Israel is the start-up nation, the Hebrew tiger, an economy that flourishes even in the midst of a global downturn — or so goes the conventional wisdom.

But according to the 2012 State of the Nation Report by the Taub Center, a prestigious policy research institute in Jerusalem, Israel’s economy is actually falling behind the West, weighed down by non-working sectors of society, low productivity and a dysfunctional education system.

The bad news: The trends noted in the report are deep-seated and long-term, and constitute an “existential threat” to the country’s future, according to Taub Center director and noted economist Prof. Dan Ben-David.

The good news: “We have all the pieces to change direction. The capabilities of this country to reverse these trends are empirically proven and fantastic,” Ben-David notes.

While the report finds woefully inadequate transportation infrastructures, low productivity in an Israeli work hour, an education system producing a generation of low-achieving students, and employment levels dramatically lower than in much of the industrialized West, there is also cause for hope.

According to Ben-David, “we have empirical studies that show Israel’s universities ranked among the world’s leading universities. So it’s not just a few Nobel laureates; we’re an academic superpower. We have all the knowledge we need. We just need to get it to our kids tomorrow morning.”

But that’s not happening today, the report notes.

For two decades, Israeli schoolchildren have consistently ranked behind other industrialized Western economies in terms of academic achievement.

In the state and state-religious schools systems, which together make up some 52% of Israel’s elementary school students, academic achievement measured by international standardized tests is simply not part of the First World, the report notes.

In the Arab and Haredi school system, achievement is below that of many Third-World countries.

“How could anything good possibly happen when all these kids grow up? How are they going to compete in the global economy?” wonders Ben-David.

Physical infrastructures, too, have been neglected. Israel’s roads are among the most crowded in the industrialized world, the report finds.

A weak education system and inadequate transportation infrastructure is a recipe for inefficiency and low productivity, the report concludes.

Little wonder, then, that Israeli workers are inefficient compared to workers in other OECD countries. Based on OECD data that links GDP to the total working hours of the economy, Israel ranks 23rd out of 34 OECD states in terms of the productivity of an Israeli working hour. Worse, Israel has been falling ever farther behind the OECD average since the mid-1970s.

Israel is similarly trailing in rates of employment. One measure of this troubling trend is in the report’s comparison of male employment in Israel and the G7 countries between the ages of 35 (late enough to offset the effects of Israeli military service) and 54.

Both Israel and the G7 show over 90% employment in 1979. That declined somewhat in the G7 countries in the ensuing years, dropping as low as 87% in the recent financial downturn. Israel, meanwhile, saw male employment during the peak productive years drop to as low as 77% in the wake of the second intifada. Even after 10 years of recovery and austerity measures that drove many Haredi men into the workforce, the figure has yet to rise above 83%.

Even in the wake of a strong recovery, Israel cannot match the employment figures for the G7 economies during their worst economic downturn in living memory.

A great deal of that is due to the lack of participation in the workforce by the Haredi sector, the report finds. It even offers a first-of-its-kind analysis of Haredi employment compared to education levels, strongly indicating, the analysts believe, that the dismal state of Haredi education is the primary reason many Haredim don’t work.

“We know how to map education’s role on employment,” explains Ben-David. “We compared Haredi employment to employment of people with different levels of schooling. There’s an argument out there that what they learn [in post-elementary yeshiva] is good [preparation for the modern economy].”

In the report’s analysis, however, Haredi employment figures are identical to those of Israelis who received no schooling after the 4th grade, hovering below 50% employment.

With a 57% growth in Haredi elementary school enrollment between 2000 and 2010, the failure of Haredi education to produce productive workers for the Israeli economy should worry anyone who cares about Israel’s future, Ben-David says.

The report also attempts to debunk the widespread perception that the Israeli economy is doing well. There are many signs of strength in the short term, particularly when compared with the global economic downturn in recent years. But this optimistic analysis fails to take into account deeply problematic long-term trends, according to the report’s authors.

One example lies in the relatively high rate of economic growth that Israel has enjoyed over the past few years. According to OECD figures, that growth has consistently outstripped the G7 economies.

But, the report warns, this picture is “misleading.” That growth is part of a long recovery from the economic downturn Israel experienced in the wake of the 2000-2002 second intifada, when rampant terror attacks severely curtailed investment and crippled tourism and other industries.

Only recently, in 2011, did that accelerated recovery bring the Israeli economy back to the relatively consistent rates of sustained growth it has experienced since the 1970s.

“The problem is that this stable decades-long trajectory reflects slower growth over the long term than in leading Western states,” the report notes. “This means that the standard of living in Israel has been retreating, in relative terms, from leading Western countries for several consecutive decades.”

Another figure often cited as a sign of Israel’s economic health is its relatively low level of public debt. By 2011, public debt in OECD countries had risen to an average of 108 percent of GDP. In the G7 countries, the seven largest economies in the world, it hit 114%. Israel’s public debt was a more manageable 74% last year.

But that’s small comfort, the report notes, as Israel’s public debt is far more expensive, constituting a far higher drain on the Israeli economy. Interest payments on Israeli public debt cost the state fully 3.9% of the GDP in 2011, a far larger chunk of the national economy than is paid by Western nations saddled with far more debt, such as the US (1.9% of GDP) or Germany (2.0%).

Israel paid more than NIS 36.3 billion in fees and interest on its public debt in 2011, 500 million more than all government expenditures on education, including higher education, combined.

In unemployment, too, Israel seems to be doing better than the leading Western economies. But unemployment only measures the employment rates of those actively seeking or desiring work. As the Haredi case demonstrates, Israel’s economy is saddled by large subgroups that don’t seek work in the first place, including a significant proportion of Haredi men and Israeli Arab women.

According to Ben-David, the report’s findings must not be relegated to another stale debate about social policy.

If Israel’s educational and economic policies don’t change, Israel’s future may be in peril. “You can’t forgo half of society and say, ‘the rest will support everything.’

“This is existential. We saw just a week ago [in the Gaza conflict] how important a modern economy is if you want to have a modern army. We’re shooting down missiles. Who else in the world can do that?”

But without a First-World economy and First-World expertise, Israel will scarcely be able to afford or to train a First-World army. “And without a First-World army, how exactly are we going to exist in this neighborhood?” Ben-David wonders.