"Herzlia Conference"

Prepared by
Dr. Yacov Sheinin
Translated from Hebrew
The Long Term Ramifications of GDP Growth
and the Economic Burden
Analysis of the low level of economic development in
Israel reveals three key causes:

1. A low rate of participation in the labor force.

2. A high fertility rate (natural increase).
3. A high proportion of population under 15.
Due to these factors, GDP per capita remains
low, the budget deficit is high, the tax burden is
one of the highest in the developed world and the
Israeli economy has difficulty allotting resources
for fixed asset investments.
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 The Effects of Demographic Composition on
Growth
GDP per capita is much lower in Israel compared with
developed countries - $16,400 in Israel versus $37,500
in the U.S. and $27,500 in the EU.
From 1975-1999 (before the recent wave of terror and
the collapse of the Hi-Tech bubble in 2000), GDP per
capita grew by an annual average of 1.6% in Israel versus
2.2% in the U.S. and 1.7% in the E.U.
If this trend continues, the gap between Israel and the
developed countries will widen and may result in a social
crisis.

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 Population Breakdown

We have divided Israel’s population into three

broad categories, based on labor force
participation, the natural rate of increase and a
tendency to form an identifiable category.

Haredim (Ultra-Orthodox Jewish) – 6% of

population.

Arab – 19% of population.

General & Other – 75% of population.

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 Characteristics per Household by Category
2030 Estimates

Arab Haredim General Total

Children per Woman 4.4 5.8 2.3 2.9

Persons per Household 5.0 4.4 3.2 3.4

% of Pop. below Age 15 41.2% 47.4% 23.6% 28.4%

Participation in the Labor
39.0% 45.0% 58.0% 54.3%
Force

Average Yrs. Education 9.6 14.5 12.6 12.2

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 Economic Data by Category
2030 Estimates, NIS ’000’s
Arab Haredim General Total

Production per Employee 158 169 226 216

GDP per Capita 32 35 89 75

Income per Household, Total 99 87 145 138

Of which:
75 52 128 119
Income, not from Allowances

Income, from Allowances 24 35 17 19

% of Income from
24% 40% 12% 14%
Allowances
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 The Effects of Demographics on Growth
The Arab and Haredi populations have a natural rate of increase of
above 3% a year, compared with 1% in the general population.
Since 1970, participation in the labor force has increased from 50% to
over 54%, as a result of waves of immigration and the entry of women
to the labor force.
The base assumption is that the period of growth through immigration
has ended and the fertility rate of the majority population will remain
constant.

On these assumptions, we forecast a decline in labor force

participation, and a change in the trend of increasing participation
since the founding of the State.

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 The Effects of Demographics on Growth

We estimate that the decline in the rate of participation in

the labor force, and the increase in the percentages of
Haredim and Arabs in the population, will reduce GDP
growth per capita by 0.4% a year.

In comparison, if the labor force participation rates,

fertility rates and GDP per Employee (wages) of the
Haredim and Arabs were to match the general population,
GDP per capita would be 20% greater.

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 Economic Burden on the General Population

The excess taxes, required from the general

population, to finance social services and
allowances that flow to the Haredi and Arab
populations.
This economic burden is calculated by the
percentage in gross income (without allowance
payments) of each household in the general
population, and has reached in 2003, by our
calculations, to 9%.

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 Calculation of Economic Burden on the
General Population

Transfer payments to minorities,

(+) Proportion of public expenses to minorities, based on
size of population (Education, Health).
(-) Tax revenues , both direct and indirect, from
minorities.
(=) Excess of payments to minorities, as financed by taxes
to the general population.
The cost of fixed public expenses (Defense, Foreign
Affairs, etc.) are not part of the economic burden.

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 The Effects of Demographics on Growth

Arabs and Haredim have a natural rate of increase above

3% a year, compared with only 1% for the general
population.
If current trends continue, the General population will
reach only 63% in 2030 and participation in the labor force
will fall to 52.6%.
This forecasted decline in labor force participation will be a
change in the trend of increasing participation since the
founding of the State (since 1970, labor force participation
has risen from 50% to above 54%).

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 Three Possible Scenarios

Status Quo Scenario – A continuation of current trends of

fertility rates, labor force participation, etc.
Investment in Education Scenario – To implement the
suggestions in this presentation to reinforce education (to be
explained), that will bring in-line the characteristics of the
minority populations with the General population in the areas
of fertility rates, labor force participation and production per
employee.
Alternative Scenario – A sensitivity analysis to the Investment
in Education Scenario, that we propose, that will show an
equalization of all factors, but fertility rates will remain as per
status quo.

