Israel's economy seems to be unstoppable these days. The latest evidence is the government's report that gross domestic product expanded by 6.2%, in annualized terms in the last quarter.
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No other country in the Organization for Economic Cooperation and Development even approaches that.
Israeli unemployment is 4.3%, its lowest in 30 years and far below the OECD average of 6.2%. The Israeli rate has been falling even though more and more Israelis are joining the labor market, evidence that the economy is generating jobs at a breakneck pace.
Israel's tech sector, too, has been thriving, even as Silicon Valley stalls: In the the last three months of 2016, startups raised $4.8 billion, their biggest quarterly take ever. Foreign investment meanwhile rose 40% from the year before in the first nine months of 2016 (the latest figures there are).
All this is happening against what could hardly called a supportive environment.
Globally, the world’s developed economies are still struggling to put the 2008 recession behind them and now face the political upheavals of Trump, Brexit and maybe yet another Greek debt crisis. At home in Israel, Finance Minister Moshe Kahlon is putting most of its efforts into an economic agenda driven by a populist media that demands quick fixes for housing prices and has a knee-jerk hostility to business. Netanyahu, meanwhile, is preoccupied with police investigations and pressures from the far-right to step up settlement construction.
If Netanyahu goes – a scenario that these days doesn’t seem too fantastic to consider – there is a real risk of chronic political instability.
Israel looks not a little like Italy in the days of the Italian economic miracle in the 1950s and '60s: A dynamic, booming business sector driving strong economic growth while a dysfunctional government looks by.
Free-market enthusiasts might answer, so what? The economy is better off without the state's meddling. Better the government, the media and the voters keep themselves busy with things like annexation and settlements, or they would have more time to start interfering with the economy, and we’d be worse off for it.
However, the Italy precedent for this is not good.
Italy's economy grew at an annual rate of 8.5% in the first years after World War II. For the two decades until the 1973 oil crisis, growth averaged a still-handsome 5.1%.
Then governmental incompetence started to get in the way. From 1995, Italy's average economic growth has been around 0.5%.
The fact is, whether you have faith in the public sector or not, some things are entirely reliant on it. When Ronald Reagan said at his 1981 inaugural address, “Government is not the solution to our problem; government is the problem," he was simply wrong.
Scandinavian countries, not to mention Singapore, Germany and others, all testify to the power of government to guide economies successfully over the long run.
It didn't work in Italy and Israel can’t go on for long without the government doing its job either.
Populated by mediocrity
The biggest challenge Israel faces is the growing Haredi and Arab populations, neither of which have the skills and education to contribute to a modern economy, much less an economy reliant on innovation like Israel's.
Even Israel’s core non-Haredi Jewish population is a laggard by developed-countries standards.
Israel may have one of the highest percentages of people with a college education, but on tests of literacy, numeracy and problem-solving, Israeli workers come out at the bottom or near bottom. Labor productivity, the key to rising standards of living and a globally competitive economy, is very low by developed-country standards.
In Israel, the best and the brightest go into high-tech or work for the handful of companies that are internationally competitive exporters. The rest of the economy is populated by mediocrity. It’s a situation that Israelis and the world, so mesmerized by the Startup Nation phenomenon, fail to recognize.
If we don’t get the rest of Israel up to speed, our standard of living will not rise. Startup Nation engine will run out of fuel.
The high-tech sector is pinched for workers because the educational system isn't producing enough graduates in the relevant fields.
There’s nothing the private sector can effectively do to deal with this problem. It’s in the hands of government, which to its credit has undertaken programs to recruit for Haredim and Israeli Arabs to the universities and is now embarking on a program to increase the number of science and engineering graduates.
But that doesn’t address the core problem, namely that Israeli schools are horrible by every standard. And here the government seems helpless.
You can funnel more students into the colleges and universities relatively easily but if they aren’t equipped with the basic skills, you’ll end up with mediocre graduates and workers.