Israel’s tale of two economies

The pandemic has highlighted economic, as well as demographic, differences in Israel

THE CORONAVIRUS CRISIS may further exacerbate social disparity, as the hi-tech sector seems to be less affected and better able to cope with it. (photo credit: MARC ISRAEL SELLEM)
THE CORONAVIRUS CRISIS may further exacerbate social disparity, as the hi-tech sector seems to be less affected and better able to cope with it.
(photo credit: MARC ISRAEL SELLEM)
The coronavirus outbreak supplied a stark reminder of one of Israel’s main long-standing economic challenges: social inequality and poverty. Two populations have been disproportionately affected by COVID-19: Arabs and haredim (ultra-Orthodox).
In terms of rate of positive tests, for example, the percentage among secular Jews is 9.7%, while it is 12% and 26% for the Arab and haredi communities, respectively. These are also the poorest populations in Israel.
Despite the country’s overall economic success, Israel is really a tale of two economies: the globally oriented (mainly tech-focused) sector and the domestic sectors. Most country-level macroeconomic aggregates are masking wide disparities within the average numbers.
Part of the economy is highly productive and competitive at an international level; consequently, income and living standards are on par with the first world. The rest of the economy is characterized by low productivity and low incomes, and poverty is prevalent.
In the chart below, one can see that productivity levels in hi-tech sectors, such as information and communication services, scientific research and development, and computer and electronics manufacturing, are higher than the OECD average. This is the case in non-pension/insurance financial services as well. Traditional sectors – such as wholesale trade, construction, accommodation and dining, and transportation – account for most of the productivity shortfall.
Skill variability in Israel is the highest among OECD countries. Some Israelis, usually those working in the globally competitive (mainly, tech) sectors, have outstanding skills; the others, the majority, are comparatively low-skilled. These low-skilled, low-paid adults are highly concentrated in the Arab and haredi populations. The productivity gaps between economic sectors are therefore closely intertwined with the broader social gaps in Israel.
Unfortunately, the novel coronavirus crisis may further exacerbate the social disparity, as the hi-tech sector seems to be less affected and better able to cope with it. Furthermore, low-skilled workers are often the first to lose their jobs in a broad economic crisis.
Low productivity, low wages and the resulting poverty are generally related to weaknesses in educational outcomes and to a lack of infrastructure investment and public services provision in the periphery and poorer municipalities.
Despite the current economic challenges related to the COVID-19 crisis, government policies should be focused on strengthening education and training, including reducing the differences between individual educational streams (secular Jewish, religious Jewish, haredi and Arabic-speaking) as much as possible, on increasing investment in infrastructure (also in the periphery) and creating a better balance between resources available to local municipalities so that quality public services can be provided to all.
It will take time, but steps in this direction would enable low-skilled workers to move to higher-productivity jobs. That is the best way to tackle poverty, reduce social gaps and, by lifting the weaker elements of the economy, boost the country’s overall economic performance. It is a win-win for everyone.
The writer is chief investment officer of Clarity Capital.