Ensuring a strong, inclusive and sustainable recovery from the COVID-19 crisis in Israel - OECD Ecoscope

Ensuring a strong, inclusive
and sustainable recovery from
the COVID-19 crisis in Israel
by Gabriel Machlica and Oliver Röhn, Economics Department

The coronavirus pandemic has interrupted Israel’s progress in
boosting standards of living. Before the pandemic, Israel
enjoyed strong employment growth and living standards had
risen close to the OECD average. To contain the spread of the
pandemic, the government reacted swiftly and introduced
stringent confinement measures in March and April. The
government and financial authorities deployed emergency
measures quickly to support households’ and firms’ incomes and
liquidity. After the economy had largely reopened, a second
outbreak has given way to a renewed lockdown in September
(Figure 1, Panel A).

As in other countries, high uncertainty and the containment
measures necessary to limit the spread of the virus have led
to a sharp drop in economic activity. The economy is projected
to decline by around 6% this year (Figure 1, Panel B). At the
height of the crisis, over a million employees were
temporarily laid off. Many have returned to work as the
economy reopened. However, the unemployment rate, broadly
defined to include workers on unpaid leave and workers who
have left the labour force due to the pandemic, remains high
at 11%. Moreover, the crisis threatens to aggravate Israel’s
long-standing challenges of high poverty and wide productivity
disparities between its vibrant high-tech sector and lagging
sheltered sectors.

The new OECD Economic Survey of Israel (2020) identifies
measures that can help Israel navigate this crisis. In the
short term, the government and financial authorities should
continue to provide fiscal, monetary and financial market
support to buttress the recovery, boost confidence and avoid
widespread bankruptcies. The government has expanded the
eligibility to unemployment benefits to workers on unpaid
leave and extended benefits until next year. This should be
complemented by stepping up active labour market policies,
such as retraining and job search support, to help workers
transition to new jobs with better prospects.

The Survey identifies priorities to put Israel on a stronger,
sustained and inclusive recovery. Introducing ambitious
reforms can improve the standard of living of the average
Israeli citizen by some 15% by 2050 and help to reduce the gap
in living standards vis-à-vis the upper half of the OECD
countries (Figure 2). These measures and reform areas include:

     Upgrading infrastructure. Israel’s core infrastructure
     stock is almost a third smaller than in other OECD
     countries. The availability and quality of public
     transport is also limited. Boosting public

infrastructure investment can lift productivity and
connect people to job opportunities.
Improving educational outcomes. The gaps in students’
outcomes between Arab-Israeli students and the rest of
the population are significant, amounting to 4 years of
schooling on average. Reducing gaps will require
improving pre-school education, recruiting high-quality
teachers, especially in the poor municipalities, and
reducing disparities in students’ outcomes between
different school streams.
Strengthening the fiscal framework for local
governments. Poorer municipalities lack resources to
finance adequate public services for their residents.
This calls for supporting poorer municipalities through
higher compensation from wealthier municipalities.
Merging municipalities and promoting regional clusters
can improve efficiency.
Supporting the poor. Employment among groups with
traditionally low labour market attachment has
significantly improved. However, the income received
from work was not enough to make a substantial dent in
poverty, which remains comparatively high. Further
expanding Israel’s earned income tax credit would
support the poor while maintaining strong incentives to
work.
Simplifying the tax system and reducing economic
distortions. The tax mix is reasonably growth- and
employment-friendly with a relatively low tax burden on
labour. Nevertheless, ample room exists to simplify the
tax system by abolishing inefficient tax expenditures
and broadening tax bases, which would support revenues.
The business and property tax system should be reviewed
to reduce distortions.
Improving environmental outcomes and reducing health
risks. Poor air quality remains a concern for the well-
being of Israelis. Introducing congestion charges would
reduce traffic flows and air pollution, and can provide

additional resources to boost the public transport
       infrastructure. Pricing fossil fuels according to their
       carbon content and other pollutants, while protecting
       the most vulnerable, would further lower carbon
       emissions, and make renewable energy generation more
       competitive.

References:

OECD   (2020),   OECD   Economic   Surveys:   Israel   2020,   OECD
Publishing,                                       Paris,
http://dx.doi.org/10.1787/eco_surveys-isr-2018-en.

