On 70th anniversary, Israel's economy growing as some sectors lag behind

With a booming economy along with more cars on the highway and soaring international investment in hi-tech, Israel seems to be doing well.

APRIL 20, 2018 12:02

A woman walks near high-rise buildings in the hi-tech business area of Tel Aviv (photo credit: REUTERS/AMIR COHEN) — A woman walks near high-rise buildings in the hi-tech business area of Tel Aviv

(photo credit: REUTERS/AMIR COHEN)

Israelis have a lot to celebrate as the country turns 70.

With a booming economy – GDP growth is around 3.5%, much higher than the still slumping euro zone – along with more cars on the highway and soaring international investment in hi-tech, Israel seems to be doing well.

But since the 1970s, Israel has fallen behind the rest of the West when it comes to investment in education, healthcare, infrastructure and transportation per capita – as anecdotally demonstrated by the worst congestion among developed OECD nations.

At the same time, Israel faces two primary socioeconomic challenges: declining labor productivity – which makes it harder to raise living standards, and the many ultra-Orthodox and Arab pupils – comprising nearly 40% of all students – who are receiving a third-world education.

“How many people will have the skills and tools to work in a modern economy versus those who won’t?” asked public policy professor Dan Ben-David of Tel Aviv University and the Shoresh Institute for Socioeconomic Research. “And we’re losing – there are too few Jews and Arabs who can work in a modern economy,” he added, referring to how Israeli hi-tech faces three job openings for every qualified applicant.

It’s also unsustainable and dangerous for national security, as a first-world army can’t be guaranteed to last with half the population getting a substandard education.

As for falling labor productivity: Up until the 1970s, Israel was closing in on wealthy G7 countries when it came to GDP per hour worked. In that decade, Israel managed to reduce the shortfall gap between itself and the G7 to $5.40 per hour (calculated in 2010 purchasing power parity adjusted dollars). Since then, the gap has more than tripled.

Labor productivity graph. (Credit: Dan Ben-David)

“Our most skilled and most educated people – will we be able to keep them?” asked Ben-David. “The amount you produce per hour dictates the amount you will be compensated. We are the Start-Up Nation, so why are we not at least keeping up?” News about exciting start-ups and multi-million-dollar exits may obscure Israel’s problem with worsening human capital – and hardly changes the overall picture.

Since the 1970s, the number of senior research faculty in universities per capita has plummeted – going from 140 professors per 100,000 people in the 1970s – reaching parity with American levels – to around 50 professors per 100,000 people today. By that decade, Israel had already established seven out of its eight universities – all except Ariel University in the West Bank – with further expansion drying up.

Senior research faculties in universities graph. (Credit: Dan Ben-David)

The same troubling decline appears when looking at the number of hospital beds per capita – plummeting from 3.3 beds per 1,000 people in the 1970s to less than 1.9 beds today – happening at the same time as Israel ages. An insignificant number of new hospitals have been built since then.

Hospital beds graph. (Credit: Dan Ben-David)

Traffic congestion is roughly three times that of small European countries, and has steadily worsened since the 1970s – after intensive road-building in the early days of the state helped ameliorate the problem. At the same time, the number of vehicles per capita in Israel is surprisingly low – 38% below the OECD average.

“This... country, with all the difficulties it had – people only came here with the clothes on their backs – built roads, towns and state-of-the-art universities. It was a tough time – there were transit camps, rationing food – you needed food coupons. And they were still building universities [up until the 1970s],” the professor said.

WHEN BEN-DAVID sits down with government officials – he name-dropped prime ministers he advised in all-night marathon meetings – many of them leave with their jaws dropping. But change is slow, with ministers citing bureaucratic and political obstacles as a reason for inaction.

The professor attributes the decline in public civilian expenditure since the 1970s to a shift in “national priorities.”

“Israel had reached equality with small European countries; within 25 years [of independence], despite being dirt poor, they brought the country up to date. Yet something happened in the 1970s,” he said, subtly alluding to some of the changes since the Likud’s takeover of power in 1977.

The professor takes strains not to blame the Right – he even self-identifies with the laissez-faire Chicago school when it comes to economics. And he meets often with both right-wing coalition cabinet ministers and left-wing opposition MKs. Recently, Ben-David sat down with Education Minister Naftali Bennett to discuss the lagging test scores of Israeli students – among the worst in the OECD.

One nugget caught Bennett’s attention: High School students who struggled to matriculate with five units in math – the most difficult level – earned much more in future salaries than those who passed with flying colors in three or four units.

Bennett leapt up, spoke to his aides and uploaded a video on Facebook – making it a mission to push kids into Math 5. Even if the students struggle to pass, the endeavor will sharpen their skill set and prepared them better for the job market, Bennett and Ben-David both argue.

Israeli students are next to last in the OECD when it comes to Programme for International Student Assessment (PISA) achievement levels in math, science and reading. And Israeli average scores on math and science were much higher in the 1970s than today. That’s in spite of Israeli children studying in school for six days a week, while most of their Western peers heed the school bell on just five days.

For Ben-David, it is a question of how resources are utilized – with Israeli teachers reportedly working far fewer hours per year out of the classroom than the OECD average.

BEN-DAVID ALSO raises the alarm when it comes to Israeli healthcare.

With hospital occupancy rates at more than 94%, patients lie on gurneys in corridors. The overcrowding has fueled an epidemic of hospital-acquired infections – more than doubling in the last two decades, with the highest mortality rate in the OECD and twice that of Mexico.

When it comes to nurses per capita, Israel has barely more than half the number as the US and the OECD – six nurses per 1,000 people versus 11 nurses per 1,000 abroad. And the number of nursing graduates lags behind almost the entire OECD.

Israel also faces the largest educational gaps in the developed world, when looking at the average standard deviation in PISA scores between students in wealthier areas and students in poorer and minority sectors.

Shining hi-tech is drawing off the cream of the students, while the majority of Israelis are increasingly struggling to keep up.

And the unstable long-term socioeconomic picture could help explain some puzzling sociological trends.

“The same country that is one of the happiest in the world, well, the younger generation is picking up foreign passports at a rate like we’ve never seen before. EU, German; they’re rediscovering their Lithuanian roots,” Ben-David said, referring to the burgeoning, decade-long trend of Israelis clamoring for second passports.

“Most people understand that there’s a huge cloud coming toward us.

And we do what Jews do, we look for an insurance policy,” he warned.