Transcript What Is Globalization

July, 2002
ISRAEL and the Globalized
World Economy
Prof. Assaf Razin
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What Is Globalization ?
• Globalization is an opening process of domestic
markets to the world markets, for trade of inputs,
goods, services, capital, labor and finance.
• Benefits: Risk diversification; Better resources
allocation.
• Costs: Increased wage volatility; Risk of financial
crisis contagion; Exacerbating business cycles;
Constraints on the conduct stabilizing macro
economic policy.
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Implications:
• The Information and Communication
Technology sector (ICT)grew from 5% of
GNP in 1990, to 14% in 2000. GNP
fluctuations became linked with the ICT
fluctuations.
• Duality between the economic activity
and the performance of the capital
market.
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• Economic Activity: Structural Indicationso GDP rose at annual rate of 2.4% in
2002/1, after a continuous decline in
2001/2 (-3.2%), 2001/3 (-5.2%) and
2001/4 (-6.6%).
o Current account deficit is 3% of GNP.
o Net external debt is 2 billions $ (gross
debt is 65 billions $; external assets are 63
billions $), about 2% of GNP.
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• Capital Market Indications:
o Top 25 index went down by 20%, from
Jan. 1, 2002 to July 10, 2002.
o Exchange rate depreciated by 13% in
Jan. 1 - June 30, and 8% in Jan. 1 – July
10, 2002.
The remains of this presentation consists of 4
parts: technology transmission, constraints on
macro policy, international trade and labor
mobility.
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Part I: Adaptation and Exports of
New Technologies.
 MOORE’S LAW: The number of transistors
on a chip doubles every 18-24 months
(Pentium 4, released 20.11.2000, has 42
million transistors).
 The ICT sector is characterized by rapid
technological changes and corresponding
price decline.
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 Technology is mobile across countries through
Multi National Firms (MNF). The origin of 90
out of the 100 largest MNF worldwide, is US, EU
and Japan.
 The size distribution of firms in the high-tech
sector in Israel, is very skewed: there are barely
handful of firms above $100 millions, with the vast
majority of medium size firms either stagnating
or disappearing after a while.
 The high-tech sector in Israel seems unable to go
beyond the “glass-ceiling” of $100 millions,
thereby forfeiting the opportunity to establish a
firm stronghold in international markets.
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Policy Implications
Israeli MNF are scarce, mainly because
they are lacking strategic management,
long term outlook.
Need to provide policy support in setting
up headquarters, R&D and management
units in Israel.
Tax Policy and Competition Policy can
facilitate M&A of Foreign firms by Israeli
firms.
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Part II: Constraints on Stabalizing
Macro Policy
• Capital market liberalization 1985 – 2002:
– Deregulating Israeli banks credit policy, abolishing
“directed” credit.
– Permission to private sector to invest abroad.
– Trust funds are allowed to invest in dollar assets.
– Household deposits in foreign currency is allowed.
– Rescinding foreign currency allocation limit for traveling
abroad.
– Permission for financial savings and investments in real
estate abroad.
– Institutional investors can invest abroad.
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Proposed Framework for Conduct
of Monetary Policy
Objectives:
• Main objective: price stability.
• Secondary objective: mitigating business cycles
fluctuations.
Policy:
• Main instrument: short term interest .
• Framework: inflation target.
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Benefits:
 Price stability over time contributes to the
stabilization of economic activity. In its absence,
expansionary monetary policy leads to
inflationary pressures, which leads to tight
monetary policy, which generates recession, and
soon.
 In recessions the monetary policy has a
significant role, as exemplified by the 11 interest
cuts by the FED, during 2001-2002.
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Monetary Policy Conduct in Israel:
• In the 1990s the central bank managed to
move down inflation to western countries
level; at the cost of increased recession in
the late 1990s.
• The short term interest rate path is shown
in the following chart:
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Short Term Interest Rate
9.1%
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Source: Bank of Israel
Deviations from inflation targets: Problems
• Inflation Target serves as a coordinator of
private sector’s inflation expectation.
• In 1999, 2000 and 2001, inflation fell bellow
the target; real wages and real interest went
up sharply, and the real exchange rate went
down.
• In 2002, the inflation realized above the
target, due to sharp depreciation; economic
activity is moderate; overshooting in
interest rate policy can contribute to
recession.
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actual
Source: Bank of Israel
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Conclusion:
Discrete jumps in interest rate can lead to
loss of credibility. October 1998 (interest
cut by 1.5%) and December 2001 (interest
cut by 2%), caused waves of capital market
instability and depreciations.
Loss of credibility required sharp interest
rate increase.
•
•
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Monetary Policy Implication
We propose to stick to interest smoothing
policy, so as to achieve medium terms
inflation targets, without overreaction to
transitory shocks.
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Budget Policy
 Current budget policy should create
credibility concerning future budget
discipline, by adapting rigid rules.
 The Maastricht rules are not suitable to Israel
for two reasons:
They do not include anti-cyclical elements;
They treat public investment on equal
footing as public consumption.
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 Balanced budget rules that allow for cyclical
fluctuations in tax revenue, and treat capital
expenditure according to user costs, could
enhance fiscal credibility, while permitting
government investment in infrastructure.
