karnit flug : israel ’ s challenge to fulfil its economic growth potential main points of remarks by dr karnit flug, incoming governor of the bank of israel, at the prime minister ’ s conference “ partnership and growth ”, tel aviv, 29 october 2013. * * * when i decided, several weeks ago, to accept the invitation to participate in this conference, i did not know that it would be my first lecture following my appointment as governor of the bank of israel. nonetheless, i am very happy that the hand of fate has led to my speaking here today, two days after the government ’ s decision to appoint me as governor, and economic advisor to the government, because i believe that this conference deals with one of the most important issues on the socioeconomic agenda in the state of israel. the topic of the conference – the arab sector ’ s partnership in the economy and in growth – is a major issue in terms of the israeli economy ’ s ability to fulfill its growth potential in the next few years and to reduce the scope of poverty and the gaps in israeli society, which are among the highest in the oecd, and about which much has already been written and said. the successful integration of the arab public into the labor market in particular, and into the economy in general, is a very important, even essential, component of the israeli economy ’ s ability to continue to grow, and to support a higher standard of living for all israelis. this conference, which deals with various aspects of the impediments to the successful integration of the arab population in the labor market, is therefore particularly important. i will begin with a few words about the recent state of the economy : from the macroeconomic standpoint of growth rates, the economy is in good shape, particularly compared to other developed countries. in the past decade, the economy has enjoyed significantly higher growth rates than most other advanced economies, and the global financial crisis, which was reflected in a deep and sometimes prolonged recession in many economies, was weathered by the israeli economy with relatively minor damage. unemployment, which jumped in many economies during the crisis and remains very high in most of them, increased relatively moderately in israel, and resumed its decline immediately following the crisis, so that we are currently at historically low unemployment levels. the labor force participation rate, and in turn the employment rate, are increasing on a consistent basis, among other things as a result of the continuing entry to the labor market of arabs

, ultra - orthodox jews and women. inflation – the main policy variable with which the bank of israel is entrusted – has been within the target range for a long time, which provides monetary policy the required degrees of freedom to support growth and employment in the short term, thus moderating the effects of the global slowdown which is still a restraining force on activity here as well. from a long - term view, the israeli economy suffers from a low rate of increase in productivity ( product per hour of work ). the average israeli worker produces lower output per given work hour than his peers in most oecd countries. not only is the increase in productivity not closing the gap with the other developed countries, the gap is growing. for instance, the ratio between product per work hour in israel and that in the us has been declining over the years. in the bank of israel annual report for 2012, the research department analyzed the phenomenon and noted a number of reasons for the low productivity. one major reason is a low rate of investment, which leads to lower stock of capital for production available to the israeli worker than what is available to a worker in other oecd countries. a further issue is bureaucratic impediments, or in broader terms, the business environment, which impede accelerated development of the business sector. returning to employment : despite the significant improvement that has taken place in recent years, and which has led to the fact that our employment rates are no longer low when compared internationally, there are still two groups that stand out for their particularly low bis central bankers ’ speeches rates : ultra - orthodox jewish men and arab women, each with their own characteristics and specific reasons. in these two sectors, even those who are integrated into the labor market generally earn a relatively low salary, which indicates relatively low productivity. this is mainly the result of a level of education and training that does not earn a high return in the labor market. the incidence of discrimination must also not be ignored, and we know that the arab public has difficulty integrating into certain industries, even if the appropriate training is provided. one such example is the high tech industry where, for various reasons, few arabs successfully integrate. since this industry has one of the highest levels of productivity and salary in the economy, that fact has far - reaching effects on the ability to fulfill economic potential with given talent such that it will be reflected in an appropriate standard of living. in the long term, demographics are expected to have far - reaching ramification