Israel's post-corona economy: "We're venturing into new territory"

The country that's vaccinating faster than anyone else is now reopening its economy - with caution, economic advisor Avi Simhon tells us.

A glimpse of life under corona in Jerusalem's Shuk Mahane Yehuda Market, May 2020.
A glimpse of life under corona in Jerusalem's Shuk Mahane Yehuda Market, May 2020.Imago/ZUMA Wire

Berlin-No country in the world is vaccinating against coronavirus as fast as Israel – almost 50 per cent of its population has now been fully vaccinated. But just like many others, the country’s economy has been hit hard by lockdown restrictions. As head of the National Economic Council, Avi Simhon advises the Israeli government on all economic issues related to the pandemic. Berliner Zeitung spoke with him for an exclusive interview.

In March last year you told the Times of Israel: “If the archangel Gabriel were to descend from Heaven and tell me, ‘Come, give me 50 billion shekels (€12.63 billion) and the crisis is behind you,’ I’d say, ‘Yalla, go for it.’” Do you know how much this crisis has cost Israel?

That's a bit difficult to assess. The effect on GDP was a drop of about 2.5 per cent – that’s definitely a lot, but the cost in those terms was actually smaller than in most of Europe. What's surprising is that during January and February [of 2021], the tax authority in fact collected more taxes than in January and February of 2020, just before the crisis. The macro effect of the crisis is not that large: a decline of 2.5 per cent of GDP is unprecedented in the history of Israel, but it's less than what we were afraid of at the time.

So has Israel’s strategy for the economy during the crisis worked?

We set a goal that when the crisis was over, all the businesses that were operating before would be able to start again. The other goal was to help those who are most affected by this crisis – and we know that these are mostly poor people. Were we able to achieve the first goal? We don't know yet.

We reopened almost all of the economy just at the beginning of this week - so it will take a couple of weeks to see who's back on track and who's not. We know that one sector of the economy will not be back for a while - this is the sector that depends on foreign tourism.

Do you know when Israel will be open to tourists again?

Foreign tourism will take a long time to return because we are still afraid to let in people from countries who are not vaccinated. Until the countries from where tourists arrive - this is mostly the United States and Europe - are vaccinated in high rates, we won't have many foreign tourists coming to Israel.

Are you planning special visas that would allow Israelis to travel again?

We are now venturing into new territory. By the way, this is how we felt during the entire crisis: we were the first to shut down air travel, the first to go into lockdown, the first to get out of lockdown the first time, and the first to close again during the second lockdown.

Now we are the first again. What we’re thinking about now is to have something called a green passport, to allow Israelis who have been vaccinated to leave Israel not for business travel, but for pleasure and tourism, and re-enter without quarantine. We've already been allowing business travel.

Infobox image
Photo: Private
Professor Avi Simhon
is chairman of Israel's National Economic Council and advises Prime Minister Benjamin Netanyahu and the Israeli government on economic matters. He specialises in macroeconomics, technological development and Israel's natural resources.

What about for foreigners who want to visit Israel?

We have to make sure we have full trust: there are some countries where you could get a fake certificate stating you are vaccinated when you are not. But of course we will trust certificates from OECD countries. We would like to get into a program whereby Israelis who are vaccinated can get to these countries and we can get tourists from those countries.

Overall you sound less optimistic than a year ago. Now you’re a little more…

(interjects:) … cautious! We've learned a lot during this year about the pandemic - we didn't think it would spread to the point that it would have so many variants. We thought that it would be contained much better. Another thing I didn't take into account is the fact that children are not being vaccinated. Until children are vaccinated, you cannot vaccinate the entire population and it will be very hard to achieve herd immunity.

What’s your prognosis for the labour market? Many Israeli companies let staff go during the corona crisis and learned to get by with fewer employees. More than 620,000 people in Israel lived on unemployment benefits during the corona period - that's almost 10 per cent of the population. As the economy ramps up, will these effects be reversed, or do you expect jobs to be irretrievably lost?

When you lay a person off, there’s not just a monetary cost, but also a psychological cost. Once you lay off a worker, you've paid this cost, and you would be reluctant to take him back if you don't think you need him. It’s definitely a possibility that even businesses who get back to their previous demand will not rehire all the workers they had before.

But then, since the Israeli economy is growing very fast, I think that within a year, we'll be at a relatively low unemployment rate again. I don’t believe we’ll get to the 3 per cent we were at just before the coronavirus within a year, but I think we'll get to something like 5 or 6 per cent unemployment - that is reasonable and we’ll see it declining gradually from there.

Israel has no system of salary subsidies, like subsidies for working less in Germany, for example. Is this something that would have helped the country?

