Israel

Launch of 2016 Economic Survey of Israel

 

Opening remarks by Angel Gurría,

Secretary General, OECD

Jerusalem, 31 January 2016

(As prepared for delivery)

 

 

Dear Minister, Ambassador, ladies and gentlemen,

 

I am delighted to be back in Jerusalem to launch the fourth OECD Economic Survey of Israel, coinciding this year with the 5th anniversary of Israel's membership of the OECD family.

 

With GDP growth averaging nearly 4% since 2003, Israel is consistenty one of the strongest performers in the OECD. As conflict in the region persists, and as the global economy struggles to achieve escape velocity from the financial crisis, growth has moderated more recently. But, unemployment remains low, prices are stable, the external surplus is comfortable, and the public finances have improved considerably.

 

Besides sound economic fundamentals, Israel has a vibrant high-tech sector and world-class universities, making it a prime destination for inward investment. Meanwhile, the exploitation of its natural gas reserves make for a bright future if carefully managed. But, while these advantages have allowed Israel to close the gap in average living standards with the most advanced OECD economies, a number of challenges lie ahead to ensure growth is sustainable and inclusive.

 

This is the main story of our 2016 Economic Survey, of which I would like to share with you some of the key messages.

 

 

Boosting productivity imperative to stronger, more sustainable growth

 

It is striking that 13 years of strong GDP growth – driven by improved labour utilisation – have not been accompanied by a noticeable catch-up with the productivity levels of better-performing OECD countries. For every hour worked in Israel, output is less than 60% of that achieved in the top half of the OECD, a figure that has hardly budged in two decades.

 

Slow productivity growth undermines competitiveness and, if it persists, will threaten the sustainability of the catch-up in living standards. Low levels of productivity also imply low real wages in the context of high consumer prices. The cost of living is 20% higher than in Spain and 30% higher than in Korea, both of which have similar standards of living as Israel.

 

One of the major reasons for this low productivity is the lack of competition in many sectors, as highlighted in our Survey. Underperforming, sheltered sectors coexist with innovative and dynamic export-oriented industries, making for a two-speed economy. The retail banking, electricity, railway and food sectors are characterised by oligopolies or monopolies.

 

This suggests ample scope for further regulatory reform, as well as efforts to tackle the abuse of market power, in order to yield productivity gains while driving down the prices faced by consumers. The food sector holds out the promise of particularly marked improvements, as it is saddled today with high tariffs, import quotas and non-tariff barriers on agricultural products, all ripe for reform. Falling food prices would bring a big social dividend, since it is typically those on the lowest incomes that devote the largest share of their incomes to food purchases.

 

Measures to increase competition should be complemented by efforts to reduce the regulatory burden on business. If Israel were to achieve a regulatory environment equivalent to the OECD average, this could boost per capita GDP by an extra 4% after 5 years, or around ¾% per year, and cause the creation of more than 50,000 additional jobs.

 

 

Investing in education and skills promises ‘double dividend’: inclusive productivity growth!

 

Another important piece of the productivity puzzle is human capital. Here, again, the scope for gains is significant. According to the Bank of Israel, increasing the share of high school graduates pursuing further education from 48 to 58% would raise per capita GDP by 3%.

 

The priority here must be to raise the formal educational attainment of Haredi and Arab students. Scores for 15 year-old Israeli-Arab youths in the OECD’s Programme for International Student Assement – or PISA – are improving, but remain low. The level of formal education of young Haredim is even lower, and their job-market skills are weaker than the previous generation. This is a big concern in light of the rising  demographic weight of these cohorts.

 

What is needed are further reforms and additional financial means targeting young people from disadvantaged backgrounds. The teaching of mathematics, science and foreign languages in Haredi schools is critical to give these students the basic skills needed to find a job. At the same time, the vocational education system needs to be more fully developed.

 

Education and skills are the common currency of the 21st century, essential for sustainable growth in living standards, and critical enablers for all citizens to seize opportunities in our modern economies. A more educated workforce not only boosts productivity, it promotes social inclusion too! 


 

Giving all citizens a stake in the growing economy

 

Better education and skills outcomes are necessary, but not sufficient to tackle poverty among disadvantaged groups. More than half of Israeli-Arabs and Haredim live in poverty. Better labour market integration is particularly important for Haredi men and Arab women, since their employment rates remain particularly low. Besides, despite some progress, workers from these communities often hold precarious and low-paid jobs. Further progress can be made more broadly by extending the so-called "negative income tax" and by strengthening active labour market policies.

 

Promoting social inclusion, however, is a broader challenge. Poverty rates are also high among the elderly, not least due to relatively low basic pensions. These could be further increased, while the retirement age for women should be gradually aligned with that of men. It’s important to introduce these reforms now, while demographics are still favourable, and while pension finances are in relatively good shape.

 

Surging housing costs are a growing burden, especially for young families. The government has already taken steps to boost housing supply and reduce administrative delays in planning and building, which are twice as long as in other OECD countries. Improvements to urban rail transport and the quality of suburban schools would encourage people to live in new areas. This could also help ease urban congestion, the cost of which is estimated at 1.5% of GDP, and reduce pollution.


 

Preserving macro-policy prudence while making fiscal room for more inclusive growth

 

Of course, such investments in infrastructure and education may be expensive, and Israel can’t afford to undermine the progress made in reining in the fiscal deficit. Civilian expenditure is already relatively low, however, so further cuts should be avoided. Rather, we think further savings can be made on military outlays while the low tax burden suggests that there is some scope to raise revenues. Introducing a carbon tax and eliminating inefficient tax expenditures, like exemptions on company cars, for example, could further reduce the deficit and benefit the environment while generating the fiscal space for necessary investments.

 

I paid tribute at the outset to Israel’s strong economic fundamentals, underpinned by prudent macroeconomic management. Besides strengthening public finances in recent years, the monetary stance has remained suitably expansionary. This stance remains appropriate to support activity until inflation rises again to the target range, and the external environment becomes more conducive to a rise in interest rates. Having said that, it is important to remain vigilant to the evolution of property prices, and to further tighten macro-prudential policy if necessary.

 

Ladies and gentlemen,

 

As we look back on Israel’s 5 years as an OECD member, and as we reflect on how much the country has developed since the turn of the century, I am also confident that we can look to the future with a sense of confidence. I have no doubt that Israel’s most pressing social, economic and environmental policy challenges can be overcome. The OECD looks forward to continued close collaboration with Israel in the pursuit of our shared goal of better policies for better lives.  

 

Toda! [Thank you!]