and productivity of the arab and ultra - orthodox sectors ; otherwise, not only will we not remain in place, but we will even widen the gap vis - a - vis the advanced economies. for example, in educational achievements, already today there is some gap between israel and advanced economies, and it can be assumed that the arab and ultra - orthodox sectors are themselves at some gap vis - a - vis the general population in such achievements. the implication is that under current conditions, the increase in labor force participation of these sectors will be reflected in the addition of employees whose productivity is low to the workforce. the data indicate that in recent decades, the gap between israel and advanced economies in output per hour has remained. among the factors in this phenomenon are an unfriendly business environment, as reflected in international indices such as the doing business index, the problem of low competitiveness in specific industries, and a low rate of investment which leads to insufficient capital stock. looking at per capita gdp, as well, indicates that we have not closed the gap in recent decades. although we have seen more rapid growth of our per capita gdp in recent years, in light of the relatively moderate negative impact of the crisis on israel ’ s economy compared with other advanced economies, we clearly don ’ t want to hope for a continued contraction of the gap between israel and other advanced economies based on the this factor. the two demographic trends that i discussed – the decline in the share of the working age population, and the increase in the share of sectors with relatively low bis central bankers ’ speeches employment rates – are expected to deduct 1. 3 percentage points from the annual growth rate. in this regard, i of course noted the improvement, which is still slow, in the employment trends in the arab and ultra - orthodox sectors. the aging of the population is expected to lead to a sharp decline in the ratio of number people of working age to the number of the elderly, from 5. 5 today to 3 in 2050. the meaning of this is that there will be a need to increase the allocations for old age allowances, on healthcare expenditure, nursing care, and such, in order to maintain the current level of these allowances and services. poverty is another issue with which we will need to deal. in recent years there has been a trend of increase in the poverty rate among families with workers, while the stability in the general poverty rate is the result of an increase in the share of families with one

high and rigid reserve requirements, and replaced it by daily, weekly and monthly auctions of monetary loans and deposits of commercial banks with the central bank. in the last two years we are gradually replacing these monetary auctions with treasury bills which will be our main instrument for conducting monetary policy vis - a - vis the market as a whole. judging from the results, the outcome is rather satisfactory : • israel enjoys price stability. • the foreign currency market functions smoothly, with relatively narrow spreads and low volatility. at the background, the central bank watches the market but does not intervene and the shekel, the domestic currency, is fully convertible. • the foreign currency position of the israeli economy is positive : the current account is roughly balanced ; fdi and portfolio investment started to go up again in the wake of the rebound in world financial markets ; and foreign exchange reserves held by the central bank are ample. to sum it up : the decision to regard the exchange rate as a policy instrument or let it be a marketdetermined variable is an integral part of the general strategy of macro - economic policy. in our case we let it be determined by the interbank market and used the short - term interest in its stead. a final word on the financial relations among mediterranean countries. while the potential for intraregional trade does not seem to be large at this stage, there seems to be some scope for furthering financial ties, especially under the auspices of the european central bank : • one example can be joint missions and consultations to review the stage of development of various financial markets. • another example, based on the trend toward a flexible exchange rate regime, is a framework for collaboration among central banks to promote the stability of the financial system and open information channels among supervision authorities. • a third example deals with the sequencing of liberalizing the capital account in connection with changing the exchange rate regime. the initiative of bank of italy and the european central bank should, therefore, be seen as a successful beginning. this is the most suitable forum to discuss and strengthen financial ties between the eurosystem and mediterranean central banks.