(Bloomberg) -- When Israeli Prime Minister Benjamin Netanyahu boasts about his country’s powerhouse technology, he glosses over the fax machines that banks still use, the homes that take nearly three years to build and the classrooms that don’t have a single computer.
Behind Israel’s shiny reputation as a locus of innovation lies the low-tech reality of much of the country’s economy, which stilts growth by reducing productivity. Israel ranks 23rd out of 35 nations on the OECD’s productivity scale.
Bank of Israel Governor Karnit Flug has warned that “the country’s economic locomotive” -- technology -- “is pulling decrepit railroad cars.” Economist Dan Ben-David says Israel’s productivity has been falling behind the developed world’s for four decades.
The government needs to invest more in education to put people in high-tech jobs, and do more to encourage innovation throughout the economy, Flug said. Half of Israeli schoolchildren score below many developed-world peers in math, science and reading tests -- and some ultra-Orthodox Jews barely study the material at all. That means half the population doesn’t reach the bottom rung of the income-tax ladder, and 90 percent of income-tax revenue is generated by one-fifth of the population, said Ben-David, founder of Tel Aviv University’s Shoresh Institution for Socioeconomic Research.
“The direction that this burden is headed will one day become untenable for the more skilled and educated sectors of the population who are keeping us afloat,” Ben-David said. “The cutting-edge knowledge that still exists in the country needs to reach all parts of its population before it’s swamped and driven out.”
Some of the productivity lag can be explained by businesses’ reluctance to spend money on technology, while some stems from a fear of using it, officials and businesspeople say.
The government is offering grants and loans to encourage businesses to modernize. The Economy Ministry last month offered 50 million shekels ($14 million) to 10 manufacturers to install technology in factories that produce doors, sausages, furniture and other non-tech goods. The objective is to make Israel more competitive with other OECD countries.
“The thriving Israeli high-tech industry is not breaking its ‘glass ceiling,’ and the majority of Israeli sectors do not enjoy its fruits,” the Innovation Authority said in an email. “Israeli industrial factories are not innovative enough, and are struggling to compete with the low operational costs of their Far East competitors.”
The Innovation Authority department dealing with the manufacturing sector, headed by Avner Shadmi, had 110 million shekels ($31 million) to hand out last year, up from 81 million shekels four years ago.
At Kibbutz Cabri, Cabiran now uses advanced processes to cast aluminum aircraft-fuel pumps and wing tips for Honeywell International Inc. and other international customers. Nearby, Hanita Coatings produces polyester film technology that makes buildings more energy-efficient. Both Cabiran and Hanita, which was acquired by U.S.-based Avery Dennison Corp. in 2016, received help from Shadmi’s department.
“If we hadn’t started changing and innovating we would have shut down completely” -- pushed out by cheaper competition abroad -- instead of seeing annual revenue growth, said Arie Shtinberg, Cabiran’s vice president of engineering and development.
The construction sector also is looking for technologies to replace labor-intensive practices such as hauling steel rods up multiple floors on foot. Today it takes an average of 32 months to build a residential project in Israel, versus 21 months a decade ago and 13 months in the U.S., said Shay Pauzner, deputy director-general of the Israel Builders Association.
“Productivity is very low,” Pauzner said. Using robots to make the work more efficient “is where we want to end up,” he added.
Israel’s relatively high population growth makes it a good place to try out new technologies, said association vice president Haim Feiglin, who started the push to modernize the industry. “There is a lot of construction,” said Feiglin, who’s been a building contractor for 40 years.
The association, in cooperation with the government and open technology platform SOSA, has launched an initiative to fund innovators to look at the construction industry, which is worth some $10 trillion worldwide.
“We’re in a branch where technology just isn’t the state of mind,” said Yoni Weizman, the association’s deputy director general in charge of entrepreneurship. “It’s a branch that’s a few steps behind. But that creates a blue ocean of opportunity.”
Program participant IntSite Construction Technologies adapted technology originally used for missile systems to create an automated crane that Chief Executive Officer Tzach Ram-On says will boost efficiency, shorten building time and save companies an average of $250,000 a month per site. Another participant is Samson, whose supply-chain solution manages safety hazards and streamlines delivery of construction materials.
While Israel’s low productivity is taking a toll on gross domestic product, there’s an upside, said Eugene Kandel, Netanyahu’s former economic adviser and now CEO of Start-Up Nation Central, a non-profit organization that monitors the innovation sector.
“There is potential for significant growth just by figuring out how to use technology already available,” he said.
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