Coronavirus:                        Living               with
Uncertainty
by Laurence Boone, OECD Chief Economist

The global economy is facing unprecedented uncertainty as the
evolution of the Covid-19 pandemic weighs heavily on the

economic outlook. Nine months after the initial outbreak in
Wuhan, it is still difficult to predict the path of the virus.
Each country has been hit in a different way, and response
strategies have varied. There is much we still do not know.
Research for a vaccine is ongoing across the globe, but more
needs to be done to prepare for mass-scale testing,
manufacturing and distribution that will be required. It seems
clear today that we will have to live with the virus for some
time, with our principal defence being tigher hygiene
standards and physical distancing measures.

Amid this unprecedented uncertainty, what we know is that the
world will be much poorer than it would have been without the
virus. If our central projection of a gradual recovery, after
the rebound, materialises, global income will be USD 7
trillion lower by the end of 2021 than what we projected less
than a year ago in November 2019. This is roughly equivalent
to losing a year’s production from France and Germany
combined.

The initial economic shock in the first part of 2020 was deep
and profound. In the wake of national confinements, the global
economy plunged 7.8% in the second quarter of this year, an
unprecedented drop in peace time. The decline would have been
harder had governments not put in place a wide safety net for
firms and individuals. As economies began to reopen,
activities that could operate with physical distancing
rebounded strongly. But it would be imprudent to infer from
this that the recovery is V-shaped and global income can
rapidly return to pre-crisis levels. In some industries a
rapid recovery will occur; those linked to digital activity
for example, but others will not be able to fully recover for
some time. Scheduled flights are still down around 50% on a
year ago in September. Entertainment and tourism have been
deeply affected. Overall, 13-20% of OECD employment is
threatened.

Because developments are so varied across countries and
uncertainty is so high, we have produced two scenarios around
our central projection. On the upside, if businesses and
households were to become more confident because a vaccine or
treatment is in sight or only mild containment measures were
required to contain virus outbreaks, world growth would be
stronger (figure). The loss of global output would be around
USD4 trillion by the end of 2021. On the downside, if
confidence remains weak because outbreaks were to intensify or
stricter containment measures were required, household
spending and business investment would weaken and the recovery
would slow, and the loss in output would be USD11 trillion.

Even if this crisis is strikingly different from others we
have experienced and uncertainty is extremely high, we have
seen that policy matters. In the confinement phase of the
Covid-19 crisis, policymakers worldwide used a rich policy
toolbox. These measures included short-term working schemes,
furloughed employment, credit or grants to firms and tax
holidays. This is pushing debt up by around 15 percentage
points of GDP across the OECD, but was necessary, and will
remain so for 2021. Central banks provided liquidity support,

and low rates kept debt interest payments at lower levels.

Policy will continue to play an important role in the next
phase of the crisis. We learnt from the aftermath of the
Global Financial Crisis that tightening fiscal policy
prematurely could impart a serious blow to an already weakened
economy. Fiscal support will have to continue. We also learnt
that policy can only temporarily prevent a rise in
bankruptcies and unemployment. Support to firms must evolve to
let non-viable firms go and encourage viable ones to grow.
Equity instruments could be deployed for large firms, with
state support, provided competition is preserved and a clear
strategy for exit designed. However, it will require more
creativity for SMEs, for example in the form of tax credits,
with repayments occuring when firms sustainably return to
profit.

Individuals in vulnerable sectors also need policy support.
For sectors where the shock is seen as temporary, short-term
working schemes may continue, with more flexibility to allow
people to take on new activity. For other sectors, existing
schemes to support individuals and firms need to be tailored
to avoid maintaining support to unviable jobs and firms that
blocks reallocation necessary for a strong and persistent
recovery. Training and job placement should be supported by
digital infrastructure and be tailor-made to individuals as a
norm. Policymakers need to make an extra-effort to be sure
support reaches those who need it most. Furthermore, the first
phase of the crisis has shown that barriers to trade can be
hugely disruptive for an efficient supply of goods and
services. International cooperation must resume to ensure
health goods and services can be delivered to all, but also
that trade barriers do not rise further putting some firms and
activities, and the associated jobs, at risk.

