Remarks by Governor of the Bank of Israel Prof. Amir Yaron at the Annual Conference of the Arab Economic Forum
· An improvement in the economic situation of Arab society is a profit many times over for all of us. It will contribute first and foremost to the Arab household, to Arab society, and to the Israeli economy as a whole. The analysis that I will present today will illustrate the macroeconomic importance of Arab society in Israel.
· The development of high tech, which is accompanied by very strong demand for skilled workers, creates an important opportunity for integrating Arab workers into this sector, and even for continuing the development of such companies in Arab society itself. Those who have the required skills will be able to find the way to integrate into high tech, and those looking to the future will be able to acquire the required skills. This is true at the level of the individual as well as of the system that is responsible for education and training.
· Arab society is expected to continue to be a significant and integral part of Israeli society, and its relative share of the economy is even expected to grow in the coming years. On the way to achieving this goal of increasing Arab society’s participation in the Israeli economy, and particularly in the employment market, there is a central obstacle that we will have to overcome together—the low participation rate of Arab women in the employment market.
· When taking into account the relative socioeconomic state of Arab society, education data indicate that when segmenting into nurture quintiles, Arab students who are in the medium-strong quintile reach higher attainments than Jewish students. This begs the conclusion that improving the socioeconomic status of the students will enable them to close the gaps in education rapidly.
· The gaps in the labor market, which derive from, among other things, the gaps in the education system, lead to real gaps in the standard of living in Arab society, relative to the Jewish one. These lead to a higher share of Arab households living under the poverty line. While Arab households make up slightly less than 15 percent of total households in Israel, their share among households living below the poverty line is markedly higher.
· The average government expenditure on education is lower in Arab society, both by class and by student, at all nurture levels. In view of that, affirmative action in hours of study should be increased in line with the principle of differential budgeting in all stages of education based on the socioeconomic background of the students, in order to decrease the funding gaps. Although the Ministry of Education already now implements a policy of affirmative action and differential distribution of budgets, in the actual allocation it appears that there is still a consistent gap to the detriment of schools in the Arab sector.
· Currently, the Financial Inclusion Team, in which the Bank is a partner, is formulating recommendations on a range of issues, including improving the financial literacy of the population in general with a focus on Arab society and low income population groups, encouraging the use of digital means of payment, variance in terms of language and culture in making them more accessible, and more. The Bank of Israel will continue to act in a range of ways to integrate the Arab population in the Israeli economy, with the hope that already in the near future we will see a trend of improvement in the issue.
Hi, all. I am happy to take part in this important conference.
I would like to divide my remarks into three parts. I will begin with a short review of Israel’s macroeconomic situation at the current time, and I will present how the Israeli economy is doing today, in regard to the COVID-19 crisis as well as in regard to the period before it. I will show how the Israeli economy was in fact markedly adversely impacted during the crisis, but came out of it strong, in international comparison as well, in large part due to the high tech sector.
Afterward I will dedicate the following 2 sections to a focus on Arab society: first, I will analyze the main challenges, from an economic perspective, facing Arab society; I will show how gaps in quality of education in the sector lead to a gap in the employment market, which leads to gaps in quality of life and the socioeconomic level of Arab society overall. Finally, I will describe the challenges facing Arab society from a financial inclusion perspective and how the joint team being led by the Bank of Israel and the Ministry of Justice is trying to deal with the issue. I will skip already to the end, and say now that improving the economic situation of Arab society is a profit many times over for all of us. It will contribute first and foremost
The analysis I will present today will illustrate the macroeconomic importance of Arab society in Israel. It will contribute first and foremost to the Arab household, to Arab society, and to the Israeli economy as a whole. The analysis that I will present today will illustrate the macroeconomic importance of Arab society in Israel.
I would like to begin, as I mentioned, with highlights of the state of the Israeli economy. In general, consistent economic activity continues in the Israeli economy at a high level alongside the COVID-19 virus and against the background of the waves of morbidity. The activity is made possible, among other things, in view of most industries adjusting to activity alongside the pandemic. The fifth wave in Israel can be seen to be ebbing. However, the risks of continued cyclicality of waves of morbidity in the future and the development in parallel of new variants of the virus remain. This, together with the recent geopolitical developments that we are witnessing, is leading to continued uncertainty regarding the intensity of the economic activity expected in the economy in the short and medium terms.
