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The PM’s ‘buy made-in-Israel’ initiative will backfire. Here’s the solution

Mandating preference for 'blue-and-white' goods will drive up prices. There is one approach that really will work: Increase work productivity
Workers at a new Bamba factory of the Osem corporation in Kiryat Gat, on February 19, 2019. (Flash90)
Workers at a new Bamba factory of the Osem corporation in Kiryat Gat, on February 19, 2019. (Flash90)

Several days ago I noticed a news item in one of the economic supplements according to which the Prime Minister’s Office was advancing a proposal that would increase preference for the procurement of Israeli-made over imported products. This is a welcome and important policy. Finance Ministry officials, however, oppose the move, arguing that it will raise the price of these products.

We are all in favor of Israeli-made products. However, the Ministry of Finance maintains, and rightfully so, that the mechanism for preferring Israeli products in fact constitutes a trade barrier whose damage exceeds its benefits. Not only will it not achieve the goals of encouraging employment and growth, it will actually bring about the opposite results by increasing the cost of public procurement, hampering employment and impeding productivity. The Ministry of Finance estimates that instituting a preference for Israeli-made goods will lead to a 7.5% cost increase in about a quarter of the procurement that will be affected, at an additional cost estimated at about NIS 1.3 billion (US$385 million) annually. 

There is a solution to this equation and it is found in increasing labor productivity rather than in favoring products made in Israel. Increased productivity means greater output, and rising efficiency will lead to growth, as Israeli plants will be more competitive and offer higher technological quality at better prices. Then it will indeed be preferable to purchase Israeli-made products, even without the artificial mechanism of government intervention. 

Israeli industry plays a very significant role in strengthening the economy, especially in light of the coronavirus crisis, and in building a sustainable economy that will provide the needed economic and social foundations, primarily in the country’s economic periphery. Labor productivity must be a national goal in order to protect the Israeli economy and enable it to be a global actor in world markets. 

The coronavirus crisis showed all of us that a strong and productive domestic economy, based on a robust, advanced and forward-thinking industry that does not depend on imports and can meet all the needs of the Israeli economy, is a core ingredient in the nation’s economic resilience.

Figures show that while productivity in OECD countries increased by 2.5% on average between 2014 and 2018, in Israel it decreased by half a percentage point during the same period. Hence, in light of the current situation of the Israeli economy, the government must invest in raising labor productivity per hour worked. Increased productivity will be achieved by developing skills at younger ages, retraining among the older workforce, developing the work environment and integrating advanced technologies into production processes. This is achievable, requiring only synchronization between the education systems of schools, colleges and universities and the business sector. 

Innovation and robotics are no longer foreign concepts among large swaths of the Israeli industry, although quite a few plants have not yet integrated advanced automation processes. The introduction of sophisticated systems and efficient work methods will not necessarily come at the expense of workers. On the contrary: as a result, workers will be more professional, skilled and educated.

There is currently a huge shortage of workers in various occupations, for example for welders, as well as for production line workers whose work requires many hours of continuous physical work. In this case, automation will make a huge contribution, productivity will increase, output will grow, and the Israeli economy will become more efficient and accordingly more competitive. 

All that is needed is a national policy, government focus and inter-ministerial collaboration in order to save the manufacturing sector from the fate of insufficient productivity. The inter-ministerial team for formulating a national policy should be comprised of the Prime Minister’s Office, the Finance Ministry, academia, the Innovation Authority and industry representatives. This national policy will include government regulation requiring the upgrading of all industrial companies in Israel, while at the same time encouraging each and every plant to increase its efficiency and competitiveness. These steps will increase overall economic efficiency, boost productivity of the economy, and lead to economic growth and greater integration into the global economy. 

About the Author
Prof. Jehuda Haddad is President of Shamoon College of Engineering.
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