Transcript PowerPoint Template

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%
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• 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
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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
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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
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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).
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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.
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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
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• 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.
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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
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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)
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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
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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.
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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.
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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.
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