The Bank of Israel’s program to accelerate economic growth: Recommended strategic pillars of action for the government
The Bank of Israel today presented government ministers with a strategic program it has prepared to accelerate economic growth. The Bank’s program includes six topics that are necessary for advancing the economy: the development of human capital, transport infrastructure, the housing market, energy and climate, digital infrastructure, and the Bank’s recommendations for dealing with the cost of living. Bank of Israel Governor Prof. Amir Yaron presented the recommendations to Prime Minister Binyamin Netanyahu, the Minister of Finance, the Minister of Economy and Industry, and a series of other ministers.
:The following is the statement by Bank of Israel Governor Prof. Amir Yaron
This program is presented to the 37th government of the State of Israel at the beginning of its term, early in 2023, following nearly three years in which the economy has been under the shadow of COVID-19. From many standpoints, the Israeli economy has in the past year closed the macroeconomic gaps that were created during the COVID-19 period. Economic growth has returned to its long-term path, and employment has returned to its precrisis rates.
A variety of global and domestic developments in the past year have shown that there is not quiet period in the economy of our time. One event follows another in quick succession, and their potential impacts on the global and Israeli economies are broad. In the past year, inflation has increased rapidly, a global crisis has developed in the supply of energy and food materials, the capital markets have absorbed sharp declines, a war is raging in Europe, and climate-related incidents have hit various places in the world. These have brought into sharper focus the importance of responsible economic policy, which sees the needs of the time while also looking forward. The design and implementation of such a policy are based on a long-term commitment to deal with challenges to the economy as a result of demographic, technological, social, and environmental developments.
In contrast with the Israeli economy’s impressive recovery from the COVID-19 crisis, it is inferior in several infrastructural areas, as a result of which the standard of living in Israel is lower than in other OECD countries. In 2019, the Bank of Israel published a special report that pointed at the low labor productivity in Israel as a main cause of the gap in the standard of living between Israel and other advanced economies, and recommended ways to increase labor productivity. Since then, the strategic issues with which the Israeli economy needs to deal have remained in place. This is because these issues must be dealt with in the long term, and a consistent multi-year path is necessary in order to implement the program. This program is an updated summary of the broad economic strategy program that the Bank of Israel presented to the 36th government. The program includes six strategic issues, a summary of which is provided here, as well as additional recommendations to advance competition and innovation in the financial system.
Human capital—which is built by the education system—is a critical component in the growth of modern economies, mainly in view of the frequent technological changes that require a variety of human skills and constant renewal of knowledge. A long series of indices show that human capital in Israel is low by international comparison. Moreover, there are large gaps in the quality of human capital between the groups that make up Israeli society. Recommendations for developing human capital are included in the first section of the program.
A main component in the productivity gap between Israel and other advanced economies is the low stock of physical capital, particularly infrastructure. In addition to the lag in the initial stock of capital, Israel has been blessed with one of the highest population growth rates among the advanced economies. Alongside this blessing, the demographic growth requires significant investment in physical infrastructure, led by transport and housing infrastructure, beyond what is required in the other advanced economies. The recommendations included in the second and third sections of the program are intended to address this.
The current energy crisis has come at a time when long-term global efforts are being invested in the area of climate and energy policy. This year, the existing tension between maintaining energy security on an economy-wide level and advancing long-term environmental goals that must be advanced without harming citizens’ ability to consume energy, has been brought into sharper focus. In this area as well, domestic policy is required that is committed to the current and future needs of the Israeli economy while balancing them with the government’s international commitments and emerging norms in the developed world. The fourth section of the program contains recommendations in this area.
The ”Israeli high-tech nation” is a global leader in the high-tech sector, in terms of output and innovation. Despite the growth and significant contribution of this sector to the economy and to society, the Israeli economy suffers from significant technological gaps between industries, and marked differences in the chances of children who grew up in various locations to integrate into employment in high-productivity industries and businesses. Investment in advanced communications infrastructure that is well-deployed throughout the country is a cornerstone in establishing the digital economy and using it to close socioeconomic gaps. The implementation of digital and technological infrastructure in the government’s work and in the services that it provides to residents and to businesses is necessary not only to improve the Israeli citizen’s user experience, but also to advance digital infrastructure in the business sector, implement productivity-enhancing technologies in a long series of areas, and reduce social and economic gaps between different geographic areas of the country. Another advantage of this is strengthening partnerships between the public and business sectors in which there is much economic potential. The fifth section of the program includes a series of recommendations to strengthen communication infrastructure and digitization.
The various components that affect labor productivity are interdependent. For instance, improving regulatory processes and work vis-à-vis the government will have a direct impact on productivity, since it streamlines work processes. There is also an indirect benefit to this, in that it increases people’s incentives to invest in their human capital, and companies’ preparedness to invest in physical capital. The cost of living in Israel is often due to complex regulation. Measures to lower the regulatory burden, which will lead to increased productivity and a lower cost of living are discussed in the sixth section of the program.
Removing barriers to the development of the financial system and diversify the existing credit products should ensure a more efficient allocation of financing sources in the economy, optimize the division of risks among credit suppliers, and thereby contribute to sustainable growth. Recommendations to advance competition and innovation in the financial system are discussed in the final part of the program.
The program covers the main areas that we believe should be advanced with a strategic economic vision. I am certain that the new government will do all that is in its power to advance these important issues, with a forward-looking economic vision. The Bank of Israel is committed to advising the government in the formulation of programs in the directions detailed in this program.Click to download as PDF Click to download as PDF