Analysis

Has Israel Made a Good Investment Subsidizing Intel?

The treasury says yes, but unless Israel solves its low-productivity problem the impact will be less than it could be

FILE PHOTO: The Intel logo is shown in Los Angeles, California, U.S. June 12, 2018.
\ Mike Blake/ REUTERS

Officials at the finance and economy ministries – not to mention the average Israeli who doesn’t really know what a semiconductor is – were proud on Tuesday to discover that Intel has chosen Israel over Ireland and even the United States for a massive new production plant.

The pride is not entirely justified. While it is true that its decision to spend between 35 billion and 40 billion shekels ($9.6 billion-$12.3 billion) on the new facilities testifies to Intel’s confidence in the Israeli economy and the track record of its plant in Kiryat Gat, there also the matter of the subsidy it will be getting.

Of that 40 billion shekels, the government of Israel is kicking in 3.5 billion. With the new plant expected to increase Intel’s payroll by 1,000 people the aid works out to no less than 3.5 million shekels per job.

The treasury rejects this simple calculation in favor of a more sophisticated model that looks at the total incremental contribution of Intel’s capital spending to the Israeli economy.

What that seeks to measure is the difference in what Israel’s economic performance would be with the Intel investment versus what it would be without it, all other economic and social parameters being equal.

With Israel’s economy at full employment right now, there’s nothing very attractive about Intel’s promise to create 1,000 new jobs.

If they were employed at Intel, those 1,000 Israelis would easily find work elsewhere. Israel’s high-tech industry is suffering a labor shortage and many of them would be welcome there.

Rather, the big incremental benefit comes from the high salaries Intel will pay those 1,000 workers, compared to what they could ever expect to get from an Israeli employer.

This is especially the case given that Intel’s Kiryat Gat plant is located in the Negev where such lucrative employment is scarce.

Intel can afford to pay generous salaries because labor productivity is so high than elsewhere in Israel thanks to its use of state-of-the-art technology.

Even though the company will be paying a very low 5% rate of corporate income tax, its huge export sales will still yield big revenues for the state.

All in all, by the treasury’s calculations (whose calculations, admittedly, it doesn’t make public), the subsidiary it will be providing to Intel is an excellent investment that will pay big returns to the economy. The 3.5 billion in aid will yield an 8.6 billion shekel payback.

Not everyone is convinced. Prof. Omer Moav, of the Herzliya Interdisciplinary Center’s Aaron Dovrat Institute for Economic Policy, has been a critic of the government’s granting help to export-oriented companies under the Law for Encouraging Capital Investment. It was in the framework of the law that the government awarded Intel the aid this week.

In Moav’s view, officials fail to take into account the baleful effect of Intel’s exports on Israeli exporters. Intel is a huge factor in Israel trade, accounting for 8% of merchandise exports—a figure that is expected to grow to as much as 15%.

That scale of exporting has a profound effect on drawing in foreign currency to Israel and causes the shekel to appreciate. A strong shekel makes it harder for exporters to complete in global markets on cost and price. The only way Israel can neutralize the effect is by increasing imports, but over the last 15 years it has failed to do so. In dollar terms both imports and exports have been growing but relative to the size of the economy imports and exports have been shrinking.

Israel is becoming less and less competitive in the world economy and the expansion Intel is now slated to commence will make the situation even worse.

“The economy’s problem is low labor productivity in services, not in high-tech.

The benefits under the investment law divest government resources from local companies to Intel,” Moav says.

“Instead of investing 3.5 billion shekels [in Intel] that will come at the expense of other exporters, the government needs to invest the money in creating the conditions that will make Israel a country that attracts investment.” That means putting money into infrastructure, reducing bureaucratic red tape and reducing the corporate rate for all businesses – not just big exporters.

Gilad Brand of the Taub Center for Social Policy Studies, says Israel has to put more resources into upgrading and training its labor force. That means spending more money on education and technical training.

Moav adds that multinational companies like Intel do bring the great added value of advanced technology, intellectual property and management skills.

While Intel may put smaller exporters out of business, down the road former managers will start new ones armed with the knowledge they gained working at the company and Israel's high-tech sector would earn a reputational boost, he says.

That said, 3.5 billion shekels is a lot of money and the payback will be less than it should be unless Israel begins to grapple with its productivity problem.