stanley fischer : the israeli economy acceptance speech by professor stanley fischer, governor of the bank of israel, for an honorary degree, hebrew university, jerusalem, 11 june 2006. * * * it is a pleasure and an honor for me to speak today as the recipient of an honorary doctorate of philosophy from the hebrew university, and it is an even greater honor to have been asked to speak on behalf of my distinguished fellow honorees. i would like to start by congratulating the students on whom doctoral degrees are being bestowed today. you have earned the congratulations and good wishes of all for the ability and dedication you have shown in completing your doctorates, and we wish you every success and happiness in your future careers. by european and american standards, this is a young university. its founding ceremony took place in 1925, at this spot, in the presence of lord balfour, viscount allenby, high commissioner herbert samuel, haim nachman bialik, nahum sokolov, harav kook, harav meir, and 10, 000 others. that extraordinary turnout testifies to the importance the inhabitants of the yishuv and of the zionist movement attached to the founding of what they called the university of the jewish people. the university already possesses a proud history, an essential part of the history of modern israel, of the history of the jewish people and their successful but ongoing struggle to establish a modern state in the ancient land of our forefathers. each of the honorary degree recipients here has been closely associated with the hebrew university in the past, and for each of us this day brings back memories, of times, of colleagues, of friends. in my case among the personal memories are those of don patinkin, former president of the university, of yoram ben - porath, also a former president of the university, and of michael bruno, former governor of the bank of israel. and for many of us, this spot and this occasion will always be associated with the image of yitzhak rabin, receiving an honorary degree from the university immediately after the six day war. for me, the hebrew university has always been special. when i graduated from the london school of economics it was at the hebrew university that i most hoped to teach. later i did teach here, but as a visitor on sabbaticals, not as a faculty member. this is the community in which rhoda and i have formed some of our firmest and most lasting friendships. each

of my fellow honorees can talk of the friendships and the attachments they have formed among this community of scholars and in this city. and every one of us will attest to the joy and the pride we feel at being recognized by our colleagues of the hebrew university of jerusalem. i have been asked to talk today about the israeli economy. in brief, the economy is doing well. it grew by 5. 2 percent last year, and the data for the most recent quarter show an acceleration of growth. current forecasts are that the economy will grow by about 5 percent this year again. the budget deficit last year was below 2 percent, and it is likely to be below 1 percent this year. our inflation rate is low. the exchange rate of the shekel is remarkably stable despite – or perhaps because of – the fact that the bank of israel has not intervened in the currency markets since 1997, and does not intend to do so except in truly exceptional situations. we have a current account surplus. the unemployment rate is declining, though unfortunately we have not yet seen a decline in the poverty rate. we are about to enter the fourth year of growth that began in the middle of 2003, at the end of the deepest recession in the history of israel. that recession started late in 2000 as a result of four adverse shocks to our economy : the collapse of the high - tech boom and the nasdaq bubble that had enabled so many israeli high - tech startups to flourish ; the global recession that started in 2001 ; the tailing off of the immigration from the former soviet union to israel ; and the second intifada. it was worsened by an inconsistent set of policy responses to the recession. by 2003 the global recession was ending, and in 2004 growth was higher than it had been in twenty years. the high tech sector was recovering. the security situation in israel improved markedly. and the israeli government in 2003 committed itself to a fiscal framework designed to restore confidence in israel's ability to finance itself, to reduce the share of government spending in the economy, and gradually to reduce the tax burden. the government also initiated a program of structural reforms, including privatizations that had been talked about for at least 20 years, and reforms of the benefits system designed to reduce disincentives to work. over the past three years the government has carried out the program to which it committed itself. this, together with a well - defined inflation - targeting approach to monetary policy, has contributed to strengthening the