How Bureaucracy Bogs Down Israel’s Economy By William A. Galston
http://www.wsj.com/articles/how-bureaucracy-bogs-down-israels-economy-1433285288
In the U.S. it takes six working days to start a business. In Israel: 34.
Israel is a remarkable country with big problems. The existential threats it faces from abroad are well known; only slightly less so, the troubled relations between the Jewish majority and the (mostly) Arab minority within its own population.
By contrast, most Americans know little about Israel’s economy, and most of what they think they know is shaped by the country’s vibrant high-tech sector. But Israel’s economy is more varied—and its overall performance more troubled—than glowing reports about the latest IT breakthroughs convey.
Put simply, the Israeli economy is an island of innovation in a sea of bureaucracy. “Start Up Nation” faces off against “Can’t Get Started Nation.” The result: The economy is functioning well below developed-world standards, and average families are paying the price.
The most fundamental problem is that productivity—a key precondition for growth in output and wages—has been growing much too slowly, and Israel is falling behind. Four decades ago, gross domestic product in the G-7 stood at $20 per work hour while Israel’s was around $17—or 15% lower. By 2012, GDP per work hour in the G-7 had risen to $45, Israel’s to just $34—almost 25% lower. Of the 34 countries in the Organization for Economic Cooperation and Development, Israel’s labor productivity ranks 26th, behind Italy, Portugal and even Greece.
This poor performance extends virtually across the board. Measured against the OECD, Israel looks mediocre in manufacturing and finance, and woeful in construction, trade and services. Agriculture is the only sector in which Israel approaches the average for developed economies.
In part, this is the result of inadequate investment. Israel’s gross domestic investment has fallen from 28% of GDP in the early 1970s, and 25% in the early 1990s, to under 20% during the past decade.
But as any Israeli will tell you, the most pervasive hindrance to economic vitality is a somnolent and often obstructionist bureaucracy. For example, it takes on average six working days in the U.S. to start a new business. The OECD average is 13 days. In Israel, this task takes 34 days. According to the World Bank’s latest “Doing Business” index, Israel ranks 109th for speed of getting electrical connections, 111th for enforcing contracts, and 121st for dealing with construction permits.
In Israel, according to the nonpartisan Taub Center, completing the construction-permit process takes on average 11 years, including three years at the local level and five at the district level. While record-low interest rates have boosted demand for housing, bureaucratic obstacles are preventing supply from responding. The result, inevitably, has been soaring prices—up more than 50% in real terms since 2007—that have hit young and lower-income families especially hard.
In the long run, the trajectory of a 21st-century economy rests on the performance of its educational system. And here too, Israel faces structural problems that it has barely begun to confront. Most of the children in highly religious Jewish communities (19% of total Israeli students) don’t study core secular subjects. The education provided to Arab Israelis (27% of the total) yields results far below norms in advanced economies. Relative to national living standards, there is a widening gap between Israel’s spending per pupil on secondary education and the OECD average. On major international exams, the performance of even Jewish Israeli high-school pupils who study a standard secular curriculum is below average.
In the quarter-century after Israel’s founding in 1948, its system of higher education and research universities soared to U.S. levels. Since then, however, there has been massive disinvestment, and per pupil spending for higher education has fallen steadily further behind that of the OECD. Compared with Israel’s population, the size of the senior research faculty at its major universities has been cut by more than half. In absolute terms, senior faculty at Hebrew University is down by 17%; at Tel Aviv University, 26%. Even at the Technion—Israel’s premiere technology university—the reduction has amounted to 26%.
Although Israel continues to spend more for defense as a share of GDP than does any other developed country, that share has fallen by more than half during the past 40 years. One common measure—defense consumption—shrank from an average of 14% in the 1970s to about 6% in the most recent decade. In principle, at least, there should be fiscal space for additional investment in Israel’s future.
There is no reason to believe that the current Netanyahu government will make much progress on the frozen Arab-Israeli conflict. But the government does have an opportunity to raise the banner of domestic reform—to pare the bureaucracy, cut through the regulatory morass, invest in education and research, and accelerate the process of more fully integrating Arab and highly religious Israelis into the economic mainstream. With its youthful population and vibrant if disorderly democracy, Israel can do much better—if it has the will.
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