Taking Stock / Things Aren't as Bad as You Might Be Thinking

The subprime crisis, recession in America, the drama sweeping through global capital markets - Israeli eyes are glued on developments in the outside world. But let's take a break in our ceaseless efforts to evaluate how the serial crises will affect Israel and glance at the annual Bank of Israel report, published two weeks ago. It describes one of the best years Israel's economy has known - although this doesn't mean all the news is good.

1 Israel's gross domestic product, the total value of final goods and services produced in a year, came to NIS 652 billion in 2007. That figure looks terribly impressive in dollar terms because of the shekel's powerful appreciation against the greenback: almost $200 billion.

During the last four years, Israel's economy grew by a rapid 5% annually or more, double the pace in most of the West. Of course, Israel's population is growing fast by Western standards, by about 2% a year - double the pace in the U.S. and triple Europe's rate. But even if we look at GDP per capita, we find that Israel has outpaced the West.

Disappointment sets in, however, when we look at growth in GDP per capita over time. When we do this, the superlatives we love to heap on ourselves, mainly around national holidays, start to sound hollow. During the last decade, GDP per capita grew by 1.6% a year on average, well below Europe's 2.5% or that of the Organization for Economic Cooperation and Development - 2.7%. The result is that Israel's GDP per capita was $22,500 at the end of last year, just 10% above its level in 2000. We have remained in the rear.

2 There are a lot of numbers in the Bank of Israel report that shed light on Israel's failure to fully exploit its economic potential. But possibly the parameter that best explains this is the reluctance of large swathes of the adult population to work.

In Israel, only 54.5% of the adult population participates in the workforce, compared with 76.8% in the U.S. and 72.4% in the OECD. This phenomenon has an enormous impact on Israeli productivity, poverty, growth and inequality.

The effect of low participation in the workforce is evident in the gap between GDP per capita and GDP per worker. While GDP per capita is well below the norms of the countries we'd love to emulate, GDP per worker is roughly the same.

3Unemployment has fallen to its lowest level in a decade, 7.3% of the workforce, to the relief of economists and politicians alike. But international comparisons will chill the blood again: The truth is that joblessness is high. Its average is 9.0% for the last decade, compared with 4.9% in the U.S. Even in Europe, which has plenty of unemployment hot spots of its own, the average is 7.4%.

4 For years, the government's vast budget cuts have been debated, applauded by some and excoriated by others, but what people tend to forget is that the cuts came after the budget had mushroomed to monstrous dimensions, in international terms. During the last 10 years, government spending comprised 49% of GDP, compared with 36.8% in the U.S. and 45.7% in Europe.

5Israel's economy has stayed extraordinarily strong during the global financial crisis and the economic problems in the U.S., though we can't be counted among the Asian tigers. One reason for our robustness is our balance sheet. Unlike the U.S. and many of the eastern European emerging markets, Israel has been running a large surplus in its balance of payments for five years, exporting more than it imports, with a positive balance in capital inflows and outflux.

6Israel's terms of trade - the relationship of export prices to import prices - have dramatically worsened in the last seven years, a fact that should have savaged Israeli exports. Yet it hasn't, and exports have continued to drive economic growth, almost doubling in five years, mainly thanks to the high-tech sector.

But the dollar's implosion over the last year and the slowdown in the United States, which is a major target for Israeli exports, make 2008 look a lot more challenging for local exporters.

7Economists around the world blame the crisis in the U.S. mainly on waste and rampant consumerism, fueled by borrowing during the past 10 years. It may surprise the macroeconomically challenged among you to learn that the situation over here is quite the opposite. Granted, consumerism has ramped up dramatically in the last year and the figures for imports of durables published last week show that spending fever continued in the first quarter of 2008. But although Israelis saved less, the general level of savings remains high because it was high to begin with and because the government demonstrated fiscal discipline in recent years.

The traditional correlation between savings and investment was severed in the last two years because of the huge surplus Israel was running in its current account. That enabled investments to increase without increasing the savings element and without raising the cost of inputs. Today, with national savings running high relative to investment, the economy could easily sustain an increase in the standard of living. Which is precisely the opposite of the situation in America.