Coronavirus Crisis Could Undo Decade of Israeli Economic Growth, OECD Warns

Organization says pandemic has exposed weaknesses of Israeli economy, urges structural reform and increased investment

Ronit Domke
Ronit Domke
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Laborers clean the facade of a high-rise building in Jerusalem, July 8, 2020.
Laborers clean the facade of a high-rise building in Jerusalem, July 8, 2020. Credit: REUTERS/Ammar Awad
Ronit Domke
Ronit Domke

The Organization for Economic Cooperation and Development warned in a report on Israel that the coronavirus pandemic threatens to undo many of the country’s economic achievements of the last decade.

“In the 10 years since joining the OECD, Israel has halved its unemployment rate, raised living standards and reduced public debt,” said OECD Chief Economist Laurence Boone in a statement. “Israel needs to keep up its efforts to protect people and firms, revive growth and avoid the crisis aggravating key challenges of high inequalities and productivity disparities between high-tech and traditional sectors.”

LISTEN: How COVID killed Bibi’s legacy and resurrected his archrivalCredit: Haaretz

The OECD, a club of many of the world’s wealthiest nations, said it expects Israel to recover from the pandemic recession, especially after the second lockdown went into effect Friday, but said the process would be slow. The organization forecasts Israel gross domestic product would contract 6 percent this year but show growth of just 2.9 percent in 2021. Unemployment, using the narrow definition that doesn’t include workers on unpaid leave, would reach 6.1 percent this year and continue rising in 2021 to 6.5 percent before gradually trending lower.

Those forecasts, it cautioned, hinge on the coronavirus. A further deterioration in morbidity rates that leads to a third lockdown would delay recovery even more. A rise in bankruptcies and even the shuttering of businesses critical to the economy could follow, which the OECD said would require the government to extend measures to support the economy.

Beyond the economic damage wrought by the lockdown, which is expected to run for at least three weeks, the report pointed to the high levels of uncertainty that will continue to weigh on the economy so long as there is no vaccine or cure for COVID-19.

It suggested a lengthy list of measures to encourage the recovery and narrow social gaps over the long-term. The report lauded the spending the government undertook as the crisis emerged last spring and said it would continue to spend as needed to support the economic recovery when it comes, even if it means increasing public debt.

Beyond that, it urged Israel to step up social and infrastructure spending to “tackle large socioeconomic disparities, boost productivity and support the recovery of aggregate demand.” In addition to increased budgets for welfare and infrastructure, the OECD urged Israel to make its tax regime more efficient and narrow the spending gaps between local authorities.

Its recommendations echoed many that officials in Israel have urged, including strengthening core-curriculum studies in ultra-Orthodox schools, accelerating the transition to renewable energy, reducing traffic through congestion taxes on drivers, removing barriers to foreign investment and enhancing business competition.

It also cited “Israel’s severe disparity in adult skills, with low-skilled workers outnumbering those with outstanding skills. This contributes to a marked labor market duality, with high-wage jobs in the high-tech sector and low-quality, poorly-paid jobs elsewhere.”

It also noted problems of corruption. The government has adopted “relatively effective” policies to combat it, but the OECD noted that perceptions of corruption among the Israeli public remain high relative to other member countries.

“Despite progress, Israel should step up its efforts to prevent corruption in the area of public procurement,” the report said. “More competition in public tenders would promote efficiency, lower prices, improve quality and increase innovation.”

To do so, the state should limit exceptions to competitive bidding and create a registry of companies with criminal records and allocate more time for bids for the biggest and most sophisticated contracts.

The report pointed to four potential shocks to the economy apart from the coronavirus.

The first is a sharp correction in the real estate market, which in turn could spread to the banks due to their heavy exposure to the sector. The second is a regional crisis that undermines consumer demand and overseas demand and forces Israel to increase defense spending. A third risk is a global debt crisis that causes a sharp drop in the value of Israeli financial assets. The fourth risk is growing trade protectionism around the world, which would hurt Israel’s export-oriented economy.

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