"Israel cannot continue to be an average country. We must be better," Prime Minister Benjamin Netanyahu declared. The year was 2010, and Netanyahu made this statement at a ceremony to mark Israel’s accession to the OECD.
"We have joined the elite club of world economies," Netanyahu said. "This is a process with one clear aim - to upgrade the local economy such that it will be recognized as one of the leading economies in the world. Our goal was, and must be, to keep progressing." On that occasion, Netanyahu even set a goal to which Israel should aspire: to be among the fifteen leading economies for GDP per capita. That goal has yet to be realized.
A decade later, in 2021, Israel was on the threshold of being among the twenty leading countries for GDP, but, when purchasing power parity is taken into account, we were in the middle of the fourth decile, according to World Bank figures. Still, it was decade of growth, and, most importantly, there was a goal on the horizon. That counts in the economy, and not just there: even if no country actually meets all the ideals it sets for itself, the aspiration itself matters.
Now, however, with Netanyahu’s return to the premiership, and the formation of a government that promises revolutions, one wonders whether the vision he spoke of thirteen years ago still applies. Can it honestly be said that we aspire to more? Specifically, are we on the path that will make it possible in the long term to close the gap with the countries that we should like to emulate?
The missing quantum leap
The challenges are well known, as is the picture that emerges of the past few years from studies by a host of professional bodies, such as the Bank of Israel, the Ministry of finance, and the Israel Democracy Institute. In the previous decade, GDP per capita did rise, but to a large extent that happened because of a rise in participation in the workforce. More people went out to work, partly because of the reforms introduced by Benjamin Netanyahu as minister of finance in 2003, and also thanks to recovery in the global economy, which drew people into the labor market. And when people go out to work, their product rises.
But for the gap to continue to be closed, something more is needed: not just that people go out to work, but that their productivity comes closer to that of workers in the most advanced Western countries. Even if the gap narrowed a little towards the end of the last decade, in 2019 the gap in product per worker between Israel and the OECD average was similar to what it was two decades earlier, in 1999.
That is to say, something else is required in order for Israel to move up a league, and the things are well known. Workers need training that will enable them to integrate into the twenty-first century economy. As Governor of the Bank of Israel Amir Yaron put it last week, we have to ensure that the next generation of the workforce now at school "will receive in the course of its studies during these important years the intellectual tools and the basic skills required for success in the labor market. This is of huge importance if they are to lead the Israeli economy to continued growth and prosperity."
One can surmise what the governor meant: in order for more haredi men to participate in the labor market, in high-productivity jobs, they need to learn the core curriculum from a young age. In the coalition agreements, this requirement is abandoned. In addition, while raising handouts for yeshiva students might not make them rich, it certainly does not prod them to go out to work.
Human capital isn’t the whole story. For the Israeli economy to make forward leap, it is also in dire need of investment in infrastructure. In this respect, there are promises in the coalition agreements, from construction of a bullet train and legislation of an infrastructures law and the Metro law, to construction of another international airport. Some of these plans are familiar from previous coalition agreements - perhaps this time they’ll be realized.
All this is in the long term. It should be said that, in the short term, our relative position might actually improve, if only because of the fact that Europe is entering on a tough year in the shadow of war, and the US too is teetering on the edge of a recession. This slowdown has reached us as well, but if the forecasts materialize, and there aren’t more crises of our own making, it should be less severe in Israel.
Equality or extra rights
But beyond education and infrastructure, there is a much deeper and basic requirement for economic prosperity, particularly relevant to the State of Israel, which even after the gas discoveries is mainly reliant on human capital. The key to economic success lies in institutions that will enable all citizens of the state to take part in the game and enjoy the fruits of growth, irrespective of identity.
Under the coalition agreements, however, the government is not moving in the direction of integration, but rather towards more discrimination, and discrimination anchored in law. The agreements may speak of "narrowing gaps in society, including in the haredi and Arab sectors", but in the same breath they promise an amendment to the law on discrimination that will set us on a course of greater division between different sections of the population, and businesses will be able to refuse service "on the grounds of religious belief." Furthermore, university faculties of medicine, law, computer science, engineering, and accounting are supposed to practice discrimination in favor of those who have served in the army, who of course are not Arabs.
The importance of inclusive institutions lies at the heart of a book by one of the world’s leading economists, Prof. Daron Acemoglu of MIT (with James A. Robinson), "Why Nations Fail: The Origins of Power, Prosperity, and Poverty". The coalition agreements led me to look up an interview I conducted with Prof. Acemoglu in 2015. Inclusive institutions, he explained to me then, "try to prevent surplus rights, especially surplus political rights, to prevent a situation in which you have political power just because of your family name, or your family’s wealth, or your ethnic origin. Such institutions try to limit surplus economic rights, and so they are always under attack."
The echoes here of the welter of initiatives in the coalition agreements are clear, and pretty dismal. But later in that interview, I also found an optimistic statement by Acemoglu which had escaped my memory. "In any period, in any successful society, people are always declaring that ruin is around the corner," he said. "But you have to look at processes with a sense of perspective and remember that inclusive institutions form the basis of the economic and political success of these nations precisely because they have a great deal of flexibility and the capacity to adapt to change."
As mentioned, we have to see what proposals in the coalition agreements materialize, especially in the light of the contra voices already being heard from the business world and from technology entrepreneurs, and also from academic institutions. The last word, it must be hoped, has yet to be said.
Published by Globes, Israel business news - en.globes.co.il - on January 1, 2023.
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