Israel’s economy: Reasons to be cheerful – and some for concern

Israel is undergoing a revolution in three major fields.

By
April 27, 2016 22:32
money

Shekel money bills. (photo credit: REUTERS)

 
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A particularly cheerful slide show presentation labeled “Israel: Island of economic success” landed in my email inbox this week. Instead of the doom and gloom, existential threat, clouds on the horizon economic scenarios that we often hear, the presentation took a longterm perspective on Israel’s economy and laid out the reasons why Israel’s prospects are looking a whole lot better than Europe’s and that of most member countries of the OECD.

I spoke to Adam Reuter, CEO of risk management firm Financial Immunities who co-authored the presentation along with Noga Kainan, president of the Israeli CFO forum, to see what he was so optimistic about. After all, Israel’s growth rates over the past couple of years haven’t exactly been soaring, the cost of living and housing prices remain exorbitantly high and median salaries are low.

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It transpires that everything is relative.

Reuter stresses that the presentation relates to long-term trends and contrasts Israel’s prospects with those of the OECD for which he has an exceptionally bleak forecast.

After outlining Israel’s economic achievements of the past 20 years, its GDP growth, its foreign reserves, shrinking debt to GDP ratio, declining unemployment rate, increase in labor force participation, Reuter goes on to state its advantages looking forward.

First up is Israel’s “enormous demographic advantage.” The OECD member states have an average median age of 42 while Israel’s median age is 31, the lowest by far of the organization’s 34 member states. In the crucial 20-34 age group the OECD is set for a “dramatic” 14 percent drop, Reuter notes, while Israel is headed for a 28% gain. He dismisses the counter-claim that the Israel of the future will be dominated by its two poor sectors, Arabs and ultra-Orthodox, pointing to declining birth rates among those demographics – alongside rising secular birthrates and a steady stream of immigration – and to their increased participation in the workforce and desire for education.

“It isn’t necessarily going to be great here, but things will be bad in the OECD,” says Reuter. “Everything is relative, growth is relative, unemployment is relative, everything is relative.”

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Other areas where Israel has an edge, says Reuter, are its technological advantage – Israel is among the only eight countries that launch satellites into space; Israel is the world leader in R&D employees per capita and first in business expenditure on R&D, first in cyber security and second in scientific research to name a few. Then comes Israel’s global edge – its export oriented focus; generations of immigrants from around the world with their knowledge of cultures and languages and global networks of connections.

Fourth in Reuter’s list of advantages in Israel’s entrepreneurial edge – number one in the world for entrepreneurship according to the 2014 IMD Competitiveness Yearbook.

Israel is also undergoing a revolution in three major fields, says Reuter: Water, where it has “beaten the desert” and now has a surplus; energy, where Israel is set to achieve independence and to become an exporter – “say whatever you like about the gas framework but at the end of the day we have discovered enormous amounts of gas and that’s an economic miracle... we are on the verge of energy independence and that’s incredible,” and transportation, where massive investment is bringing the periphery closer to the center.

Another positive, says Reuter, is that while the world is experiencing a net loss of jobs due to automation, Israel’s hi-tech industry is creating new professions and new jobs.

When I try to dampen his enthusiasm and put to him that Israel’s growth has been slowing, Reuter returns to relativity.

“Growth isn’t low,” he protests. Those saying growth is low are living in the pre-2008 era. We live in a different world to before the financial crisis. If you look at the aggregate growth of the European countries over the past seven years they have barely grown and the same goes for Japan. In the US growth has been moderate. In today’s world, if Israel grows by around 2.5% per annum we are doing OK.”

“Look it’s not that everything is pink, I’m not a deluded optimist,” says Reuter. “There are several cardinal problems that need to be taken care of.”

At the top of that list comes the high cost of housing, which, he says, has reached the proportions of a bubble.

“If anyone thought the real estate market was like the communications market where you could cut the price of calls they got it wrong,” he says, “there is a need for a serious root canal to deal with structural problems, but i think the general direction is positive...

I think in the end prices will come down, but it will take a long time.”

Secondly, Reuter says that defense expenditure is still too high, but can be reduced gradually as the strategic threats facing Israel have been reduced. A former intelligence officer, he says: “As a result of the Arab Spring, there is no longer a Syria, Libya or Iraq. Most of our strategic enemies no longer exist so the threats become tactical. With all due respect to ISIS it is a tactical threat not a strategic threat. There is a huge difference in the expenditure the IDF needs to prepare for tactical threats as opposed to strategic threats so I believe that we will be able to reduce our expenditure.”

Thirdly, Reuter points to the median wage which he says is too low, but gives credit to Finance Minister Moshe Kahlon, saying he has been moving in the right direction on that front. Again he finds cause for optimism, saying that increased tax collection as a result of the clamp down on tax evasion, aggressive tax planning and undeclared overseas assets will make it possible to reduce direct taxation.

“Taxes in Israel are more or less average for the OECD,” says Reuter, “but why shouldn’t we have taxes that are less than the average and thus increase people’s net salaries? So what is the bottom line? “What we are trying to present,” says Reuter, “is that in relation to where the world is going our situation is OK. It won’t be wonderful here, but it will be worse elsewhere.”

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