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The Herzliya Conference
The Economic Dimension
2009
Prof. Rafi Melnick
Provost, Interdisciplinary Center (IDC)
Herzliya
Prof. Rafi Melnick
February 2009
The Big Issues
• The broken crystal ball
• A crisis that happens once in 100 years
• From a country oriented economy to a
world global economy
• A need for a new architectural structure of
the financial markets and Institutions
Prof. Rafi Melnick
February 2009
Identifying Business Cycles
Turning Points in the Israeli
Economy
The Present Cyclical Position
Prof. Rafi Melnick
February 2009
The Melnick Index 1994-2008
(2004 = 100)
130
The Present Cycle
May 2008
120
110
The big crisis
October 2000
100
The contraction recession
March 1996
90
80
The high-tech bubble
May 1999
Growth and Recovery
August 2003
Jan-94
Jul-94
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
70
Prof. Rafi Melnick
February 2009
The Source of Economic Resilience
Prof. Rafi Melnick
February 2009
General Government Expenditure
2000-2008
(Percent of GDP)
55
50
45
40
35
30
2000
2001
2002
2003
2004
Prof. Rafi Melnick
2005
2006
2007
2008*
February 2009
General Government Deficit 2000-2008
(Percent of GDP)
8
7
6
5
4
3
2
1
0
2000
2001
2002
2003
2004
Prof. Rafi Melnick
2005
2006
2007
2008*
February 2009
Public Debt 2000-2008
(Percent of GDP, Gross Debt)
105
100
95
90
85
80
75
70
65
60
2000
2001
2002
2003
2004
Prof. Rafi Melnick
2005
2006
2007
2008*
February 2009
0
Prof. Rafi Melnick
February 2009
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Bank of Israel Interest Rate 2000-2009
12
10
8
6
4
2
International Reserves 2008
(In US dollars, millions end of the period)
40,000
38,000
36,000
34,000
32,000
30,000
28,000
26,000
24,000
22,000
20,000
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
Prof. Rafi Melnick
February 2009
Labor Force Participation 2000-2008
(Percent)
58
57
56
55
54
53
52
2000
2001
2002
2003
2004
Prof. Rafi Melnick
2005
2006
2007
2008*
February 2009
GDP and Business GDP 2000-2008
(Rates of Growth, Percent)
12
10
8
6
4
2
0
-2
2000
2001
2002
2003
2004
2005
2006
2007
2008
-4
GDP
GDP Business
Prof. Rafi Melnick
February 2009
Unemployment 2000-2008
(Percent)
11
10
9
8
7
6
5
2000
2001
2002
2003
2004
Prof. Rafi Melnick
2005
2006
2007
2008*
February 2009
Current Account 2000-2008
)Percent of GDP)
6
5
4
3
2
1
0
-1
2000
2001
2002
2003
2004
2005
2006
2007
2008*
-2
Prof. Rafi Melnick
February 2009
Recommendations for Fiscal Policy
 The first priority of the new government is to
approve the 2010 budget. For 2009, the government
should make minor necessary adjustments to the
2008 budget.
Given the present uncertainties the government
should not cut taxes and/or increase expenditure.
The government should allow the rise in the deficit,
due to the reduction in tax collection. The fiscal deficit
is expected to rise to 5% of GDP.
It is crucial that the 2010 budget signals a long
term, credible, deficit reduction path – and a return to
a trend of reduction in public debt.
Prof. Rafi Melnick
February 2009
Recommendations for Fiscal Policy
2
Up to 3% of the budget deficit, relative to GDP,
should be financed by internal borrowing the rest
should be financed abroad using the US loan
guaranties if necessary.
The government should give priorities to:
 Research and Development
 Labor retraining and education
 Unemployment compensations
The government should initiate large infrastructure
projects – in collaboration with the private sector
Prof. Rafi Melnick
February 2009
Recommendations for
Monetary Policy
 Monetary policy should continue to be
expansionary
 The Bank of Israel should set the lowest possible
interest rate
 The Bank of Israel should support the financial
system and the banking system acting as
“Lender of Last Resort”
 The Bank of Israel should continue to support the
Shekel
 The Bank of Israel should take measures to
restore proper functioning of the credit system
Prof. Rafi Melnick
February 2009