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Government Debt
• Government debt as a strategic (long term)
target has to be structured so as to take into
account that:
o Gross debt is partially matched by
government assets (lands, banks, telecom.).
o Debt reduction through privatization does
not affect net debt, whereas debt reduction
via budget surplus, reduces net debt.
• Given that OECD countries have different
stocks of public owned assets than Israel, the
adaptation of the 60% debt/GNP rule to Israel
is not relevant.
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Reintroducing Stabalizing
Elements Into Budget Policy
 Establishing an a-political Fiscal-Board,
which shall determine future long-term
growth forecast, as a benchmark to the
budget.
 The growth forecast will be the base for the acyclical tax revenue projections.
 Public capital spending accounting will be in
accordance to “resource accounting”. The
board will determine the types of public
investment in infrastructure that shall be part
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of the resource accounting.
Total Public Sector Deficit 1991-2002
(GNP Percentage)
6.0
5.0
4.0
3.0
2.0
1.0
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Source: Bank of Israel
.‫של הממשלה‬
*
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.0
‫*על פי יעד הגירעון החדש‬
‫)‪Gross Infrastructure Investment (GDP %‬‬
‫}‪{OECD at 1994-95; Israel at 2001‬‬
‫‪1.54‬‬
‫‪1.6‬‬
‫‪1.34‬‬
‫‪1.4‬‬
‫‪1.24‬‬
‫‪1.22‬‬
‫‪1.19‬‬
‫‪1.10‬‬
‫‪1.2‬‬
‫‪1.07‬‬
‫‪1.04‬‬
‫‪0.96‬‬
‫‪0.96‬‬
‫בריטניה‬
‫בלגיה‬
‫‪1.0‬‬
‫‪0.89‬‬
‫אירלנד‬
‫ישראל‬
‫הולנד‬
‫‪0.73‬‬
‫‪0.8‬‬
‫‪0.69‬‬
‫‪0.68‬‬
‫טורקיה‬
‫‪0.82‬‬
‫‪0.80‬‬
‫יוון‬
‫‪0.83‬‬
‫‪0.6‬‬
‫‪0.48‬‬
‫‪0.4‬‬
‫‪0.2‬‬
‫שוויץ‬
‫ספרד‬
‫שבדיה‬
‫לוקסמבורג‬
‫גרמניה‬
‫פינלנד‬
‫צרפת‬
‫נורבגיה‬
‫איטליה‬
‫דנמרק‬
‫‪OECD‬‬
‫‪0.0‬‬
‫‪26‬‬
‫‪Source: bank of Israel‬‬
Tax Reforms (June 2002)
• Capital income taxation.
• Alleviating labor income taxation.
• International taxation.
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Direct Tax Rates Following the Reform
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Estimated Net Income Increase
Following the Reform
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Budget Balance Prior to the
Reform Commencement (2002 prices)
2003
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2004
2005
2006
2007
2008
2009
2010
2011 2012
Part III: International Trade
• The fundamentals of opening an economy for
international trade:
o Competition; Price reduction.
o Channeling production into relative advantage
sectors.
o Canceling trade deviation/distortion.
o Reduction of imports license rents.
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• The liberalization in Israel since 1991:
o Canceling purchase tax, thereby exposing the
textile, furniture, shoes etc. industries.
o Gradual reduction of custom regarding “third
countries” import.
o Narrowing down shielding regulations
regarding import, reciprocity acquisitions,
tenders etc.
o Exposing the agriculture industry (since 1996).
o Abolishing depreciation substitutes.
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• Results of the exposure:
o During 1983-1999 the non-trade goods’
prices increased 56% higher than the
traded goods.
o Market centralization declined, import
and efficiency increased.
o Trade distortion reduced, and import
from “third countries” went up.
o Employment declined in the exposed
industries.
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Policy Implications
Retracting liberalization in goods, will inflict
substantial macro damages – price increase,
efficiency loss, trade distortion etc., without
real employment improvement.
Exposure achievements should be
maintained, and measures like import levy
shall be used only in proved market flooding
situations.
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Part IV: Labor Mobility
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 The total number of foreign workers in
Israel in 2001, including Palestinians and
illegal workers, is estimated as 250,000,
which is 13% of the total labor force in the
private sector.
 The increase in the total foreign workers
corresponds to the reduction of Palestinian
workers in Israel (from 120,000 to 14,000).
 Almost half of the foreign workers are in
the construction industry. Many employed
in agriculture and food services industries.
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• Advantages:
– Essential labor force in construction, agriculture...
– Reciprocity with countries which employ Israelis.
• Disadvantages:
– Delaying technological innovations.
– Wages reduction and the crowding out of Israeli
employees in those industries.
– Establishing immigrants communities.
– Social rights violation, poor medical services
rendered, low standard accommodation.
– Asymmetric power between employers and
employees.
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Policy Implications
Taxation of Israeli employers, thereby
equalizing foreign and domestic employment
remuneration.
Enforcing employees shielding rules.
Granting the visa to the worker, not her
employer.
Establishing authority that will regulate the
number of foreign employees.
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