Inside story

Is Netanyahu an economic wizard? The numbers beg to differ

The PM often boasts he has turned the Israeli economy into ‘a huge success story.’ A review of the past decade’s figures reveals a different reality, for which Israelis are paying

Prime Minister Benjamin Netanyahu at the World Economic Forum (WEF) annual meeting on January 25, 2018, in Davos, Switzerland. (AFP Photo/Fabrice Coffrini)
Prime Minister Benjamin Netanyahu at the World Economic Forum (WEF) annual meeting on January 25, 2018, in Davos, Switzerland. (AFP Photo/Fabrice Coffrini)

On Saturday, Benjamin Netanyahu marked a cumulative term of 13 years and 128 days as Israel’s prime minister – a day longer than David Ben-Gurion, the country’s first prime minister and considered its founding father.

This remarkable longevity sparks curiosity regarding Netanyahu’s legacy, and what the public will remember him by.

But among the achievements in which he takes particular pride, and for which he garners widespread support, is the flourishing of the Israeli economy.

During the last Israel Business Conference, held in Jerusalem in December, Netanyahu spoke about the possibility that Israel may see a string of yellow vests protest – a reference to the grassroots political movement for economic justice, whose members staged mass protests in France in October 2018 – saying, “You know why these types of protests fail [in Israel]? Because people know the truth. The Israeli economy is a huge success story.”

Prime Minister Benjamin Netanyahu (2L) seen with Angel Gurria (2R), Secretary-General of the Organization for Economic Co-operation and Development (OECD) , during the weekly cabinet meeting in Jerusalem on January 31, 2016. (Kobi Gideon/GPO)

But is the Israeli economy really the booming success story for which Netanyahu is claiming, and is generally granted, credit? Data from the last decade reveals a different reality, one the average Israeli feels every day, and one it is doubtful Netanyahu would like to claim as his own doing.

GDP: Soaring or lagging?

In terms of GDP per capita, Israel has noted impressive achievements over the past decade. According to data from the Organization for Economic Cooperation and Development, Israel’s GDP per capita has grown by almost 45 percent during this period, from $27,500 in 2009 to about $40,000 in 2018. Other OECD member-states noted a more moderate average increase of 34%, from $34,000 to $45,600.

Is this an extraordinary achievement? Not necessarily.

Israel, with its high birthrate and spike in immigration in the 1990s, is not comparable to established, developed European countries, which find it more difficult to show substantial economic growth. In any case, Israel’s GDP per capita is still almost $6,000 lower than the OECD average.

Israel represents a mixed model between the established, developed European countries and developing countries such as China and India, whose lower starting point has allowed them to show impressive annual growth rates – at times of over 10% – in recent decades.

Among OECD members, this point can be illustrated when you look at former communist Eastern European countries. GDP per capita in Latvia, for example, has grown by 81.5% in the past decade, while Lithuania’s growth rate stands at 95%. That’s why both are closer to Israel with this respect than they were a decade ago.

Another example is Ireland: until 25 years ago, its economy was in shambles, but its recovery rate in the 1990s and over the previous decade has been so great, it has earned the nickname the “Celtic Tiger.” In recent years, Ireland is again experiencing a major economic leap and its GDP per capita has spiked from $52,100 in 2009 to $79,500 in 2018. In 2020, Ireland’s GDP per capita is projected to trend around $85,000.

Illustrative: A board showing stock fluctuations at the Tel Aviv stock exchange. (Moshe Shai/FLASH90)

According to the OECD’s 2019 Economic Reform Report, while Israel has shown a higher growth rate than the OECD average, the gap between its GDP per capita and that of the stronger half of the OECD’s member-states remained unchanged due to low labor productivity.

If this is the case, perhaps a comparison to Israel’s growth figures prior to the last decade can reveal an impressive achievement by Netanyahu?

Here, too, the answer is no. Whereas between 2002 and 2008 the country’s GDP per capita grew by 2.3% annually, it seems that between 2012 and 2018, Israel’s growth rate increased by only 1.7%.

From a long-term perspective, Netanyahu’s years in office can be characterized by average growth, and while they are free of major dips, like the inflation crisis of the 1980s or the Second Intifada, which bit into the economy between 2000 and 2005, they are also devoid of any major spikes in performance, as were noted following the 1967 Six-Day War, in the early 1990s, or in part of the previous decade.

