December 2016 meeting, when members were concerned that the segment zoned for commerce had not yet been built, nor indeed had the essential infrastructure for it, whereas in the residential zones as many as 2100 housing units were already occupied.²⁰

To sum up our fiscal analysis of the HG, although there is a prima facie decentralization process, it seems that the local authority’s income will decrease dramatically as a result of the HG, and consequently, so will its fiscal autonomy. According to data provided by local officials, each additional resident means an annual deficit of NIS 2000 (approximately USD 570). Thus, 13,000 additional apartment units, mainly housing families with children,²¹ could add some 50,000 new residents, bringing the annual deficit to USD 28.5 million. To achieve a balanced budget, it is necessary to double the town’s commercial and industrial areas. The promised addition of revenue-generating zones under the HG is too small and will probably come too late. As a result, town officials say it is moving toward a budgetary disaster.

The situation is relevant to most municipalities that have signed an HG, but the effect is more pronounced in small, peripheral municipalities where the feasibility of an increase in revenue-generating zones is extremely low. This HG fiscal problem was addressed in April 2017 by the Interior Ministry director-general, Mordechai Cohen, who noted that “massive construction plans may bring down local authorities”.²²

Administrative decentralization

This dimension involves the local authority’s responsibility to supply services to its residents. Because the HG deals mainly with building new neighborhoods, we paid special attention to planning and examined the effect the HG has had on the local authority’s planning independence, both physical and social.

Building infrastructure and project management – The HG transferred the responsibility for building the infrastructure for the new neighborhoods from the central government to the local authority (Article 3.1). According to a local politician involved in the negotiations for the HG,²³ although this would be a financial burden on the municipality, it would also allow local government to control several aspects of the project’s progress. First, the municipality could make sure the plans for the new neighborhoods met the needs of present and future town residents; second, the municipality could ensure that the infrastructure would be ready ahead of occupancy; and finally, it could promote the establishment of necessary services like banks, supermarkets, and clinics.

The local authority may in fact have both the incentive and the expertise to serve the residents’ interests best, and giving it such responsibility could be viewed as a sign of administrative decentralization. However, it is unclear how a municipality with the human and professional capabilities for managing a town of 11,000 households can successfully undertake a project of this magnitude on top of the ongoing town management. Indeed, in a town council meeting on 5 December 2016, council member Aviva Shaked said the municipality was swamped with the building project and unable to carry out its everyday tasks.²⁴

The solution the HG provides is to establish a professional administrative body to assist the municipality in carrying out its tasks. But the government finances only 70% of that body, with money from the development fees of the projects, the remaining 30% to be covered by the local authority (Article 10.2). Moreover, because the ceiling for the municipal workforce is determined by the number of residents,²⁵ only in the advanced stages of occupancy will the local authority be entitled to additional administrative and professional personnel. Hence neither in this respect does the HG promote administrative decentralization.

Planning – The terms of the agreement inflict on local government a twofold loss of control over planning: First, the municipality commits to a minimum sale rate of 2500 housing units a year and 9000 units for the duration of the agreement (Article 2.2). This is 25% above the mandatory rate of the initial government decision. Second, the municipality commits to issuing building permits to developers within 90 days (Article 9.2), thereby waiving its right to delay the progress of the building project. This means that even if the infrastructure is not ready, or the rate of growth is contrary to the local residents’ interests, the municipality can do nothing to stop it or to slow it down.

We saw this to be true when, in a town council meeting on 5 December 2016, members demanded that building permits be withheld because the project had so many problems, and the mayor said that the HG forbade him to do so.²⁶ In the same meeting, council member Omer Ratzon declared: “Once again we have built a town for national [interests], contrary to the local residents’ interests”.

The municipality cedes to the MCH not only control over the rate of sales, but also over the sale format. As we have noted, new sale mechanisms adapted to lower housing prices allowed developers to pay less for the land, provided they charged less for the housing units erected on it. In the HG, these mechanisms are at the discretion of the MCH (Article 2.4), giving it the possibility of direct control over the price of houses to be built and indirect control over the population to reside in the town. The MCH can decide on a project for long-term renters, a project of smaller, cheaper apartments for young couples purchasing their first home, or luxury apartments for middle-class families. The municipality, whatever its wishes or interests, has no say. This already proved to be a problem when the municipality tried to plan the facilities for the new neighborhoods: The head of the project’s administration, Sharon Moyal, explained in the abovementioned town council meeting that whereas the planning of public facilities (such as kindergartens and schools) was based on the national average, in practice, the population that purchased apartments in the developed areas was younger and had many more young children. This necessitated redeployment at both the planning and the budgetary level, created incongruence between the pace of development and the occupancy rate, and entailed costs far higher than planned.

