To Prof. Zvi Eckstein, Israel’s economy is like the man in the joke who has fallen from the top of a 50-story building.
Freefalling through a series of rapid-fire election cycles, plus a stalemated government budget, the coronavirus pandemic and more, the man tumbles past the 20th floor and smiles: “So far, so good.”
Unlike the doomed optimist in the joke, Eckstein, a former deputy governor at the Bank of Israel, sees the pavement coming up fast. And he is worried.
“We have an 18% poverty rate, and a GDP per capita that is 40% in real price terms lower than that of the US and 30% lower than leading small countries in northern Europe. And we are not closing that gap,” he said recently in an interview with The Times of Israel.
The Israeli government, like many others around the world, is scrambling to find answers to the immediate economic issues caused by the coronavirus pandemic, Eckstein said. But the nation’s leadership, rudderless and budget-less, is failing to set out strategies and reforms that will enable the country to exit the pandemic and put its economy back on track and on pace with other developed nations in the world. The result may be serious damage to the quality of life, which could trigger a flight of highly educated middleclass families to foreign shores, he warned.
“The election is just a symptom of the fact that we don’t have a fully functioning government, and that there is no economic strategy for the medium and the long run,” said Eckstein, who is also an emeritus professor of Economics at Tel Aviv University.
Eckstein, 71, is currently serving as dean of the Tiomkin School of Economics and as head of the Aaron Economic Policy Institute at IDC, a private college in Herzliya. Over the years, Eckstein has won academic and professional awards, published in leading economic journals, and chaired several professional government committees that designed economic policies. He has been an adviser to the government for many years.
To Eckstein, a lack of long-term planning has been the most evident casualty of the dysfunctional governments Israel has had for the past two years. The nation has struggled through three inconclusive elections and is headed for a fourth, in March, and Prime Minister Benjamin Netanyahu has held up the passing of the 2020 and 2021 budgets for political considerations and is on trial for corruption.
The absence of a national budget, Eckstein explained, means that ministries, government agencies, nonprofits and subcontractors, which all need these funds, are functioning in the dark. They don’t know how much they can spend, or are trying to operate with reduced budgets that have not been adjusted for population growth and other changes.
When planning for the next month is a challenge, planning new and necessary projects meant to last a decade or more is impossible. And the lack will be felt far down the road.
The goals Israel is unable to pursue range from free childcare for infants to hospital budget reforms to large infrastructure endeavors such as new rail lines or highways.
The lack of progress on needed changes will generate lower economic growth rates, higher unemployment and inequality, and more poverty in the medium to long term, said Eckstein, who holds a BA from Tel Aviv University and a PhD from the University of Minnesota, both in Economics.
All of this “will cause the people who are doing extremely well here to stay, it will keep the people who cannot move, and the middle class will leave — and that is terrible.”
‘All at risk’
Before the pandemic struck, Israel boasted a robust economy, with real GDP growth well over 3% since 2016, according to an S&P November 2020 report. Unemployment was at a record low of 3.8% in 2019, and the tech sector was raising record amounts of money and attracting multinationals, earning the country the nickname Startup Nation.
Israel, Eckstein said, has been a “huge success.” A hundred years of Zionism generated a place where “people feel at home, safe, and have the opportunity to have their dreams come true.” While many came to Israel thanks to Zionist ideology or to flee anti-Semitism, the country’s economic success over the years has also been key to attracting Jews from all over the world and keeping them here, Eckstein said.
But a significant drop in quality of life in a country that was built so well and with so much sacrifice “could put all of that at risk,” Eckstein said.
“If things start to deteriorate more and more, in many aspects, and opportunities don’t exist as they used to, then there is a problem. Because we are flexible, we are smart, and we are always looking out for the best for [ourselves],” he said.
“I am worried about the negative slope — and the negative slope is that we will not keep up the quality of life here like the competing countries, the top European countries and the US.”
GDP per capita in Israel in 2019 was $43,600, well below the US’s $65,000. For 2020, the International Monetary Fund predicts Israel’s per capita GDP to come in at $41,560, above the European Union average of $33,560, but well below that of several leading European countries, such as Sweden, with $50,340, Ireland with $79,670, and the Netherlands with $51,290. In 2020, the US has a projected per capita GDP of $63,050.
Forecasts to 2025 show the gap with the leading European countries and the US widening or remaining at the same level. An OECD Economic Survey of Israel 2020 shows that the gaps in GDP per capita with the upper half of OECD countries remain high without strategic planning and reforms in various areas, but the nation has the potential get closer to these economies once reforms are in place, in a projection to 2050.
At the same time the poverty rate in Israel is going up, according to a recent report by the Taub Center for Social Policy, with the main victims of the crisis being working families who saw their jobs disappear or their salaries cut, single-parent families and young families.
