The Israeli Economy in 2060: Not in Bad Shape at All

An OECD study sees growth exceeding the developed world’s average, living standards getting closer to America’s

A view of Tel Aviv
Tomer Appelbaum

Prime Minister Benjamin Netanyahu said eight years ago that he wanted Israel to be among the world’s 15 wealthiest countries as measured by gross domestic product per capita. At the time, it sounded like a long shot, but according to the Organization for Economic Development, in a report released last week, Israel is now No. 21.

Israel will be in 18th place in 2060 and could attain Netanyahu’s goal (albeit a few years late) if it sees to it not only to improve its human capital but also upgrades its sagging infrastructure, pares back regulation and encourages competition.

Predicting so far into the future is a risky business, but the OECD doesn’t try to predict events. Instead it focuses on long-term trends, especially demographic ones that are more easily estimated going forward. But even those, the OECD readily admits, are likely to be inaccurate.

Why bother? As the report’s authors explain, the long-term outlook aims “to better illustrate the potential benefits of reforms to education, governance, labor market policies and product market regulations, whose effects play out over decades.”

On that basis, it sees global economic growth falling from about 3.5% annually now to 2% in another 40 years, mainly because fast-growth emerging economies such as China won’t be growing as quickly.

Change for the better
Addition to forecast GDP in 2060 if reforms are
undertaken*

GDP per capita (in other words, living standards) in the OECD countries, the grouping of developed nations, will improve by between 1.5% and 2% per annum over the coming 40 years. Living standards in the BRIICS countries (Brazil, Russia, India, Indonesia, China and South Africa) will grow faster, but decelerate from 6% annually over the last decade to just over 2% by 2060.

As a result, their standard of living will still be less than half the level seen in the most developed countries. However, as the OECD report, “The Long View: Scenarios for the World Economy to 2060,” emphasizes, if the BRIICS countries take steps to improve education and governance, standards of living could be 30-50% higher in 2060.

The same applies to Israel. Thanks to its unusually high birthrate, Israel won’t suffer the same demographic squeeze as other developed countries as their populations age and the size of the workforce declines — in relative or even absolute terms. Israel will have to spend less on pensions and healthcare than countries with more rapidly aging populations.

Israeli GDP will slow to 2.2% annually over the next 12 years and then to 1.9% from 2030 to 2060, but that is better than the OECD countries as a whole, where the average rate will decelerate from 1.5% a year in the next decade and rise moderately to 1.7% in the 2030-2060 period.

Israel’s standard of living will grow from 61% of that of the United States to 80% in 2060. Turkish living standards will be higher than Israel’s, at 86% of the American level, thanks to even more favorable demographics.
OECD countries such as Israel, which already have high standards of education and governance, can improve their performance by better regulations in product markets. That is especially the case for Israel, where if Israel matches the top five countries in reducing red tape, GDP per capital would be almost 20% higher in 2060 than the OECD baseline forecast.

“The countries with the most to gain are those currently furthest away from the leading countries, including Turkey, Israel, Korea, Slovenia and Mexico,” the report notes. When it comes to infrastructure, if Israel were to boost its spending to the 6% level of GDP that the top five infrastructure spenders do now, GDP per capital would be 8.8% higher in 2060 than the OECD’s baseline forecast.

Doing that, however, isn’t painless: If it is not to increase its debt, Israel’s tax burden would have to increase by one percentage point by 2060. On the other hand, Israel is the only OECD country that will not have to raise its tax burden to avoid increasing its debt-to-GDP ratio. In fact, the baseline scenario sees it reducing the tax burden by 1.6 points.