Slides made for a workshop at the Brookings Institution that served to open up a discussion on the main challenges of the Israeli economy.

1. Challenges to the Israeli
economy: addressing the
symptom or the illness?
Dany Bahar, PhD

2. 1
Israel’s strong economy

3. 2
Israel’s strong economy

4. 3
Strong foundations: R&D as % GDP (2013)

5. 4
But, high inequality among OECD
0.20
0.25
0.30
0.35
0.40
0.45
0.50
Source: OECD Income Distribution Dataset
Gini Coefficient, 2014

6. 5
… as well as relative poverty rate
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Iceland
Denmark
CzechRepublic
Finland
Norway
France
SlovakRepublic
Luxembourg
Netherlands
Switzerland
Sweden
Ireland
Austria
Germany
Slovenia
NewZealand
Belgium
Hungary
UnitedKingdom
Poland
Canada
Australia
Italy
Portugal
Latvia
Korea
Greece
Spain
Japan
Estonia
Mexico
Chile
Turkey
UnitedStates
Israel
OECD
Relative Income Poverty Rates, 2014
Source: OECD Income Distribution Dataset

7. 6
More bad news…
• Child poverty rate is 24.3% (2014), just
behind Turkey
• Top 20% earns 7.4X as bottom 20%
» Just behind Chile, Mexico, US and Turkey
» Iceland (#1) 3.4, Ireland 4.8, Italy 5.8, Greece 6.3
• Poverty rates for ultra-orthodox and Arabs
are above 50%. For rest of society is ~10%
• What’s behind that? Two reasons…

8. 7
First, highly unequal employment rates…

9. 8
Why this heterogeneity?
• State provide different incentives to different
'tribes’: e.g. child allowances on ultra-orthodox
– Fertility from 2.76 to 5.88 between 1955 and 1980s
– Labor force participation went from 68.3% in 1989 to 43.3%
in 2000
– Child poverty in Israel rose from 9.6% to 35.8% between
1979 and 2006.
– Cohen et al. (2013) show a causal relationship between child
allowances and fertility rates in Israel
• Some safety nets might play an important role

10. 9
…but getting them to work is not enough

11. 10
The “scale-up” nation? Not quite…
• ~1-1.5K startups per year
• Not enough jobs: 10.7% of total
employment in 2008 to 8.9% in 2013
• Strong incentives to start, but not to grow:
tax incentives only to large exporters
• Integrating labor force to productive firms
is key to sustained growth

12. 11
Second, high relative cost of living…

13. 12
…and housing keep rising

14. 13
Highly concentrated markets…

15. 14
… with few imports

16. 15
For example, in food…

17. 16
Red tape in housing markets…

18. 17
Why care about economics?
• 60%+ of Israelis think economic gaps are
an existential threat (?!)
• New political parties focused on economic
welfare sell themselves as “a-tribal”
» Israel should move from a ‘tribe-based’ to
‘income-based’ economic policies
» This will help in improving transparency and
reduce corruption

19. 18
Open questions…
• Unemployment for all:
» Safety nets -> conditional cash transfers / EITC
» Addressing regulation to scale-up hi-tech firms
that’d employ non-engineers; providing
engineering ‘boot camps’ to under-employed
populations
• Cost of living: address the symptom (i.e.
public housing or subsidies) or the illness
(i.e. foster competition and supply)?