Download Israeli GDP per capita

The Israeli Economy: Maintaining a
Thriving Economy in the Shadow of
Terror
Prof. Zvi Eckstein
Deputy Governor, Bank of Israel
The Jerusalem Center for Public Affairs
March 26, 2007
The Macroeconomic
Picture
Real GDP per capita
Israel vs. USA
0.7
90
80
0.6
Ratio of Israel to USA
GDP per capita (right
scale)
NIS '000 (fixed prices, 2000)
70
60
0.5
0.4
50
40
0.3
Israeli GDP per capita
(left scale)
30
0.2
20
0.1
10
0
Source: BEA, PWT, OECD, BOI
2006
1999
1992
1985
1978
1971
1964
1957
1950
1943
1936
1929
1922
0
Running an Economy Under
Terror
• In 2000-03) terror has become a part of
every day life in Israel.
– A continuous impact on GDP growth.
– High level of defense consumption.
– Larger impact on the weaker segment of the
population.
– Great impact on uncertainty, which influences
economic activity in the macro and micro levels.
Implications of Terror
(Eckstein and Tsiddon,2003)
• When the rate of terror incidents is high, output,
consumption, investment and exports decline
significantly.
• In times of terror, non-durable consumption and
GNP per capita declined by about 3.2%
annually, while exports and investments fell by
14%.
• GDP could have been 12% higher.
GDP Growth and the Unemployment
Rate
% 12
10
8
6
4
2
0
-2
*
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
GDP growth
Source: CBS and BOI
Unemployment rate
*BOI Forecast
The Budget Framework Today
• Keeping public expenditure under 47% of GDP
• What is the desirable rate of public expenditure?
Main services that we need to take into
consideration: security, health care, education,
etc.
• Decrease of the budgetary deficit to around 1%,
so that the public sector debt would be about
60% of GDP.
Fiscal stability supports financial stability, and
both set the ground for annual GDP growth
of 4-5% and more.
Monetary Policy, and
Inflation and
Exchange Rate
Evolution
Managing Monetary Policy :
Bank of Israel Targets
• Achieving price stability, adhering to inflation
target (1-3%).
• Promoting financial stability.
Short
term
interest
rate
• Banking Supervision: Supporting the stability
and the efficiency of the banking system
Developing the capital market in a
global economic environment ensures
efficiency in consumption, investments
and production.
Monetary Policy in 2006 and 2007
• Inflation in the past 12 month was below
target (-0.8%). Main impact factors:
depreciation of the $ and the falling of fuel
prices in the past 6 month.
• Decrease of sovereign risk premium.
• Current account surplus.
The Importance of Transparency and
Moderation in Monetary Policy
Management
• Policy steps should be moderate in order
to prevent panic in markets. Harsh
decisions should be taken only in crisis
times.
• Keeping policy transparent.
• Signaling agents in the markets regarding
policy fundamentals.
Monetary Policy and Expected
Inflation in 2007:
 Private forecasters: 2.0%.
 Capital market: 1.4%.
 The economic atmosphere enables the
BoI to operate at a low interest rate of
4%, while achieving the inflation target
and financial system stability.
Reforms
The Israeli Economy
Weaknesses
• Financial markets:
– Money markets are not at the world’s high
standards
– High centralization, low level of
competition and efficiency in the banking
system.
– Banks are the main suppliers of financial
services – change had begun in 2000 prior
to Bachar reform.
The Israeli Economy
Weaknesses
• Labor market:
– High rate of poverty.
– Low participation/employment rate.
– Foreign workers.
• Education system.
- Low levels of basic knowledge: Need to reform
• Low productivity in low-tech sectors.
• Infrastructures:
– Low urban development in peripheral areas.
– Lack of public transportation and low quality of
roads in peripheral areas.
What needs to be done?
• Financial markets:
– Enhancement of efficiency, competition and
financial instruments: Following the world.
• Labor market:
– Active Labor Market Policies: US/UK examples
– Reduction of foreign workers
– Compliance with labor laws
• Infrastructure improvement.
• More reforms…”Doing Business” by the World
Bank.