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 Basic Assumptions for each Scenario
Economic productivity will increase by 1.3% a year, the
average increase in productivity over the past 25 years, before
the current outbreak in terrorism (i.e. 1975-2000).
General population participation in the labor force will remain
at 58%.
By 2010, the economy will shift to full employment with
unemployment remaining at 6%.
Fertility rates and immigration rates – according to the middle
forecast of the Central Bureau of Statistics.
Public service spending will rise in proportion to the rise in
GDP but without incurring a budget deficit.

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 Demographic Composition in 2030
Status Quo Scenario

Arab Haredim General Total

Population (Thousands) 2,830 1,040 6,489 10,359

% of Population 27.3% 10.0% 62.6% 100.0%

% of Households 18.9% 7.5% 73.6% 100.0%

Labor Force Participation
39.0% 45.0% 58.0% 52.6%
Rate

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 Forecast for GDP Growth and the Economic
Burden in 2030 in Status Quo Scenario
The economic burden on the General population will reach
17% of household income.
GDP growth per capita will reach 1.3% a year (of which 0.2%
derives from the move to full employment).
The gap with Europe in GDP per capita will increase by 23%.
GDP per capita will be 49% of European levels.
The gap with the U.S. in GDP per capita will increase by 26%.
GDP per capita will be 35% of U.S. levels.

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 Significance of the Status Quo Scenario

The increasing par in economic conditions

between Israel and the developed economies will
increase the discord between the General
population and the minorities.
Increase of the economic burden on the General
population will also increase the discord between
the populations.
The combination of these two factors may lead to
a social crisis with serious consequences for social
rights and welfare policies.

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Barriers to GDP Growth in the Haredi Population

The very low participation rate of men between the ages of

25 - 40 is due to barriers related to compulsory military
duty.

The fact that the average wage is only 75% of the average
wage of the General population, indicates the lack of
professional training required by the job market.
A very low participation rate of young women between the
ages of 20 - 40 (apparently due to the high fertility rates
and the lack of suitable daycare).

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 Barriers to GDP Growth in the Arab Population
The rate of participation in the labor force by Arab men declines
after age 45 as over 50% of Arab men are employed in
professions requiring hard physical labor.
The fact that the average wage is only 70% of the average wage
of the General population, indicates the low level of education.
The usage of cheap foreign labor has repressed, for the near-
term, the representation in the labor force of populations with
low income levels.
The presence of cheap foreign labor acts to prevent a shift to
more advanced technologies and methods in labor intensive
sectors and works to keep the wage level down.
There is a very low level of participation of Arab women in the
labor force (only 17%) with a very low level of income.
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 Suggested Solutions

Investment in education, leading to a change in the

levels of education, especially for the Arab and
Haredi populations.
Reformation of the educational system, including:
1. Move to a long learning day.
2. A focus on educational areas with a high demand
for work.
Move to a long learning day will allow weak populations
to advance to post- high school education.
Establishment of sufficient daycare centers for
children below age 5, allowing mothers to find full
time employment.
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 Suggested Solutions – Cont.
Implementation of the Tal law and offering an
option of national service, instead of military duty,
will result in a higher level of participation of the
Haredi population in the labor force.
A prohibition on hiring foreign workers at
marginal wages will lead to a switch to the higher
skilled methods being used today for labor
intensive sectors.
We believe, that by taking these steps (and others
that will become necessary) , production per
employee will rise (higher wages) among the minority
populations and match the General population.

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 The Investment in Education Scenario
Educational levels in all populations will be equivalent.
Production per employee (wages) in the minority
populations will rise and match the General population.
There will be an increase in fixed asset investments and a
shift from work in labor intensive industries to
knowledge intensive industries (hi-tech).
An increase in the participation rate of the minority
populations in the labor force to match that of the
General population.
A decline in fertility rates to match that of the General
population.

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 Demographic Composition in 2030
Investment in Education Scenario
Arab Haredim General Total

Population (Thousands) 2,251 772 6,489 9,512

% of Population 23.7% 8.1% 68.2% 100.0%

% of Households 21.9% 7.8% 70.2% 100.0%

Labor Force Participation

58.0% 58.0% 58.0% 58.0%
Rate

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 Forecast for GDP Growth and the Economic
Burden in 2030 in Investment in Education
Scenario

There will be no economic burden on the General population.

GDP growth per capita will reach 2.2% a year (of which
0.2% derives from the move to full employment).
The gap with Europe in GDP per capita will decrease by 3%.
GDP per capita will be 62% of European levels.
The gap with the U.S. in GDP per capita will decrease by 1%.
GDP per capita will be 44% of U.S. levels.

