The Shekel Stops Here / How to Boost Israeli Economic Growth

Second of a six-part series based on analyses by Dan Ben-David on the challenges facing the Israeli economy.

As we said in the first part published yesterday, The State of the Nation report on Israeli society, economics and policy is in places an alarming read. The graph we presented yesterday from the paper, compiled by Dan Ben-David, professor of economics at Tel-Aviv University and director of the Taub Center for Social Policy Research in Israel, shows the development of Israeli growth from 1950 to the mid-1970s, and how it slowed afterwards. Now we consider what to do about it.

Today's article looks at growth from that turning point - locally and compared with the long-term trend in the United States.

It's true that the broad economy, and especially the financial market, are cyclical. They swing between periods of expansion and contraction. But over time we find not only a remarkable uniformity in trend, but that the trend is linear.

The first graph shows the development of America's gross domestic product per capita over 140 years. GDP per capita, an accepted way to gauge the standard of living, is shown on the vertical axis on a logarithmic scale.

Throughout most of those 140 years it advanced steadily along a linear path, until recently.

There are two glaring exceptions: the Great Depression of the 1930s, followed by the boom that lasted nearly until World War II. This graph shows how extraordinary those two events were from a historical-economic perspective. It also shows that, in the final analysis, even they didn't break the trend.

The dominant trend

Israel's economic history is shorter and less well documented, but we can see a dominant trend. After rapid growth in the 1950s and 1960s, growth significantly slowed in the 1970s.

From 1973 to 2009, as Graph 2 shows, the steadiness of the trend persisted despite significant developments during that period such as the hyperinflation of the 1980s, wars, the great aliyah from Russia and its neighbors in the late 1980s and early 1990s, and the high-tech bubble and its demise in the early 2000s. These events are reflected in nothing more than cyclical behavior around the same, steady, long-run growth path.

In contrast to the common wisdom about the cyclical nature of growth, says Ben-David, long-term growth is based on technological improvements. It is not determined by increasing consumption or demand. Technological improvements require investment in physical infrastructure and human capital, and do not change easily, which is why the long-term growth trends are so steady.

Yet experience in other countries and Israel in the 1970s shows that a sea change in national priorities can affect the long-term growth path, for better or worse.

But there are ways to tackle the curse of slow growth.

One, says Ben-David, is to upgrade infrastructure, mainly to improve education of basics among all Israeli pupils - particularly ultra-Orthodox and Arab school children.

Another way is to replace incentives not to work with incentives to work, to enable adults to "go back to school," and to provide training that meets the needs of the modern economy. Laws regarding employment must be enforced, including the minimum wage and taxes, and budgetary transparency must be improved so the public can know what Israel's national priorities really are.