OECD head says Israel should focus on equality, competition beyond tech sector

The visiting head of the Organization of Economic Cooperation and Development (OECD) told Israeli government ministers on Sunday that Israel should focus on closing socioeconomic gaps, cutting bureaucratic red tape, and boosting competitiveness and productivity in its economy beyond its vibrant tech sector.

Mathias Cormann, secretary-general of the 38-member OECD, was in Israel on his first visit to the country as head of the organization. He joined the weekly cabinet meeting led by  Prime Minister Naftali Bennett to discuss Israel’s economy, tax reforms, and the impact of the COVID-19 pandemic.

Cormann, a former Australian politician who entered the secretary-general’s office in June, praised Israel’s economic growth over the past few decades “as a result of structural reforms [and] effective macro-economic management,” its high-performing tech industry, as well as its deft handling of the two latest waves of the pandemic (Delta and Omicron).

“Israel’s successful COVID-19 management has been one of the world’s most advanced and flexible, keeping Israel fully open through the fourth and fifth waves, and has been an inspiration to other countries,” he said.

The OECD has said that the Israeli economy rebounded strongly in 2021, growing by an estimated 6.3% led by the tech sector, and projected further growth in 2022.

Cormann said the OECD expects “Israel’s robust economic recovery to continue for this year and next.”

But the country also faces longstanding challenges such as low productivity (estimated by the OECD at 35% lower than the organization’s best performers) driven by the disparity between the tech sector and more traditional sectors, heavily regulated industries such as manufacturing, and widening socioeconomic gaps.

“Some of the structural challenges facing Israel are linked to its two-speed economy and the need to bridge the socioeconomic gaps to foster economic performance,” Cormann told the cabinet meeting Sunday.

“The remarkable productivity of Israel’s vibrant high-tech sector stands in stark contrast to the lower productivity levels in more traditional lagging sectors which actually employ most of the workforce in Israel. This continues to lead to slower gains in aggregate productivity,” he said.

Israel’s tech sector accounts for roughly 10% of the labor force but drives “the most significant source of export growth,” according to the Economy Ministry.

According to the OECD’s assessment, “if Israel were to reduce its level of bureaucracy and overregulation in some of those sectors it has accumulated throughout the years, that would certainly help boost competition, help boost performance and help lower prices,” added Cormann.

Israeli Prime Minister Naftali Bennett, center, leads the cabinet meeting at the Prime Minister’s Office in Jerusalem on February 13, 2022, with OECD secretary-general Mathias Cormann to his left. (Haim Zach/GPO)

Bennett’s coalition has been the target of intense public anger in recent weeks amid a rise in prices for food, electricity, and gas. The government unveiled a NIS 4.4 billion ($1.4 billion) plan last week to address the rising cost of living, which will include a suite of measures to lower taxes for working families. The plan also seeks to lower tariffs on various products and increase competition in the markets, but the tangibles of those declarations remain in question.

Israel’s reform efforts, said Cormann, “should include a focus on broader productivity growth, also beyond the high-performing high-tech sector, also tackling socioeconomic gaps along the way.”

He later tweeted that “improving equality of opportunity through education and skills development” was a key effort for Israel to undertake.

Bennett said in the meeting that Israel’s economy was on a “good track” but acknowledged that it faced “a fair share of challenges.”

“We’ve got to reform the stagnant parts of our economy and we need to increase competition. We don’t have enough domestic competition and that’s something that’s always tough. And we need to have the courage to take these actions,” said the prime minister on Sunday.

Cormann also met separately with Finance Minister Avigdor Liberman in Jerusalem Sunday, and was set to meet later with Bank of Israel Governor Amir Yaron.

The International Monetary Fund (IMF) said last week that Israel has weathered the COVID-19 pandemic “exceptionally well” with a swift, efficient vaccination campaign and a rapidly recovering economy, but still faced “significant” risks to its 2022 outlook such as soaring housing prices and affordability.

The IMF report also said Israel’s efforts to reduce trade barriers would be “key to promote efficient allocation of resources, investment, and innovation,” and help boost competition and reduce costs.