Israel needs to cut red tape in traditional industries so they can boost productivity and catch up with the country's booming high-tech sector, the head of the Organisation for Economic Co-operation and Development (OECD) said on Sunday.
Prime Minister Naftali Bennett welcomed Secretary-General of the OECD Mathias Cormann and his delegation when they joined a weekly cabinet meeting. At the meeting, OECD Secretary-General Mathias Cormann praised much of Israel's economic progress since joining the OECD in 2010, particularly with its robust technology sector and its ability to avoid lockdowns during the latest waves of the COVID-19 crisis.
He projected Israel's strong economic growth would continue in 2022 but told Bennett the country faces structural challenges and wide socio-economic gaps due to a "two-speed economy".
"The remarkable productivity of Israel's vibrant high-tech sector stands in stark contrast to the lower productivity levels in more traditional lagging sectors which actually employ most of the workforce in Israel," said Cormann, a former Australian finance minister. "This continues to lead to slower gains in aggregate productivity."
High-tech jobs account for about 10% of the labor force and the sector is highly efficient, unlike manufacturing, agriculture and other traditional sectors that are subject to heavy regulations.
"So Prime Minister, the OECD's assessment is that if Israel were to reduce its level of bureaucracy and over-regulation in some of those sectors that have accumulated throughout the years, that will certainly help boost competition, help boost performance and help lower prices moving forward," Cormann said.
Bennett responded: "Israel’s economy is on a good track. We’re recovering from the latest COVID wave remarkably well with rapid growth as you're well aware of. This has to do with our decision to keep Israel's economy open throughout the fourth and fifth wave, while diligently fighting the virus. So we're not on any extreme; we know the virus is much more than just flu but on the other hand, we're not in [a state of] hysteria that we need to close everything. "
"Israel has got several growth engines," Bennett continued. "First and foremost, our fantastic hi-tech sector but also our decision to release tens of thousands of young Haredi men into the workforce. And we're going to have to embrace them and that will be a huge engine because these folks are really smart and when they are injected into the hi-tech sectors and others, we're going to see a huge boost. The new bridges we’re building in the region—with the Emirates and others— I see this as another engine. A further engine is integrating the Arab sector—the young Arab men and women—into Israel's economy."
Alternate Prime Minister and Foreign Minister Yair Lapid added, "We have only one place to go: a million high-tech Israelis. When we invest in traditional industries, the market that we're aiming for is 9 million people. When we're investing in the hi-tech market, we're aiming for seven billion consumers. That's the difference. One million Israelis in Hi-tech is an achievable number. Already today 10'11% of the labor market is in Hi-tech. We need to double that number."
"Membership in the OECD is very important to Israel and helps it endure economic and social challenges, especially during the complex period that has befallen us," said Finance Minister Avigdor Liberman.
"Israel continues to keep high growth and economic stability for the benefit of its citizens. We will integrate Haredi men and Arab women into the workforce in order to grow the group that works and contributes to society. Israel will continue to advance an economy based on innovation and reduce gaps in Israeli society. We will pay attention to the advice of OECD in order to pass a responsible budget."
Bennett and his government have come under fire in recent weeks amid rising food and other living costs. The government last week announced a $1.3 billion plan to reduce the cost of living, including tax cuts for working families, child-care subsidies, and streamlined regulation to stimulate price-cutting competition for products.
"We've got to reform the stagnant parts of our economy and we need to increase competition," Bennett told Cormann. "We don't have enough domestic competition and that's something that's always tough because there is always a good reason on why you need to slow down on that. And we need to have the courage to take these actions."
Israel's economy grew by an estimated 6.5% in 2021 and is projected to grow 5.5% in 2022, according to the central bank.