Public Investment Policy and Structural Reforms for Increased Productivity and Growth

The impressive recovery of the Israeli economy from the COVID-19 crisis, and the return to the employment rates which prevailed prior to the crisis, allows the government to return its focus to reforms which are crucially needed for the Israeli economy, in order to promote sustained growth and poverty reduction. Our analysis shows that prior to the crisis, according to 2019 data, a change for the better was evident in the economy, as indicated by the reduction of the gap in GDP per capita between Israel and the benchmark countries (Austria, Denmark, Finland, Sweden, and The Netherlands), along with reduction of the gap in labor productivity (that is, GDP per hour worked).
In order to turn this positive change in the economy into an ongoing trend, and to enjoy the full growth potential of the Israeli economy, attention should be directed once again to promoting the reforms which are necessary to address the main growth barrier facing the Israeli economy – low labor productivity. Despite the improvement recorded in recent years, the GDP per hour worked in Israel is still 37% lower in comparison to advanced countries which resemble Israel in terms of population size and the structure of their economy, and which Israel aspires to resemble in terms of the standard of living and poverty rates (“benchmark countries”). Due to the low labor productivity, the standard of living in Israel as represented by GDP per capita is still lagging behind the standard of living in the benchmark countries, despite the positive change, as the GDP per capita in Israel is USD 38,600, compared to USD 51,300 in the benchmark countries (OECD 2019 data, in 2015 prices, PPP).
The goal of this policy paper is to propose a comprehensive economic strategy for the Israeli economy, backed up by a methodological framework based on the economy’s strengths and weakness, including a description of the areas that need to be addressed, specific and implementable programs and continuous measurement of progress. This framework will allow the economy to achieve its strategic target - continuous growth alongside reduced poverty.
Our main recommendations for increasing labor productivity are: Preparing a multi-year plan of investments in transportation infrastructures at a volume of NIS 800 billion until 2040, with long-term government commitment that will provide private actors with certainty in regard to the adaptation of urban development, including employment hubs, residential and leisure complexes. To encourage investment in the business sector, stimulate competition and reduce the cost of living we recommend regulatory optimization and reduction of the bureaucratic cost, which is the main task of the newly established Regulation Authority. As for human capital we recommend continuing a policy aimed at full employment and raising the employment quality of the lower half of the population, by building employment plans which would include vocational diagnosis and guidance toward employment, education and training, and reforming the vocational training system.