Looking further ahead, there is no way today to predict how
people will behave after 18 months of a pandemic, how they
will work and undertake leisure activities. We can sketch out

how some trends will accelerate though. First, there will be a
wider use of teleworking, although the limits of out-of-office
work must be taken into consideration. Second, we will see
more services move online and increased online retail sales.
Third, there will be greater demand, and need, for crisis
management preparation, including health, cybersecurity,
energy security and protection against natural disasters.
Fourth, as the crisis impacts more precarious workers, the
essential workers who cannot telework, those living in crowded
accomodation, those in poor health, public demand for greater
access to essential goods and services including public health
and education provision should prevail. Amid a background of
public disapproval with the evolution of inequality, policies
will need to improve on transparency, increasing competition
and reducing collusion, and finding the means for a more
efficient delivery of public services.

Policymakers have to aim higher than trying to restore our
pre-pandemic living standards: they need to deal with pre-
crisis trends that threaten our future and seize the
opportunity for change. It is an opportunity to implement
green recovery and a significant shift in the sustainability
of our economies. Governments are spending a lot of money in
the policy response to the pandemic, but not enough of this is
focused on sustainable solutions. Some countries are taking
measures, but the effort needs to be bolder. Still, over 50%
of policy support for energy in recovery packages is going to
‘brown’ fossil fuels. As recovery plans will be at the heart
of governments budget preparation for 2021, the opportunity to
reboot the economy on a stronger, fairer and more sustainable
footing should not be wasted.

Further reading:

OECD Interim Economic Outlook, 16 September, 2020

Coronavirus :                        Vivre          avec
l’incertitude
par Laurence Boone, Cheffe économiste de l’OCDE

L’économie mondiale fait face à des incertitudes sans
précédent. L’évolution de la pandémie pèse lourdement sur les
perspectives économiques. Neuf mois après son apparition à
Wuhan, la trajectoire de propagation du virus reste toujours
délicate à prévoir. Les pays ont été touchés de différentes
façons, et leur stratégie, en réaction, a varié. De nombreuses
inconnues demeurent. La recherche d’un vaccin est en cours
dans le monde entier, mais beaucoup reste à faire pour
préparer les opérations de dépistage de grande échelle, et la
large production et distribution du vaccin qui seront
nécessaires. Il semble clair aujourd’hui que nous devrons
vivre avec le virus pendant un certain temps, avec comme
principale défense des normes d’hygiène renforcées et de

mesures de distanciation physique à respecter.

Dans ce climat d’incertitude inédit, la seule chose que nous
sachions est que le monde se retrouvera beaucoup plus pauvre
qu’il ne l’aurait été en l’absence de virus. Si notre scénario
central d’une reprise graduelle, après la phase de rebond, se
réalise, le revenu mondial sera inférieur, à la fin de 2021,
de 7 000 milliards USD au niveau que nous avions estimé il y a
moins d’un an, en novembre 2019. Ce chiffre équivaut
globalement à une année de production de la France et de
l’Allemagne réunies.

Le choc initial sur l’économie au premier semestre de 2020 a
été rude. Dans le sillage des mesures de confinement
nationales, l’économie mondiale a plongé de 7.8 % au second
trimestre de cette année, une chute jamais vue en temps de
paix. La déclin aurait été plus prononcé encore si les
pouvoirs publics n’avaient pas déployé de larges filets de
sécurité pour protéger les entreprises et les personnes.
Lorsque les mesures de strict confinement ont pris fin, les
secteurs qui pouvaient fonctionner en appliquant des mesures
de distanciation physique ont rebondi énergiquement.
Toutefois, il serait imprudent d’en déduire que l’économie se
redressera en suivant une courbe en V et que le revenu mondial
pourra renouer bientôt avec ses niveaux d’avant la crise.
Certains secteurs se redresseront rapidement, notamment ceux
liés aux activités du numérique, mais d’autres auront besoin
de temps pour se rétablir totalement. Ainsi, le nombre de vols
prévus en septembre était encore inférieur de près de la
moitié à celui d’il y a un an. Les secteurs du divertissement
et du tourisme ont été profondément touchés. Au total, 13 % à
20 % des emplois sont menacés dans l’OCDE.