Gross domestic product per capita is gauged by several benchmarks. Those set by the International Monetary Fund, the United Nations and the World Bank rank Israel in the 21st and 22nd slots – a respectable performance in a list comprising 190 countries. But when evaluating GDP per capita by purchasing power parity (PPP), Israel slips to the 32-37 slots, meaning our money does not stretch as far as we think.

Take Spain for example. Netanyahu has looked down on Madrid’s economic performance many times over the last decade given that it ranked 31st in global GDP (nominal) per capita. However, when you translate Spain’s numbers to PPP, it climbs one place in the rankings to surpass Israel, which falls sharply from the 21st to the 34th slot. The disparity is $3,500 in Spain’s favor.

A year ago, Netanyahu bragged about how Israel had surpassed Japan in terms of PPP, but the figures in fact peg the average Japanese’s purchasing power at $44,200 a year, compared to only $38,000 available to the average Israeli – a difference of over $6,000.

OECD data shows that Israelis’ purchasing power has increased by 50% since the mid-1990s – less than in Bulgaria, Latvia, Ireland and Estonia, where PPP has nearly tripled. The PPP in other developed countries such as Iceland, Finland, Australia and New Zealand, has also surpassed Israel’s, albeit only slightly.

Close-up of Israeli currency, Jerusalem. (Orel Cohen/Flash90)

The growth in purchasing power parity that has taken place in Israel is not a new phenomenon for which Netanyahu can take credit. In fact, 30 or 40 years ago, many Israeli families were financially balanced and owned their own home, despite the fact only one spouse was working. The shekel simply stretched farther back then. Money was worth much more than today.

Then, a new concept was introduced: the high cost of living.

The high life

According to the Knesset’s Information and Research Center, the cost of living in Israel is 25% higher than in the OECD with respect to foods, and nearly 70% higher with respect to dairy products and eggs. When it comes to home furnishings and appliances, prices here are 34% higher than the OECD average. Transportation costs are 30% higher, restaurants and hotels are 29% more expensive than in the OECD, and Israelis spend 20% more on health costs and 18% more on culture and entertainment activities.

The taxes Israel imposes on new vehicles and fuel are among the highest in the world. According to Numbeo, a crowd-sourced global database of reported consumer prices that compares the cost of living in various countries, the price of fuel in Israel is the fourth highest in the world, and the price of a new car is the fifth highest globally.

Crucially, the past decade has seen housing prices in Israel nearly double. According to the Central Bureau of Statistics’ price index, housing costs account for 34.3% of total household expenses, compared to 15.3% in the European Union, which is the clearest illustration of the heavy burden Israelis bear.

So how do Israelis cope with the high cost of living? They take out loans.

According to the Taub Center for Social Policy Studies in Israel, “Net credit (loans minus savings) fell sharply from 27.1% of the GDP in 2000 to 10.7% in 2009. This trend then reversed, and net credit rose to 23.4% of the GDP in 2017.”

According to the Bank of Israel, while household debt more than doubled over the past decade, disposable income grew by only 50%, suggesting that not everyone who took out loans will be able to repay them.

Increased wages, below average

One encouraging statistic is the increase in wages. According to the Taub Center, between 2012 and 2017, the wages paid to Israeli employees in the two lowest deciles increased by 19%, thanks to the increase in minimum wage and negative income tax. Employee wages in the fifth and sixth percentiles have increased by 22%. But even now, only about a third of Israelis earn more than the average monthly wage in Israel, which currently stands at NIS 10,600 ($2,987). The rest find it difficult to be party to the consumption celebration.

According to State Revenue Administration data for 2017, this disparity is the reason why the three highest deciles paid 95% of the state’s total income tax revenue, while 55% of employees didn’t even earn taxable income.

As for the unemployment rate – Netanyahu frequently boasts that his governments’ policies have reduced unemployment in Israel to a 40-year low, from 7.5% in 2009 to 4.3% in early 2019. No one questions that this is a worthy achievement, but here, too, it is a global trend. Unemployment rates among OECD member-states have also decreased, from an average of 8.1% in 2009 to 5.3% in 2019.