The effect of these terms is more pronounced when we learn that the HG encompasses all the housing units planned for Rosh Ha’ayin, so that the MCH is given complete control over the town’s physical and social character for years to come. Thus, as far as planning is concerned, the HG is a major centralizing step.

Political decentralization

As noted earlier, the HG was one of the main policy tools for addressing the national housing crisis. The central government was, and still is, eager to speed housing production using this mechanism. When it was negotiated (February 2014), local authorities were in a favorable bargaining position vis-à-vis the government and so could obtain favorable conditions under the HG and use this opportunity to deal with other important issues.

The HG signed with Rosh Ha’ayin does mention a few such issues (Articles 2.10–2.14), including urban renewal programs in the old town, moving a high voltage line that passes through the locality, and diverting an international airplane landing route that passes over the town. However, these issues are formulated simply as matters to be “viewed positively” or “examined” in the future.

This means that the town failed to take advantage of its bargaining position to obtain benefits for its residents. It seems that the HG provided a one-off opportunity for such leverage, because it encompassed the entire pool of potential housing units in Rosh Ha’ayin according to the existing town’s master plans. In the words of the previous mayor, who objected to signing the HG: “Once you have given them everything, you gave up every [negotiating] card … you gave them control in that they no longer need you … you have no ability at all to negotiate from a position of strength”.²⁷

It would therefore seem that whereas the negotiations regarding the HG gave the local authority potential political power, once the agreement was signed, that power was considerably weakened.

Discussion and conclusions

The HG has been a key solution of the Israeli government to the national housing crisis. It was the first and only attempt to engage local authorities in Israel in solving a national crisis, and therefore was perceived as a sign of growing decentralization of the political system. But was this a real cooperation between the two levels of government, central and local, or was the central government simply using local government as an instrument to increase the national stock of housing? That question guided this study.

As we have shown, the answer is mixed. Whereas some terms of the agreement promote fiscal and administrative autonomy, others curb it and point to a strong centralizing effect, as presented in Table 1.

Table 1.

Effect of the HG on the three dimensions of decentralization.

Type of decentralization	Relevant issues under the HG	Effect of the HG on central–local government relations
Fiscal	Government grants	Short term – decentralizing, because they are at the discretion of the local authority Long term – no effect, because it is a one-time grant
	Development fees	Centralizing – earmarked, calculated, and collected by the central government
	Property tax	Centralizing – the town’s fiscal autonomy might decrease dramatically as the result of an imbalance between residential and commercial zones
Administrative	Control over infrastructure	Mixed effects – more responsibilities, but with little discretion over their execution and no additional staff
Administrative	Planning	Centralizing – because the central government totally controls the rate of construction and the type of housing to be built
Political		Mixed effect – decentralizing during negotiations, centralizing after the HG is signed

HG: Heskem Gag.

As Table 1 shows, the HG increases decentralization in several ways: It transfers large sums of money as unearmarked grants from the central government to the local authority, providing it with short-term financial autonomy. It also gives the local authority responsibility for constructing the infrastructure, thus increasing its administrative autonomy. However, on the centralizing side, the government sets the pace for selling the land, decides on the demographics of the new residents through the sale format, and controls the amount and purpose of fees received from the developers. Even the granting of building permits, normally under the explicit authority of the local planning and building committee, is predetermined in the HG. If we recall that the state owns the land sold, and that all revenue from sales will be transferred to the state, we conclude that the HG puts the entire issue of urban development in the hands of the central government, virtually ignoring local interests and considerations. The most troubling effect of the HG is that it seems to endanger the long-term fiscal stability of the local authority, because it drastically changes the balance between residential and commercial zones.

What model of central–local relations corresponds with these findings? According to the literature, Israel is shifting from a centralized welfare state into a decentralized neoliberal state, described in Figure 3 by the dotted line. In such a scenario, neoliberalism and decentralization are inseparable. However, our findings show a different outcome.

Figure 3.

The process suggested by this work – neoliberalism without decentralization.

The HG, like most solutions to the national housing crisis adopted by the government, was market oriented. In this, the Israeli government reasserted its long-standing stance as a neoliberal political economy. At the same time, decentralizing trends are not so clear. In the government’s treatment of the housing crisis, we see mainly centralized solutions, and the one solution that involves local government – the HG – is essentially a mechanism for transferring funds to local authorities in return for their relinquishing their control over planning autonomy.

Our findings, therefore, suggest a movement towards neoliberalism, while retaining many traits of centralization, as shown in Figure 3 by the continuous line and much like the process Bennett (1997) associates with developing countries. This is a hybrid model of relations between central and local government, which combines neoliberal trends with centralized tendencies.

