Dan Singer - Start-up Nation

But despite all this success, Ben-David is worried. He told us that Israel’s academic lead has lessened in recent years, and will fall further as older faculty members retire and many of the rising stars leave to teach abroad. In his own field, economics, Ben-David pointed to a study that found that of the top thousand economists in the world, as measured by citations of their work between 1990 and 2000, twenty-five were Israelis, thirteen of whom were actually based in Israel. Since that study was published, only four of these have remained in Israel full-time. And none of the twelve Israelis working abroad in 2000 have returned to Israel. In total, an estimated three thousand tenured Israeli professors have relocated to universities abroad.

Ben-David is one of those four top economists who remain in Israel. And he is sounding the alarm on Israel’s continued economic growth. From 2005 through 2008, Israel grew substantially faster than most developed countries. But there was a recession the previous few years so, Ben-David argues, “all we’ve done is return to the long-term path. We’re not in uncharted territory; we are where we should have been had we not had the recession.”

The problem, according to Ben-David, is that while the tech sector has been surging ahead and becoming more productive, the rest of the economy has not been keeping up. “It’s like an engine,” he says. “You have all the cylinders in the engine. You have all the population in the country. But we’re using fewer and fewer of the cylinders to move this machine forward.” In essence, the tech sector is financing the rest of the country, which is “not getting the tools or the conditions to work in a modern economy.”

This underutilization brings us to what we believe is the biggest threat to Israel’s continued economic growth: low participation in the economy. A little over half of Israel’s workforce contributes to the economy in a productive way, compared to a 65 percent rate in the United States. The low Israeli workforce participation rate is chiefly attributable to two minority communities: haredim , or ultra-Orthodox Jews, and Israeli Arabs. 6

Among mainstream Israeli Jewish civilians aged twenty-five to sixty-four, to take one metric, 84 percent of men and 75 percent of women are employed. Among Arab women and haredi men, these percentages are almost flipped: 79 percent and 73 percent, respectively, are not employed. 7

The ultra-Orthodox, or haredim , generally do not serve in the military. Indeed, to qualify for the exemption from military service, haredim have to show that they are engaged in full-time study in Jewish seminaries (yeshivot). This arrangement was created by David Ben-Gurion to obtain haredi political support at the time of Israel’s founding. But while the “yeshiva exemption” first applied to just four hundred students, it has since ballooned to tens of thousands who go to yeshiva instead of the army.

The result of this has been triply harmful to the economy. Haredim are socially isolated from the workforce because of their lack of army experience; plus, since they are not allowed to work if they want a military exemption—they have to be studying—as young adults they receive neither private-sector nor military (entrepreneurial) experience; and thus haredi society becomes increasingly dependent on government welfare payments for survival.

There are two primary reasons why Israeli Arabs have low participation rates in the economy. First, because they are not drafted into the army, they, like the haredim , are less likely to develop the entrepreneurial and improvisational skills that the IDF inculcates. Second, they also do not develop the business networks that young Israeli Jews build while serving in the military, a disparity that exacerbates an already long-standing cultural divide between the country’s Jewish and Arab communities.

Each year, thousands of Arab students graduate from Israel’s technology and engineering schools. Yet, according to Helmi Kittani and Hanoch Marmari, who codirect the Center for Jewish-Arab Economic Development, “only a few manage to find jobs which reflect their training and skills. . . . Israel’s Arab graduates need to be equipped with a crucial resource which the government cannot supply: a network of friends in the right places.” 8And in the absence of those personal connections, Israeli Jews’ mistrust of Israeli Arabs is more likely to hold sway.

Another problem is the bias within the Israeli Arab community against women in the workplace. A 2008 study by Women Against Violence, an Israeli Arab organization, found that public opinion among local Arabs may be slowly changing, but traditional attitudes are still entrenched. In a survey, even participants who “opposed older attitudes” still agreed with the statement “Arab society is predominantly patriarchal, where men are perceived as the decision-makers and women as inferior and ideally subservient. . . . A man who treats his partner other than [according to] the acceptable norm endangers his social standing.”

Despite this paradox, Women Against Violence director Aida Touma-Suleiman said that she sees men as partners for change, including a new acceptance of women who work outside the home. “There are Arab men who are unhappy with this balance of power, and wish to improve the relations between the genders. They see it as in their interest as much as anyone else’s,” she said. 9

Yet because of the high birth rates in both the haredi and the Arab sectors, efforts to increase workforce participation in these sectors are racing against the demographic clock. According to Israel 2028 , the report issued by an official blue-ribbon commission, the haredi and Arab sectors are projected to increase from 29 percent of Israel’s total population in 2007 to 39 percent by 2028. Without dramatic changes in workforce patterns, this shift will reduce labor-force participation rates even further. “The existing trends are working in stark opposition to the desired development,” the report warns. 10

As he was campaigning to return to the premiership, Bibi Netanyahu made getting Israel to number among the top ten largest (per capita) economies in the world a centerpiece of his agenda. An independent think tank, the Reut Institute, has been pursuing a similar campaign called Israel 15. Gidi Grinstein, the founding president of Reut, was an adviser to former prime minister and current defense minister Ehud Barak, who had been a political rival of Netanyahu’s. Yet Grinstein agrees with Netanyahu that Israel’s goal should be not just to keep up with advanced nations but to rise to rank among the top nations as measured by GDP per capita.

As Grinstein sees it, “This challenge is not a luxury, it’s a necessity.” At a minimum, Israel must grow 4 percent per capita for a decade, he believes; the current gap in living standards between Israel and other developed countries is dangerous. He says, “Our business sector is among the world’s best, and our population is rich in skills and education. At the same time, the quality of life and the quality of public services in Israel are low, and for many, emigration is an opportunity to improve their lot.” 11

This may be overstated, since record numbers of Israeli expatriates have recently been returning from the United States and other countries, in part due to a newly enacted ten-year tax holiday on foreign income for such returnees. And, of course, other factors besides income enter into “quality of life” decisions.

But the point that Israel can, should, and must grow its economy faster is crucial. Of all the threats and challenges facing Israel, an inability to keep the economy growing is perhaps the greatest, since it involves overcoming political obstacles and giving attention to neglected problems. Israel has a rare, maybe unique, cultural and institutional foundation that generates both innovation and entrepreneurship; what it lacks are policy fixes to further amplify and spread these assets within Israeli society. Fortunately for Israel, it is probably easier to change policies than it is to change a culture, as countries like Singapore demonstrate. As the New York Times ’ Thomas Friedman put it, “I would much rather have Israel’s problems, which are mostly financial, mostly about governance, and mostly about infrastructure, rather than Singapore’s problem because Singapore’s problem is culture-bound.” 12