Israel’s Economy: From Start-Up to Shut-Down Nation? (opinion), Paul Rivlin, Moshe Dayan Center
GPO.An employee of "M Systems" Hi Tech Company, Kfar Saba, Moshe Milner, 12/24/2001

In January 2023 Israel’s minister of justice announced proposals for radical changes in the legal system that would have virtually ended the separation of power between the courts and the Knesset or parliament. This resulted in massive demonstrations by hundreds of thousands of Israelis that have continued ever since. The minister later admitted that those moves would have reduced three branches of government to one and that his proposed makeup of the judicial appointments committee could never exist in a democratic country. The proposals passed their first stages in the Knesset, Israel’s parliament, but in March were suspended following public protests.  

These proposals have had major effects on the economy and were condemned not only by legal experts but also by numerous economists at home and abroad. The damage has been noted by the Bank of Israel and by the Finance Ministry. The IMF has said that uncertainty created by the proposed judicial reform could have a negative impact on the economy. It added that maintaining the strength of the rule of law is important for economic success. The Organisation for Economic Cooperation and Development (OECD) has lowered its forecast for Israel’s GDP growth for 2023 and 2024. Bank of Israel forecasts have also been lowered and the government has moved from surplus to deficit on its fiscal accounts. 

Israelis are becoming increasingly aware that their economic fate is tied not only to changes in the legal system but also to demographics. The demographic issue that worries them most is not the traditional one of Arabs versus Jews, although that issue remains. Rather, it is the balance between the ultra-orthodox Jews and the rest of the population. The issue has been highlighted in the recently issued budget for 2023-2034. This allocated huge increases in funding for ultra-orthodox education and religious projects. 

The ultra-orthodox have large families and their population is growing much faster than other communities in Israel. The labor force participation rate among ultra-orthodox males is very low and most of those who work are low-skilled. They are therefore low earners and even though many ultra-orthodox women work (and are skilled) average family incomes are low. Given that families are on average large, income per person is low and poverty rates are high. There have been many calls for the education and training of the ultra-orthodox to be improved. The $3-4 billion added to ultra-orthodox education budgets in 2023-2024 will, however, make the problem worse. It will permit the expansion of an education system for men that lacks much of the basic syllabus and leaves graduates without skills that can be used in most of the economy. Increasing these budgets will intensify Israel’s low productivity problem.  

In May 2023, the Ministry of Finance calculated that if the legal changes are enacted, GDP per capita could be 13% lower than without them. Adding the consequences of the increased spending on ultra-orthodox education (which expand the disincentives for ultra-orthodox men to train and work) means that the losses will be higher. 

The Israeli economy has grown largely as a result of hi-tech. This sector is based on exports, foreign investment and the free movement of people and ideas. All this is threatened by legal changes and by other measures that would make Israel a much more religious and less liberal state. The Israel Innovation Authority has stated that in order to reduce the damage that has occurred and is expected to continue in the hi-tech industry, due to the combination of global factors and an internal crisis of uncertainty in the economy and to bring the industry’s growth back to the global growth trend, ending the uncertainty due to the political-legal crisis, is vital.

Current demographic change puts past achievements at risk. The share of population groups with low labor market participation and productivity is projected to increase dramatically. Arab-Israelis and ultra-orthodox constitute 30% of the working-age population today rising to 50% by 2060. According to the Ministry of Finance, this will lower potential GDP growth to around 2.5% per year, from an average of 4% over the last twenty years. 

In June, the government announced that it would resume its plans to change the legal system. It is in the context of these legal and budgetary changes that for the last six months Israel has been experiencing an unprecedented middle-class revolt. 

(By posting a guest’s views, CIE does not take a position on the contents, nor verify the facts nor the assumptions presented.0

Paul Rivlin is an economist and senior fellow at the Moshe Dayan Center for Middle East and African Studies, Tel Aviv University. He studied at Cambridge, London and Harvard Universities and is the author of two books on the Israeli economy and three others on Arab economies.