Right now, we have a plan in place until the end of June. Within a month or two, we'll know much more about what's going on with employment and the labour market and we will have to think again about what we are doing. It's premature now to say what we should do.

The corona crisis has exacerbated a lot of social disparities, including in Israel. Israel's tech sector is very strong, and has been virtually undamaged by the pandemic, while workers in other sectors have been left behind. How will you try to level these differences after the corona crisis?

The tech sector has a great influence on everyone in Israel. It turns out that those in the lowest 20 per cent of income actually gained from the crisis. Why? Because the lowest 20 per cent depends on government subsidies, and subsidies actually increased during the crisis.

Let’s think which workers were most affected: those are waiters in restaurants and staff in clothes shops. But once the economy picks up, people will go back to restaurants and continue to buy clothes. So I think the fact that we have this engine that pulls the economy, the tech sector, gives us policymakers a lot of confidence to spend money helping those who are left behind. And secondly, [tech sector wealth] spreads, because people who work in tech consume more than the average of the goods and services produced by those people who were affected during the crisis.

So you're relying on trickle-down theory, whereby wealth automatically redistributes itself from the top to the bottom?

Precisely. But again, there is not only the trickle-down effect, there is the effect that it produces taxes to the government and we can use those taxes to help those who are mostly affected.

If we look at the effects of the corona crisis in Germany, people like homeowners or those who had invested in the stock market benefited more than the average person. Are there any plans in Israel to share the costs of the crisis through tax increases for those who have profited from corona so far?

No, because I believe, and this government believes, that taxes are bad for the economy. The deficits are manageable, and the interest rate that we pay for debt is very low - so there's no need to raise taxes. You raise taxes only when you have to, not to redistribute money or to punish those who gained from corona.

You mentioned your very low interest rates - Israel government bonds are still in the Prime Standard, and the country enjoys a high degree of confidence in the bond markets. But like many OECD countries, Israel took on enormous debt last year. Do you think interest rates will remain at this low level?

Yes, because our current account surplus is very high, at $20 billion. In terms of debt, we are in the same club as the Netherlands and Germany. I don't see why any foreign investors would be worried about the Israeli economy. So I'm quite confident that we can keep a high rating and we'll go on to pay very low interest rates on all our debt.

This is not only a topic that concerns Israel, it's a global phenomenon that states have raised a lot of debt during the corona crisis.

You’re right – and I should add that our debt relative to GDP is lower than most other OECD countries. 

There have been numerous elections in Israel over the past 10 years, and another is scheduled for 23 March. Are these political rifts having a negative impact on your efforts to get the economy working again?

Well, sometimes it does and sometimes it doesn't. We got into this political instability about two years ago but it didn't seem to affect our ability to act and do the necessary things, and I'm hopeful that it won't affect our ability to deal with this crisis in the future.

Have you already seen a positive effect on the Israeli economy from the new peace treaties with your Arab neighbours?

They have not had an effect yet – but we hope to see it in the future.

Many Israelis placed a lot of hope on Leviathan, the new gas field discovered off the coast of Israel, but now gas prices are down. What is your perspective on that situation?

It's always nice to get a present, but we never thought gas would be more than 1 per cent of our GDP. Given that our economy normally grows at about 3.5 per cent a year, we never really thought this would be something very dramatic. Although it's nice to be independent in your energy consumption: previously we were dependent on importing all our energy, and now we have half of it here. The sense of independence is more important than the actual economic effect.

You have advocated that proceeds from the gas field should be used for infrastructure in Israel, rather than foreign investments.

Yes, that’s correct. I think that the private sector should deal with foreign investment, and the government should deal with investing in infrastructure within the country. We should take all the proceeds and invest them in infrastructure within Israel.

The Israeli and Palestinian economies are highly intertwined. How will Israel’s economic recovery affect the Palestinians?

Many Palestinians come to work in Israel - they come in the morning and return in the evening. That means we not only affect but we infect each other. If there is a burst of the pandemic in the Palestinian territories, it immediately affects the Israelis, and vice versa. Epidemiological, we cannot separate what's going on there from what's going on here. We cannot block the territories because many Palestinians depend on work in Israel. This is why we are now beginning to vaccinate Palestinian workers who come to Israel. This is very rare for vaccine doses to be shared like this - I'm not sure that in normal times we would be so quick to vaccinate our Palestinian neighbours, but now we are doing this.

So you’ve already started vaccinating commuters from Palestinian territories?

Yes, previously we supplied masks, disinfectant and other medical goods to Palestinian hospitals. But now we are also providing for the workers who come to Israel.