Strategy for Change and Recent Developments
Comments prepared by David Klein,
Governor, Bank of Israel,
for a meeting of the
Chamber of Commerce Switzerland-Israel,
December 7, 2000
The Israeli economy has undergone a major transformation in the last decade:
These results are not an accident or a result of sheer luck. They are due to a long-term strategy, adopted by all Israeli governments, starting in the second half of the ’80s. The core of this strategy is, of course, neither new nor unique: distance the government, as much as possible, from economic activity. In the case of the government of Israel, that was an awesome agenda. We have not yet finished the job, but we have gone a long way:
A decade of structural changes and macro-economic strategy for stability, resulted in the current year being one of the best in our recent history.
Until the third quarter of 2000 the economy was growing at an annual rate of some 6%, led by the hi-tech sector. Exports are estimated to increase by 20%, reflecting also the acquisition of start-ups by foreign companies. Industrial exports are likely to increase this year by 25%.
At the same time the standard of living also bounced. Private consumption per capita is estimated to increase this year by 3% in real terms – compared with 1% per-annum only in the previous two years.
Investment in equipment and machinery is increasing this year by 7%, indicating positive prospects for further growth in the future.
The higher-than-expected growth of the economy increased government tax revenues and reduced the budget deficit by more than 50% compared to the planned one. As a result, the public debt burden will further decline, reducing government interest payments.
The last quarter of this year, as we all know, is going to be different. However, assessment of the likely repercussions, for the Israeli economy, of the rising military tension in the area, requires some perspective. Three comments are warranted here:
First, as far as one can tell, the recent tension is not going to lead to a reversal of the peace process in our region. It is certainly a serious distraction, but judging by the way the various sides handle it, they clearly are mindful of the need to contain it.
Second, it affects the Israeli economy in a specific way. A decline in tourism is clearly visible, and the absence of the Palestinian workers is affecting activity in construction and agriculture. The implications for the rest of the economy are indirect and a lot less significant. Tentative assessments, prepared by our Research Department, talk about a one-time reduction of 1%-2% of GDP from the previous estimate for 2001, which was 5%-6%. On the other hand the unemployment rate is likely to decline because of the increased demand for labor, especially low-skilled – most of the unemployed in Israel, to replace the Palestinian workers.
Domestic financial markets, so far, lend support to the view that the Israeli economy will return to normal operation after a while. In particular, the yield on long-term government bonds hardly budged, and the reaction of the foreign currency market was relatively benign. This may be a sign that our commitment to maintain stability is still credible, but it should not be taken for granted.
Third, overall economic policy over the last decade resulted in a significant improvement in the economy’s capability to compete on world markets. Hence, its ability to weather a disturbance like the one we are experiencing now, was greatly enhanced. After all, we know by now rather well that integration in the global economy may also subject us to external shocks. We have learned, as a result, that adjustments in our behavior are called for from time to time.
That does not mean that our overall economic strategy should change. I believe that it won’t. Based on our past performance it is very likely that any future government will carry forward the economic strategy that proved to be so successful in the last decade, namely:
We know that this is the key to make progress in the global economy and, hence, the road for a durable growth.