Bank of Israel Governor Amir Yaron holds no grudges against Benjamin Netanyahu. After all, it was the prime minister who appointed him, only a few months ago. Nevertheless, the central bank’s first annual report under Yaron — issued Sunday, just nine days before the election — gave the prime minister an F on the economy.
The report paints in the colors of failure the man who has led Israel since 2009 and has arguably been the dominant figure in Israeli economic policy since his stint as finance minister in the early 2000s.
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The most damning figure is 0.8. “Since the start of the decade, Israel’s rate of GDP growth has been 0.8 percentage point less than in the previous decade,” the Bank of Israel report stated dryly. In other words, the decade of Prime Minister Benjamin Netanyahu has taken the economy backward.
The main barometer of an economy’s success is its gross domestic product per capita, because it shows how much economic growth has been delivered to the population. Here too, Netanyahu has failed.
He entered office in 2009, at the height to the global economic crisis, and the following year he extricated Israel from it and delivered a sharp rise in GDP per capita. (Many of the measures that made this possible were taken by his predecessor, Ehud Olmert.) Since 2010, however, per capita GDP growth has been in decline.
In the past three years, Israel’s per capita GDP growth has begun to lag that of other developed countries. Israel — Startup Nation, with a high birth rate, and which sailed through the economic crisis a decade ago — is now falling behind the supposedly lumbering giants of Europe.
The Bank of Israel says it will only get worse. If things continue as they are now, the rate of overall economic growth will decelerate from 3.3% a year now to 2.8% in 2025 and 2.7% in 2065.
Growth in GDP per capita will decline from 1.4% annually to 0.9% in 2035 and just 0.6% in 2065. That will mark a sharp retreat from the rising standard of living that Israel has enjoyed, and the gap between the country and the rest of the developed world will not narrow.
The reason for the disappointing growth of the past decade is the loss of the growth engines the economy had in the 1990s and early 2000s, which mainly affected Israel’s human capital.
One of these growth engines was the big improvement in higher education as a result of the early 1990s college revolution of Prime Minister Yitzhak Rabin and his education minister, Amnon Rubinstein. The establishment of new institutions of higher education and the growth of the college population left Israel with one of the highest rates of people with tertiary degrees in the world today.
The other driver was the growth in the percentage of Israelis in the labor force. That was due to the increased number of women getting a higher education, an increase in the legal retirement age and the gradual increase in the numbers of Arab women and ultra-Orthodox men entering the workforce.
Netanyahu deserves credit for the latter two phenomena. As finance minister in the early 2000s he raised the retirement age and contributed to the growing workforce participation rates of Haredim and Arabs by cutting government allowances.
But the impact of these trends have run their course, and in the case of Haredi men, there has been a retreat. As prime minister, Netanyahu undid much of the work vis-a-vis the ultra-Orthodox by restoring stipends for yeshiva students after he formed his current government in 2015.
Also driving in the 1990s and the first decade of the century were the massive immigration from the former Soviet Union and the rise of Israeli high-tech. But they have also run their course as growth engines.
The decade of Netanyahu as prime minister, as against the decade of Netanyahu as finance minister, has seen Israel treading water. So where will Israel find the next drivers of growth?
The Bank of Israel has several ideas, all of them self-evident. It calls for a revolution in the schools in order to improve Israel’s poor human capital. In particular it calls for a revolution in education for Israeli Arabs and Haredi Jews.
It calls for increasing productivity by reducing bureaucracy and spending more on infrastructure. Netanyahu has begun to work on these. But it goes on to recommend improving preschool education, boosting the quality of teachers and adjusting collective bargaining agreements in order to encourage greater use of technology in the civil service.
The good news from the Bank of Israel report is that if the government does follow through on its proposals, the economy will look much brighter in the decades ahead. Per capita GDP would be 13% to 20% higher by 2065, compared to its most pessimistic forecast. The economy will be 300 billion shekels ($83 billion at current exchange rates) annually.
None of the things the Bank of Israel is proposing to achieve those results is new or controversial. Still, Netanyahu has done little to implement them and the result is that the Israeli economy has suffered a lost decade.
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