Face à des évolutions si diverses d’un pays à l’autre et à un
degré d’incertitude aussi élevé, nous avons choisi de produire
deux scénarios articulés autour de notre scénario de
référence. Selon le scénario favorable d’une révision à la
hausse par rapport aux prévisions, la croissance mondiale
serait plus forte (graphique) si la confiance des entreprises
et des ménages s’améliorait parce qu’un vaccin ou un
traitement serait en vue, ou si des mesures d’endiguement
plutôt légères suffisaient à circonscrire la propagation du
virus. La contraction de la production mondiale se situerait
alors autour de 4 000 milliards USD d’ici la fin de 2021. Dans
le scénario plus défavorable, les dépenses des ménages et
l’investissement des entreprises fléchiraient, la reprise
ralentirait et la perte de production s’établirait à
11 000 milliards USD si la confiance devait rester faible en
raison d’une intensification de l’épidémie, ou parce que des
mesures d’endiguement plus strictes s’imposeraient.

Même s’il est évident que cette crise est très différente
d’autres crises que nous avons connues et si les incertitudes
sont particulièrement fortes, nous avons pu observer que
l’action publique est importante. Pendant la phase de

confinement de la crise liée au COVID-19, les responsables de
l’action publique ont, partout dans le monde, mobilisé un
vaste arsenal de mesures. Parmi ces mesures, on peut citer les
dispositifs de chômage partiel, le chômage technique, les
prêts ou subventions aux entreprises ou encore les
exonérations fiscales temporaires. Ces mesures devraient
augmenter la dette de quelque 15 points de PIB dans la zone
OCDE, mais elles étaient nécessaires et le resteront en 2021.
Les banques centrales ont procédé à des apports de liquidités
et le faible niveau des taux d’intérêts a permis aux charges
d’intérêt de la dette de ne pas trop augmenter.

L’action publique continuera de jouer un rôle important au
cours de la prochaine phase de la crise. Nous avons appris des
suites de la crise financière mondiale qu’un resserrement
prématuré de la politique budgétaire pouvait mettre
sérieusement à mal une économie déjà affaiblie. Le soutien
budgétaire devra donc être poursuivi. Nous avons aussi appris
que l’action publique ne parvient que temporairement à
prévenir l’augmentation des faillites et du chômage. Le
soutien aux entreprises doit évoluer pour laisser disparaître
les entreprises non viables et encourager celles qui le sont à
se développer. Des instruments de fonds propres pourraient
être déployés pour les grandes entreprises, avec le soutien de
l’État, à condition que la concurrence soit préservée et
qu’une stratégie de sortie claire soit définie. Une plus
grande créativité sera toutefois nécessaire s’agissant des
PME, le soutien prenant par exemple la forme de crédits
d’impôt remboursables une fois que les entreprises auront
renoué durablement avec les bénéfices.

Les personnes se trouvant dans des secteurs vulnérables ont
aussi besoin du soutien de l’action publique. Dans les
secteurs où le choc est considéré comme temporaire, les
dispositifs de chômage partiel peuvent être maintenus, avec
une souplesse plus grande pour permettre à chacun de s’engager
dans une activité nouvelle. Dans les autres secteurs, les

mécanismes actuels d’aide aux personnes et aux entreprises
doivent être réajustés pour éviter de continuer à soutenir des
emplois et des entreprises non viables, bloquant ainsi la
réaffectation nécessaire à une reprise vigoureuse et durable.
Les actions de formation et de placement professionnel
devraient pouvoir s’appuyer sur une infrastructure numérique
et être systématiquement personnalisées. Les responsables de
l’action publique devraient renforcer leurs efforts pour
s’assurer que les dispositifs de soutien bénéficient
effectivement à ceux qui en ont le plus besoin. En outre, la
première phase de la crise a montré que les obstacles aux
échanges pouvaient très gravement perturber la fourniture des
biens et des services en nuisant à son efficacité. La
coopération internationale doit reprendre pour garantir que
des produits et services de santé pourront être mis à la
disposition de tous, mais aussi que les entraves au commerce
ne vont pas continuer d’augmenter, avec les risques que cela
fait peser sur certaines entreprises et activités, et sur les
emplois associés.

