The economy of Israel is going through difficult times, with low GDP figures for the third quarter and sluggish exports.
In the third quarter, there was annual nominal GDP growth of 2.2 percent. In real terms, this adds up to only 0.5% because the annual population growth stands at 1.7%.
The economy is sluggish and is still feeling the effects of the huge budget deficit inherited from the previous government. However, government spokesmen have said that the economy will get back on track by 2015-6.
Because of the latest figures published recently, one can ask oneself if these forecasts are still feasible. Finance Minister Yair Lapid believes they are. In a talk with The Economic Post, he had much to say.
“The economy is improving. When the present administration took office, we had a huge deficit, a huge overdraft. Now the overdraft remains, although smaller, the economy has grown, and government income has increased with it. Consequently, I believe that we are on track toward fulfilling our promises and expectations,” says Lapid.
“With regard to the low third quarter figures, these are an aberration from the current growth trends that were caused by some onetime developments. Nevertheless, the figures for September and October show a rebound in economic growth – an annual increase of 5% and 6%, respectively. And according to Finance Ministry forecasts, GDP growth for the whole of 2013 will be over 3%. Even with an annual population growth of 1.7%, these figures are better than GDP growth figures in Western Europe and North America,” he asserts.
When you took office as finance minister, you said you were not an economist. What would you say now if you were asked the same question?
I also said that I would be surrounded by experts who would advise me in these matters.
If asked now, I would give the same answer but would add that a minister need not be an expert, but he must have the necessary information to be able to have his priorities right. He must be able to operate within a team and be a good administrator.
As finance minister, I have three priorities: A: To create an economy based on innovation, which is the only way we can create a sustainable growth rate of over 5%.
B: To create more equality so that the growth rates apply to all sectors of the community.
One of the most worrying statistics I came upon were those that compared growth rates with the average monthly salaries. During the decade between 2002 and 2012, the GDP in real terms rose by 26.8%, while average monthly salaries rose by only 2.1%.
C: To increase the workforce by including whole sectors that have opted to stay out.
You say that the hefty GDP rise compared to the paltry rise in average salaries is worrying. The inequalities in this country are among the highest in the OECD. History has shown that glaring inequalities lead to revolutions because a society cannot exist if the divide between the haves and the have nots is too great. But what you are proposing will increase those inequalities. An economy based on innovation – R&D, scienceoriented industries, hi-tech, etc. – will employ only highly trained people. Only a minority of the population would have the necessary qualifications for such a workforce. So a minority would have large salaries, while the mass of people would not. A situation where every many would be unemployable, and unemployment would rise.
I totally disagree. Such an innovation-oriented economy as I envisage it would have room for everyone. It would be innovation oriented, but we would have conventional, low-tech industries that would make use of hi-tech equipment. These would decrease production costs and produce high-quality goods at competitive prices. It would increase profits, which would allow these industries to pay high wages.
Furthermore, hi-tech science-oriented industries create additional economic growth and more circles of employment. Those employed in innovation in creating new technologies will be getting very high salaries.
Consequently, they will be able to pay more for services such as restaurants, hairdressers, health clubs, etc. They will pay more but will expect to get more in return. Service providers will have to offer quality services and will have to employ people who are good at what they do, such as physical training instructors, cooks and waiters. These people will have received adequate training and will get higher salaries.
What I envisage is a technology-oriented economy with a strong emphasis on innovation, producing quality goods and delivering quality services. We are known as the Start-up Nation. I would add another word to that: The Quality Start-up Nation.
For an advanced technological economy, you need qualified people with a technological background, and at present there is a chronic shortage of such people.
I agree. It is not only the hi-tech industry that finds it difficult to recruit the kind of people it needs. The low-tech companies also have trouble recruiting. They cannot find metalworkers, locksmiths, carpenters, printers, plumbers, etc. This is largely the fault of the education system. Technical schools have been closing down for the past 40 years.
We now intend to reverse this trend. The Education Ministry is starting a program in which, when completed, 40% of students will be attending technical schools – the same percentage as that in the highly developed countries of Western Europe, such as Germany, Great Britain and Holland.
Furthermore, we intend to increase the workforce by increasing the number of Arab women and haredi men in the workforce. We intend to initiate a program where Arab women will be encouraged and helped financially and otherwise to set up small businesses. We have also created an environment in which haredi males are increasingly joining the labor force because they understand that their way of life is unsustainable in a modern society. According to our records, the number of young haredi men enrolling in yeshivas has fallen, and those joining the workforce has increased.
In the speech you gave at the Sderot conference, you said that unemployment was low – some 7% of the workforce. According to the figures published by the Central Bureau of Statistics, these are true figures; but are these not artificial figures? As you said, most Arab women and haredi men do not participate in the workforce, and the IDF intends to cut down its manpower. If everyone were to start looking for work simultaneously, there would be a big problem and unemployment would soar. Is that not so?
I believe the figures to be realistic. Some 74% of those aged 25 to 64 are included in the workforce compared to an average of 71.1% in the OECD, despite the fact that large segments of the population do not participate in the workforce. I expect that our program to find productive employment for Arab women and haredi men will succeed. With regard to Arab women, the program is designed to help them set up their own small businesses and become self-employed entrepreneurs. With regard to haredi men, their inclusion in the workforce will be a gradual process. Not all of them will want to start work at the same time. I also believe that if the economy grows at a rate of 5% a year, we will be able to create jobs for everyone.
You say that the government will promote hi-tech and innovation, but you are not helping the hi-tech industry now, in its hour of need. Exports are falling because of the debt crisis in Western Europe and the residue of the sub prime crisis in the US. Furthermore, an industry that is dependent in raising money in overseas markets is finding it increasingly difficult to do so. Plus the strong shekel is causing havoc with Israeli exports in general and the hi-tech industry in particular because hi-tech industries export more than 80% of their output. Yet the budget of the chief scientist is barely half of what it was 10 years ago, and the budget of the Science and Technology Ministry is paltry.
The budget of the chief scientist is indeed small, but they will got more funds out of the budgetary reserves. The problems of the hitech industry are temporary. Demand for our products in overseas markets has decreased because demand in general has decreased due to the current crisis in North America and Western Europe, not because we do not have quality cutting-edge products. When things get back to normal, demand for our products will recover.
It is also true that the strong shekel is harming exports. In this I totally agree with the governor of the Bank of Israel, Karnit Flug, when she says that we will not allow the strong shekel to wreck Israel’s export trade. The Finance Ministry, as well as the Bank of Israel, is intervening on the market, selling shekels and buying dollars, and this will send a deterring message to the currency speculators.
The government wants to build hundreds of thousands of new dwellings to increase demand and bring down prices. But is this program feasible? The contractors barely have the necessary manpower to maintain current housing starts.
We are totally determined to solve the housing crisis, which is one of the major problems facing this country. If need be, we will bring as many construction workers from overseas as necessary. And if need be, we will employ overseas construction companies.
Nothing will deter this government from increasing building starts. You can be sure that we will solve the housing crisis by whatever means necessary.