From a broad perspective, it can be seen that in all the graphs presented, COVID-19 impacted markedly on the Israeli economy and caused real negative impact to the economy—although much less than in most countries worldwide. Nonetheless, contraction of more than 2 percent in GDP is not a small thing. However, the Israeli economy has been in a marked recovery in recent months. Thus, after GDP contraction in 2020, GDOP grew very significantly in 2021. Thus, the budget deficit in 2021 as well is not far from the level similar to where it was on the eve of the crisis.
In view of this, the debt to GDP ratio contracted in the past year, after it expanded at the height of the crisis, in 2020. In the labor market, recent data indicate stability at the general employment level, and it is not far from what it was before the crisis.
In international comparison, the Israeli economy recovered rapidly from the coronavirus crisis. Thus, Israel leads among OECD countries in GDP growth in the past 12 months by a notable margin. This is to a large extent due to the high tech sector, which in recent years has been responsible for unprecedented growth in services exports in Israel.
As noted, the high tech sector in Israel is at record growth: the scope of funds raised by Israeli companies in 2021 increased by 250 percent. Thus also the capital raised as a share of GDP, which was higher in Israel than in Europe and the US even before the COVID-19 crisis, grew especially impressively in the past year.
This high-tech sector growth impacts on the Israeli economy overall. About one-tenth of employees in Israel are employed in high tech, and a quarter of the income tax paid in the country is paid by it. In addition, approximately 15 percent of GDP in Israel is created by high tech companies, as is 43 percent of Israeli exports, which as noted have been in a notable rise, attributed to high tech companies. In my view, this development, which is accompanied by tremendous demand for skilled workers, creates an important opportunity to integrate Arab workers in this sector and eventually even the development of such companies in Arab society itself. Those who have the required skills will be able to find the way to integrate into high tech, and those who look to the future will be able to acquire the required skills. This is true at the level of the individual as well as of the system that is charged with education and training.
Looking at inflation, after several years of a low—and even negative—environment, inflation in Israel has been increasing in recent months. It is important to note that the inflation rate in Israel remains among the lowest in OECD countries. It is important to me to note that we at the Bank of Israel are constantly examining the economic environment and inflationary developments. This is true in routine times, and most certainly it is true in a reality of significant events that are occurring at this time.
I would like now to present a short basic economic analysis of the place of Arab society in economic activity.
First we have to recognize the very significant demographic changes that Arab society has been experiencing in recent decades. The growth rate of Arab society—relative to the rest of Israeli society—is declining. The fertility rate in Arab society in recent years has been approaching that of the general population, after having been much higher than it through all the years of the State’s existence. The growth rate of the share of the Arab population in the country is moderating, in view of the slowdown in the fertility rate and due to growth in the general population, which derives, among other things, from the growth in the ultra-Orthodox population.
Arab society is expected to continue being a significant and integral part of Israeli society, and its relative share in the economy is even expected to grow in the coming years. However, the road to achieving this goal of increasing Arab society’s participation in the Israeli economy, and in particular in the employment market, has a major obstacle that we will have to overcome together—the low participation rate of Arab women in the employment market. Arab women are at a significant employment gap compared to women who are not Arab.
Research at the Bank of Israel has found a range of reasons for the small number of Arab women in the labor market. The conclusions indicated that in order to lead to increased participation, policy steps are required that will lead to an increased level of schooling and skills; steps that will reduce the costs of going out to work, that will work to change social norms regarding women going out to work; and increasing the access to workplaces.
This can be seen as a double opportunity: first, increasing the participation rate of Arab women will contribute to an improvement in the standard of living of the population and Arab households themselves. Second, this has a very big potential to enrich the labor market with the abilities of Arab women with their unique characteristics that today are not reflected enough.
To summarize this part, we can say that Arab society is a notable part of Israeli society overall, and therefore the economic challenges that I will immediately present are relevant not only in order to improve the standard of living of the Arab population—an important step in and of itself—but they have the potential for a macroeconomic impact on Israeli society overall.
I will begin with one of the issues that is close to my heart, which in my view, and the view of the economic literature, is a key factor to economic growth—quality of education.