À un horizon plus lointain, il est impossible aujourd’hui de
prévoir comment les individus se comporteront après 18 mois de
pandémie, comment ils travailleront et quels seront leurs
loisirs. Toutefois, nous pouvons esquisser la manière dont
certaines tendances vont s’accélérer. Premièrement, le recours
au télétravail va se développer, même si les limites du
travail à distance doivent être prises en compte.
Deuxièmement, de plus en plus de services vont être proposés
en ligne et le commerce électronique va s’intensifier.
Troisièmement, on va voir augmenter la demande, et la
nécessité, d’une préparation à la gestion de crise, que cela
concerne la santé, la cybersécurité, la sécurité énergétique
ou la protection contre les catastrophes naturelles.
Quatrièmement, la demande citoyenne d’une augmentation de
l’offre de services publics de santé et d’éducation devrait
prendre de l’ampleur car la crise a touché en premier lieu les
travailleurs les plus précaires, les professions de première

ligne pour lesquelles le télétravail est impossible, ceux qui
vivent dans des logements trop étroits et ceux qui ne sont pas
en bonne santé. Dans un contexte de mécontentement du public
face à l’évolution des inégalités, les responsables des
politiques publiques devront progresser en matière de
transparence, favoriser la concurrence et réduire les
phénomènes de collusion, et trouver les moyens de rendre plus
efficiente la fourniture des services publics.

Les pouvoirs publics doivent viser plus haut qu’une simple
tentative de rétablissement de nos niveaux de vie d’avant la
pandémie : il est nécessaire qu’ils prennent plus largement en
compte les menaces qui, avant la crise, pesaient déjà sur
notre avenir et saisissent cette opportunité pour changer
l’action publique dans ces domaines. Nous avons la possibilité
d’engager une relance verte et d’opérer un basculement dans la
durabilité de nos économies. Les pouvoirs publics consacrent
énormément d’argent aux mesures destinées à faire face à la
pandémie, mais la part de cet argent consacrée à des solutions
durables n’est pas suffisante. Certains pays agissent, mais
les efforts doivent être plus audacieux. Dans les trains de
mesures en faveur de la reprise, plus de 50 % des aides
publiques à l’énergie concernent encore les combustibles
fossiles « bruns ».

Alors que les plans de relance vont être au cœur de la
préparation des budgets publics pour 2021, il ne faut pas
laisser échapper l’occasion de remettre l’économie sur une
trajectoire plus vigoureuse, plus juste et plus durable.

À lire:

Perspectives économiques de l’OCDE, Rapport intermédiaire,
Septembre 2020

Thomas Laubach – A world-
class economist and a dear
friend
by Laurence Boone, Vincent Koen and Patrick Lenain, OECD
Economics Department
Across the OECD, Thomas’ family and friends are in our
thoughts.

Photo source: “Der einflussreiche Deutsche im Hintergrund der
Fed”, Handelsblatt, 9 April 2018
Rarely does an economist have the opportunity to exert a
direct influence on policymaking and contribute to better
outcomes. Thomas Laubach did just that during his 23-year
tenure in the Federal Reserve system, where he rose to the key
position of Director of Monetary Affairs and directly advised
Chairwoman Janet Yellen and Chairman Jerome Powell. Known
worldwide for his innovative work on the natural rate of
interest – famously labelled “R-star” — he was also the author
and co-author of over twenty articles published in key
academic journals. His 2003 piece with John Williams,
“Measuring the natural rate of interest”, was quoted no less
than 1100 times (Google scholar) and his 1998 book with Ben
Bernanke, Frederic Mishkin and Adam Posen on “Inflation
targeting: lessons from international experience” received
almost 3000 quotations.

