In the wake of the 2008 global financial crisis, several Western countries brought interest rates down to near-zero in an effort to stimulate their economies. This expansionary policy was designed to increase investors’ appetite for risk and to motivate banks and other financial institutions to expand credit levels for private clients and small businesses.
The burden of encouraging growth has mainly fallen on the shoulders of the central banks, as interest rates are the main instrument they have to influence economic activity.
This will, however, likely change significantly in the near future, as the near-zero rates rise, ending the era in which the only movement in interest rates was downward.
At that point, traditional budgetary and fiscal tools rather than monetary policies will need to be used to spur economic growth.
As 2015 draws to a close, the US is on a trajectory for growth, and a number of European countries seem to be on the same track. At the same time, asset values – especially in real estate and corporate securities – are inflated.
Balance between the various world regions is still eluding the international economy. Prices of most commodities have fallen, especially in the energy sector.
Although the lower energy prices support production at competitive prices, this has significantly hurt countries whose main source of income is energy. The impact has been felt most severely in some of the developing countries that have functioned as the world’s growth drivers in the last few years, by raising the standard of living and creating a substantial middle class.
Is a trend of economic imbalance between global regions reemerging? Will we once again witness crises in a number of developing countries or a slowdown in Africa, the continent everyone was expecting to be the new economic growth sensation? The trend in which the West strengthens in contrast with other countries is already evident with respect to bond prices.
Western countries’ bond prices are rising, whereas they are declining in developing countries. As a result, it is becoming more difficult for the latter to raise capital.
Israel is uniquely situated between East and West. Israel navigated the global financial crisis with relative ease; it was not forced to enlarge its debt, and it was therefore able to continue the trend of lowering its debt-to-GDP ratio. This made it easier, relatively speaking, for Israel to achieve growth. Israel was able to maintain a reasonable budget deficit, and surpluses are now being distributed in an effort to benefit vulnerable populations.
Israel cannot afford a severe economic crisis. Had the damage caused by the 2008 crisis in Israel approached the magnitude of its impact in Europe, Israel’s GDP in 2014 would have been lower by about NIS 150 billion. The cumulative damage in GDP that we would have absorbed during the period from 2008 to 2014 would have been about NIS 800b.. Israel succeeded in avoiding a crisis on that scale due to its financial stability and responsible economic policies.
But will Israel succeed in regaining the growth momentum it has lost over the last two years? There is no simple answer to this question, since it depends on a large number of factors. There is no doubt, however, that one of the most important components is the ability of the economy to adapt to changes quickly and efficiently.
In recent years, many organizations and businesses across the world have experienced radical changes that have dramatically influenced the practices and profit margins of entire industries. These changes, most of which are based on technological advancements, have brought about a genuine digital revolution. And like all economic and technological revolutions, this revolution also has an impact on global employment, both collectively and on each individual employee. Policy-makers are struggling to create work environments and jobs that are not technology-based.
Innovative hi-tech stopped being an isolated industry some time ago. Innovation and technology are woven into the fabric of every organization that aims to remain relevant and competitive. These organizations speak the language of technology and have adopted a digital culture – an open and dynamic culture that generates confidence, flexibility and a liberated hierarchy.
I believe that one way to reignite growth can be found right under our noses. For years, Israel has been known as the “Start- Up Nation,” a technological and innovative world power. However, there are entire communities in Israel that have not been part of this technological revolution. To correct this imbalance, the government must set social policies that reach beyond support and subsidies to build up capability in underprivileged communities, especially in young people, so that they can become actively productive in the new world.
This, of course, is no easy task. We must revamp entire systems, first and foremost our educational system, and adapt them for this new, complicated and constantly changing world. We need to carry out thorough reforms in the public sector; how can we continue to maintain technological leadership, while most of our public services lag light-years behind? But the necessary changes and adjustments extend far beyond technology and digitization. Possibly the most crucial element of the transformation is behavioral: We must promote curiosity, an interest in new developments and innovations, quick and independent learning, and an eagerness to continually remain relevant.
The Israeli banking system, whose stability played an important role in the country’s economic resilience during the crisis, is a world leader in innovation and technology. Leading Israeli banks are constantly upgrading and making changes in order to stay relevant in the modern economy. They respond quickly to clients’ changing needs, and in a number of fields have spearheaded technological innovations. These technological changes have been possible due to simultaneous conceptual changes, such as the growing prevalence of digital culture, support for FinTech development, reduced organizational hierarchies, the creation of multidisciplinary teams of employees from a variety of sectors within a business, and the training of employees for the new world of banking.
I believe that if the Finance Ministry and the Bank of Israel succeed in protecting the strategic asset that is a robust and stable banking system, Israeli banks will know how to adapt to future changes and to ensure economic stability and growth.