Israel’s economy: We can learn a lot from the US

Israel’s economy: We can learn a lot from the US
Barack Obama spoke of “winning the future”. Israel should listen well.
Dr. Yacov Sheinin 8 Feb 11 18:02

Once a year, the President of the United States gives the State of the Union address to both houses of Congress. Last month, President Barack Obama presented his socio-economic vision to the American people. In my opinion, the speech contained several central segments that were very relevant for us. I recommend our Prime Minister to adopt the principle of a leader presenting a vision to both parties together.
In his speech, “To win the future”, Obama calls to leave the partisan fighting and unite around common goals: infrastructure, education, and developing innovation. He sees in infrastructure investment – fast trains, expanding roads and airports, fast Internet, clean energy, research and development, and innovation – the lifeline to the future.
It is the core that will bring new place of work to unemployed. Obama claims that the government needs to take an active role in managing the economy, through reducing bureaucracy and cutting the deficit, but also cannot remain passive in all that is connected to planning the future and marking the path.
These concepts can be copied, almost word for word, for Israel as well.
The real rate of unemployment: 19%
True, we don’t have a major budget deficit, and they do. But their deficit is temporary, and is expected to fall and reach a normal level (about 4.5% of GDP) by 2013. True, the unemployment rate for them is 9.4%, and for us it is only 6.8%. But for them, 75% of the population aged 15-64 is in the workforce, and for us only 66% of that age group is.
If tomorrow morning, through some miracle, that entire difference (more than 420,000 people) were to show up at the employment office (obviously they wouldn’t have work, because there is another 7% of unemployed people who are already looking for jobs which aren’t there), then the unemployment rate would rise to 19%, and that – 9.4% unemployment rate in the US, and 19% unemployment rate in Israel – is the correct comparison.
True, America is in crisis, and in contrast we feel like we succeeded in avoiding it. But let’s not forget that in the US, GDP per capita is $47,000, while for us it is only $29,000. And that is at an exchange rate of NIS 3.60/$. At an exchange rate of NIS 4.20/$, GDP per capita is only around $25,000.
It is worth always remembering that when comparing the US and Israel, the US is 40 times bigger in terms of population, and 70 times bigger in terms of GDP. So when their defense budget is $700 billion, while ours is $12 billion, the share of defense spending to GDP is bigger for us than for them.
However, the most important point is that in my opinion the US is on the way to recovery in 2011, with a growth rate of about 3.2%, which means about 2.5% growth per capita. We, on the other hand, are, in my opinion, on the way to a slowdown, with a similar growth rate (though for us it means 1.5% per capita growth, because our population growth rate is double theirs).
It appears that the Americans will succeed in lowering their unemployment rate to 7.5% by the end of 2012. Toward that end, they are doing everything, including causing the dollar to be, for now, a weak currency (0% interest and the biggest monetary expansion in the world). A weak currency supports exports and depresses imports. We, on the other hand, are helping them, supporting the shekel to be as strong as possible (with interest of 2.25%), and the result is that we will find it hard to export to the US, and will find it more worthwhile to import from there. Today it’s ketchup and mayonnaise, and tomorrow maybe even milk and water, because it is much cheaper.
Putting gas in perspective
Yes, we found natural gas in the sea, and it will be good for Israel’s economy. But this gas won’t turn us into a wealthy Arab emirate. In the meantime, all our gas reserves (with Tamar and Leviathan) are about 0.4% of the world’s gas reserves, only slightly more than the proportion of our GDP to the world’s.
And by the way, about 40% of the gas which we found is American (Noble Energy), and it pays not to forget that the total value of our expected annual gas output (not profit) is less than 1% of GDP, so that for the time being the gas is not expected to change the Israeli economy.
The state of the American nation may be “catastrophic”, but they will do everything in order to succeed, and it appears to me that they will succeed, big-time. They always do everything big: they fall big, but primarily rise up big. And they always are looking forward.
In contrast, the state of the Israeli nation today is very good. The problem is that we are looking in the rear-view mirror, and not through the front windshield. In my opinion, we are marching confidently toward a slowdown, with a strong shekel and big drop in investments relative to GDP.
Israel is a modern, developed nation, but we don’t even have enough water. While in the Mediterranean Sea there is as much water as you want, we haven’t built in time, and are not building enough, desalination plants. We are raising the interest rate so that the prices of houses won’t rise, instead of clearing government land for development, which would increase supply, as is needed to be done.
We don’t know when, and if at all, there will be a real train, and certainly not a subway in Tel Aviv. We don’t have fast Internet, and in education we are in 40th place in science and reading comprehension.
We have realized that there is a need for more roads and interchanges, but we have time. The end result is that the level of investment in sectors of the economy (not residential construction) is 12% of GDP, compared with 16% in the middle of the 1990s. (In South Korea, for example, the ratio of investment, excluding residential construction, to GDP is 20%.)
We are not building enough production capacity and competitive abilities for the future, and so we are on the way to a slowdown, not to a takeoff.
In 2010, we still flew on the fuel vapors that were left in the tanks. The question is whether they will be enough for 2011, or if we will begin to see now the effect of the slowdown. I believe that the slowdown is coming. The growth in 2010 was in large part paying back for the pullback in industry in 2009 (and it was the same thing with exports).
The gap hasn’t narrowed
Over the course of the past 30 years, the relative gap in GDP per capita between Israel and the US hasn’t narrowed. That is, the average rate of growth per person in Israel wasn’t higher than in the US. There is volatility, and sometimes it seems like we are growing faster over a short period of time, but looking back over a long period of time, the relative gap remained as it was, whether comparing with 1996 or comparing with 1981.
In contrast, Ireland is very different than us. Only 25 years ago our GDP per capita was the same as Ireland’s. We are a high tech country, and they were a small country that raised sheep. But within 20 years the Irish GDP per capita reached nearly double that of Israel’s. The crisis of 2008 indeed impacted Ireland very heavily, but their GDP per capita is still about 50% higher than Israel’s.
Since there is no objective reason for the huge gap between Ireland and Israel, it is clear to us that our potential over the past 25 years was at least 50% higher than was actually reached. So there is no reason why we shouldn’t begin to close the gap. In order to achieve that, all we need to do is to adopt the plan of the US itself, presented last month by Obama: “Win the future”.
Dr. Yacov Sheinin is the CEO of Economic Models.