Economics: Reasons to be cheerful

Hanging outside Yuval Steinitz’s office at the Finance Ministry are portraits of all his predecessors dating back to Israel’s first treasury minister, Eliezer Kaplan. Many of them seem to have a gloomy, worried look on their faces. Steinitz has been in the job for three years and will only see his portrait hung when he leaves office, but while he says that it is a “finance minister’s job to be worried,” he paints a rosy picture of the economy and of the country’s achievements as it enters its 65th year.

Israel, says Steinitz, is sailing on the rough seas of the global economic crisis and has yet to navigate its way to a safe harbor, but its economy is doing exceptionally well and when Israelis look back at what the country has achieved since independence, they have reason for satisfaction and for cautious optimism looking forward.

Steinitz admits that there are problems, especially the high cost of living, housing prices, lack of competition, and poverty among the ultra-Orthodox Jewish sector and the Arab sector, but says the government is making significant inroads on all fronts.

On the diplomatic front, Steinitz takes issue with those who say Israel is increasingly isolated and points them back to the days when the country did not have ties with today’s emerging powers India and China.

The following are excerpts from Steinitz’s interview with the Post.

How do you see the state of the Israeli economy after being in the job for over three years, and are you optimistic about the future?

Although in 2009, at the beginning of the global crisis, we did feel the very severe impact of the crisis here and we had almost zero economic growth, in 2010 and 2011 we saw growth of 4.8 percent. So there was a very significant economic recovery from the initial impact of the global crisis here in Israel and actually the figures are quite exceptional. Israel showed the fastest economic growth in the developed world in both 2010 and 2011. Israel is the only Western country which brought unemployment to a significantly lower level than pre-crisis figures. Israel is the only Western country that was upgraded in the last three years by Standard & Poor’s.

The secret of all this is that we are the only country in the developed world, and maybe in the entire world, where the level of investments in the real economy was going up in the last three years rather than down – it went up by 35%. So, generally speaking, the Israeli economy did use the global crisis in order to improve its position and to build itself for the future.

Still, on the negative side, if when I was appointed finance minister in March 2009, I assumed together with Prime Minister Netanyahu that in 2011 that the crisis would already be over, then the crisis is not over at all. We are very worried about the global crisis still and especially about the very significant difficulties in Europe and we already feel the ramifications.

If the Israeli economy is like a little ship sailing in the sea of a global storm, the good thing is that we did not sink, we are still sailing and in good shape. The bad thing is that we have not yet reached a safe haven and we are not yet harboring in the port; we still have to navigate our way in the ongoing global economic storm.

You describe the Israeli economy as a small ship sailing on a rough sea, but doesn’t the fact that we are a small economy also give us the advantage of being more flexible, of being more nimble, of being able to switch our markets to Asia. What’s the government doing to help shift the focus away from Europe?

There are some advantages to being small – and by the way there are many disadvantages. But it’s not necessarily so, because you see countries like Portugal or Ireland or Greece that are approximately the same size as Israel and the results there are not so good to say the least. So it’s not automatically the case that little countries with little economies are doing better in a time of global crisis.

In the past it was said that we are appreciated for our ability as a little country to defend ourselves against security threats... but I think in the last three years we became quite known in the world for our capacity to defend ourselves economically as well, to defend our national economy.

And what about the shift to Asia?

Two years ago at the Treasury, we came to the conclusion that the European economy is in very bad shape and that the crisis in Europe is only beginning, and there might be some impact on our exports to Europe. We decided to put a special focus on improving our economic ties with India and China. I visited China with a big delegation exactly two years ago and since this visit Israeli exports to China jumped from $1 billion, and we hope to end this year between $3b. and $4b. We almost tripled our export to China in two years. No less important, for the first time, in the last two years we saw many Chinese investments in Israel. Now I think in the last two years since my visit, Chinese firms invested between $5b. and $6b. in the Israeli economy, which is significant. We want to see more. I also visited India and we are about to sign a general free trade zone agreement with India.

So we put a special emphasis on improving economic ties with both China and India, not just to increase imports and exports, but also to create stronger ties. Just to give one example, one of many, I announced a few months ago that we will subsidize 300 post-doctoral scholarships for young PhDs from China and India who will spend two or three years here – approximately 200 from China and 100 from India annually from the best universities and colleges. This means that 10 years from now we will have 2,000 PhDs from China in computer science, in biotechnology, in medicine, in economics, in agritechnology who did two or three years of post-doctoral research in Israel. They will know the markets here, know the companies and opportunities, they will know Israel and have friends and colleagues here and probably know some Hebrew.

So Israel will have 2,000 ambassadors?

Two thousand ambassadors that will be either in the private sector in China, probably in very prominent positions, or in universities, or in government. This doesn’t increase Israeli exports immediately, but it creates bonds, strategic ties in both China and India that will serve cooperation between the Israeli economy and these two giants.

