The Bottom Line / Trachtenberg Means Every Word. And Olmert?

The decade between 1995 and 2005 was overall a good period for Israel's economy. While the country experienced one of its most serious economic crises in its annals between 2001 and 2003, this decade, in contrast, was blessed with six separate years in which growth was over 4 percent. Interest rates and inflation fell to historic lows, the deficit and tax rates also hit new lows, and the country successfully based itself on the power of high-tech.

The feeling is that one can look back at the past decade with satisfaction, until one discovers that satisfaction is very relative. Israel, it turns out, may have ran ahead during the last decade, but its competitors ran faster. In reality, the country fell behind. If in 1995 per capita income here was 65 percent of per capita income in the U.S. (adjusted for gaps in buying power between the two nations), in 2005 per capita income fell back to 55 percent of the U.S. That is to say, the average Israeli standard of living drew further away from the American standard of living, which of course significantly reduces the allure of Israel as a modern and prosperous nation capable of attracting a strong population.

There are excellent reasons why the standard of living in Israel is declining in a global comparison. Productivity in Israel is 43 percent that of the U.S. The statistic calling for even greater attention involves R&D projects. Israel spends only 25 percent as much as the U.S. on R&D. No, that's no typo. It is true that Israel is a global power in producing advanced technologies, but we are exporting all the technologies to others without making any use of them ourselves. In all that is related to adopting advanced technologies in the day-to-day lives of the industry and service sectors, Israel trails other western nations by a generation.

This is one of the explanations for the growing per capita income gap between Israel and the U.S. While the engine of growth in Israel over the past decade has been high-tech - a small engine in scope that only a minority of the population benefits from - in the U.S., the service sector was the principal growth engine and skyrocketed after adopting communications and advance computer technologies.

In other words, despite record highs on the stock market, there is no reason for euphoria regarding the country's economic situation. Not only is the record growth of the past two years dwarfed by growth in our competitors, and not only is Israel's comparative advantage in technology steadily disappearing in the wake of India and China's massive entry into the field, but Israel is also having a hard time maintaining a competitive edge, in light of the enormous weight it is carrying on its back. No, not the weight of the security burden, but rather the burden of the hidden core of impoverished within Israeli society - a core of Haredim and Arabs comprising 25 percent of the population and 55 percent of the poor.

Israel is ranked last in the Western world when it comes to socioeconomic gaps and participation rates in the workforce. Hope that the high-tech growth Israel experienced this past decade would save the state from the bottom of the pit on these two parameters was dashed. Nor is there a place to hang hopes on the education system to succeed in improving these parameters in the coming decade. Israel is languishing at the bottom of the Western world in educational achievements, and it's now clear that Israel's higher education and scientific achievements are in retreat.

"Look back with concern" should be the conclusion of one analyzing long-term processes overtaking the Israeli economy. It's also the message the head of the National Economic Council in the Prime Minister's Office, Manuel Trachtenberg, is trying to communicate in "The Socioeconomic Agenda of Israel: 2008-2010," whose principle is to improve Israel's standing in the two parameters in which it is lagging: the high poverty rate and low participation rate in the workforce.

Trachtenberg concludes that without improving these two parameters Israel has no economic future. Improvement in these two parameters needs to top the agenda, even if it means giving up on promoting structural reforms and annoying the Finance Ministry. "After 20 years of wonderful structural reforms," says Trachtenberg, "a time-out can be taken to deal with poverty." He would have the government adopting these two parameters as economic policy goals to join the traditional deficit and inflation goals.

One can believe Trachtenberg means every word he says and wish him (and us) that his agenda will succeed. It's harder to believe Trachtenberg's boss, Prime Minister Ehud Olmert, who signs off on the agenda, which calls for reducing foreign workers, just two weeks after he brought the government to add 3,000 foreign workers to agriculture. It's also hard to believe Olmert when he waves the flag of educational and higher education reform at a time when students are striking to pressure him to give in on raising tuition fees.