Israel's economic recovery plan: Full of unknowns

Israel's failure to use the opportunity to invest in retraining programs may have been a costly lost opportunity, Margalit said.

OUTSIDE THE Jerusalem Employment Office (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
OUTSIDE THE Jerusalem Employment Office
(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
What will Israel’s economic recovery look like once it begins to emerge from the coronavirus pandemic? Even as rising vaccination rates make “the day after corona” a scenario that optimists believe could arrive within the coming months, economists are reluctant to try to predict how it could evolve.
“The problem is that we have a high degree of uncertainty with too many economic parameters,” said Prof. Yotam Margalit of Tel Aviv University and a senior fellow at the Israel Democracy Institute.
“For ‘normal’ economic crises, like the 2008 recession, we have quite a few precedents that we can analyze and learn from,” he said. “But this situation of the coronavirus is in many ways more like a natural disaster, and there are a lot of factors at play that make it much harder to draw robust insights from the past.”
For example, Margalit said, it is hard to predict how widespread shocks to the employment market will impact its return.
“Some companies have had workers on halat [unpaid leave] for a year, so they have had a lot of time to learn how to operate without them and haven’t been in contact much during this time,” he said. “Other countries offered employers salary subsidies so that the company could continue employing the workers while paying only a portion of their paychecks. But for most Israelis, it was either full employment or full halat. That creates a higher uncertainty about whether those workers will be brought back.”
Some sectors, such as hospitality, restaurants and entertainment, will likely return to full employment quickly once things open up, Margalit said.
“Those sectors employ many younger people, which have been among the groups hit hardest by the pandemic’s impact on the labor markets,” he said.
“Israel now has about 650,000 people unemployed in the broader definition [including halat],” he added. “We may still have 400,000 or so even after Israel opens back up.
Israel’s failure to use the opportunity to invest in retraining programs may have been a costly lost opportunity, Margalit said.
“Israel has under-spent on labor-market training for decades, and its gap in labor productivity with other Western countries has been widening,” he said. “By not requiring people on halat to upgrade their skills to receive benefits, we missed a real chance to close the gap.”
According to Prof. Dan Ben-David, president of the Shoresh Institution for Socioeconomic Research and an economist at Tel Aviv University, “While we are known as the Start-Up Nation, students are getting poor education, and that has caused productivity to fall further and further behind the G7 since the 1970s. This really came to a head in the past year.”
“The problem is that the government doesn’t have a plan,” he said. “It isn’t saying, ‘Here’s what will happen in three months, six months and 12 months.’ It’s just shooting from the hip.”
“The tech sector has weathered this okay, but many parts of the economy have not,” Ben-David said. “The government is not dealing with fundamentals, and until someone tries to, we will continue to bounce from crisis to crisis. We have no state budget, for purely political reasons. But a budget is how a nation defines its priorities, and we haven’t done that.”
Neither Ben-David nor Margalit were overly concerned about a rise in inflation once the economy opens up, although Ben-David did not discount the possibility.
“In most recessions, there is no reason to worry about inflation because declining demand leads to lower prices,” he said. “But this is not a standard recession, and it’s not yet clear whether supply or demand will fall faster.”
Margalit said he was skeptical that US President Joe Biden’s economic stimulus plan will increase the money supply to the point that it causes rapid inflation.
“Most economists don’t think inflation is a major threat,” he said. “I believe that there is a much greater concern that governments will do too little to boost the economy than a concern that they’ll be doing too much.”