This is a process that has taken upwards of 15 years, a process with one clear goal – to upgrade Israel’s economy so that it becomes known as a leading economy among the world’s leading economies.
This is a momentous occasion and good news for Israel’s economy.
Israel has joined the elite club of world economies, the OECD. I would like to thank Minister of Finance, Yuval Steinitz, Governor of the Bank of Israel, Stanley Fischer, Minister of Industry, Trade and Labor, Fouad Ben-Eliezer and my colleagues here: Eyal Gabbay, Eugene Kendall and Uri Yogev, as well as many others who worked to make this happen – past Ministers of Finance, Prime Ministers and other ministers, past and present, who advanced this goal.
When I served as Minister of Finance, I defined it as follows: Israel’s accession to the OECD has strategic importance for the process of positioning Israel’s economy as a developed and advanced economy, as well as in attracting international investments. My predecessors understood this as well. The process began in 1994, when a delegation of observers was sent to the OECD. We weren’t members, but they provided us with the status of observers. The official decision to establish a committee to examine the repercussions of joining the OECD was made by my previous government on December 7, 1997. Ten years later, a negotiation team was established. It took us ten years to reach a position in which we were negotiating Israel’s active accession to the OECD. These negotiations found expression in very intensive activity over the past year in all the ministries and ended today with the vote that Israel was accepted into the OECD.
This is a process that has taken upwards of 15 years, a process with one clear goal – to upgrade Israel’s economy so that it becomes known as a leading economy among the world’s 31 leading economies. Today, three more countries joined and now it is 34 economies.
This has three advantages. The first is receiving a "degree". In the labor market, if one has a university degree, it provides one with openness, accessibility and recognition in a great number of spheres. In the economic sphere, this "stamp of approval" is important.
The second advantage is that it sets standards that we are expected to implement here. The OECD has standards. Not everyone meets all the standards, but the members try to meet most of them. This organization represents what is referred to as "best practice" – the policy that must be implemented in central fields. Over the past year, the OECD surveyed each and every field, including education, government procurement and economic activities and made constructive comments, most of which were very important. This stabilizes national consensus through international consensus regarding various actions and reforms that we have yet to implement.
The third advantage is that it opens new horizons for investments which were previously closed to us. Part of the definition of investment funds, which bring together a vast portion of the world’s investment capital is that the fund’s managers must invest a certain percentage of the fund in developed economies. Until now, we couldn’t be a part of this, and therefore Israel was prevented from receiving an enormous source of investments. Today it is open to us. Of course, they could have invested in Israel as an awakening economy, but then we are in competition in those same funds that invest in economies that grow much faster. All at once, a new investment horizon has opened up to us, and this is extremely important.
Our goal is to move ahead. We are ranked in the thirties when it comes to per capita income and our goal should be to rank among the top fifteen countries in per capita income. If we indeed achieve this, our economy will no longer be so small – in fact it will be quite large. I am setting this as our target. I spoke of it when I was Minister of Finance as well. I tell you today – we will reach this target. We will reach it if we continue on the path we have followed since we defined joining the OECD as our goal. The reason we were accepted by the OECD is that above all we had to prove that were a developed economy with a free market, but also a responsible economy. This is a mandatory condition. We could not have achieved what we did if we had not developed a high economic ability and accelerated growth that increased our per capita product that raised us to a level where we weren’t at the bottom of the list anymore. We were among the leading group, and the question was asked why Israel didn’t join the OECD – given that we were a rising economic force and a primary technological force. This led to our development. Our accession will allow us to continue our development.
I must also mention that I expressed my gratitude to our many friends who helped make this happen. I must thank Angel Gurria, Secretary General of the OECD. He took this on as a personal mission. His involvement was tremendously important. I must also thank the 31 countries, any one of which could have vetoed our accession. They did not. This event, of course, has very important international repercussions. Alongside the ongoing criticism we hear about Israel’s status, I mention the fact that 31 countries voted today to accept Israel as a member of this international organization, when any one of them could have stopped it. I think this is a very important development for Israel and for its economy.
I said before that we are in the process of developing our economy. This process is one that has ten central steps. Six of them have already been accomplished. Two are being implemented this year and two more will be launched in the coming year. I would like to describe these steps.
