OECD: Israel's Economy Is Strong, but Inequality Is Rampant

Israel’s economy has enjoyed one of the highest growth rates among the world’s developed economies, thanks to cautious fiscal and monetary policies, but it has failed to deliver the fruits of growth to much of its population.

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That is the bottom-line conclusion of the Organization for Economic Cooperation and Development – the club comprising the world’s 34 most advanced economies – in a report on the Israeli economy released on Sunday.

But the OECD warned that low rates of employment for ultra-Orthodox men and Israeli Arab women were hurting the economy’s performance. It faulted what it called a regulatory regime that was excessively hostile to business and often ineffective. Regulatory reform alone, the report said, could increase gross domestic product by 3.25% after five years and 5.75% after 10.

Israel is also characterized by high poverty and large gaps among many “material and non-material dimensions of well-being.” Israel’s poverty rate was the second highest among OECD countries in 2013, except for Mexico’s.

“Growth rates have exceeded those in most other OECD countries for more than a decade; employment is rising; inflation is low; and the public finances are in relatively good shape; but, there is homework to do if everyone in Israeli society is to benefit from this strong growth,” OECD Secretary General Angel Gurria said, who was in Israel on Sunday to release the report.

He urged Israel to adopt a package of OECD recommendations that would address Israel’s low level of labor productivity

The OECD lauded Israel for posting 13 consecutive years of economic growth – an average of 4% annually over the period – and its ability to rebound quickly from global crises.

The OECD said it expected Israeli economic growth to reach 3.1% this year and accelerate to 3.3% in 2017. Merchandise exports, which declined last year, will grow 3.2% in 2016 and 4.3% the year after. The ratio of Israel’s debt to GDP will hold steady over the next two years at about 2015’s level of 66.1%.

Unemployment, which fell last year to 5.2%, will edge up this year and next to 5.3%, according to the OECD’s forecast. However, the Central Bureau of Statistics reported on Sunday that the jobless rate was still falling and reached 5.2% in December, down 0.2 percentage points from the month before.

The OECD similarly praised Israel’s high-tech industry’s low unemployment, low inflation and surplus on the current accounts of its balance of payments. It noted that the financial situation of Israeli households was also good, with income rising faster than in most other OECD economies.

Gurria told a meeting with journalists that Israel must boost productivity – which economists say is the key to raising incomes – with capital investments, innovation, better training and a slimmer regulatory regime, as well as through more government transparency and a crackdown on corruption.

Israel, he added, had to make a special effort in these areas because of its difficult geopolitical situation and because the economies of its trade partners are weak.

Investing in infrastructure and education risks Israel’s strong fiscal performance of the last decade, but the OECD said Israel had ways of squaring the circle.

“We think further savings can be made on military outlays while the low tax burden suggests that there is some scope to raise revenues,” Gurria said.

“Introducing a carbon tax and eliminating inefficient tax expenditures, like exemptions on company cars, for example, could further reduce the deficit and benefit the environment while generating the fiscal space for necessary investments,” he said.

The OECD report found that Israelis are personally more satisfied with their lives than people in nearly all other OECD countries. On the organizations better Life Index, Israelis rated their subjective well-being a 9.61 on a scale of 0-10, compared with an average of 6.64 for OECD never countries’.

But the report found that objectively speaking, their satisfaction wasn’t warranted.

On health issues, Israel’s ranked seventh and on income and jobs was in the middle. Israelis’ relatively low level of income compared to the OECD average was offset by a high employment rate and low risk of long-term joblessness, the report said. But on civic engagement and governance, Israel was ranked 33rd and 32nd, among its lowest scores.

In the area of market reform, the OECD said Israeli food prices are too high and, among other things, urged Israel to replace quotas, guaranteed prices and customs tariffs with direct subsidies to farmers.

It said Israel Electric Corporation, which has a near monopoly in power, should turn into a holding company, and separate the business of electricity generation from operation of the grid.