Israel’s Unbalanced Economic Development

Israel is not realizing its full potential for economic growth

Israel is not realizing its full potential for economic growth. The public debate on this issue generally focuses on low labor force participation rates, pointing the accusing finger at ultra-Orthodox Jewish men and Arab women. The present document attempts to direct the discussion to the issue of investments, and more specifically, to the imbalance in investments between different geographic areas and different social groups in Israel.

In the background are several important facts. Firstly, Israel’s present level of investments (fixed capital formation) is lower than it was in the past. In the first decade following establishment of the state, it was 29% of GDP, on average. In the 1960s, 1970s, 1980s and 1990s, it was 25%, 27%, 22%, and 19%, respectively. During the years 2000-2009, it declined further to an average of 17% of GDP.

Secondly, Israel’s fixed capital formation is lower than the average of OECD countries. In 2008, the last year for which comparative figures were published, Israel’s fixed capital formation was 18% of GDP, compared with the average of 20.6% for OECD countries.

Thirdly, the present level of fixed capital formation is unbalanced: over the past decade, investment in the hi-tech industries, concentrated in the center of the country, grew at an average annual rate of 8%, while investment in low-tech industries, located in peripheral areas, grew at an average rate of only 2%.

Fourthly, in the first half of the last decade, fixed capital formation declined, following the double crisis of the global hi-tech industry and the second Palestinian intifadah. In the years that followed, investments began to increase but once again declined after the global financial crisis at the end of 2008.

Israel does not publish figures on fixed capital formation by geographical area and locality. However, it is possible to approximate such figures by using the proxy of investments in non-residential construction, which are available by locality. This allowed us to examine the imbalance in investments between different geographical areas and types of locality.

In general, total investment in non-residential construction declined during most of the years 2000-2009, from NIS 16.7 billion in 2000 to NIS 12.7 billion in 2009. The decrease occurred in all three of the main constituents of non-residential construction: (1) public buildings, (2) construction for commerce and commercial services and (3) construction for manufacturing. Exceptional was an increase in the construction for manufacturing purposes in 2006-2007, apparently due to the expansion of the Intel plant in Kiryat Gat.

The report that follows examines the above-mentioned three types of non-residential construction — by administrative district (there are seven: Tel Aviv, Central, Northern, Southern, Haifa, Jerusalem and Judea & Samaria) and by type of locality (we use five categories: all Jewish localities, all Arab localities, Jewish development towns, the group of 15 most prosperous cities in Israel, and the Israeli settlements in the Palestinian territories). In each area, the document examines the building stock that existed at the beginning of the decade (2003), and the investments in construction made during the course of the decade 2000-2009.