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 The Alternative Scenario

This scenario is a sensitivity analysis to the Investment in

Education Scenario.
Similar to the Investment in Education Scenario, all our
recommendations will be implemented.
The difference is that in this scenario, though the Haredi and
Arab populations will be integrated into the job market, their
fertility rates will not decline (from the trend for the past 15
years for the Arab population).

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 0
1
2
3
4
5
6
Yemen 7
6.8

Saudi Arabia
6.2

Oman
5.9

PA

25 Source: The CIA

5.3

Iraq

Israel (Arabs)
4.5 4.4

Ssyria
3.7

Lybia
3.5

UAE

Kuqait
3.1 3.1

Egypt

Qatar
3.0 3.0

Jordan
3.0

Morroco
2.9

Bahrain
2.7

Algeria

Israel (Maj.)
2.6 2.3

Iran
Fertility Rates among Arab Countries

2.0

Lebanon
2.0

Tunisia
1.9
 Demographic Composition in 2030
Alternative Scenario

Arab Haredim General Total

Population (Thousands) 2,830 1,040 6,489 10,359

% of Population 27.3% 10.0% 62.6% 100.0%

% of Households 18.9% 7.5% 73.6% 100.0%

Labor Force Participation

58.0% 58.0% 58.0% 58.0%
Rate

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 Forecast for GDP Growth and the Economic
Burden in 2030 in Alternative Scenario
There economic burden on the General population will
decline to only 2% of household income.
GDP growth per capita will reach 1.9% a year (of which
0.2% derives from the move to full employment).
The gap with Europe in GDP per capita will increase by 4%.
GDP per capita will be 57% of European levels.
The gap with the U.S. in GDP per capita will increase by 7%.
GDP per capita will be 41% of U.S. levels.

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 Summary of the Different Scenarios
Investment in
Status Quo Alternative
Education
Population (Millions) 10.4 10.4 9.5
General Population
as % of Total
62.6% 62.6% 68.2%
GDP per Capita
23.2 27.5 29.5
(US$ ‘000’s)
GDP Growth per
Capita
1.3% 1.9% 2.2%
Economic Burden
on the General 17% 2% 0%
Population

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 Development of the Gap Between
Israel and the E.U. from 2004-2030

Investment in
Status Quo Alternative
Education
Avg. GDP Growth Per
Capita in Israel
1.3% 1.9% 2.2%
Avg. GDP Growth Per
Capita in the E.U.
2.1% 2.1% 2.1%
Accumulated Gap w/
the E.U. (2004-2030)
22.7% 3.7% -3.2%
GDP per Capita in Israel
vs. E.U. in 2030
49% 57% 62%

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 Development of the Gap Between
Israel and the U.S. from 2004-2030

Investment in
Status Quo Alternative
Education
Avg. GDP Growth Per
Capita in Israel
1.3% 1.9% 2.2%
Avg. GDP Growth Per
Capita in the U.S.
2.2% 2.2% 2.2%
Accumulated Gap w/
the U.S. (2004-2030)
26.2% 6.7% -0.5%
GDP per Capita in Israel
vs. U.S. in 2030
35% 41% 44%

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 Summary - I

The current demographic composition necessitates action to

change the trend in growth.
Without any action, growth is expected to be slow and
accompanied by an increase in the economic burden on the
General population, and increase social tensions.
An increase in the educational levels of the minority populations
and integration into the modern job market is of prime
importance.
A reform in education requires a switch to a long school day,
leading to an increase in the amount of higher education among
the minority populations.
Establishment of sufficient daycare centers for children below age
5, allowing mothers to find full time employment.
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 Summary - II

A ban on employment of foreign workers is necessary for

the development of higher use of technology and more
modern methods in all sectors.
Implementation of the Tal Law and an option of national
service in place of military duty is necessary in order to
integrate the Haredi population into the job market.
Adoption of our recommendations will put a halt to the
current deterioration of the situation and allow reasonable
growth, comparable to developed markets.
Any delay in implementation will worsen the situation, and
so our plan must be put into action immediately.
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 Conclusions
Steps to integrate the Arab and Haredi populations into the
labor force are also expected to lead to an increase in
participation of the General population in the labor force and
rise above 58%.
A gradual increase in participation in the labor force, to U.S.
levels of 65%, will lead to an annual 3% GDP growth per
capita and reduce the gap between Israel and Europe by 50%
by 2030.
We are of the opinion, that at the current time, the
economy has a rare opportunity to create sustainable growth
per capita, for many decades, through both investment in
education and in investments in infrastructure.
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