Israel ranks 19th in the world in terms of GDP per capita, according to International Monetary Fund’s World Economic Outlook, released this month. That sounds great − GDP per capita is $43,689 per person, which puts Israel under 18 countries but above 194.
But that’s not the complete picture. When it comes to purchasing power parity – the actual statistic that enables comparing financial wellbeing in different countries – Israel’s GDP per capita drops to $40,547, and its ranking falls to 35th according to the IMF, on par with its ranking over the past few years. (After removing particularly small nations such as Brunei and Macao from the list, Israel ranks about 30th). This puts Israel on par with Cyprus, and under Italy, the Czech Republic and Malta.
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“Israel’s economy survived the crisis in good shape relative to other countries. Its GDP and GDP per capita shrank less than elsewhere, partially due to the economy’s structure – demand for high-tech increased, and we have a relatively small tourism industry, so it had relatively less impact,” said Dr. Karnit Flug, former Bank of Israel governor. “But over time, Israel’s GDP per capita is growing more or less at pace with other nations. The comparison between GDP per capita is misleading: The population grew 1.5% more here than it did in other developed nations.”
Israel’s economy is more or less marching in place because labor output is increasing very slowly, says Flug. Israel’s human capital, the population’s skill and education levels, the poor state of infrastructure, and inefficient regulation weigh on the business sector, she said. “The fact that there isn’t a strategic plan to address these three factors means that Israel’s growth potential is lower than it could be. Over time, these things have influence,” she said.
Other economists repeated this point. “The uncertainty regarding government policy means we can’t advance, there’s no investment in infrastructure, and we’re all stuck in traffic jams,” said Prof. Leo Leiderman, chief economic advisor at Bank Hapoalim.
The disparity between Israel’s ranking in terms of GDP per capita and in terms of purchasing power parity stems from Israel’s high cost of living, said Flug, Leiderman and other senior economists.
For decision makers, this is one of the country’s major challenges, and it weighs on Israel’s potential to compete with the most advanced Western economies. Taiwan, for example, ranks much higher in terms of purchasing power parity (16th) than in terms of nominal GDP per capita (31st), which means Taiwanese residents benefit from their economy’s wealth much more than Israelis benefit from theirs.
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Leiderman notes that when the shekel gains strength against other currencies, Israel becomes more expensive relatively speaking. “In macro terms, there’s no question: Israel is an expensive country internationally speaking,” he said. There are some good reasons for this, he noted: “We finished last year with a current account surplus equal to 5% of GDP. We export more than we import, which is fantastic given the year-long pandemic. Money is flowing in, and it’s not speculative money looking for high interest but rather medium- to long-term investments,” he said.
Finance Ministry sources believe the strong shekel reflects the current account surplus. A main reason for the surplus is Israel’s high-tech sector. Increased demand for technology products and services, at a time when high-tech accounts for a large portion of Israel’s economic output, helped the country get through the coronavirus crisis. Demand for technology will keep powering the economy over the next few years, say sources. But is this a long-term solution?
Other countries with significant high-tech sectors are also highly ranked in terms of GDP per capita – including South Korea, Ireland, the United States and Taiwan – but only a few countries have successful high-tech sectors.
It was reported this month that the number of startup companies in Israel has been declining over the years. Long-term trends such as gaps in education levels and the fact that certain communities aren’t required to teach core subjects in their schools put the startup nation model at risk. On the other hand, Israel has an unprecedented amount of readily available money and fundraising options, as well as mature technology companies.
But Israel’s technology industry doesn’t include the country’s whole population and the coronavirus crisis worsened economic gaps, with less skilled and educated workers the main losers. That’s another crucial factor when it comes to long-term economic growth.