Economist-27/07/2007

TBC, (Economist)

"ITS conflicts may be never-ending and its politics ever more scandal-ridden, but for a while Israel has had an economy to be proud of. It has been growing since the summer of 2003, when the second Palestinian intifada was still raging, at a robust annual average of 5% a year, barely slowing even after last year's war in Lebanon. The shekel is strong, the ratio of debt to GDP is down, the budget in surplus and foreign investment at record levels. GDP a head is about six times higher than that of its closest Arab neighbours; it is richer per person than Greece or Portugal (see chart).

One reason is tax cuts and deregulation, imposed in the wake of the 2001 dotcom crash and the outburst of the intifada. Also, the defence industry has done well in the wake of 9/11, and Israel's technology sector, driven by a highly educated workforce and incentives to entrepreneurship, comes second or third in the world in numbers of start-ups, firms listed on NASDAQ and patents filed.

But economists look to the future with furrowed brows. The ebullient tech industry employs just a few tens of thousands of people, and they are the ones-young, educated, multilingual-who can most easily move abroad if things turn nasty. Outside that sector, much of the economy is rather more sickly. The productivity of traditional industries is falling, and they spend just a quarter as much on research and development as their American counterparts. While some European governments are increasing their education budgets by 3% a year in per capita terms, Israel's is falling by 0.7%, says Nathan Sussman at the Hebrew University-something parents are having to make up for by hiring private tutors. In other words, Israel is becoming less competitive, even as other countries elbow their way into global markets.

The country is also becoming more unequal. The proportion of families below the poverty line (which is measured relative to the average income) has risen from 17% in 1998 to 20% today, while the proportion of poor children has rocketed from 23% to 35%. This is partly because social benefits were reduced to permit the recent tax cuts, but also because of high unemployment among two groups of Israelis with big families: Arabs and ultra-Orthodox Jews, together nearly a third of the population. As a result, those who do pay taxes will face a growing bill to cover social benefits for the rest.

The government recently adopted a "socio-economic agenda" for the next three years, which aims to reduce poverty and increase employment, each by 3%. Its author, Manuel Trajtenberg, head of a national economic council to the prime minister that was set up last year, says the key is not to restore benefits but to get more people into work. That means, in particular, finding jobs for ultra-Orthodox men, and giving them incentives to work and pursue professional training instead of studying Torah on government handouts; and helping Arabs, who often suffer discrimination in getting jobs."

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