Photo Credit: Hillel Maeir/TPS
Bank of Israel Governor Dr. Karnit Flug speaking at the Herzliya Conference. Jun 15, 2016.

Israel’s macroeconomic situation is positive, Bank of Israel Governor Karnit Flug told the Israel Economic Association on Thursday. But she also warned that the government must avoid short-term thinking and take advantage of the good times to adopt long-term reforms and to deal effectively with fundamental weaknesses if the country wants to promote the declared goal of sustainable growth and reduction of poverty.

Flug noted that the economy continues to grow at a pace of 3.5–4 percent per year. But in contrast to previous years, during which growth was based on private consumption, the current growth is more balanced, with exports and investments also contributing.

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While that growth is reflected in continued demand for workers, and the economy is in full employment with low unemployment among all sectors and schooling levels, and increasing wages, Flug noted that employment rates among Arab women and ultra-Orthodox men remained low, and that the increase in the employment rate among ultra-Orthodox males has halted in recent years.

Furthermore, Flug said, poverty levels in Israel remained the highest of all OECD countries, and a marked share of those joining the labor force are low-skilled workers with a low earning capacity. As a result, she said, there has been a marked increase in the rates of poverty among families with two wage earners: Among the Arab population, 15 percent of families with two wage earners live below the poverty line. Among the ultra-Orthodox the share is much higher at 27 percent.

The high share of workers at low wages reflected a low level of productivity, Flug said – noting a gap of about one-quarter between Israel and the OECD average in GDP-per-work-hour – that was down to inferior quality of human capital, inferior quality of physical infrastructure, and a business environment she described as “not at all friendly.”

Flug pointed to a skills gap between Israel and the OECD average in the areas of literacy, numeracy, and functioning in a digital environment that was notable in all schooling groups, and population groups as well.

“The weakness in these skills among a large part of the population is expected to weigh on future integration into employment, particularly when processes such as digitalization, automation of workplaces, and use of artificial intelligence decrease, and will decrease even more in the future, the demand for workers in routine jobs, and in manual labor, while demand for workers in analytical jobs relying on a high cognitive level and creativity is increasing and is expected to continue to increase,” Flug said.

Only inclusive and sustainable growth, which depends on an extended increase in productivity, will lead to a prolonged increase in the standard of living and to reducing gaps and poverty, Flug continued.

Such growth, she said, would require, inter alia, improvement in human capital, improvement in the quality of education to provide talents and skills such as independent learning, problem solving, creativity, and critical thinking, increased budgets for students from weak backgrounds; professional training, including in technological areas; improving regulation and reducing bureaucracy; promoting reforms (ports, electricity, the natural gas industry, energy); and encouraging employment among populations whose employability is limited, by providing appropriate incentives, and in particular, reducing the tax inherent in benefits to disabled people, and increasing the retirement age.

“The long term is already here!” Flug said. “The sooner we adopt a strategic plan focused on these issues, and implement it, we will be able to deal with the challenges and fully utilize the economy’s potential.”

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