Getting lucky

Netanyahu didn’t invent the Internet or the cell phones, nor did he come up with the concept of low-cost airfare or online shopping. He is not singlehandedly responsible for the global drop in the price of consumer electronics or the abundance of choice now available for consumers in developed countries. He was, however, fortunate to reach positions of power in the era of globalization and technology, in which the standard of living worldwide has significantly increased.

Netanyahu can be credited for pursuing policies demonstrating fiscal responsibility, meaning those that preserve macroeconomic data.

Over the past decade, Israel’s debt-to-GDP ratio has dropped from about 75% to 60% of the GDP, and its international credit rating has risen accordingly. In early 2019, global credit ratings agency Standard & Poor’s gave Israel a record rating of AA-, only four steps from the maximum rating of AAA.

Prime Minister Benjamin Netanyahu and Chinese Vice Premier Liu Yandong at an innovation gathering in Beijing, March 21, 2017. (Haim Tzach/GPO)

The question remains whether solid macro data necessarily means the economy is healthy. The answer is complex, but the gist of it is both yes and no.

Yes, because the state must be wary of becoming insolvent, or experience a rise in the price of credit or the inability to secure credit. No, because high debt does not always entail risk and it is sometimes best to use it to invest in the future.

While Israel’s debt stands at about 60% of the GDP, which is about NIS 800 billion ($225 billion), the average debt in developed countries is 108% of the GDP.

As Israel defines itself as a welfare state, the question remains, is it better to make painful cuts to meet the state budget, or take long-term loans until the investments Israel makes in various sectors begin to yield returns?

Show us the money

Netanyahu, it seems, prefers the painful cuts approach, and, as finance minister, he significantly cut the budgets appropriated to social services and welfare stipends. The implications here go beyond welfare per se, as such moves also undermine human capital and stifle growth engines.

Consider, for example, the issue of free education from infancy to the age of 3 (the newest campaign promise from Israel Democratic Party leader Ehud Barak). The consensus in developed countries is that quality investment in toddlers accelerates their development and reduces social, educational and economic gaps.

Israel, however, invests the least in every child, just 22% of the average investment by the bloc’s member-states – $2,700 a year compared to $12,300. The result: Only about 120,000 of the approximately 500,000 toddlers up to the age of three in Israel benefit from daycare centers that are supervised and subsidized by the state.

In the early 2000s, a parliamentary committee was set up with aim of laying the foundation for reforms in the Israeli education system. Headed by Director General of the Policy Planning Division in the Prime Minister’s Office Ehud Prawer, the panel noted that in OECD states, quality care for toddlers is perceived as “the cheapest and most effective means of treating difficulties and preventing the formation of developmental obstacles.” The OECD has also formed a special taskforce to oversee education up to the age of 3.

Prime Minister Benjamin Netanyahu speaks during American Independence Day celebration in Jerusalem on July 2, 2019. (Marc Israel Sellem/POOL)

Given Israel’s dismal investment in toddlers, OCED reports on this issue make it look bad. Very bad.

If Israel is indeed the robust economic success Netanyahu claims it to be, why can’t it find NIS 3 billion ($847 million) a year in order to significantly improve the future of half a million toddlers? How is it that a country that boasts a GDP of NIS 1.3 trillion ($367 billion) fails to meet such a basic goal?

The result of the low investment in early childhood education, and host of other issues plaguing the education system as a whole, is revealed time and again in standard international performance tests, as well as in OECD reports on Israel’s labor productivity – employees’ average hourly wage.

In a report released just a few days ago, the OECD found that Israeli labor productivity was almost 40% lower than that of other developed countries.

Studies by Prof. Dan Ben-David, a senior fellow with the Department of Public Policy at Tel-Aviv University and president of the Shoresh Institution for Socioeconomic Research, have shown that the trend in Israel is negative: while 40 years ago, each Israeli worker produced $5.4 less per hour than the average worker in G-7 countries, by the middle of the decade this gap increased to $17.2 – but Israel still invests only half as much as OCED states in vocational training.

The Group of Seven represents the seven largest economies in the world, which together generate 58% of the global net wealth. It includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

A similar question arises with respect to how Israel deals with poverty. OECD reports on this issue are less than flattering, as they show that 18% of all families and 23% of all Israeli children live below the poverty line. These figures are similar to those noted in 2009, and constitute a clear failure on Netanyahu’s part.