The first step was controlling government expenditure. In other words, according to the fat man/thin man model, there was an essential need to "go on a diet" as the fat man nearly overwhelmed us. In relation to the OECD, our government expenditures were very high. It was very difficult and it cost us politically. But it was necessary and included the very important curbing of expenditure by moving from allowances to employment. This is a subject we will return to as it is a critical one. If we had not done this, we would have found ourselves in crisis, and in my opinion, much worse off than other countries, even today.
The second step was to reduce tax rates. In the fat man/thin man model, this provided the thin man with oxygen. People invest and work and start initiatives because it is worthwhile to do so. There is no economic activity for the long-term if it is not worthwhile. If marginal income tax is 65%, and corporate tax is 36%, it is simply not worthwhile to invest, to work, to make an effort or to conduct any economic activity. On the contrary, it is worthwhile not to do anything or even to commit fraud. The reduction of taxes is a mandatory condition. I would like especially to mention the reduction in corporate taxes. It was 36% is 2001, and this year it was reduced to 24%. By 2016, it should be 18%. This is mandatory.
We cannot stay an average country. Not with regard to corporate tax and not with regard to income tax. We must be better. The reason we joined the OECD it not because we are in 34th place. It is because we are in a much better place. Our competing in global markets obligates us to be more attractive. Therefore the outline for reducing taxes is a mandatory condition that created growth. If our marginal income tax had remained 64% and our corporate tax was still 36%, we would not have reached the place we are in today. Not only in terms of the OECD, but in general our international status would be completely different.
When we put forward our plan to reduce taxes, there was a great deal of arguing. We were told that we would cause tremendous deficits and reductions in tax revenue. We thought otherwise, and I believe that it has been proven beyond a doubt that reducing taxes increased our tax revenue – it certainly did not harm it. On the contrary, the tax base and growth have in fact created tremendous revenue with lower tax rates. Lowering the tax rates provided oxygen to the thin man – and this was critical.
The next thing we needed to do was, of course, remove obstacles. The most important thing we did to this end was during the 1990’s – in fact from the end of 1989 through 2000. It was an ongoing process of opening up the economy to competitive imports. This meant reducing the prices of everything – shoes, clothes, food. In turn, this led to an increase in the standard of living. If a citizen has money in his pocket and he can buy the products and services needed for his existence cheaper, he will receive more. The standard of living increases. This obligates and requires focusing on the advantages of Israel’s economy. Opening the economy to importation was carried out by a number of governments. This was a very important part of the process, as was joining Israel to the global economy through its primary medium – money. This was accomplished by easing the limits on foreign currency. It is hard to believe that only 12 years ago, it was impossible to remove money from this country, and money could not be brought in without reporting it to the officials in the Bank of Israel. Without this step, we would not have been able to participate in the growth, and we could not have become a dynamic and successful force in the global economy. This was a fundamental reform that we implemented. We did so in 1998. There was a small addendum added in 2003, which I did as Prime Minister.
So we have a fat man who has gone on a diet; we have a thin man who received oxygen and he’s trying to move forward but is facing all kinds of obstacles. This was the next step. We had to remove more obstacles in order to increase our competitiveness and the economy’s ability to move forward and to release the government’s tight grip on economic assets. We had to privatize these assets, and do so while ensuring competition. For example, we divided up the refineries so that they would compete with each other. We privatized El Al, banks – Bank Hapoalim in 1998, then Bank Discount and we still have to privatize Bank Leumi, although we are in the process. We privatized the communications industry: we added cellular carriers, introduced competition in international calls, multi-channel television services. Of course, we also started the process of privatizing the ports, and will complete the process. This is a very important goal. It was important to private communications and the movement of goods, products, information and raw materials so that we could create this clearing of obstacles.
This step was critical. We cannot take a step back. Competition is welcome and necessary to advance the economy, increase our reserves, increase our GDP and lower prices. These reforms in the capital market are critical. We faced a situation in which the pension system had no coverage and we needed to guarantee it. This involved complicated steps and the promise of government money, but also an increase in the age of retirement – something which very few countries have done to date, but they are dealing with this problem now. We already dealt with it. This is important because life expectancy is increasing – happily – but there was no corresponding increase in the age of retirement.
We did these things in the State of Israel. Many developed countries have not done this yet. They are starting to look to us, as they do with regard to our two-year budget. They see that we are taking action. It is true that they tell us what to do, but maybe we are also signaling the path they should take. It is another reason we were accepted to the OECD.
