knowledge among them. it has been found the more a country ’ s trading partners invest in research and development, the more the country ’ s total productivity will increase. it is encouraging to see how greatly less - developed countries are benefiting from the r & d investments of the industrialized countries. these results, however, have a negative side : the investment in technological innovations may widen the gap between rich countries and poor ones. how can this outcome be prevented? only by making a focused effort to rise to, and stay at, the forefront of global technology. and how can this be accomplished? by investing in education and by providing support for general and applied science - including research and development. this, however, is a complicated thing. almost everywhere in the world, direct government intervention in r & d is regarded as a failure. there are two exceptions - finland and israel. the office of the chief scientist in our country has been a success - even though it is necessary to continue investigating the factors that are responsible for our success and to draw inferences for possible changes in the future. let me sum up this part of my remarks : 1. increasing productivity is crucial for sustainable economic growth. 2. being at the forefront of knowledge and of technological innovation is crucial for economic growth. 3. countries that wish to stay at these forefronts must make sure that their pool of technological knowledge expands steadily. 4. evidence from around the world speaks clearly about the importance for israel of enhancing human capital in education and technological infrastructure, so that we stay at the forefronts of knowledge and technological innovation. these will lead to increases in productivity and per - capita growth. to bring this about, it is important to establish a correct set of incentives and a correct institutional structure. it is important to develop a set of incentives that will promote education, with emphasis on technological education, for the entire population. concurrently, it is important to create various forms of incentives for processes that promote innovation and invention. 5. if i may, i would also like to address the relationships between growth and inequality and between inequality and poverty. the first result in regard to the relationship between growth and inequality is called the kuznets curve. the data in kuznets ’ possession led him to believe that inequality rises at the beginning of the growth process and afterwards starts to fall. however, the data available back then were very scanty. it is now clear that there is no simple relationship between growth and inequality. the reason for this is simple

to pursue an interest - rate policy consistent with the inflation target of between 1 percent and 3 percent a year, with the intention of reaching the mid - point. the economy does have the problem of poverty, and this should, indeed must, be tackled responsibly by adopting the necessary measures. but it must be tackled with open eyes, with reality constantly in view, and with a commitment to the strategy of long - term growth. without such growth, problems such as poverty cannot be resolved, and it is therefore essential that economic policy be constantly directed towards the achievement and maintenance of growth. as i stated at the outset, the banking system is very important in every economy, and of course israel is no exception. the importance, however, clearly lies in the banking system being healthy, stable and competitive. i have also mentioned the important, even dramatic, development that affected the financial system as a whole, and in particular the banking system - and that is the reform proposed by the bachar committee. i am pleased to see that the banks, or most of them, are already preparing themselves for this, and sales of provident funds and mutual funds are already taking place, and with some measure of success, so it seems to us. when i see this i am happy that the pessimistic scenarios predicted by some are not being realized. in the past, too, such scenarios preceded successful reforms, for instance in the foreign - currency market. it is natural that concern is felt before reforms and changes, but it must be understood that israel's financial system is in need of additional reforms. it is up to the banking system today, and to a great extent also up to the bank of israel, to prepare itself to confront the new targets it faces in a proper manner : at the top of the list i would put basel ii. the bank of israel has placed high on its list of priorities the preparedness of the banking supervision department to adopt the rules of the new basel capital accord ( basel ii ). this also requires the banking system to organize itself accordingly, and that is no small matter. the second target is gearing up to meet the internal audit standards set out in section 404 of the sarbanes - oxley act of 2002 ( " sox 404 " ). this subject is also high on the priorities of the banking supervision department, and of the whole banking system, and will be for the next two years. i have learned from my experience in citigroup