OECD Report: Israel Hasn’t Closed GDP Gap With Top Western Economies

Growth in Israel expected to lag due to increase in birth rates and low employment rates. Annual report recommends strengthening the state’s underfunded employment programs

FILE Photo: Ultra-Orthodox children walk to school in the Mea Shearim neighborhood in Jerusalem.
Sebastian Scheiner / AP

Israel needs to improve the education it provides to socially disadvantaged groups, reduce barriers to food imports and other regulations and improve public transportation if it wishes to close the productivity gap with other developed economies, the Organization for Economic Cooperation and Development said in a report issued Friday.

The recommendations were made in the face of evidence that Israel continued to lag 18 other developed economies in per capita gross domestic product.

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In its annual “Going for Growth 2019” report, the OECD recommends to its member states policy changes to spur growth and improve quality of life. The changes, it said, are designed to address long-term trends that weigh on economic expansion.

>> Read more: Israelis take too long to grow up – and it’s costing us | Analysis 

In Israel, which has a high birth rate and whose population skews young, growth is expected to lag in the coming decades primarily due to an increase in the number of ultra-Orthodox men and Arab women, groups with lower employment rates.

The OECD’s main recommendations for Israel include increasing competition by opening the market to new players and new imports. It specifically recommends strengthening the state’s underfunded employment programs in order to boost workforce participation in population groups with high rates of joblessness.

Regarding education, the OECD recommends expanding Hebrew-language tuition in Israel’s Arab schools. It also suggests making government funding of schools for ultra-Orthodox Jews contingent on expanding the study of core subjects such as math and English.

On the issue of regulation, the report suggests adopting a “silence is consent” rule “to lower administrative burdens and promote online procedures for business licensing and paying taxes.”

On the issue of business competition, the OECD recommends that Israel adopt European Union safety standards for highly perishable foods such as dairy, eggs and meat, in order to facilitate imports.

On the subject of transportation, the report states that “partly due to past underinvestment, Israel has a large infrastructure deficit in public transport, which causes road congestion and poor air quality.” It notes that in the past two years, more than 50% of government spending in transportation has been for public transportation, including a high-speed rail link between Tel Aviv and Jerusalem and plans for more light-rail systems. It recommends increasing the use of tolls so that those who use infrastructure help pay for it.

It also recommends shifting automobile taxes “substantially from ownership to vehicle use to reduce pollution,” meaning that motorists would be taxed to a greater extent for using their cars than for owning them. It also recommends cost-benefit analysis of projects “with mandatory justification of policy-makers’ choices.”

According to the OECD’s data, in the past five years Israel did not close its per capita GDP gap with the 18 leading OECD member states. A weighted average for these countries was developed based on the size of their populations. That gap has stalled at about 30% less than the average for those 18 countries.

Israel’s low labor productivity is partly offset by the longer hours of its workforce. It shares this situation with fellow OECD member states China, Estonia, Japan, New Zealand and South Korea. In Belgium, France, Finland and Germany, the situation is just the opposite. In this group, high worker productivity compensates for the relatively low number of hours worked.

Praise for Israel

The OECD had praise for certain economic measures that Israel has taken over the past year, including loosening restrictions on parallel imports, meaning imports that are made without the permission of the manufacturer and which compete with products that are imported through the manufacturer. The report also noted the reduction of customs duties on some products, the expanded use of negative income tax for the poor in the 2019 budget and the Bank of Israel’s credit database project. Also mentioned are a pilot program to teach Hebrew in Arab kindergartens and steps being taken to increase competition in the financial services and electricity generation sectors.

Nevertheless, Israel’s per capita GDP growth slowed from an average of 2.3% a year in the seven years leading up to the global economic crisis (2002-08) to an average of 1.7% in the seven-year period from 2012 to 2018. And worker productivity growth slowed from 1.4% to 1.2% on average.

The report focuses not only on GDP growth but also on income disparities. On that score. Israel has made improvements in recent years but it is still not doing well compared to the OECD as a whole.

The report, which was compiled under the direction of the organization’s chief economist, Laurence Boone, also focuses on the importance of long-term efforts to deal with the environment. Israel, according to the report, has one of the highest concentrations of atmospheric particulate matter, and nearly every segment of the population lives in areas of moderate particulate concentrations.

The pace of policy changes among OECD member countries is insufficient to meet the challenges they face, Going for Growth warns. The appetite for reform was great in the wake of the global economic crisis of the prior decade, the report says, but since then the pace has stabilized at pre-crisis levels.