Israel is doing better than most of the developed economies, but people are still unhappy with their economic situation. Do you have any doubts that they will be out on the streets again this summer?

There are many things that need to be fixed in the Israeli economy and society and therefore I can understand why people are not satisfied despite this economic success. We have a lot to fix in society and we are doing it, but it takes time. There are many problems that should be taken care of. I was asked once by a reporter for [financial news agency] Bloomberg why there are such big economic protests in Israel despite the significant economic success and low unemployment and so on, and not only this but the average household income has gone slightly up despite the crisis of the last two years, while in most Western countries it has gone down. Unlike in many countries we have not seen cuts in healthcare, education, pensions and so forth. So I said it’s very difficult to be a finance minister, because if you fail to handle the crisis people complain they are suffering, and if you succeed in handling the crisis, people complain they enjoy too little of the success.

But let’s admit it, there are still many problems in the Israeli economy and society. For example, very large pockets of poverty among two important sectors of society – ultra- Orthodox Jews and Israeli Arabs. We have to deal with this, we have to increase the level of participation in the labor force of ultra-Orthodox men and Muslim women.

The results are still not satisfactory but in the last two years we have seen a significant improvement especially among ultra-Orthodox men. The percentage of haredi men participating in the labor force went up from 38% to 45.5% in two years. That is still very low, but if we continue to see such an improvement over the next few years then haredi employment will follow a similar pattern to the rest of the country.

Do you see that as a sustainable trend? Is it the result of government policy or is it the result of the funding crisis in the haredi world sending more people out to work?

I think both. We have made a special effort to encourage it by two means. Firstly, we addressed the ultra-Orthodox sector through the media. I gave a lot of interviews to ultra-Orthodox newspapers and radio stations, we spoke to many rabbis to encourage them to tell their people that it is legitimate to go to work, and secondly we increased our subsidies and support. For example, to universities to open special campuses for the ultra- Orthodox to pursue academic degrees or to take vocational courses to prepare themselves for the labor market. The number of ultra- Orthodox going to universities or colleges to acquire skills or academic degrees has gone up dramatically.

As for Israeli Arabs, we have given a lot of incentives for Israeli hi-tech companies to open branches in Arab towns and villages and we have improved public transport to enable people, especially women, to get to work. We have opened centers for technological education in Arab towns and taken many other steps to enable the Arab population to be integrated into the vibrant Israeli economy – for them and for us.

What steps can be taken to reduce the cost of living?

We can reduce the cost of living by increasing competitiveness, especially by the abolition of certain obstacles and by enabling free imports of foods and other goods in order to reduce prices and create some competition. Because in a small, isolated country like Israel we have less competition than say in the US or in Europe. If in Israel you have only two dairies there is a duopoly, and this might have some impact on prices, but if in Belgium you have only two dairies this is not problematic at all because you have dairies in France, the Netherlands and Germany and maybe even Denmark or the UK that are very close physically and have totally free access. The same truck that distributes cheese in Holland can cross the border to Belgium. It’s not the case that you can create internal competition in everything and therefore sometimes you have to lift barriers and customs in order to create competition from the outside to reduce prices.

In the housing sector there was a sharp price increase that puts pressure especially on young families. We have taken steps to increase the number of new apartments and the number [of housing starts] has jumped from 30,000, which was the average over the past 10 years, to 48,000. We have succeeded in stopping the rise in apartment prices and they have even gone down a little.

With regard to the cost of living for families with small children, we have come up with some very serious responses. For a young couple the cost of education in preschool ages is significant and this issue was brought to our attention by the protests. We took some very serious steps with the payment of negative income tax for women with young children, with tax credits for men with small children, we decided that free education in Israel would start at the age of three instead of five, and we put up a lot of money to enable this. In most towns there will be a long school day until four o’clock. If you take a family with two or three kids then all those steps together are worth between NIS 1,500 and NIS 2,500 per family [per month]. This is significant relief for young families with young children. People still aren’t feeling these steps because most of them are only now beginning to take place, but they will feel them toward the end of this year and they are significant.

The third complaint was about the connection between wealth and power between big money and the political system. I think that this government is the first government – even long before the protests – that showed that when the public interest is at stake this ill-linkage doesn’t work. Let me remind you about the Sheshinski Committee that I founded a year and a half before the protests.

This was the biggest struggle of its kind ever in Israel’s history. A struggle for around NIS 400b. That is the money that over the next 27 years the country will get as extra money from gas and oil in the Mediterranean because of this process. The same goes for royalties from the Dead Sea natural resources.

Now we are about to receive the findings of the Economic Concentration Committee. So this government is the first government in Israel that is ready to fix significant problems, regardless of the economic power against it.

Are you worried about the increased budget deficit. Do you plan to raise taxes to keep the books balanced?

