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An Overview of the Israeli Economy Prof. Manuel Trajtenberg Head of the National Economic Council The Prime Minister’s Office, Israel May 2008 • Background • Economic Policy • Challenges and Opportunities • R&D and Innovation A Brief Economic History – 60 Years of Growth Average annual Total Growth Growth rate over 60 Years Product 7% 60-fold Population 4% 10-fold Product per Capita 3% 6-fold 3 3 Current Economic Performance – Robust Growth, Low Inflation GDP Growth (% per annum) 8.9% 9% % 7.0% 6.6% 7% 5.4% 5.2% 5% 4.2% 2.9% 2.8% 3% 5.3% 5.2% 5.3% Israel Average (4.2%) 4.2% OECD Average (3.2%) 2.3% 12 1% Inflation rate 10.59 10 8.62 8.1 2008 E 2007 2006 2005 2004 2003 -0.6% 2002 2000 1999 1998 1997 1996 1995 1994 2001 -0.4% -1% 8 6.99 6.5 6 3.4 4 2.4 2 1.41 1.34 1.2 0 0 -0.1 -2 -1.9 Source: Central Bureau of Statistics and Ministry of Finance Projections T T 2008 2009 2007 4 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 -4 4 The Current Account 8% Current Account Deficit/Surplus as % of GDP 7% 5.6% 6% 5% 4% 3.3% 3% 3.2% 2.4% 2% 1.2% 1% 0.3% 0% -1.2% -1% -1.2% -0.6% -1.3% -1.5% -2% -1.3% -2.1% -3% -3.3% -3.5% -4% -4.3% -5% -5.1% -5.1% Sources: Central Bureau of Statistics and the Bank of Israel 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 -6% 5 5 • Background • Economic Policy • Challenges and Opportunities • R&D and Innovation Fiscal Policy: Government Expenditure & Budget Deficits 6.0% General Government Expenditure (% of GDP) Government Budget Deficit (% of GDP) 55% 5.4% 5.5% 52.6% 53% 52.4% 52.2% 5.0% 4.5% 4.0% 4.2% 51.0% 51% 3.9% 3.6% 3.6% 52.2% 3.7% 51.0% 51.2% 50.2% 3.5% 49% 3.0% 48.4% 48.1% 2.6% 2.5% 2.3% 2.2% 47% 1.8% 2.0% 45.6% Deficit Ceilings 1.6% 1.5% 1.0% 1.0% 46.3% 45% 44.6% 44.0% 1.0% 0.7% 43% 0.5% 0.0% Source: Bank of Israel and Ministry of Finance Projections 41% 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 F 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 0 20 7 08 E 20 09 E 0.0% 7 7 Public Debt as % of GDP 110 105 104.5 102.5 % 101.8 103.3 101.7 99.9 99.8 100 97.5 95.9 95 91.9 90 87.1 86.7 85 81.0 78.9 80 75 1995 1996 1997 1998 1999 2000 Source: Bank of Israel and Ministry of Finance Projections 2001 2002 2003 2004 2005 2006 2007 2008F 8 8 Tax Burden Average tax rate on personal income Corporate tax rate Year Tax rate 55% 2003 36% 50% 2004 35% 2005 34% 2006 31% 20% 15% ,00 0 40 ,00 0 35 ,00 0 30 25 5 ,0 ,00 0 Monthly income, NIS, 2007 prices 10% ,00 0 25% 25% 20 2010 30% ,00 0 26% 2010 15 2009 35% ,00 0 27% 40% 10 2008 2007 00 29% 45% 0 2007 2002 Source: Ministry of Finance 9 9 Recent Reforms & Privatizations Bank Leumi Tax Reforms Pension Fund Reforms Domestic Government Bonds Reforms Capital Market Reforms Discount Bank Bezeq (telecom corp) Oil Refinery Ashdod & Haifa El Al Israel Airlines, Ltd ZIM (Israel navigation corp) Investment in Infrastructure Sea Ports Structural Reform 10 10 • Background • Economic Policy • Challenges and Opportunities • R&D and Innovation The Snapshot on the Israel’s Challenges Israel’s highly heterogeneous society, with a tremendous range of different » backgrounds » cultures » religions Exposed to the rigors of the global economy Challenged by its geo-political situation 12 12 Socio Economic Agenda 2008 – 2010 Main problems and challenges In the Global Environment: A massive influx of new players in advanced R&D, challenging Israel’s standing in this field. Geo-political instability. Domestic Issues: A high incidence of poverty, particularly among the ultraorthodox and the minorities. High inequality – (Gini Index of 0.38). 13 13 From Challenge to Action: the Current Agenda 1. Increase employment, reduce poverty. 