Flug: Israeli brainpower fueled growth for 37 years, but is hitting a wall

Even now, Israel's GDP per capita - a measure of wealth and productivity per person - is 40% lower than that of the United States.

May 25, 2016 18:41
2 minute read.
Israeli stock market traders work at their office in the Meitav investment house in Tel Aviv

Israeli stock market traders work at their office in the Meitav investment house in Tel Aviv. (photo credit: AFP PHOTO)


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Israel’s brainpower – its human capital – helped fuel its growth from an agricultural economy to a hi-tech leader. All that may be about to change because of misaligned, ineffective and low-quality education, Bank of Israel Gov.

Karnit Flug warned Wednesday.

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Speaking at the Israel Democracy Institute’s Eli Hurwitz Conference in Jerusalem, Flug noted that almost half of the country’s economic growth from 1974 to 2011 was attributable to increases in human capital. According to an OECD study, however, human capital’s contribution to growth is expected to be near zero in the next 15 years, among the lowest in the OECD.

“We do not have relative advantages compared to the rest of the world, other than human capital and our innovation and creativity,” Flug said. “As such, these trends are worrisome.”

Even now, Israel’s GDP per capita – a key measure of wealth and productivity – is 40% lower than that of the United States. Without changes, the gap will not only remain static, Flug said, but increase.

Part of the problem is concentrated in Israel’s minority sectors, which are expected to comprise an increasingly large proportion of the population in the coming decades.

For example, Flug cited BoI research showing that within the haredi men’s sector, 17 years of education equates to 10 years of secular education when it came to earning capacity.


“This finding, particularly against the background of the projected demographic trends, indicates that a marked slowdown in the effective schooling of the entire population is expected in the coming years – which is expected to markedly lower the contribution of increased education to per capita GDP growth,” she said.

The research shows the education- earnings gap is unique to ultra-Orthodox men – who tend to not study core subjects such as math, science and English – not ultra-Orthodox women, Arabs or secular Jews. Though educational gaps exist with these groups as well, haredi men are the only group who gain fewer skills from additional years of study.

Israel also scores low on international education tests, and even where it succeeds there is misalignment between the skills people are learning and the needs of the job market.

For example, non-export-oriented manufacturers typically need about 3 percent of their workforce to have higher education. In Israel, 18 percent of their staff have such education, and yet their productivity is still a third lower than the OECD average.

“We can see from this that the extra education does not translate into effective education that provides skills that contribute to high labor productivity,” Flug said.

To avert economic decline, Flug said the government should increase investment in the state education system, and put an emphasis on affirmative action to pull up lagging sectors. More focus should be given to post-secondary professional and technology schools. A strategic assessment should be undertaken of what skills will be necessary in the future labor market, and schools should orient themselves toward building those skills.

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