The research findings raise two interesting questions: First, what are the implications of this housing policy on the city and its residents? Second, what explains a central government’s ability to retain its power in a neoliberal era?

Although it is too early to analyze the overall implications of the agreement, from the brief experience thus far, and on the basis of our research findings, one can draw tentative conclusions. Whereas the HG indeed fulfilled its declared purpose of quickly producing a large number of housing units, some argue that in the long term the HG provides only a partial solution and actually creates new distortions.²⁸ As a result of the HG, many cities are rapidly expanding by constructing new neighborhoods. But because most of the projects include high-rise buildings, the target population of the new neighborhoods is different in character and more affluent than that of cities to which they are added (Margalit, 2013). Moreover, because the HG requires the local authority to invest in new infrastructure and public facilities in the new neighborhoods, it may continue the ongoing neglect of the oldest neighborhoods in the city centers that require substantial treatment. In the long run, it may create two separate cities: one older and weaker and the other newer and populated mainly by young families of a higher socioeconomic status (Cohen and Margalit, 2015; Margalit and Alfasi, 2016). As shown in this study, these problems are already evident in Rosh Ha’ayin and in other cities that have signed an HG.²⁹ This situation may be exacerbated because, as we have seen, the HG does not generate enough additional revenues for the municipal budget to finance the additional population and the investment necessary to provide them with adequate infrastructure and public services.³⁰

A possible explanation to the existence of a neoliberal-centralized government is the notion that established institutional arrangements significantly shape the scope and trajectory of neoliberal reforms (Peck and Brenner, 2009). As we have described earlier, Israel exhibited a very centralized policy in its first decades, especially in land use (planning) and housing issues. Despite prominent neoliberal trends, decentralization with regard to land use policy has occurred at a very moderate pace. Therefore, it can be assumed that in times of national emergency, such as the housing crisis of 2011 in Israel, a country with such a centralized history will tend to adopt centralized policies in response to the crisis. Jessop (2010) claims that this is true about national states in general, and indeed we saw that even the US (that does not share Israel’s centralized history) applied a policy of “neoliberal centrism”(Peck et al., 2009) in response to the financial crisis of 2008.

In conclusion, the HG is an important governmental instrument to increase the housing supply, especially in peripheral areas. However, its current formation is problematic, as this study has shown, because of the hybrid model of relations between central and local government. The two models described in the literature are balanced: in the welfare-state–centralized model, the state has the power to act and bears responsibility for the results; in the neoliberal–decentralized model, the state renounces responsibility but also gives up part of its power. In the hybrid model, by contrast, there is no balance. Whereas the centralist aspect of the model gives the government control over the planning of new neighborhoods and the sale of the housing units, its neoliberal aspect rejects government responsibility for the substantial fiscal implications of the HG and leaves the municipalities to their own devices. The first HGs did not address this anomaly, but as experience has accumulated, some as-yet-insufficient improvements have been made in later agreements.

The theoretical and practical findings of this study point to three issues to address in future agreements within such a hybrid model: first, drafting a revenue formula to ensure the municipalities’ fiscal stability; second, incorporating mandatory investment in the municipality’s veteran, disadvantaged population; and third, developing a variety of commercial and industrial zones to benefit all municipal residents. Adopting such measures in hybrid models, wherever they exist, will help solve national crises like housing without creating municipal crises and without harming the municipality’s disadvantaged population.

Footnotes

Acknowledgements

We thank the editor, Alison Mountz, and the anonymous reviewers for their useful and challenging comments, which have strengthened the paper. We also wish to thank Ilan Appelbaum and Sary Sela for their assistance with obtaining data.

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

Sharon Eshel is a doctoral candidate in Urban Planning at the Kreitman Graduate School at Ben-Gurion University of the Negev. Her work focuses on the impact of worldwide trends, such as globalization, and local events, such as the housing crisis in Israel, on the Israeli planning system, the relations between local government and central government, and the nature of urban citizenship in towns on the periphery of the metropolis. She also holds a BA in Law and Economics, an MA in Analytical Philosophy and an additional master’s degree in Urban Planning, all from Tel Aviv University.

Ravit Hananel is a faculty member and Head of the Urban Renewal lab, at the Department of Public Policy, Tel Aviv University. She holds a Master degree in political science from Tel-Aviv University, and a Ph.D. in urban and regional planning, from the Technion, Israel. She is an expert in land policy, land use (planning) policy and housing policy. Her research engaged in spatial and urban studies, and focuses in the relationship between decision-making in spatial public institutions and questions about distributive justice and social equality.

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