IMF says Israeli economy robust but social gaps threaten long-term stability

International body says Israel saw strong growth and low unemployment in 2017 but measures must be taken to increase productivity, improve infrastructure, and cut poverty

Sue Surkes is The Times of Israel's environment reporter

View of the Tel Aviv skyline in a dense sandstorm, September 08, 2015. (Miriam Alster/Flash90)
View of the Tel Aviv skyline in a dense sandstorm, September 08, 2015. (Miriam Alster/Flash90)

The International Monetary Fund on Tuesday gave Israel’s economy a qualified thumbs up, citing strong growth, low unemployment, healthy foreign currency reserves, and increasing market competition.

Looking to the future, however, it warned that modest productivity, inadequate infrastructure, and growing poverty and social gaps could challenge long-term stability.

In its report on 2017, the international body which supervises monetary stability and international economic cooperation said Israel was enjoying strong annual growth of 3.4 percent, which was expected to continue into 2018 and remain at this level for a few years before leveling off to around 3%.

This growth reflected solid domestic demand as well as growth globally, the report said.

Unemployment was at a healthy 4.2 percent, having declined gradually from nearly 6 percent in 2014 and this was supporting broad-based wage increases.

Illustrative image of a housing construction site in Tel Aviv, December 1, 2016. (Nati Shohat/Flash90)

According to the report, housing price increases slowed to just two percent, although supply and turnover also slowed down last year.

And moves to increase economic competition were to be welcomed.

But, said the report, Israel will face challenges to growth and stability in the long term because despite a dynamic high-tech sector, productivity has been modest, infrastructure needs are considerable — as evidenced by heavy traffic congestion — and poverty and social gaps will become more pronounced as low skilled people occupy a higher proportion of the working age population in the coming decades.

“The government should undertake deep reforms of education and training to reduce the gaps in labor productivity and participation, while enhancing redistribution carefully,” the report said.

“The effectiveness of schools should be increased, such as through higher standards for teachers, covering core subjects at all grades in Haredi schools, improving Hebrew teaching in Arab schools, and extending the short school day. Enhanced vocational training can also play a large role in reducing skills gaps with expanded active labor market policies further aiding employability,” the report reccomended.

“To raise labor participation and work hours of women, childcare support needs to be further expanded, especially for younger children, and increases in the female retirement age should continue without introducing new incentives for early retirement.”

Kindergarten children in their classroom (illustrative photo; credit: Edi Israel/Flash90)
Kindergarten children in their classroom. (Edi Israel/Flash90)

To help further alleviate poverty and income gaps, the IMF called for “substantially expanding” tax credits on earned income, implementing and targeting them more effectively.

The report called to continue reforms to cope with the effects of slowing housing construction coupled with high purchase prices.

It also recommended improving public transport and encouraging workplaces to locate nearer to communities where people needed jobs.

On the business sector, the IMF called for the strengthening of financial oversight and reduction of bureaucratic bottlenecks.

“Numerous regulations and their high compliance costs remain major impediments to competition and investment,” it said, calling for “simple and timely administration of regulations, such as a ‘one-stop shop’ that would assess all regulatory requirements within a reasonable period.”

“All proposals for new regulations should be subject to robust regulatory impact assessments,” it continued, adding that court procedures needed speeding up to allow for efficient enforcement of contracts. A special court for complex antitrust cases would also help, it said.

Harvesting of crops, April 21, 2018. (Anat Hermony/FLASH90)

The report called for the continuation of reforms to stimulate competition, singling out agriculture, where it said targeted subsidies to protect local farmers were preferable to trade barriers to keep foreign competitors out.

Under Article IV of the IMF’s Articles of Agreement, the organization holds bilateral discussions with each of its 189 member countries, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

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