Challenges to the Israeli EconomyHerzliya Conference 2019
Prof. Rafi MelnickTiomkin School of Economics and Lauder School of Government
The Interdisciplinary Center (IDC)Herzliya
ולא במה שיש בא , אל תסתכל בקנקן
Literal translation
Do not look at the pitcher but what is insideor
What it actually means
Don't judge a book by its cover
Main Economic Indicators 2018
3Prof. Rafi Melnick - IDC Herzliya
3.3%GDP Growth
N.I.S 149.5 – US $ 41.4 ThousandsGDP per capita
0.8%Inflation
4.0%Unemployment77.5%Employment
US $ 11 BillionCurrent Account
US $ 103.8 BillionExports
US $ 102.2 BillionImports
3.8% of GDPGeneral Government Deficit
61.0% of GDPGeneral Government Debt
18.4% (Families-2017)Poverty (after taxes and transfers)
0.353 Gini (Families-2017)Inequality after taxes and transfers)
GDP Israel, USA, Euro Area and World 2000 – 2018(Rates of Growth, Percent)
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Israel USA Euro Area World4
Prof. Rafi Melnick - IDC Herzliya
Vulnerability Resilience
GDP and GDPB 2000 – 2018(percent change)
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP GDP B i
5Prof. Rafi Melnick - IDC Herzliya
Vulnerability Resilience
Second War In Lebanon
" עופרת יצוקה"“Cast Lead”
“ " צוק איתן “"Strong Cliff”
" עמוד ענן"“Pillar of Cloud”
At the World Financial Crisis 2007 A Growing Economy Credible Fiscal Policy Rule Balance Budget Declining Debt/GDP Ratio Ammunition for Monetary PolicyLow Inflation Flexible Inflation Targeting Policy Surplus in the Current Account Stable Financial Sector
6Prof. Rafi Melnick - IDC Herzliya
The Source of Economic Resilience At the Next Crisis X X X X X Y Y Y Y
• Productivity and Growth• Fiscal Policy – Deficit and Debt• Infrastructure Investment• The Cost of Living – Housing Prices • Poverty and Inequality
7Prof. Rafi Melnick - IDC Herzliya
Challenges (inside the pitcher)
8Prof. Rafi Melnick - IDC Herzliya
Productivity and Growth
CONCLUSION• Without improvement in the rate of productivity the rate of growth
will be just over the population growth !!! 9Prof. Rafi Melnick - IDC Herzliya
Basic Output Growth AnalysisGDP Growth = Productivity Growth + Labor Input Growth
Labor Input Growth = Population Growth + Participation Growth
• Most GDP Growth in recent years is due to Labor input growth with disappointing productivity growth
• Labor input growth accelerated in recent years due to the rise in the rate of participation. The rate of participation is not expecting further growth.
Productivity Challenge – GDP per Hour Worked 2009-2018 (USD at constant 2010 ppp)
Prof. Rafi Melnick - IDC Herzliya 10
65.0 USD
36.7* USD
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Benchmark Countries Israel
Benchmark Countries: Austria, Belgium, Denmark, Finland, lreland, Netherlands, Sweden
24.2 USD
29.3 USD
* Estimate
The Sources of the Productivity Gap* in 2015
Total Factor Productivity
(5)
Human Capital(4)
Private Capital(3)
Public Capital ICT**
(2)
Public Capital Infrastructure
(1)
Productivity Gap(1)+(2)+(3)+(4)+(5)
4$5$8$1$8$26$
16%20%31%3%30%100%
Prof. Rafi Melnick - IDC Herzliya 11
*Calculations of the Aaron Institute for Economic Policy Research
** ICT - Information and Communications Technology
Employment Rate 2003 – 2018(percent, ages 25-64)
50.0
55.0
60.0
65.0
70.0
75.0
80.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
12Prof. Rafi Melnick - IDC Herzliya
GDP and GDPB 2000 – 2018(percent change)
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP GDP Business
13Prof. Rafi Melnick - IDC Herzliya
GDP Ratio Israel/Benchmark Countries 2013 – 2018 (Per capita GDP, ppp, percent)
65.00
66.00
67.00
68.00
69.00
70.00
71.00
72.00
73.00
2013 2014 2015 2016 2017 2018
Benchmark Countries: Austria, Belgium, Denmark, Finland, lreland, Netherlands, Sweden
14Prof. Rafi Melnick - IDC Herzliya
15Prof. Rafi Melnick - IDC Herzliya
Fiscal Policy – Deficit and Debt
General Government Expenditure 1995 – 2018(percent of GDP)
16Prof. Rafi Melnick - IDC Herzliya
30.0
35.0
40.0
45.0
50.0
55.0
