Stanley Fischer: Challenges facing the Israeli economy
Remarks by Professor Stanley Fischer, Governor of the Bank of Israel, upon taking leave of
the Knesset Finance Committee, Jerusalem, 4 June 2013.
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I would like to thank the members of the Committee for their wishes. It was an honor for me
to serve as Governor of the Bank of Israel. It was not readily apparent that they would offer
the position to someone who was not a citizen of Israel. But in the end, that is what
happened, and my wife and I are very happy for the extraordinary opportunity that we had.
Many people on the professional team at the Bank of Israel helped me during this period,
contributing much to the work at the Bank during my term of office. We must not forget that I
arrived in 2005, when the economy was in the midst of a period of impressive growth, and
one of the reasons for the fact that we made it through the global crisis was that the economy
entered the crisis in good condition: the government budget was balanced in 2007, the
current account was in surplus, the banks were strong-everything required for a country to
successfully get through the crisis was in place in Israel before the crisis.
I would also like to thank the former Chairman of the Finance Committee, MK Rabbi Moshe
Gafni, who contributed much to the system's stability, and to the legislation of the new Bank
of Israel Law, which was also helped along by former Knesset Speaker MK Reuven Rivlin. I
recognize the fact that you cannot work alone-it is necessary for there to be people who
agree to work with you, and in this context, I also note the Opposition Leader who is here,
who was then in the coalition and who assisted with the passage of the law.
If I compare the situation of the economy today to what it was in 2005, the debt-to-GDP ratio
is much lower, although the government deficit is higher. We moved to a situation where the
current account is balanced compared to the surplus we were in before the crisis. The
unemployment rate today is very low in an historic perspective, and the employment rate is
higher. The incidence of poverty remains more or less at the same level as it was. The
exchange rate is more appreciated today, which to a large extent is a result of the strength of
the economy-people want to live in a strong economy with a weak exchange rate, but this is
a situation that generally does not happen. The foreign exchange reserves are obviously
much higher than what they were when I took the position, as a result of foreign currency
purchases that we have been making since 2008. The average growth rate between 2005
and 2012 was 4.3 percent, and average per capita growth during those years was 2.5
percent. The average inflation rate then as today is within the target range, such that we can
say that we did not, and do not today, have an inflation problem.
The last decade started with a deep recession and negative growth, and in the middle of the
decade, we moved to rapid growth of 6 percent for a number of years, an exceptionally high
rate for countries at the level of development of Israel. Following the financial crisis, we
continued to grow at a higher rate than other developed countries, and if we continue
maintaining responsible policy, we can, I hope, continue this way. The unemployment rate is
very low compared internationally, since while unemployment in Israel is in decline, it has
risen in many countries. Long -term inflation expectations are close to the midpoint of the
target range. This means that the public believes that the economy can continue growing
without inflationary outbursts, and it can plan its economic life without concern of spikes in
prices. This is a very important achievement-thirty years ago, we never would have
believed we would attain it.
The government deficit grew in 2012 by 4.2 percent, and in order to reinstate control over the
budget, the government recently decided on important measures to reduce the deficit in the
coming years. These measures are also very important due to the fact that the interest
burden that the government is paying is very high in international comparison, as a result of
the risk premium that the financial markets include for the Israeli economy. A diplomatic
process, if the markets attribute any importance to it, would reduce these costs in the final
analysis, although it would take time, since the interest paid today is on debt that was issued
in the past, and a reduction in the interest rate would affect new debt.
There are many challenges facing the Israeli economy.
The first challenge to which will relate is handling the problem of poverty. The data
unsurprisingly show that the incidence of poverty is higher among large families, and lower
as the percentage of wage earners increases. Furthermore, the incidence of poverty among
Arabs and ultra-Orthodox Jews is very high. In this context, it is important to implement a
policy that will increase the labor force participation rate of these two sectors, and we are
witness to important initiatives in the area of academic education, mainly among the
ultraOrthodox sector.
The Israeli education system's achievements in the international PISA tests are below
average. We have recently had better achievements in TIMS tests, and I hope that they will
also be reflected in the other tests. We must improve the achievements of the education
system in order to achieve higher economic success.
The World Bank conducts a survey of the ease of doing business in all countries each year.
In 2013, we were in 38th place, a very unsatisfactory placing. We have fallen significantly in
this ranking during the past decade, not because our situation has deteriorated, but because
the bureaucratic burden in other countries has lessened. The bureaucracy affects not only
the ease of doing business, but also the cost of living. For instance, we see its effect on the
ability to adjust the supply of housing and on housing prices.
The Concentration Committee made two important recommendations on the matter of
breaking apart pyramids and separating financial and real holdings. In this context, I note that
if we require the immediate complete separation of financial and real holdings, there would
be no people who would be able to be controlling owners of banks, since they would not be
able to obtain the required capital through their activities in the real industries. It is possible
that in another few decades, we will reach the conclusion that controlling owners are not
necessary for banks. But in the meantime, I suggest not to conduct such large experiments
on the financial system. I usually don't make comparisons to Greece, but this time I will do
so: For hundreds of years, we have seen the ramifications that an unstable financial system
has on the market. We have a strong banking system, which was of tremendous assistance
in our ability to withstand the crisis. We must not endanger its stability, so I suggest not to
limit cross-holdings of financial and real entities for now beyond what the Concentration
Committee recommended when it set a benchmark of NIS 6 billion for holdings of a real
company by someone who holds controlling interest in a financial entity. I understand the
logic behind the other suggestions, but I think that we must first of all examine the
ramifications of lowering the number of entities that can hold controlling interest before we
continue advancing in this field.
Labor productivity in the Israeli economy is 20 percent lower than the OECD average. While
we are a wealthy economy, it is a mistake to compare ourselves to the US and Scandinavia
all the time, where labor productivity is very high. It is important that we deal with all the
challenges in education, the bureaucracy, infrastructure and more, in order to deal with the
problem of low productivity.
The Supervisor of Banks headed a team that presented important conclusions regarding
reinforcing banking competitiveness. Each time I would meet a senior banker from abroad, I
would try to convince him to start banking operations in Israel. I didn't succeed, and since
2008, I have stopped trying since the crisis led banks to stop expanding their operations
overseas. However, at the team's recommendation, there are many steps whose
implementation can help reinforce competitiveness in the banking system.
Defense expenditures increase from year to year, although their share of GDP continues to
decline and has now reached its level from the beginning of the 1960s. Still, defense
expenditures are the largest component in the state budget. It is clear to all of us that we live
in unsafe and uncertain surroundings. It is the government's duty to protect its citizens, and
there is therefore no alternative to large budgets for the defense establishment. This also has
positive ramifications, such as the defense establishment's contribution to the development
of the high-tech industry. We do not have the luxury to think that we are Sweden and to plan
our expenses without needing to allocate about 5 percent of GDP to defense. We must
continue to provide ourselves with defense, but the allocation of more money to defense is
not the only solution. We must also try to find other solutions, and try to achieve a peace
agreement with our neighbors, including with the Palestinians. The phrase, "there is no
partner for peace" is a self-fulfilling phrase. You need two for an agreement, and if we don't
want to look for a partner, we will remain in the current situation. We must look for the
partners for peace. Until we reach agreements, it will cost us more since we will need to
reinforce our readiness. However, in the long term, we will benefit from it, and it will have
positive ramifications in various areas. We must, therefore, find a way to act more proactively
in order to stop the conflict that has continued here for far too long.