stanley fischer : recent developments in the israeli economy ; future paths of the imf and the world bank speech by professor stanley fischer, governor of the bank of israel, at the imf - world bank annual meetings, washington dc, 22 october 2007. * * * mr. chairman, distinguished governors, mr. rodrigo de rato, managing director of the international monetary fund, mr. robert zoellick, president of the world bank group, delegation members, colleagues and former colleagues, ladies and gentleman : these meetings take place not only at a challenging time in the international economy, but also at a time of unexpected changes in the leadership of both the bank and the fund. i will use this opportunity to discuss the futures of each of these two great institutions. but let me start with recent developments in the israeli economy. 1. the israeli economy the israeli economy has been growing at an average annual rate of more than 5 percent, since 2004. in 2007, inflation is expected to be within the target range of 1 - 3 percent per year. the budget should end the year close to balance. the balance of payments is in a surplus of between 4 and 5 percent of gdp, and foreign direct and financial investments continue to flow into the economy. controls on capital flows have been removed progressively over the last fifteen years, and the capital account is essentially totally liberalized. the exchange rate floats freely and the bank of israel has not intervened in the foreign exchange markets since 1997. fiscal discipline has reduced the share of government spending in gdp from 52 percent in 2003 to 44 percent this year. fiscal discipline, together with privatizations and sustained growth, has reduced the debt to gdp ratio from more than 100 percent in 2003 to a level expected to be about 82 percent at the end of this year – a level that is still too high but that is expected to continue to decline. growth has reduced the unemployment rate, from more than 11 percent in 2003 to about 7. 5 percent at present. this has been accompanied by an increase in the participation rate, which is very low in israel. the poverty rate – a relative measure in israel – is beginning to decline but more needs to be done to improve the standard of living of the poorest members of the population. the impressive achievements of the israeli economy are due in part to the global boom, but also to improved economic policies based on the understanding that the only way to sustainable growth, particularly for a small economy, is to pursue market - based policies and to embrace

decisions. it is that simple. it is also clear that the governance / quota problem will not be solved without resolving difficult issues about the representation of europe in the fund. for lack of time, i pass over quickly two other issues : the income of the fund, and the fund's role in poorer member countries. as emphasized in a recent paper by jack boorman, the fund's income needs to be fitted to its role, and not vice versa. with regard to poorer member countries, the fund, in close collaboration with the world bank, needs to continue to be involved in working with them. after all, its claim to legitimacy depends on its being and being seen as a global institution. in this regard, it will probably be necessary to increase the basic vote by more than agreed upon at least year's singapore meeting. there is much to be done, and we wish incoming managing director strauss - kahn every success as he takes over leadership of the fund. 3. the bank president zoellick has set out his vision for the bank in his october 10 speech at the national press club and his october 21 note to the development committee. the vision is appropriately ambitious. it deserves the strong support of the membership. the overall vision is to contribute to an inclusive and sustainable globalization – to overcome poverty, enhance growth with care for the environment, and create individual opportunity and hope. to do that, the president sets out six key strategic themes : • overcoming poverty and spurring sustained growth in the poorest countries, especially in africa ; • helping rebuild post - conflict and failing states ; • producing an appropriate business model to help middle income countries meet their development goals ; • fostering regional and global public goods ; • promoting development and economic opportunities in the arab world ; • developing the role of the bank as “ the knowledge bank ”, a brains trust of applied experience. as they should, these themes clearly reflect the needs and wishes of a wide range of the developing and emerging market member countries of the bank. the goals implied by the themes will not be achieved easily. indeed it is fashionable to emphasize the failures of development over the past fifty years, the many countries where per capita income has declined, the persistence of poverty and of hunger. it is right to emphasize the problems that remain to be solved. but we should also from time to time recognize that this has been a remarkably successful decade for the developing countries, that many african countries are now growing at rapid rates, and that in asia