Headwinds or Opportunities

Headwinds or Opportunities

Evaluating Israel’s Economic Challenges

“The Israeli economy continues to register remarkable performance, with strong growth, low and falling unemployment and sound public finances leading to the fifteenth consecutive year of economic expansion.”

Those were the OECD’s conclusions late last year as they unveiled their 2018 OECD Economic Survey of Israel. OECD Acting Chief Economist Alvaro Pereira went on to comment: “Today’s excellent outlook offers Israel a unique opportunity to prepare for the challenges of the future.”

What are Israel’s economic challenges, and to what degree do they represent a headwind or an opportunity to investment in the State?

The first set of challenges facing Israel is fairly straightforward to identify – and potentially to address. Israel’s infrastructure has failed to keep up with its growing population, which has also spilled over into high housing prices. Israel’s credible central bank has contributed to stability in the shekel, but that stability has also fueled appreciation in the currency that can threaten exports. And bureaucratic red-tape remains an issue, causing Israel to lag other developed countries in surveys such as the World Bank’s Doing Business report.

The Israeli government has already taken key steps in addressing the infrastructure challenge, unveiling in late 2017 plans for a coordinated infrastructure investment program. Improvements in infrastructure will also open new areas for real estate development. This growth offers obvious opportunities for investment, and the government has signaled its interest in attracting increased foreign capital in these sectors. For example, in a recent conversation with Eran Nitzan, Minister of Economic Affairs to the US, he mentioned a chronic shortage of long-term rental housing in Israel as an opportunity for foreign developers.

The Israeli government must also continue to foster competition and efficiency in the economy. Tremendous strides have been made in the past 25 years to break up monopolies and other consolidated-holding structures, which has drastically lowered the cost of items like cell phone service. But while Israel has plenty of multinational companies setting up R&D centers in Israel, its level of global trade relative to GDP remains modest – foreign service providers in particular have been slow to set up shop in Israel (without other prospects in the region to pursue.) Amazon’s recent inroads into Israel, however, indicate that major foreign companies are no longer ignoring Israel’s growth potential.

But perhaps the most profound challenge Israel faces is that the fastest growing segments of the Israeli population - the Haredi and Arab-Israeli - are the least integrated into its society. Poor metrics for worker productivity, wage gaps, and poverty levels all reflect these divisions. They are reflected too in the differing education standards within these communities, and the ongoing dilemma regarding their role in military service.

Still, addressing the deepest problems can yield the biggest impact on the economy. In this case, the solution begins with education. Raising salaries for teachers – especially those working in disadvantaged schools, increasing Hebrew language courses, and offering vocational training are a few of the suggestions offered by the OECD. The government must also confront the labor union regarding the hiring, firing, and evaluation of teachers.

The Haredi/Arab-Israeli issue is highly nuanced and will require a multi-faceted solution. And any efforts must be matched with genuine interest on the part of these groups. But in referring to Israel’s economic future, Minister Nitzan commented: “The jobs will be there if we get these other pieces right. We will need people equipped to handle them.” He is optimistic specifically that Arab-Israelis have sought out younger new leadership to promote progress.

We wrote in our last piece that Israel thrives on creating opportunity from adversity. This has translated into remarkable economic growth for Israel – a strong indication that there is much more going right than wrong. But there is still substantial room for improvement, and with it continued economic expansion.