david klein : israel ’ s policy of integration in the global economy : the difficulties speech by mr david klein, governor of the bank of israel, to the directors ’ forum, the association of electronics and information industries, tel aviv, 29 april 2001. * 1. * * the economic strategy for the past decade the object of israel ’ s macroeconomic policy has been to achieve economic integration within the global economy. the main aspects of this policy are well known : • reducing tariffs and abolishing non - tariff barriers, so that goods and services can move freely ; • removing foreign - currency control, enabling the free flow of capital ; • introducing structural changes to render the economy more competitive and reduce the government ’ s share in it ; • adopting international standards of economic management, inter alia in the macroeconomic sphere, the most prominent among them being to adhere to the fiscal discipline required in order to reduce the government ’ s debt burden, and to attain price stability via an independent central bank. the logic underlying this policy is two - fold : • contending with competition in world markets will require us to become more specialized and more efficient. utilizing the resources available to us, this will result in a higher growth rate. • abolishing foreign - currency control, introducing structural changes, and adopting international standards of economic management will enable us to build another stratum on this basis : improving the investment climate and attracting foreign capital to israel. as a result, israel will be able to finance investment not only by domestic saving but also by foreign saving, making an even faster growth rate possible. we are evidently referring to a policy that focuses on sustainable growth accompanied by an ongoing increase in productivity, and led by a rise in investments and exports ; while the improvement of the standard of living is not the leading factor, but the result of that structure, alongside adherence to budgetary restraint and price stability. this policy differs substantially from that adopted in the first four decades of israel ’ s existence, although it embodies elements - such as tariff - reduction - that have been on the agenda in the past. on the other hand, the change in israel was made possible because of the significant shift towards globalization in the world at large. nonetheless, the adoption of the new approach, in all its aspects, has not gone smoothly. many interests and habits were based on the old framework, and although the number of advocates of the old view is dwindling they are still able to drag out the process of change

aspects of the work of the board of directors : clarifying the role of the board of directors and emphasizing the difference between the functions of the board and those of management ; strengthening the composition of the board, and the independence and professionalism of the outside directors ; raising the level of director ’ s qualifications, and clarifying expectations regarding their functions ; improving the board ’ s working practices. the bank supervision department has drawn up the principles regarding the existence of a main risk management function in banks, and all banks have appointed a chief risks officer. the principles of a proper compensation policy have also been formulated, and changes in this sphere are becoming evident world wide. my third subject is what is known as the shadow banking system. the practical significance of this term is that it deals with aspects of the financial system that the regulators do not know how to supervise. in the us and the uk, and to a lesser extent in europe too, a large part of the credit market is now outside the banking system. in israel the banking system currently covers slightly above 50 percent of total credit, credit from abroad accounts for some 18 percent, so that nonbank credit has increased to more than 30 percent of the total, mainly as a result of the pensions reform and the bachar committee reform. no system of regulation can be perfect, but it is essential that we find a way to supervise nonbank credit. it is no coincidence that many of the companies affected by the crisis belonged to one industry, the real estate industry, and that tells us something. the securities authority is responsible for transparency, but it does not regulate due diligence in new issues. in the final analysis, it is the institutions that manage the public ’ s money that must take the investment decisions. these areas have advanced and improved recently, but we must continue to enhance the quality of supervision over the conduct of these entities, and the quality of corporate governance in companies.