First, it’s my job to be worried all the time. That’s my job, you know a finance minister cannot say he’s not worried.

If you are pointing at 2012, the picture is that we believed that we would end up with a deficit of around 3-point something, 3.3%, not beyond. We will keep the framework, the expenditure framework, the deficit will be slightly higher than what was planned but it’s not that significant. Until now I didn’t decide to initiate any new tax because it was unnecessary. If the deficit is 3.3% instead of 2% this is not terrible. I am not in favor of changing the policy every few months or even every year. I think that this is unnecessary. In 2009 we set a deficit target of 6%, 5% for 2010, 3% for 2011, 2% for 2012 and 1.5% for 2013. It’s just a forecast. In 2009 and 2010 we were one percent [age point] below our target so if this year it will be 1.3 percent[ age points] above our target then nothing really happened.

So what is the cutoff point where you really start to get worried and raise taxes?

I won’t give any figures but if it is much beyond the range of 3-4% then we might reconsider.

Obviously the gov’t has no influence on global oil prices, but what can be done to lessen the effect at the gas pump.

It’s very difficult – very difficult for people to pay and very difficult for the government to do anything. Taxation, at least compared to most of Europe, is very low. Overall tax on gas in Israel is 48% and in most of Europe it’s 60%. It’s a matter of priorities, I heard one minister say, ‘Let’s cut NIS 2 from the excise tax. Okay, technically it’s possible to do, but then I will have to cut around NIS 8b. from pensions, from health, maybe cut the idea of free education from the age of three, cut many very important projects, I think no country, at least not in Western Europe, has done what we have done. We already gave up 60 or 70 agorot in tax on gas. Generally speaking the government of Israel, like all other governments, cannot guarantee that it will keep petrol prices below a certain level.

As Israel enters its 65th year, can you look into your crystal ball and forecast what lies ahead?

The people of Israel can look back with great satisfaction despite all the problems and all the difficulties. Let’s compare the current situation of Israel with the situation of Israel 30 years ago.

Demographically, in 1982 we were 3 million Jews in Israel; now we are 6 million Jews. So despite wars, terrorism and all the problems we doubled our numbers.

If at the beginning of the 1980s there was a fear that people may leave the country because of all the problems – economic problems, terrorism, suicide bombing attacks, rocket attacks, wars, animosity, threats, well the opposite has happened. Many people came and we have doubled our numbers. Demographically we are much stronger than we were 30 years ago and by the way in the last two years also we have had a very positive migration balance. We have more newcomers and also more Israelis who are coming back from the US and elsewhere, partially because of the crisis, because of unemployment. It’s easier sometimes to find a job in Israel than it is in American or in Europe.

Economically, we had a very little, problematic economy based largely on agriculture and textiles. We were totally insignificant in the global economic picture. There were very few, if at all, foreign investments in Israel, no hi-tech, no real industries, no exports beside agriculture and textiles. The country was among the developing countries. Now look what happened in those 30 years to Israel’s economy. The GDP per capita is about $32,000 and has already reached the level of Southern Europe. GDP per capita is similar to that of Spain, Italy, Greece. We have developed a very strong economy, a very strong and vibrant hi-tech industry. Israel has become a global R&D center, a world laboratory for technology, industry, agri-tech, biotechnology and of course IT.... Especially during the crisis, people have realized that Israel is a very vibrant, very flexible, and very strong economy. We can be proud of our achievements despite the remaining problems.

Diplomatically, people tend to complain that we are isolated, that there is a lot of animosity and anti- Israeli propaganda in the world and some boycotts. But I remember the 1970s and the 1980s; there is nothing to compare. Take into account the fact that in 1982, 30 years ago, we didn’t have diplomatic ties with many many countries. We didn’t have diplomatic ties with very important countries like Russia, like China, like India. Today we have very strong diplomatic ties with Russia, with China we have increasing economic ties and with India it is almost a strategic alliance – we have very strong security and defense ties with India. So, also from this point of view our current situation is much better than it was 30 years ago.

So I think that if we try from time to time to see the broader picture, there are still many problems and many threats – the Iranian threat is a very serious one, especially their attempt to gain nuclear weapons – and we have to be cautious about the Arab Spring which is becoming more and more an Arab winter and we still didn’t resolve our problems with the Palestinians and so on and so forth. There are enough problems. But if you take Israel, and you see what it was not where it was 64 years ago, but just three decades ago, Israel is now demographically stronger than it used to be, economically stronger than it used to be and even diplomatically stronger than we used to be.

Looking forward I’m optimistic. We can still improve many things. I think that we can bring more Jews and more Israelis back home. I think we are going to improve our education system, especially higher education. I think we will continue to grow our economy and we can improve our public relations, but generally speaking I think there are reasons for satisfaction and also for careful optimism looking forward.