2. Reinvigorate the education system, expand and upgrade its pool of human capital 3. Refocus innovation and R&D in the incipient scientific and technological frontiers 4. Improve Governance, reduce frictions within its governing bodies 5. Pursue further structural reforms, investments in infrastructure. 14 14 Socio Economic Agenda 2008 – 2010 Quantitative Targets and Main Policy Tools Negative Income Tax (1) The employment target: “increase the employment rate to the OECD average ” Innovation in Traditional & Services Sectors (2)The poverty reduction target: Reduce the Number of Foreign Workers “increase the income of the lowest quintile by more than the per capita growth rate. ” Enhanced enforcement of the Labor Law From Welfare to Work programs Ultra-Orthodox and Minorities Targeted Tools 15 15 • Background • Economic Policy • Challenges and Opportunities • R&D and Innovation Background and Features of Policies Background (1970’s): Israel had little resources, but highly skilled manpower, scientific prowess – how to mobilize them for growth? Strategic Decision: Jump-start a “science-based” sector by providing broad financial support, and making up for market failures. Hallmark of policies: “Neutrality”: respond to market demand/signals, do not “pick winners.” Dynamic/Innovative: create new and varied support programs according to evolving needs; avoid “selfperpetuating” programs. 17 17 Main R&D-Support Programs in Israel Matching grants to commercial R&D projects criteria: innovativeness, tech and commercial feasibility. “Magnet” Program for support of generic R&D consortia: corporations + academia; longer term, higher support. Examples: Nano Functional Materials, Streaming Media Messaging, Digital Printing. Technological “Incubators” Program: from innovative ideas to start-ups. “Yozma” Program 1993-97: Jump-started the Venture Capital Industry – success, hence discontinued 18 18 Silicon Miracles from the Holy Land: Highlights of Israel’s High Tech Sector ICT growth since 1990: ~ 15% per year ~ 4,000 high tech companies, most of them start-ups. 2nd largest VC market after the US The most foreign IPO’s in Nasdaq World’s fourth in US patents per capita Major innovations: ICQ, disk-on-key, Centrino chip, advanced firewalls, GPS software, Pillcamera, etc.; R&D/GDP= 4.6% (world highest) 19 19 The Ingredients of Israel’s “Silicon Miracle” 1. Entrepreneurship, Israeli style 2. High-quality human capital, technical skills 3. Government support for commercial R&D. 4. Venture Capital, local and US-based 5. Very open economy, strong ties with the global main players 20 20 But Israel’s Silicon miracle not for all Wide disparity between thriving High Tech and rest of the economy: HighT grew 5 times as fast! Low productivity of non-tradables, non-ICT sectors – a “dual economy”. Rising socio-economic inequality, in part consequence of dual economy : concern in itself, and narrowing future pool of human capital. 21 21 Why? Innovate here, benefit elsewhere… 1. Innovations mainly for exports, some spillovers internal, but benefits realized mostly abroad. • not much “Wal-Mart effect” in Israel 2. Gov. supports mostly product rather than process innovations; hence little R&D in traditional industries, services. 3. VC-backed startups: must exit, mostly by selling off to US-based corporations – who benefits? Israel: powerhouse in generating innovations, but not quite in benefiting from them. 22 22 Some lessons from the Israeli experience 1. Cannot have economy-wide growth by relying just on one fast-growing sector (ICT), Need to encourage and channel innovativeness also to non-High Tech sectors 2. Cannot have sustained growth with widening socio-economic gaps : Need policies of inclusion, of expanding the pool of human capital. 23 23