Central Bank Chief Warns About Dim Economic Future for Israel

Karnit Flug says the government must spend more on education and health.

Bank of Israel Governor Karnit Flug, June 2014.
Bank of Israel Governor Karnit Flug, June 2014.Credit: Michal Fattal

Bank of Israel Governor Karnit Flug urged policymakers to spend more on education and health care and forge a strategic plan to guide the economy, saying that Israel faced a dim economic future of slow growth and stagnant incomes.

“Per capital GDP in Israel is about 40% lower than that of the U.S. According to a study conducted by the OECD using a business-as-usual scenario relying on existing trends regarding production factors and productivity in Israel and around the world that gap isn’t expected to close any time in the next few decades,” she told the annual Eli Hurwitz Conference of Israeli economic policymakers.

Flug warned that Israel faced a growing population of elderly, making up 17% of the population four decades from now, compared with 10% today. In addition, ultra-Orthodox Jews’ and Israeli Arabs’ share of the population will grow, but both groups are less active in the labor force than other Israelis and their educational performance is inferior, she said.

Flug cited a Bank of Israel study that found that while the ultra-Orthodox have an average of 17 years of schooling, in terms of skills needed to hold a job this is equivalent to just 10 years.

“This finding, particularly against the background of the projected demographic trends, indicates that a marked slowdown in the effective schooling of the entire population is expected in the coming years, which is expected to markedly lower the contribution of increased education to per-capita GDP growth,” she said.

Flug also warned about growing pressures on Israel’s health care system as the population ages. Demand for health care services will increase by as much as 70% at a time when hospital overcrowding is already very high and about half the country’s physicians in the system are 55 or older the highest figure in the Western world.

But Avi Nissenkorn, the chairman of the Histadrut labor federation, told the conference that Israelis work too hard and that the work week should be cut.

“The time has come to reduce the number of works hours to 40 per week,” he said. “Wage earners are worn down and suffer from the high cost of living and low pay, which is what is causing them to want to unionize, especially after the [2011] social-justice protests.”

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