When implementing the reforms of the capital market, we had to decentralize the sources of credit. It was very, very difficult to receive credit in the State of Israel. Seventy percent of all credit was concentrated in banks; 70% of credit was granted to 1% of clients. Try to build an economy like that; try to grow it by 5% per year, year after year. It was impossible, and therefore we had to implement a comprehensive reform of the capital market of the banks’ retirement funds and trust funds. We did so. We took one-third of their assets and put them out in the market. It was not easy. But it helped create credit, and without credit there is no oxygen. Taxes must be lowered and credit must be given.
These are six steps we have taken over the past several years, but there are still four steps we must take which are essential to continue our climb in the rankings of countries in economic terms. Two of them were taken in the government’s first year. They are related to housing and transportation – the reform of the Israeli Land Administration and the reform in planning and construction that we recently launched.
One has been completed, but we must ensure its full implementation. The Israel Land Administration controls a tremendous economic resource – land – and it is strangling the State of Israel. Nothing is moving. Because of this, people pay outrageous housing costs, which are higher than they need to be because in desirable areas, 40% to 50% of housing costs are land and there is no land because we cannot free up the land. The procedures to do so are so complicated and cumbersome, and that puts us somewhere outside the OECD, outside the First World, outside the Second World and even outside the Third World. We are in a special category – the Fourth World. In terms of bureaucratic red tape, land, planning and construction and obtaining construction permits, we are more or less at the bottom of the list of nations, in 147th place or 120th place. Right now, registering assets and the time to obtain construction permits is undergoing a revolution.
The second is of course the national transportation network. We do not want to be trapped in the narrow and short area between Hadera and Gadera. We are opening up the Galilee and the Negev. There is tremendous work being done in paving roads and laying train tracks, including a national train network that we intend to implement in the next decade. We allocated the appropriate funds for the planning stage – NIS 2.5 billion. This opens up the country and allows for the movement of people and goods, but also of ideas, information and money. This will open up the State of Israel and of course greatly increase its economic capabilities.
We have focused on these two steps over the past year, and we will ensure that they are implemented in the coming year. There are two more steps we will begin next year which are very important and imperative. They will obligate great efforts by the government.
The first of these, the ninth step, is reducing centralization in the economy. The Israeli economy was highly centralized in the government and the Histradrut for the first decades of our existence. To a great extent, the first steps we have already taken have reversed this trend. However, the private sector is still too centralized. We intend to act vigorously, determinedly and wisely to reduce this centralization. I am not referring to traditional monopolies that exist in certain branches of industry or the economy. I am referring to lateral ownership of pyramids of control which reduce competition, because instead of equal competition, obstacles to competition are created by cross ownership that at times reaches levels that simply stop competition. There is no clear limitation to this phenomenon in our laws governing business restrictions, but I believe there are several steps we will have to take. Take, for example, the question of ownership of financial institutions. Can a business corporation also own financial institutions? We intend to deal with this. I intend to lead this step. I think it is a very important step in preserving competition. We want competition. We want to remove the obstacles to competition whether they come from the government or from the private sector.
The final step, and one that is no less important by any measure, whether economically, socially or in terms of our national values and national unity, is to improve the education system so that it improves at all levels, including in public schools. We must improve our ability to deal with the global world in which we find ourselves in every sector of the population – especially the ultra-orthodox population and the Arab population. We must continue to encourage them to join the labor market and provide them with the appropriate tools to do so. Participation in the labor market means providing them with the tools to earn a decent living and do so in the existing market. You will hear a great deal about these two things over the next year.
This is the plan we are working on. It is not a plan made up on the fly. It is a well-thought out plan with which we are moving forward. I described it in tremendous detail to the OECD officials, including Angel Gurria, during their visit here. I think these 31 countries were very impressed with how Israel was working clearly for all these years to become one of the most competitive nations – not just one of the developed countries, but one of the most advanced, competitive and responsible developed countries in terms of its economic and social administration.
There is still work to be done. We have done a great deal. We are doing a great deal; and we will do a great deal to move towards the vision I described – so that we can be on the list of leading countries, among the 15 most advanced countries in the world. This goal is possible and it won’t take us too many years to accomplish.