Israel’s biggest challenge? Poverty, says Olmert’s economics guru

By Candice Krieger, May 1, 2008

As Israel gets ready to celebrate its 60th anniversary, Prime Minister Ehud Olmert’s chief economic adviser says the country’s much-vaunted “economic miracle” places it in a good position to weather the current global financial storm. But he warns that greater domestic challenges lie ahead.

Getting a free meal at the Meir Panim soup kitchen in Jerusalem

Professor Manuel Trajtenberg, 57, has been advising the Prime Minister on socio-economic policy since 2006, when he was made head of the National Economic Council at the Prime Minister’s Office. “There is a serious issue of poverty in Israel,” he tells JC Business.

“This is the greatest challenge facing the Israeli economy. This is the order of the day.” Although Israel’s unemployment levels have dropped to around 7 per cent from 10.7 per cent in 2003, he says integrating the marginal populations, notably the strictly Orthodox and the Arabs — who together make up between 25 and 30 per cent of the population — is the priority on the Prime Minister’s economic agenda. Professor Trajtenberg explains: “When you have strictly Orthodox and Arab communities, it is very demanding.

These people are not in the mainstream of economic activity and are not contributing to the labour force or economic growth. And given the tendency for these communities to have large families, the numbers are growing and poverty is breeding. You can not have a country where part of the population is carrying another on its shoulders.”

He adds: “I don’t want to be in a country that has high poverty. In order for Israel to keep growing, we need a big push to integrate them.” He acknowledges that there is not just one way to do this. The tactic, he says, is to be creative. Based at Mr Olmert’s office in Jerusalem, he is currently working with the Prime Minister to develop a one-year civil-service programme for the strictly Orthodox and Arab populations — many of whom do not serve in the army — to enhance their basic labour skills.

“Policies in the past have poured money into these populations. We need to help them help themselves,” says Professor Trajtenberg, who holds a PhD in economics from Harvard Business School. The government aims to increase the employment rate from 69.1 per cent to the OECD average of 71.7 per cent by 2010. Other strategies include reinvigorating the Israeli education system and retraining older people.

“There are pockets of meritocracy which we can not afford. We need to invest in human capital and continue to develop high-tech innovations to cope with increasing global competition.” Another matter of urgency is to reduce immigration.

“There are too many foreign workers in Israel occupying the low-skill jobs,” he notes. “These people are competing with the minority populations in Israel for jobs. We can not afford for this to be happening.” But does he welcome those who make aliyah? Born in Argentina, he himself moved to Israel in 1969. “These people decide to move on their own volition. They are already more entrepreneurial and driven than those that don’t. They possess a series of qualities that are beneficial for the economy.”

A consultant at the World Bank, Professor Trajtenberg insists the Israeli economy is well-placed to withstand the current slowdown in the global markets, despite a reduced growth forecast for this year of around 3 per cent, compared to 5.2 per cent the previous two years. As far as he is concerned, Israel’s economic situation is a sensational success story.

“It’s the 60, 10, 6,” he explains. “In the past 60 years, the national product of Israel has grown by a factor of 60, the population by a factor of 10 and the product per capita has grown six-fold. The individual numbers are not unique but the combination of all three is. People don’t realise what an achievement this is, particularly in light of the geo-political challenges.”

He says that since the Second World War, there has been no other country where both the population and national product has grown by such an extent.” What’s the secret? “The quality of the labour force in the early years [1950’s and early 1960’s],” he says.

“Essentially, when you bring people over that have a great deal of human capital and you put them in a different situation where they need to cope with rather hostile circumstances, such as the climate and hostility of the surrounding area, it triggers a tremendous amount of creativity. These smart people, with a great deal of motivation, created the economy. This is something very rare. You have people moving for good reasons, wanting to establish their own country and bringing with them knowledge and capabilities.”

He adds: “As Israel becomes a more normal country, we have to increasingly rely on the human capital we produce ourselves.

“Israeli entrepreneurs are outstanding and not just in high-tech. And when you have entrepreneurs like this that are identifying opportunities all over the world, that is a source of strength.” He cites the Centrino computer memory-disk key, a medical-pill-sized camera for internal investigations, GPS software and advanced computer firewalls as some of the more successful high-tech products developed in Israel. “I have no doubt that the economy will continue to grow.”

Surely the US credit crisis is a major concern? “If the US experiences a serious slowdown but not a recession — and this is the scenario we are basing things on — there will be a reduction in the rate of growth for the rest of the economy, but we can withstand it pretty well.”

It is unquestionable that the slowdown in the US, coupled with the appreciating shekel and weakening dollar, will have a significant impact on Israeli exports, a majority of which are to the US.

Industrial exports have steadily risen from $52 million in 1955 to $39.4 billion in 2006, constituting 5.6 per cent of GDP. But the Israel Export and International Cooperation Institute says that exports in 2008 will experience a dramatic reduction, far less than the 16 per cent growth experienced in 2007. “We need to shift exports towards Europe and Asia, and this requires a big effort.”

Professor Trajtenberg lives in Tel Aviv.

    Last updated: 8:45am, August 19 2008