60.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Fiscal Rule Violation
General Government Deficit 2000 – 2018(percent of GDP)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Big Recession Fiscal Rule Violation
17Prof. Rafi Melnick - IDC Herzliya
Automatic Stabilizers
General Government Debt 2000 – 2018(percent of GDP)
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
18Prof. Rafi Melnick - IDC Herzliya
19Prof. Rafi Melnick - IDC Herzliya
Infrastructure Investment
General Government Investment 1960-2018(percent of GDP)
0
1
2
3
4
5
6
7
8
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
The Lost Decade
20Prof. Rafi Melnick - IDC Herzliya
21Prof. Rafi Melnick - IDC Herzliya
Cost of Living – Housing Prices
Hosing Starts 2007:Q1 – 2019:Q1 (Seasonally adjusted at annual rates)
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
2007
-Q1
2007
-Q2
2007
-Q3
2007
-Q4
2008
-Q1
2008
-Q2
2008
-Q3
2008
-Q4
2009
-Q1
2009
-Q2
2009
-Q3
2009
-Q4
2010
-Q1
2010
-Q2
2010
-Q3
2010
-Q4
2011
-Q1
2011
-Q2
2011
-Q3
2011
-Q4
2012
-Q1
2012
-Q2
2012
-Q3
2012
-Q4
2013
-Q1
2013
-Q2
2013
-Q3
2013
-Q4
2014
-Q1
2014
-Q2
2014
-Q3
2014
-Q4
2015
-Q1
2015
-Q2
2015
-Q3
2015
-Q4
2016
-Q1
2016
-Q2
2016
-Q3
2016
-Q4
2017
-Q1
2017
-Q2
2017
-Q3
2017
-Q4
2018
-Q1
2018
-Q2
2018
-Q3
2018
-Q4
2019
-Q1
22Prof. Rafi Melnick - IDC Herzliya
23Prof. Rafi Melnick - IDC Herzliya
Poverty and Inequality
10
15
20
25
30
35
4019
79
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
After taxes and transfers Before taxes and transfers
Is this good enough?
Poverty Incidence in Israel 1979 – 2017(Families, percent)
24Prof. Rafi Melnick - IDC Herzliya
0.0
5.0
10.0
15.0
20.0
Den
mar
k
Finl
and
Czec
hRe
publ
ic
Hung
ary
Net
herla
nds
Fran
ce
Nor
way
Aust
ria
Irela
nd
Swed
en
Ger
man
y
Belg
ium
New
Zea
land
Switz
erla
nd
Pola
nd
Portu
gal
Unite
dKi
ngdo
m
Aust
ralia
Italy
Kore
a
Cana
da
Gre
ece
Spai
n
Japa
n
Turk
ey
Unite
d St
ates
Isra
el
Poverty Incidence OECD Countries(Latest available data, Families, percent)
Prof. Rafi Melnick - IDC Herzliya 25
0.3
0.35
0.4
0.45
0.5
0.55
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
After taxes and transfers Before taxes and transfers
Inequality in Israel 1979-2017(Gini Coefficient))
26
Is this good enough?
Prof. Rafi Melnick - IDC Herzliya
0.00
0.10
0.20
0.30
0.40
0.50
Den
mar
k
Czec
hRe
publ
ic
Finl
and
Belg
ium
Nor
way
Aust
ria
Swed
en
Hung
ary
Ger
man
y
Pola
nd
Fran
ce
Kore
a
Switz
erla
nd
Irela
nd
Net
herla
nds
Cana
da
Italy
Japa
n
Portu
gal
Aust
ralia
Gre
ece
Spai
n
New
Zea
land
Unite
dKi
ngdo
m
Isra
el
Unite
d St
ates
Turk
ey
Inequality Incidence OECD Countries(Latest available data, Gini Coefficient)
Prof. Rafi Melnick - IDC Herzliya 27
Efficiency of Welfare Policy 1979 – 2017Percent of decline in poverty and inequality due to taxes and transfers
20
25
30
35
40
45
50
55
60
65
70
197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
Poverty Decline Inequality Decline Prof. Rafi Melnick - IDC Herzliya
28Prof. Rafi Melnick - IDC Herzliya
The Social Challenge - Public and Private Consumption1995-2018 (At constant 2015 prices, percent of GDP)
Prof. Rafi Melnick - IDC Herzliya 29
10
20
30
40
50
60
70
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Public Private
• Productivity and Growth: Without improvement in the rate of productivity growth the per/capita income will remain stagnant
• Fiscal Policy – Deficit and Debt: There is an urgent need to change the fiscal rule and to regain control on the expenditure and the deficit
• Infrastructure and Private Sector Investment: Without a major increase in infrastructure investment (specially in transportation) and an increase in private sector investment the gaps vis-à-vis the western countries will remain
• The Cost of Living – Housing Prices: without additional supply of houses, prices will increase
• Poverty and Inequality: The trickle-down approach to poverty and inequality reduction is not sufficient to achieve significant improvements 30Prof. Rafi Melnick - IDC Herzliya
Summary