A cityscape of Tel Aviv.
(photo credit: REUTERS/AMIR COHEN)
Israel is facing a slow-down in the hi-tech industry, a sustained housing bubble, and a daunting economic future if it does not fully integrate Arabs and the ultra-Orthodox into the workforce, the Organization for Economic Cooperation and Development warned in its biannual report published on Sunday.
On the face of it, the OECD – a grouping of wealthy, Western countries – applauded Israel’s 3.5% GDP growth and low unemployment. But underlying demographic trends and worsening social inequality overshadowed the positive in the report.
“What’s really important is not GDP growth but GDP per capita growth, or GDP per hour worked, which means labor productivity,” said Prof. Dan Ben-David of Tel Aviv University and the Shoresh Institution. “But when you talk about labor productivity, Israel is not catching up to anybody and their prognosis is that...we’re going to fall further and further behind in the next few decades.”
While one in eight Israelis work in hi-tech for industry giants like Intel, Teva and Check Point and billions of dollars of international investments are flowing into the country, the OECD says that the sector is slowing down in terms of propelling the economy.
Since 2010, “the vigor of the hi-tech sector has weakened, and it has no longer been the engine of growth,” the OECD report states. Since then, the hi-tech industry has expanded at half the rate than the general economy. Production in the sector, which stood at more than an eighth of the GDP in 2009, has fallen by more than 10%, with its share of exports no longer increasing.
Israeli hi-tech also faces too few trained employees for the available positions, a significant obstacle to further growth. Yet that may be a problem of quality education, with faltering allocations to universities and colleges.
“According to the hi-tech sector, for every three computer-related positions, there’s only one applicant,” Ben-David said. “Yet when we look at the number of college graduates, the numbers should be enough. The implication is that for two out of three graduates... many of the degrees aren’t worth the paper they’re written on.”
On the flip side, the OECD touted Israel for its significant spending on research and development – comprising 4.1% of the GDP, or the second-highest in the rankings. Israel’s early-stage and seed venture capital funding scene captures a larger chunk of the GDP than any other OECD country.
The report also explains the impact of the country’s changing demographics. The ultra-Orthodox and Arabs – two sectors of the population lagging behind in terms of educational attainment and neither of whom serve in the army – are projected to comprise a majority of the population by 2060. Israel is expected to grow from 8.5 million citizens in 2015 to 18.5 million in 40 years.
For that reason, the OECD urges Israel to do a better job of providing quality education and training to these two sectors, in order to decrease the productivity gap between them and non-haredi Jews and in order to help the economic growth continue. Israeli Arabs comprise only 3% of the hi-tech sector, and the ultra-Orthodox are similarly underrepresented in that field and other professional services.
“If the authorities fail in their enhanced integration efforts and these groups [Arabs and the ultra-Orthodox] keep their current employment and productivity gaps, average Israeli incomes would fall to close to 30% below the OECD average in 2059, almost double the current gap,” the report states.
Part of that is because the ultra-Orthodox do not study in schools that teach core subjects, leaving almost one-third of Israelis lacking basic mathematic skills.
“It’s very important to start demanding that the haredi [ultra-Orthodox] schools teach a core curriculum to all the children, all the way through high school,” said Ben-David. “One very important way to ensure that is to basically make the funding of their schools contingent on teaching a full core curriculum.”
Meanwhile, the average price for buying a home in the country has hit record highs, the OECD noted, costing nearly eight times the average annual household income. That’s more than double the ratio in the United States, a sign that supply has not kept up with the burgeoning demand. Currently, some 45,000 new families every year need housing, and that is projected to rise to 60,000 in 2025.
In terms of transportation, Israel continues to lag behind in spending on infrastructure as a percentage of the GDP, leaving the country the most congested in the OECD in terms of the number of cars per kilometer of road. That’s despite Israel owning 38% per capita fewer cars than the group’s average, according to Ben-David.
“The OECD report gives a tailwind to the reforms that were led in the last budget and demonstrates how they have helped to sustain economic growth and reduce [economic] concentration,” said Shai Badad, the Finance Ministry’s director-general.
The report does make note of possible extreme shocks affecting the Israeli economy, including renewed geopolitical tensions and the Boycott, Divestment and Sanctions movement. Both could impact domestic and external demand and force a commensurate rise in military spending.