In general, the achievements of students in Israel are lower than in advanced economies, with the achievements of Arabic-speaking students low compared to those of Hebrew-speaking students. Thus, while the grades of Hebrew speakers in reading, math, and science are close to the average grade among OECD countries, the average grade in all these subjects among Arabic-speaking students is much lower. However, taking into consideration the nurture decile, the achievements of the Arabic-speaking population are higher than the Hebrew-speaking population, and this finding has important significance in my view, which indicates potential.
Over recent years, this gap has widened. Despite some increase in the grades of Arabic-speaking students in math in recent years, the increase among Hebrew-speaking students was more notable. In reading, the average grade among Arabic speakers has been declining in recent years, while among Hebrew speakers it is actually rising.
These gaps in education have many factors. We will discuss some of them in the Bank of Israel Annual Report that will soon be published, and parts of which I will present here later for the first time.
A central factor to which I want to refer now is the gap in communication infrastructure and networks such as fiber optics, as well as means of remote learning. Learning over the course of the past two years was characterized by remote learning based on technological means. It appears that also after it will be possible to return to in-person studies, these technological means will serve as a significant tool for interactive learning, which apparently will be integrated into the education system in the coming years. A lack of access to infrastructures markedly adversely impacts students’ ability and quality of learning throughout the COVID-19 pandemic, and as I said, after it as well. For Arab students there is a notable gap in access to a computer connected to the Internet and a quiet study environment.
An analysis that we conducted in the past, and validated again ahead of the upcoming Annual Report, shows that when we take into account the relative socioeconomic state of Arab society, the data present a notably different picture. The gaps in grades between the two population groups derive to a large extent from the socioeconomic gaps, while looking at it based on part of the nurture quintiles, the Arabic-speaking students underperform relative to Hebrew speakers. As such, it can be seen that another factor in the gaps in education between the Arab and Jewish populations in Israel is related to the relative distribution of the Arab population in the nurture quintiles.
In the lower quintiles, there is greater representation of Arabic-speaking students while in the upper quintiles there is overrepresentation of Hebrew speaking students. When segmenting by nurture quintiles, Arab students in the medium-strong quintile reach higher achievements than Jewish students.
This begs the conclusion that an improvement in the socioeconomic state of the students will enable them to close the education gaps rapidly.
Unsurprisingly, the gaps in the education system between the Arab population and the Jewish one led to significant gaps in the labor market as well.
The PIAAC survey, which examines workers’ skills in a large number of parameters in international comparison, indicates clearly that Arab workers have lower scores compared to Jewish ones. These gaps are similar to the gaps between the students in PISA tests, which strengthens the assessment that the gaps in the education system adversely impact on the development ability of Arab workers to develop labor skills.
In a more focused view, it can be seen that the gaps in education also make it difficult for the Arab population to integrate into the world of high tech, which as I noted at the beginning of my remarks, is a sector with significant growth, to an extent that impacts on the economy overall.
A gap in education at the elementary and secondary levels impacts on the share of Arabs among students starting out; but also within the higher education institutions it appears that the gaps in education continue to have an impact, as the share of Arabs among students in all areas of study is higher than their share in studies of high tech professions, which require knowledge of English and math. Among all recipients of diplomas in high tech areas, the share of Arabs is minimal, at about 4 percent, while their share in the population is about 25 percent.
That is, gaps in education, which impact all along the training path of potential Arab employees, leads to low integration of the Arab population in the high tech sector. To the extent that the stages at the base of the pyramid will widen and approach the share of Arabs in the county, the top of the pyramid will also widen and many more Arabs will be able to integrate into the high tech sector. It will be a Win-Win situation for all the sides—for high tech that requires additional workforce, and for Arab society that will benefit from the high labor productivity.
A major obstacle to the entry into the Israeli labor force facing the Arab population is the language barrier. The level of command of Hebrew by the Arab population is low in all age groups. This makes it difficult for Arab workers to integrate into the Israeli labor market, which is nearly fully conducted in Hebrew. Instead, many choose to work in occupations that make it possible to work near the place of residence, where interaction is solely with other Arabic speakers. This is at the expense of employment in occupations with higher productivity and wages. It is important to me to note the double negative impact that I mentioned before – the first to be adversely impacted are the Arab youth themselves, who find themselves employed in occupations with low productivity, and hence with lower wages. However, as noted, the adverse economic impact doesn’t end with that: from a macroeconomic perspective, Israeli society overall loses an efficient allocation of workers that would have contributed to economic growth.