The slight improvement in poverty rates in recent years can be attributed mainly to the Histadrut labor federation and its Knesset partners, who fought to raise the minimum wage.

Other examples of Netanyahu’s economic failures include old-age pensions and disability payments, as those who receive them cannot make ends meet. How can it be that Israel, which Netanyahu argues is so successful, fails to meet its citizens’ needs?

Then prime minister-elect Benjamin Netanyahu reacts during a Likud party meeting in Jerusalem to discuss the new coalition government, on June 5, 1996. (Menahem KAHANA / AFP FILES)

Other benefits, such as unemployment, are also far less generous than in developed countries. According to a 2018 National Insurance Institute report, Israel’s spent 58% less on welfare per capita than the OECD average – about $5,000 a year, compared to $7,800. In most European countries, welfare spending is usually around $10,000.

All this indicates that Israel’s economic success, much thanks to its high tech sector, places it about 35th with respect to the global standard of living. GDP per capita is higher, but the cost of living, inequality, and low government investment in welfare and public services significantly impair this achievement.

Millions lost to gridlock

Netanyahu’s failures go beyond whether to increase government debt in favor of better public services. They also involve shying away from issues that are critical to Israel’s economic development.

The most glaring example is Israel’s perpetual gridlocks, which cost the economy tens of billions of shekels a year. A recent report by State Comptroller Yosef Shapira on public transportation quotes a study predicting that, by 2030, the economy will lose NIS 74 billion ($21 billion) over work hours lost to traffic jams.

Meanwhile, accidents and wasted fuel costs are counted as a viable part of the GDP, creating a false representation of growth and consequently fostering the gap between high GDP and low purchasing power. When you consider that Israel’s highways are 3.5-times more congested than the OECD average and the use of public transportation is low, it accumulates into significant sums.

Netanyahu cannot shrug off his responsibility for the erroneous transportation strategy promoted by Minister Israel Katz. The priority given to private vehicles over efficient public transportation and the cumbersome promotion of the latter’s infrastructure have inflicted hundreds of billions of shekels in damages on Israel’s economy over the past decade, and have had an adverse effect on the public’s quality of life.

The stagnation in the growth of the high tech sector over the past decade is also Netanyahu’s responsibility, as is the public housing crisis. He is also responsible for other economic failures, such as continued sub-urbanization, which gnaws at open spaces, the insurmountably slow introduction of cheap, renewable energy and natural gas, and the tens of billions of shekels in tax benefits offered to large companies at the expense of small and medium businesses.

Hazy view over Tel Aviv as a dust storm covers the city, November 4, 2015. (Miriam Alster/Flash90/File)

Strategic questions aside, perhaps what illustrates the considerable gap between Israel’s image and reality most poignantly is the labor dispute that has been playing out at the Foreign Ministry. Last week, the ministry’s employees announced plans to go on strike, warning they would not handle the prime minister’s trips abroad until their concerns about the major budget cuts the ministry is facing are addressed.

According to Haaretz, the cut in question amounts to NIS 350 million ($98 million) and so far, it has had absurd results. The ministry has suspended payments to about 20 international organizations in which Israel is a member, ambassadors and other diplomats have to stay in Israel because the ministry cannot afford airfare, and events, such as Independence Day celebrations, are held at embassies only if they are sponsored by donors.

Diplomats have described a reality in which they have no travel budget for train rides and no budget to entertain officials with whom they are in touch. This exacts a high price from Israel, as a significant part of the Foreign Ministry’s work focuses on promoting economic ties.

“We are like a large family living below the poverty line. We don’t know where we’ll get what little money we need to make it through the next day,” one ambassador said last week.

On Sunday, the strike was averted, for now, with a deal signed that will reportedly see a significant increase in budgeting as well as an agreement to tax half of a monthly stipend diplomats receive for expenses instead of the entire amount.

These kinds of disputes are not how an economic power should manage its affairs. They reflect a country whose leader can simply sideline a major ministry for unclear reasons, ranging from an attempt to undermine authority to failed management. Such conduct directly harms vital economic interests and has a detrimental effect on Israel’s image, making the startup nation look bankrupt and poor.

This article was adapted from a version published on Zman Yisrael, the Hebrew sister site of The Times of Israel.

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