Flug: Allowing foreign workers in keeps construction methods 'ancient'

Overall Israel's economy suffers from low productivity, and is dragged down by inward-looking industries that are less exposed to global competition.

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January 27, 2016 13:28
3 minute read.
A laborer works on an apartment building under construction in Har Homa

A laborer works on an apartment building under construction in the Har Homa quarter in Jerusalem. (photo credit: REUTERS)

 
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The construction sector in Israel is among the least productive in part because of easy access to cheap foreign labor, Bank of Israel Gov. Karnit Flug said on Wednesday.

Speaking to the Jerusalem Press Club, Flug noted that Israeli industries that were exposed to foreign competition and, indeed, targeted foreign markets were as productive as or more so than those of other advanced economies. In hi-tech, medical equipment, optical and medical devices, Israel thrived, she said.

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Overall, however, Israel’s economy suffers from low productivity, and is dragged down by inward-looking industries that are less exposed to global competition.

“At the lowest point we see construction,” Flug said, noting that the sector was “very dependent on non-advanced technological ways of production.”

Importing foreign workers from places such as China and even the Palestinian territories provides cheap labor, which means construction companies do not have to invest in higher-tech means of building.

“That allowed the constructors to continue using ancient methods,” she said.

About a quarter of Israel’s 235,100 construction workers are foreigners, and while the vast majority of them are Palestinian, the government has approved measures to bring in an increasing number from other places, particularly China.

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Low productivity can add to the time and cost associated with building new homes, a crucial step in reducing the housing shortage and, thus, the soaring price of real estate.

In her speech, Flug also tackled several other major issues facing the economy.

Much of the moderation in the country’s economic growth is attributable to slowing global trade, though Israel’s strong currency has also slowed exports. The labor market is healthy, and has managed to create jobs to accommodate the (slowly) increasing participation from haredi men and Arab women, though those two demographics participate at vastly lower rates than their non-haredi Jewish counterparts.

“I think it’s a strategic challenge [in which] we don’t have the option of not succeeding,” Flug said. “Their integration is crucial for them and for the Israeli economy.”

Turning to monetary policy, Flug noted that many of the factors holding headline inflation figures in negative territory – such as falling energy and commodity prices, and government decisions to reduce VAT, water prices and transport costs – were onetime or temporary factors. Without such effects, inflation would be 0.7 percent instead of -1%. The fact that forecasters expect inflation to return to the 1%-3% target range in the next 24 months indicated that “people believe that the inflation target is credible.”

The focus on keeping inflation expectations, and not current inflation, in the range may indicate that the central bank does not intend to take more measures to battle the price levels.

Flug also issued a subtle reminder that the Bank of Israel opposed some of the Strum Committee’s recommendations on increasing competition in the financial sector. The bank stood behind measures to separate the two large credit card companies from the banks, reducing restrictions on non-bank credit companies, and promoting technological platforms that increase transparency and help customers make informed decisions.

She did not name the other recommendations “on which there are various opinions,” though the central bank has in the past opposed separating smaller credit companies from medium-sized banks, and has warned about measures that could hurt Israel’s financial stability.

Finally, when asked whether boycott measures against Israel were affecting the economy, Flug said that they were not.

“From what we can see so far, we actually don’t see in the macro numbers an effect,” she said.

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