The gaps I presented today are not a phenomenon that began in the recent period – these gaps have existed for quite some time and are not improving.
When comparing the average response by Arabic speakers to the average response from the Jewish population, a ratio below 1 indicates gaps in favor of the Jewish population. The ratio of the unemployment rate in the Jewish sector to that in the Arab sector, like the ratio of the median wages, has remained fairly similar over the past 20 years.
The gaps in the labor market, which derive from among other things the gaps in the education system, lead to real gaps in quality of life of the Arab population, relative to the Jewish one, according to various indicators.
The gaps in the labor market, as I have discussed now, lead to a higher share of Arab households living below the poverty line. While Arab households make up slightly less than 15 percent of all households in Israel, their share among households below the poverty line is markedly higher. More than a third of households in Israel living below the poverty line are Arab households.
As a derivative of the economic gaps, according to quality of life indices examined by the Central Bureau of Statistics, the responses received from among the Arab population are much lower. Thus the ratio of average responses of the Arab population to that of the Jewish population is less than 1and in some indices is much les than 1. This indicates that on average, Jews have a lifestyle that is healthier, they are more satisfied with their residential area, trust the government more, live in lower density areas, and feel more involved as citizens in what occurs in the State than do Arabs.
In view of this, we formulated at the Bank a series of recommendations that deal with among other things, the issue of education in the Arab society. This is under the insight that I presented now that the gaps in education are at the basis of the gaps in the employment market, which in turn causes gaps in standard of living between the various populations.
Average government expenditure on education is lower in Arab society, both by class and per student, in all nurture levels. In view of this, the affirmative action in hours of study should be increased, in accordance with the principle of differential budgeting at all stages of education on the basis of the socioeconomic background of the students, in order to reduce the budgeting gaps. Although the Ministry of Education already now implements an affirmative action policy and differential distribution of budgets, from the allocation in actuality it appears that there is a consistent gap to the detriment of schools in the Arab sector.
Currently, certain education plans are conditioned on the participation of the local authority. Thus, when the Education Department in a local authority is not strong enough, the local education system is negatively impacted twice. Therefore, we recommend promoting a plan to improve education departments in Arab municipalities through integrating budgeting processes conditioned on an improvement in results in the education system in the residential area.
As I presented, command of Hebrew has a marked effect on the ability to integrate into the Israeli labor market. As such, we recommend dedicating a notable part of the additional hours in the Arab sector to improving and advancing the study of Hebrew.
An additional way to improve education in the Arab sector is by improving the quality of teaching. Even though today, according to PISA data, the standing of teachers in Arab society is markedly higher than in Jewish society, it is in decline.
The recent trends in hiring educators indicate a decline in the quality of teaching in general, and more so in Arab society.
As such, it is recommended to formulate tools to attract high-quality teachers and principals to Arab schools, particularly with the goal of improving the use of resources allocated to studying basic subjects, including math, reading comprehension, and English, and in order to support the integration of Arab students into computer programs, in which there is a notable shortage.
In addition, in order to increase the access to education in the Arab population and in order to decrease the classroom density in Arab society, which is higher than in Jewish society, it is recommended to act to remove the barriers to building new schools in Arab localities.
In this regard I’d like to note the five-year plan for the socioeconomic development of the Arab population that was approved by the Government a few months ago, and its conclusions are in line with the research findings and the policy recommendations that have been presented in the past by the Bank of Israel. The considerable resources that will be invested in the plan have the potential to markedly promote the economic situation of Israeli Arabs, and the welfare in the localities of Arab society and among Arab residents of mixed cities.
The current plan’s emphasis on reducing gaps in education, among other things by more equitable allocation of resources and by promoting plans that are in line with the needs of Arab society, makes it a national investment in a sector with very high potential return.
Investment in focused employment plans and in promoting access to places of work will also be able to help considerably to increase the income of families from Arab society and to reduce economic gaps. To the extent that there will be progress in developing the infrastructure for services in Arab localities, they will enable leveraging to achieve the goals in the area of employment, beyond their contribution to improving the standard of living and quality of life in the localities.