Thomas was also a close friend of the OECD. He spent two years
in the OECD Economics Department, in 2003-05, as part of a
long-standing programme where the Federal Reserve dispatches
one their promising researchers to Paris, with mutual benefits
for both institutions. There, he worked on two OECD countries
– the largest economy (United States) and the smallest one

(Iceland). Thomas was passionate about both, and his
intellectual contributions continued to resonate in Reykjavik
for many years. His unfailing kindness, collegiality and
equanimity, to borrow Jay Powell’s words, won him many good
friends in Paris. Back at the Fed, he remained involved with
the OECD, notably as a regular and key participant in working
groups, including the small but influential network of
“Monetary Experts”, which has been recognized as a key
platform to exchange views on the latest in monetary
economics. A loyal friend, he stayed in touch with many of his
former OECD colleagues.

Born in Germany in 1965, Thomas graduated from the University
of Bonn before embarking on one of his countless transatlantic
trips. At Princeton University, he started to work with then
Professor Ben Bernanke, who supervised his PhD in Economics,
which led to their investigation of the international
experience with inflation targeting. Thomas stayed close to
Ben Bernanke and their joint efforts eventually led to the
Federal Reserve adopting in 2012 a long-run inflation
objective of 2% as a new framework to anchor inflation
expectations. After a brief stint at the Federal Reserve
Branch of Kansas City, Thomas joined the Board of Governors in
Washington DC, where he published his important work on the
natural rate of interest.

The idea of a neutral interest rate was already present in
John Taylor’s monetary policy rule as the interest rate that
should prevail when the economy is operating at potential with
stable inflation. However, there was no consensus on how to
estimate it. Together with John Williams, now President of the
New York Fed, Thomas elaborated a methodology to estimate a
time-varying natural rate of interest, depending on the trend
growth rate of output. It used the Kalman filter to jointly
estimate the natural rate of interest, potential output, and
trend growth. The Laubach-Williams model (“LW R-star”) found
the estimated natural rate of interest to have varied

substantially over time in the United States. This turned out
to be an important insight because R-star was previously
assumed to be stable, with different monetary policy
implications. This work was extended in 2017, together with
Kathryn Holston (Holston-Laubach-Williams, “HLW R-star”), this
time covering several countries.

Thomas’s most influential insight was to show that the natural
rate of interest in real terms has declined dramatically over
the past four decades – and indeed has remained close to zero
since the global financial crisis (see the figure below).
Explanations for this decline include “shifts in demographics,
a slowdown in trend productivity growth, and global factors
affecting real interest rates” (Holston, Laubach and Williams,
2017). Estimates produced for other countries have shown
similar declines close to the zero bound, thus leading to the
conclusion that global factors have played a crucial role in
shaping natural rates of interest. Without doubt, such
findings played a crucial role in convincing central bankers
in OECD countries that they should not hesitate to cut
interest rates to historical lows and maintain them there,
while conducting asset purchases to circumvent the zero-lower
bound.

On top of his heavy responsibilities as Director of Monetary
Affairs since 2015, Thomas continued his research work and
remained an influential thinker, helping to modernize the
Federal Reserve’s policy framework. Most recently, and a few
days before passing, he published a “FEDS Note” with several
co-authors that provides the backbone behind the important
reform announced by Chairman Powell at the 2020 Jackson Hole
Symposium, namely the clarification that the inflation target
is “symmetrical” and that the Fed will be flexible in seeking
full employment given uncertainties about the natural rate of
unemployment – compounded by the COVID-19 crisis – and the
flatter Phillips curve (Altig et al., 2020).

While he spent most of his career in Washington DC, Thomas
never forgot his native country. Returning to Germany during
2008-12, he held the position of Professor and Chair of
Macroeconomics at the Goethe University of Frankfurt, where
many PhD students benefited from his wisdom and friendly
advice. Thomas will be sorely missed on both sides of the
Atlantic Ocean, but his intellectual contributions will
continue to thrive for a long time.

References: Holston, Kathryn, Thomas Laubach and John C.
Williams (2017), “Measuring the Natural Rate of Interest:
International Trends and Determinants“, Journal of
International Economics, vol. 108, Supplement 1, pp. S59-S75.

Altig, David, Jeff Fuhrer, Marc P. Giannoni and Thomas Laubach
(2020), “The Federal Reserve’s Review of Its Monetary Policy
Framework: A Roadmap“, FEDS Notes, Washington DC: Board of
Governors of the Federal Reserve System, August 27, 2020.