Stanley Fischer: The growth of the Israeli economy in the long run
Address by Professor Stanley Fischer, Governor of the Bank of Israel, to the Sderot
Conference for Society, Sderot, 6 November 2007.
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The subject for this evening is "Evaluating the Socio-Economic Situation of Israel in 2008". I
prefer, with your permission, to take a longer perspective, and to speak about the growth of
the economy in the long run.
In this context, I will focus on economic policy, and the importance of sustainable growth.
The rate of growth is critical for the future of the economy, and the future of the state. If we
manage on average to grow in the next 25 years at a rate of 5 percent a year, in 2032 we will
attain a level of GDP of NIS 2,235 billion (in 2007 prices), compared to a GDP of NIS 660
billion in 2007. To compare, if we were to grow by only 3 percent a year, GDP would reach
only NIS 1,380 billion. That's an enormous difference, of more than 60 percent. It is important
that we understand that if we can achieve persistent high growth, then we will have the
necessary resources to address existing problems in critical areas, such as social welfare.
With regard to sustainable growth, I will not speak here of the importance of continuing the
strategy of macroeconomic stability, free markets, the opening of the economy, and its
integration into the global economy. Instead, I will speak today on three structural and no
less important issues: education, welfare and investment.
I have listed welfare among these three topics, because Israeli society cannot succeed -
certainly not in the long term - if there are wide social gaps, and if a large part of the
population has to subsist on a very low standard of living.
A. Education
In principle, we all understand the importance of education in Israel. We have no natural
resources but we have human resources, which should be constantly developed in order to
maintain and increase the qualitative edge of the State of Israel. Over the years the country
has placed great stress over the years on the subject of education, and if this topic does not
continue to hold a high enough place in our priorities, then we shall find ourselves in a
continually deteriorating situation. And in some ways this erosion has already begun.
When looking at our spending on education in international comparison, we find a very
interesting and important picture: on average, spending per child in compulsory and tertiary
education as a share of GDP is not low by OECD standards, and in some cases is higher.
But when we see the decline in pupil achievement over the years, compared to other
countries, then we must conclude that the Israeli education system is not effective. To
improve the situation, it is important that we examine the reasons for this ineffectiveness and
that we act to put it right. Why? Because we are referring to our most important investment,
the investment in our young, who are our future source of labor, enterprise and growth.
In the field of higher education too there is room for special concern. It is sufficient to see the
lists of Israelis on the faculties of the leading universities of the US and other countries. This
is a difficult situation to accept. The Shochat Committee, which reported earlier this year, has
done sterling work on advancing higher education in Israel and it is important that its
recommendations be implemented, including granting wage differentials in order to reward
the best academic staffers.
Another area that has been neglected in recent years is that of technological education. I
hear this from various sources: in the educational system, and from industrialists who need
individuals with technological qualifications. This is also a field that needs cultivating and
promoting.
As is well known, education is the best way of reducing poverty in the long run. And this
leads me onto the next topic, that of welfare.
B. Welfare
A very important way of alleviating poverty is by integrating those who can work into the field
of employment, and at the same time raising the compensation that poorly paid people
receive. In this context I am delighted that the subject of Earned Income Tax Credits is on the
government's socioeconomic agenda and I hope that it will be implemented soon, along with
the other subjects found on this important agenda.
I will not elaborate today on the ways to integrate the poor into employment and to support
those who cannot work. Rather, I would like to refer to the topic of the composition of Israeli
society. According to data from the Central Bureau of Statistics, most of the poor in Israel are
concentrated in two sectors: the ultra-Orthodox and the Arab. While the incidence of poverty
among the non-ultra-Orthodox Jewish population was only 12 percent in 2006, the incidence
of poverty among the ultra-Orthodox and Arabs was 57 percent and 58 percent respectively.
This is connected to the low rates of employment in these two sectors, particularly among
ultra-Orthodox men and Arab women. In 2006 the employment rate among ultra-Orthodox
men was 25 percent (compared to 62 percent among the male population overall) and
among Arab women it was 17 percent (compared to 53 percent among women in general).
If we do not manage to deal with this issue, more and more of the Israeli population are likely
to find themselves outside of the labor market and, as a result, poor. It is important that this
sensitive and complex topic be addressed, and that appropriate solutions are found based,
inter alia, on the right system of incentives.
C. Investments
Investment is the key to growth, and therefore it is important that the Israeli economy is an
attractive place for local and foreign investors. In this context, I will refer to the easing of
processes required in order to do business in Israel.
There are a number of reports that refer to this topic, such as the World Economic Forum's
Global Competitiveness Report. I will concentrate on another important report, the Doing
Business Report, published by the World Bank. This report ranks 178 countries measured by
parameters that represent the ease (or difficulty) of doing business in each country.
Overall, Israel is ranked 29th, which is not bad, and even relatively high. If we examine the
parameters of the index more closely, we will find that Israel ranks even higher on some of
these: for example, on the strength of minority shareholder protections against misuse of
corporate assets by directors for their personal gain, Israel is ranked fifth; or on the legal
rights of borrowers and lenders, and the availability and legal framework of credit registries,
Israel comes seventh; on the procedures necessary to import and export by sea a
standardized cargo of goods, eighth; and on the procedures and costs associated with
setting up a business, 17th.
However in other parameters Israel ranks very low: for example, on legal procedures relating
to the enforcement of contracts (102nd place); on the procedures, time, and costs to build a
warehouse (109th place); and on registering property (152nd place). These findings will not
surprise any Israeli.
It is very important that all the relevant authorities cooperate, to remove these bureaucratic
obstacles, and to bring about an improvement in all these fields, especially in those where
Israel currently ranks low.
It is easy to think that details like these are not important. But we have to contend with
competition from all the world, and it is clear that the achievement of sustainable growth
depends on our dealing with these barriers to growth. And for the long run, there is nothing
more important for the Israeli economy and the economic well-being of Israelis than
sustained rapid growth.