If Israel does not catch up with the US and European countries, young people who can “choose where to live might leave,” Eckstein warned.
He is careful, though, to not be a prophet of doom. The problems he described will not spell the end of the Zionist dream, he said, just the inability of Israel to reach its full potential.
“The question is whether the economic success of the Zionist dream will continue at the same rate as it did in the last 70 years,” he said. “I think it is possible, but I think we could actually do much better.”
“I am not saying we are going to crash because we are on the 20th floor,” he added, referring back to the falling man joke. “We will land. But that would not be the best Israel can get. And that is the main problem.”
At the moment, Israel is still an attractive place to live. Its population is increasing by an annual 2% both through organic growth and immigration.
According to the Jewish Agency, more than 20,000 new Jewish immigrants from 70 countries, including countries of the former Soviet Union, Western Europe and North America, moved to Israel in 2020. That number is some 40 percent lower than the 33,247 new immigrants who arrived in 2019, according to Central Bureau of Statistics figures, likely due to the pandemic.
“If we invest in the sectors that are currently underfunded, like education, health and public transportation, we could attract even more people to come in, and we could have much better success here in the future,” Eckstein said.
Israel’s productivity rate has remained nearly stagnant for the last two decades, according to the Organization for Economic Cooperation and Development, which measured GDP per hours worked. In 2019, Israel placed barely above the OECD average, and that is only because productivity in the high-tech sector is very high. In the traditional economy, which employs most of the workforce, productivity is still very low.
Eckstein said government initiatives and support would be needed to bring productivity to world-leading levels. This would mean investing in schools to train students for a changing job market, dealing with aging infrastructure, getting internet speeds and other digitization efforts on par with world-class standards, encouraging public and private investment, and removing bureaucratic hurdles to doing business.
More needed to stop the mighty shekel
The lack of investment in local industry and infrastructure can also be seen in the appreciation of the shekel against the dollar. The shekel rose by some 7.5% against the dollar over the course of 2020, and has gained some 40% over the last 13 years.
“No one is investing in Israel, neither the government nor the private sector. And therefore imports are not going up” — which would have balanced funds coming in with outgoing funds, Eckstein said.
At the same time, both tech and traditional industries are making less on exports, which are paid for in dollars, creating what Eckstein described as a vicious circle.
Whereas tech firms are strong enough to survive, others, such as textile factories, door manufacturers and even arms producers, are cutting back, investing less in machinery or shutting down local activities and moving manufacturing abroad.
Factories are closing down, Eckstein said, because of the low profit margins, the difficult bureaucratic and regulatory environment, and the workers’ low productivity.
“Workers here are not producing as much as people who live in Germany, for example, because they are not trained as well,” he said.
Private capital investment per hour worked in Israel, an indication of the level of investment in the private sector, is 40% lower than in European countries, Eckstein said.
Exports relative to GDP have declined from 40% in 2007 to 27% today, “because all the traditional export is closing down, only the high-tech sector is still exporting.” Imports per GDP in this period have plunged to 25% from 40% in 2007, he said.
Adding to the problem, the coronavirus has halted Israelis from traveling abroad, meaning they aren’t trading shekels for dollars, creating an imbalance that further weakens the dollar against the shekel.
The Bank of Israel, of which Eckstein was deputy governor between 2006 and 2011 serving under governor Stanley Fischer, has been trying to stem the rise of the dollar through the acquisition of foreign currency.
On Monday, Governor Amir Yaron said the central bank would continue to intervene as much as necessary in the market to keep the shekel rise in check. The Bank of Israel bought some $20 billion worth of foreign currency in 2020 to stem the appreciation of the shekel, Yaron said.
“The Bank of Israel can do very little” to halt the shekel rise, said Eckstein, who in 2008 was part of the decision-making team at the central bank that intervened in the foreign currency market to halt the rise of the shekel during the global financial crisis.
“The Bank of Israel can slow down to some extent the strength of the shekel,” he said. But as long as there is no local investment and imports remain low, “the shekel will get stronger, and we will see even more low-profit exporters closing down.”
“Unless we will see more investment by the government and the private sector, and importing a lot of machines and other things, we will not see a reversal of the shekel,” he added.
On top of the weak dollar, the COVID-19 crisis, and the political deadlock leading to underinvestment in the economic structure, Eckstein said that Prime Minister Benjamin Netanyahu’s efforts to undermine the court system and the deep societal rifts fueled by the political instability were further dampening hopes for the country’s economic future.
When you “generate more disagreement among the different people than unification… where each group tries to get as much as they can for themselves, that can generate a process that will be opposite to what Israel has been doing in the last 70 years,” he said. “As an Israeli, I am worried about it. I don’t want it to happen.”
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