In December 2010, Prime Minister Benjamin Netanyahu got on a stage and made an ambitious promise: “We will be among the 15 leading countries in per capita income within 15 years.”
He not only made that vow but detailed the way Israel would arrive at the goal. It included maintaining fiscal discipline and the budget deficit, reducing taxes and cutting the corporate rate to 18%. He spoke about investment in education and the importance of investing in infrastructure, including transportation, water and telecommunications. Finally, Netanyahu spoke about reducing government interference in the economy by slashing regulations.
Eight years have passed since that speech, more than half the time he allotted to conquer the summit of the mountain and all of it under his leadership as prime minister. But the Sir Edmund Hillary of economics he is not.
Between 1980 and 2018, Israel’s per capita GDP – a barometer of how well-off a country is – actually doubled, an impressive achievement. But if we look at Israel’s GDP per capita ranking among countries belonging to the Organization for Economic Cooperation and Development, the achievement isn’t so spectacular.
According to International Monetary Fund figures, we were 23rd in 1980. A decade later we were still at 23 and in 2000 made a move up to No. 22. But that didn’t last long and by 2010, Israel’s ranking was back to 23, where it has stood till this day. Nearly 40 years of no movement on that indicator.
Those years of treading water stand in stunning contrast to the performances of a handful of other countries. In 1980, Ireland was 22nd; in 2018 it was second (and first if you discount the mini-state of Luxembourg). South Korea rose from No. 30 in 1980 to 19 today. Countries can do it if they are sufficiently determined.
If Avichai Mendelblit permits it, Netanyahu has another seven years to reach his target. Given his management of the economy so far, we can only hope the task is handed over to someone else.
Regarding budget discipline, the first way the prime minster said Israel would reach the coveted No. 15: Last year the deficit reached 2.9% of GDP, a high figure for an economy that was growing rapidly and enjoying full employment. The forecast for this year is that the deficit target will be exceeded.
The fact is that under Netanyahu budgetary spending has grown, which is legitimate, but the growth has been accompanied by higher taxes to cover it.
Netanyahu’s second pathway to No. 15 likewise hasn’t been achieved, since he gave up on the idea of lowering taxes in the wake of the 2011 social-justice protests. The tax burden in Israel has remained unchanged and the corporate rate is still 23%. Given the widening deficit, it’s just as well the rate wasn’t cut to 18%.
Investment in education? That was forgotten a long time ago. In the last decade, only one major reform was made, and that was by Shai Piron when was he was education minister in the previous government, the goal having been to narrow the gaps between children from different socioeconomic backgrounds by more equal budgets.
The change wasn’t enough to fundamentally alter the mediocre performance of Israeli schools. The other reforms, dating from the previous decade (Oz L’Tmura and Ofek Hadash) haven’t produced the results hoped for, and Netanyahu hasn’t taken any initiative of his own.
As for investment in infrastructure, there was some improvement but hardly enough to make up for years of underinvestment. After three consecutive Netanyahu governments, Israel’s roads are more clogged with traffic than ever.
On the other hand, the prime minister does deserve credit for cutting Israel’s red tape. Since the start of the decade he has pushed this and the fruits of his effort were revealed this month when the OECD’s economic freedom index, the Products Market Indicator, showed Israel had moved up from second to last to close to the middle of developed countries in just five years.
But among those five pathways Netanyahu pointed to in 2010, he succeeded in two of them and Israel remains at No. 23 for per capita GDP in the world.
Permit me to say that even if Netanyahu had kept to all five promised avenues, it’s doubtful Israel would be looking at a No. 15 ranking anytime soon because none of them can do the trick. Israel’s real problems weren’t even mentioned by the prime minster back then – the problems of the low participation by ultra-Orthodox Jews and Israeli Arabs in the labor force and low productivity.
To that, a new factor has emerged, namely stagnant growth in the high-tech sector, which had been the engine of Israeli economic growth. Not surprisingly these problems are all interlinked.
As for the Haredim, Netanyahu has not only done nothing to address the problem, in fact he has let it grow worse by allowing the allowances to yeshiva students to be resumed, and he has effectively put a break on efforts to teach secular subjects (i.e., those relevant to future employment) in Haredi schools.
Regarding Israeli Arabs, Netanyahu did authorize a 10 billion shekel ($2.7 billion) program for development in Arab communities. But he has undercut their economic integration with racist remarks and the passage of the nation-state law.
His record on productivity is better. Stepped up infrastructure spending, laws to weaken monopolies and cartels and the reduction in bureaucracy have all been important steps. But he has ignored the pressing need to improve Israel’s human capital by improving the schools and Haredi and Arab education in particular..
And what about high-tech? Israel is contending with a shortage of skilled workers. Again, it’s an issue of human capital and the need to address the problem of the schools and Haredim and Arabs. On this, Netanyahu has done nothing.
He can point to years of above-average economic growth under his governments, but high growth is to expected when Israel’s population is expanding so quickly. The real test is per capita growth and there he has failed.
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