Most of the challenges facing the Israeli economy are not dissimilar to those that other industrialized countries are facing today.
What is done to resolve these challenges is often a matter of political viewpoint: To what extent ought privatization of state-owned companies be undertaken? What is the best mix of tax burden and public spending, especially with regard to social services and welfare? How can unemployment best be reduced? Can unskilled workers upgrade their educational levels to enable them to seek higher-paying skilled jobs? Can traditional pension and social security payment levels be maintained in the face of ever-increasing percentages of retirees? Should public policy give greater importance to reducing wealth inequalities or boosting wealth creation? What is the role of labor unions in post-industrial, knowledge-based economies?
Unique to Israel
There are, however, at least two challenges that are somewhat unique to Israel, which no serious analysis of the Israeli economy can ignore:
1) Terrorism. During the Second Intifada, Israel was the target of a horrific wave of suicide-bombing terrorist attacks that claimed the lives of hundreds of people. These attacks had a direct impact on the economy in several ways. Tourism shrank to new lows. Fear of attacks in public places curtailed entertainment and dining spending, and caused severe economic depression in once-crowded city centers. Spending on security services in nearly every public building soared, at the expense of other resources. The negative image the country suffered abroad hurt foreign exports and investments.
With the end of the Second Intifada and the beginnings of global economic recovery, Israel’s economy began to grow again.
2) Work Force Participation. In 2010, workforce participation in Israel was 64% among the working-age population, significantly lower than the Organization for Economic Co-operation and Development average of 71%. The significance of this figure is clear: The wealth of a nation is determined ultimately by the product of the healthy adults within its borders. The lower the level of workforce participation, the smaller the national product per capita, which translates directly into lower standards of living in general.
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