The Economist: Israeli Economy Stable but Has Shaky Foundation

In special section on Israel, magazine says growth based only on high tech, country not prepared for future.

The Economist, arguably the most important economic magazine in the world, has devoted a special section in this week's edition to the Israeli economy in honor of Israel's upcoming 60th birthday - and what is has to say is not all good, to put it mildly.

Israel may have an astonishing economy despite having so many wars, writes the Economist in classic British understatement, but then continues to draw much less complimentary conclusions: The economic miracle and high growth is mostly based on a one-time opportunity in high tech, and the country is not prepared for the future.

It praises the Israeli economy for growing by more than 3% per year over the last four years, well above the average for developed nations, despite the second intifada, the costs of the Gaza disengagement and the Second Lebanon War. But it also calls the engines of economic growth punier than they look.

"Beneath its gleaming high-tech skin, the body of Israel's economy is slightly worn. True, the country has some successful industrial giants and does well in a few export niches such as generic drugs, weapons systems and agricultural and water-treatment technology... However, much of the country's traditional industry (e.g., machinery, chemicals, clothing and food), which accounts for more than half of its jobs, is lacklustre. Average industrial productivity is around half that in America. One reason: Israel leads the world in R&D spending as a proportion of GDP, but this is heavily concentrated in high-tech. In more traditional industries the rate is just a quarter of America's," writes the magazine.

It further says "Israel's ability to capitalise on the internet boom was a lucky one-off."

In particular the magazine criticizes the low participation in the workforce, particularly in the ultra-Orthodox and Arab sectors.

It further draws attention to a long list of problems such as overweening bureaucracy, mediocre infrastructures and institutions, and low labor efficiency and productivity.

It calls the state of the education system "perhaps the most serious threat to Israel's long-term prosperity, and the one that most troubles ordinary Israelis."

It also explains that wealth is over concentrated in too few hands, with income inequality one of the highest in the developed world. Further, economic growth has not reduced poverty and the number of children living below the poverty line has actually grown.

In addition it takes a look at the middle-class, and finds it suffering, too.

As to the causes and solutions, The Economist places much of the blame on the political system, calling it "chronically dysfunctional." And they are not overly optimistic about the future either: "It is politicians, not their voters, who will have to approve a change in the system. The risk is that whatever they agree on will continue to serve their own interests better than the country's."

Finally, of course, there is the question of the peace process and the Palestinians. As to an Iranian bomb falling on Israel, The Economist may not think that is too large a threat, but such a bomb, even if unused, "will prompt the best and brightest Israelis, who are also the most mobile, to emigrate and tip the economy into an irreversible decline."