Israeli Economy Unsustainable if Haredim, Arabs Don't Join Workforce, Experts Warn

National Economic Council presents cabinet both internal and external threats that Israel's economy is expected to face until 2050.

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The Israeli economy cannot thrive without ultra-Orthodox Jews and Israel's Arabs being more fully integrated into the workforce, the National Economic Council warned the cabinet at a meeting last week.

The council presented a socioeconomic analysis and forecast cautioning that if the rate of workplace participation and the job skills of these two sectors is not boosted, Israel's economy will ultimately become unsustainable.

The council is headed by Prof. Eugene Kandel and operates within the Prime Minister's Office. Its presentation was made as part of the body's new responsibility for strategic planning. The expanded role came at the initiative of Prime Minister Benjamin Netanyahu and former Finance Minister Yuval Steinitz.

Work on the socioeconomic analysis took months and was prepared in cooperation with the Finance Ministry, the Bank of Israel and the deputy-directors general for strategy at a number of government ministries. The council reportedly received a high level of cooperation from the ministries involved in preparing the analysis that was presented to the cabinet.

The presentation included a survey of the threats facing the Israeli economy until 2050 and identified a range of them - both internal and external. This week, the cabinet will receive the second half of the presentation, with proposed ways in which the threats can be addressed.

External threats

The council identified the following external threats:

1. Uncertainty in the world economy

The world economic crisis is not expected to dissipate quickly, and it's hard to assess how it will end because it is a crisis of the most dangerous and complicated kind. It is a financial crisis born of a mountain of debt around the world. The national debt rate of countries is actually similar now to what it was at the end of World War II. Reducing those debt levels will require a reduction of demand and continued contraction of the global economy. As a result, capital markets are currently on edge and not forgiving of countries that commit missteps in the management of their economies.

2.Aging populations

The constant increase in life expectancies is moving the world in the direction of a situation in which for every retiree over 65, there will be just two people in the workforce (not including working children ). Such a ratio is unsustainable. The world labor market, therefore, must change. The number of years in which people are employed must be extended. Workers must adapt themselves to more flexible work and have more than one career in the course of their employment years.

3. The rise of the developing economies

The center of gravity of the world economy is moving eastward, while the Israeli economy is intricately linked to the economies of the West.

4. The information revolution

There is no doubt that the information revolution will continue to change the world, in ways that are difficult to predict. It is already clear that these changes have integrated the world's economies to a greater extent, giving individual citizens greater power at the expense of their governments.

5. Greater competition for resources

The growing wealth in the world due to the emergence of developing economies is creating huge competition for resources, including, most notably, human resources. Skilled manpower is being courted by countries around the world. As a result, countries like Israel must remain attractive to maintain their own skilled workforces.

Internal threats

In the face of these external threats, the council said Israel is also beset by serious internal weaknesses. As things currently stand, the council said, the country is not prepared to address the global threats unless it makes dramatic domestic changes. The council's analysis of that situation is as follows:

Israel's economic problems start from the fact that it has a small, open economy that is also saddled with major geopolitical handicaps. It bears a major defense burden that requires it to maintain a fast growth rate if it is to avoid falling behind. It also has an aging population.

These are only the simpler problems it faces. There are more major and interrelated problems - a low rate of productivity, and a high rate of economic inequality. There is no single clear explanation for the low rate of productivity of the average Israeli worker, but it is apparently related to problems in the education system and worker training.

The most serious problem here, however, is related to working-age populations that are not employed - meaning, the low workforce-participation rate of the country's Arabs and the ultra-Orthodox population. The problem is the product of a lack of desire to be employed, when it comes to the Haredim, as well as low skill levels. (A large proportion of Haredi men choose to engage in Torah study full-time rather than work. )

The council presented the cabinet with a slide, showing that between 1997 and 2012, the poverty rate of the non-Haredi, non-Arab population remained unchanged at 12%, while the rate among Arabs and Haredim skyrocketed from 38% to 58%. As a result, Israel's population consists of three separate countries: Arab Israelis, ultra-Orthodox Jews, and everyone else. And that last segment is actually contracting while the two weaker segments are growing.

In 2009, 71% of those aged 25 to 29 entering the labor force belonged to the third, more highly skilled, group (i.e., the non-Haredi and non-Arab sector ). The council said, though, that this group will decline to just 59% of the newly employed by 2019, and 53% by 2029. Israel is, therefore, moving in the direction whereby if things are not changed, the non-Arab, non-Haredi working population with relatively high productivity will become just over half of the new members of the workforce - a situation that is not sustainable.

The council's message implies that the situation would beset the economy with major problems not only in the long-term but also in the medium-term.

The council says that as a result of the situation, as early as next year the country will have a 3% structural deficit - an excess of government expenditures, including items such as social welfare payments to the poor - over government income from taxes and economic growth.

The structural deficit is a reference to a situation in which the government spends more than it is taking in, not as a result of transient factors but rather the entrenched structural characteristics of the economy. Even more alarming, the council says, is the fact that the structural deficit will be 10.5% by 2050, if the current situation is not addressed.

Israel needs to decide, the council says: It can continue down its current path of greater government outlays for the poor at the expense of increased taxes, and reduced government spending in other areas. This will perpetuate poverty among Haredim and Arabs and impose an impossible burden on the remaining working population.

Alternatively, Israel can better integrate the Arabs and ultra-Orthodox into the general workforce, increasing their participation and substantially enhancing their skill levels through education.

The council's assessment is that if the three population groups are indeed integrated into one productive workforce, by 2030 Israel will once more be competitive in the world economy.

An ultra-Orthodox family. Credit: Yaron Tsur Lavie

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