karnit flug : two economies - one society remarks by dr karnit flug, governor of the bank of israel, at the eli hurvitz conference on economy and society “ one society – one economy ”, tel aviv, 19 june 2017. * * * private consumption has led growth in the economy in recent years, covered for the slowdown in exports and in investments against the background of moderate global growth, and supported a significant improvement in labor market data, with an emphasis on weaker population groups. growth based on consumption comes with risks if it is based on factors that are not sustainable, but the main factor in increased consumption in recent years was increased income from labor. the rapid increase in consumer credit in recent years requires closer monitoring by regulators, increased caution on the part of the public and credit providers, and an informed examination of repayment capabilities when providing or taking out credit. growth that is led by consumption generally leads to lower long - term growth. low investment leads to a smaller increase in the stock of capital and in the adoption of technologies that accompany that investment, and lower exports lead to the economy being less able to exploit its relative advantages. the good current state of the economy, thanks partly to the rapid increase in private consumption, makes it necessary for us today to focus on dealing with the challenges we face — improving human capital and workers ’ skills, improving the business activity environment, and investing in infrastructure. all these will ensure improved productivity and a better standard of living in the long term. in recent years, private consumption has become an important component of israeli economic growth, and this has various implications. today i would like to discuss israel ’ s macroeconomic situation in recent years, and particularly the significance of the fact that growth is being led by private consumption, and the long - and short - term implications of this phenomenon. in recent years, gdp in israel has grown by higher rates than in most other advanced economies, but the growth rate of per capita gdp is similar to that of the other advanced economies. in the past year - and - a - half, growth data have been affected by what economists call “ noise ” ( mainly volatility in the import of vehicles ), but excluding that noise, the growth of gdp has accelerated, and it currently stands at about 4 percent in annual terms. this is an impressive rate, particularly if we take into account that world trade, which reflects global demand for our exports, increased by an average of about 3 percent

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