Another central dimension related to the integration of Arab society into the Israeli economy relates to financial inclusion. Financial inclusion means access to financial services and their use at reasonable cost.
In 2021, I initiated the establishment of a joint team, headed by the Deputy Governor of the Bank of Israel and the Deputy Attorney General, for the promotion of financial inclusion in Israel, meaning increasing the access to and use of financial services for all citizens.
Within the framework of the team’s efforts, a comprehensive outline of the gaps in financial inclusion was carried out. The team’s findings indicated that the level of financial inclusion in Israel is high, and similar to the level of other advanced economies, and that the gaps in financial inclusion are focused on certain population groups, and in particular there are notable gaps between Arab society and the rest of the population. In contrast, in ultra-Orthodox society, very low gaps were found in some services, and in some their use is even higher than the general population. Currently, the team is formulating recommendations in a range of areas, including improving financial literacy for the overall population, with a focus on Arab society and low-income population groups, encouraging the use of digital means of payment, variance in language and culture in making them accessible, and more. The team’s analysis and work are focused in several different dimensions, in an attempt to analyze, understand, and raise the level of financial inclusion in Israel in general, and in Arab society in particular. I would like now to present 3 examples of findings that came up in the team’s work. As noted, these are only examples, and the team is working on a range of other areas as well.
First, a subject dear to my heart, and to which I dedicate considerable resources, is means of payment. Back when I took on this position, I defined the development of the payment market in Israel as a strategic goal, and we are already witnessing a material improvement in the sector. According to a Household Expenditure Survey for 2021, the main part of Arab household expenditure was in cash, and the percentage is at a large gap with general society, both Jewish non-ultra Orthodox and ultra-Orthodox. Similarly, in Arab society the share of those holding a credit card is markedly lower than in Jewish society, including the ultra-Orthodox. Thus, while a strong majority of the Jewish population does not pay electricity bills in cash, about half of Arab society does so.
Second, the language barrier that I dealt with in regard to the gaps in education, is relevant from a financial perspective as well. The level of command of Hebrew of the Arab population is lower than that of the Jewish population in all age levels. This adversely impacts their approach to using digital means and makes it difficult for them to carry out remote financial and banking transactions. This raises the question, if there a need to make more financial programs available in Arabic? And if so, what is the best way to do that?
Finally, a very important issue that has a direct impact on the quality of life of wide parts of the Arab population: mortgages. The number of housing loans relative to the quantity of homes purchased or built in Arab society localities is low compared to the Jewish sector. In a large part of transactions in Arab society localities there is a problem of putting the asset as collateral due to a lack of orderly registration in the land registry. The number of housing loans in Arab society increased by 42 percent in the past two years.
Several factors can play a role in this. First and foremost, the lack of registering the real estate in Arab society localities, which does not allow the registration of the asset as a collateral for receiving the mortgages, and the difficulty in realizing the asset if necessary. Additional factors are the gap in financial literacy between Arab society and rest of the population, the lack of financial information on borrowers, which would have enabled entities to extend credit at notable amounts, and the cultural difference, reflected in the small amount of trade in land in Arab society. The team formulated a plan, in which it will be able to grant state guarantees to borrowers, while regulating the registration of the assets. This plan is being reexamined now by a team headed by the Accountant General in the Ministry of Finance, who in the end will need to finance this plan if it will be decided to put it into practice.
As noted, these are only “tastes” of the work of the team, which we at the Bank of Israel have merited to take part in leading. I have no doubt that improvement in these issues will assist a lot in improving the state of Arab society and I am happy that the Bank of Israel is taking a significant role in promoting the issue.
In conclusion, we have seen that the Israeli economy is in a good situation, and is recovering strongly from the crisis. Inflation is rising, but remains around the upper bound of the target, and is not anomalous in international comparison. In addition, we dealt with the economic state of Arab society: we saw the gaps beginning in education, moving to skills gaps in the labor market, and being reflected finally in lower quality of life indices. Finally, I presented a “taste” of the work by the joint team to enhance financial inclusion in Israel.
I will conclude with the commitment that the Bank of Israel will continue to act in a range of ways to integrate the Arab population into the Israeli economy, with the hope that already in the near future we will see a trend of improvement in the issue.
I wish you all a continued productive, interesting, and educational conference.