Israel’s economy needs strong moral underpinnings to blossom and become more
equal, according the Bank of Israel’s Barry Topf, who is stepping down from his
position as senior adviser to the governor on monetary policy issues and member
of the Monetary Committee at at the end of October after 32 years on the
Asked what important issues Israel’s economy faces, Topf responded:
“The moral underpinnings of a well-functioning economy... Corruption or its
perception can have an effect on performance, and I think these shouldn’t be
taken for granted.”
Similarly, a moral approach to business could help
reduce inequality, he said, adding: “I don’t think that’s a legal and or
economic issue; that’s an issue of norms and appropriate behavior. That’s where
people should look for the solution, not to legal or policy steps. Even if
managers and owners have the ability to extract a certain return from their
business legally and financially and economically, I think they have a duty to
ensure that it’s appropriate and proportional to their own contribution and the
contribution of others.”
The Bronx-born Topf, who made aliya at the
age of 21, recently sat down with The Jerusalem Post at the Bank of Israel to
discuss his experience at the bank.
Topf’s departure comes at a time of
transition. The six-person Monetary Committee that makes the central bank’s key
interest-rate decisions, which includes three bank representatives and three
outside academics, has been short one person since former Bank of Israel
governor Stanley Fischer stepped down at the end of June. Karnit Flug, Fischer’s
deputy and the current acting governor, plans on stepping down shortly after a
new governor is in place. Topf’s departure means the central bank’s entire
representation on the committee will be new.
While he refused to comment
on the prolonged search for a new governor or the performance of Finance
Minister Yair Lapid, Topf offered insights into how Israel navigated the 2008
financial crisis, the qualities the next governor should have and the why
markets are like Polish mothers.
What has been your most important
accomplishment to date at the bank?
Helping steer the central bank during the
economic crisis, which began in 2008, without a doubt. The bank’s response was
particularly important here because there was a transitional government, so
fiscal policy, the other lever of macroeconomic policy, was not available to be
The most important thing heading into a crisis is having a strong,
resilient economy, and that you can’t do once the crisis hits.
the single-most interesting thing we did, and to my mind still had the best
positive impact, was intervening in the foreignexchange market starting in March
2008, which I think played a major role in helping the small, very open,
export-oriented economy to deal with an almost unprecedented global
Along with that, we also increased our foreign-exchange reserves,
which we had wanted to do for a long time. The higher foreign reserves are an
insurance policy, improve our credit standing and give flexibility to respond to
a crisis should one develop. In that sense, the increase in reserves during my
tenure is one way I know I leave the economy in a much better condition than
when I began, or even five years ago.
The unsung hero of the crisis was
the fact that we responded very quickly in terms of liquidity to the banking
systems, which helped the Israeli banking system avoid problems. It kept
The fact that a year before that we joined the CLS
[international clearing system], so foreign exchange transactions were able to
continue with high level of certainty.
Quantitative expansion, which was
not called that at the time, initiated in February 2009, also boosted the
economy. And of course, all along, similar steps, strong steps in banking
supervision were very important. And the monetary policy response of lowering
interest rates at a timely, sometimes dramatic fashion.
What is your
I would’ve wanted to have more of an impact in terms of
promoting long-term reforms in the Israeli economy, which working on the
financial side I really didn’t. I would have personally been gratified to play a
role in long-term structural reforms, which is needed in education, health care,
There’s a lot of work that still needs to be done in
infrastructure – transport, telecommunications, ports.
These are all in
the news all the time.
In terms of education, if you look at long-term
health, it’s based on quality of the education system, and a lot has to be done
there. I think the health-care system, while good, faces major
Fischer won accolades for his performance as governor. You
were his adviser. What made him exceptional?
He brought a standing and
self confidence and gravitas that allowed him to take dramatic decisions in a
timely fashion, such as the intervention in the foreign-exchange markets and
reducing interest rates. He really saw the big picture and was willing to be
flexible, and in a certain way even unconventional, and respond to the needs of
Any stories that stick out?
There’s the classic story of him
serially pulling me off planes at various points in the crisis. He delayed an El
Al plane on the way to New York – that was two or three days after Lehman
Brothers – on the way to the IMF meetings, and he decided that we both have to
stay because of the crisis. I was already on the plane and it was about to pull
away, and I get this phone call. And they don’t let you off the plane for
security reasons, so I stand up and everybody jumps, and the security officer
asks to speak on the phone, and he gets on and says, “Shalom zeh Stanley
Fischer,” so they let me off.
With Fischer gone, and you and Flug
leaving, there will be an obvious hole in the Monetary Committee.
markets worry about that?
The markets can be like a Polish mother: They worry
about everything, but that doesn’t mean it makes anything better. I rely on the
people who make those decisions to appoint capable and able people to fill all
those rolls, so there will be continuity. I think it’s a mistake to ascribe too
much importance to personalities.
On the one hand, the quality of the
work always comes down to the people, the human element, especially in the area
we work in. On the other hand, there’s a reality: There are talents and
capabilities that are not spread equally amongst everyone, but they are
certainly adequate at the top levels of the bank and the economic field in
The structure, the very fact there is a Monetary Committee and
the three outside members are staying creates continuity. I don’t think it’s a
concern for the markets. The bank has shown over long periods of time and
through a lot of personnel changes that it’s a competent and well-managed
institution with a lot of talent, and I wouldn’t ascribe too much importance to
Of course it would be preferable to have positions
filled in a timely, efficient manner. But we’re not the only institution in
Israel or in the world in which these kind of decisions take time.
are the most important qualities they look for in a central bank governor?
Humility. The physicians’ motto is do no harm. People in the central bank have
an influential role; we have to be very responsible, very careful, very humble
to a certain extent. There are limits on what we can do. We’ve seen a lot of
mistakes that have stemmed from overconfidence.
He has to be a good
manager, because this is an organization with tremendous potential. We have a
lot of talented people, but talented people can be harder to manage.
need someone who is able to think deeply and see the big picture, but maintain a
degree of flexibility and not be hemmed in by the conventions, which in the
financial world can be strong.
It’s extremely important that it’s someone
who can control the independence of the central bank and high ethical standards.
We sit here on a lot of money, a lot of power, and that comes with temptations,
and the bank has always maintained a high standard of behavior.
a specific philosophy or worldview a governor should have?
I don’t think there’s
a point in making too much of whether this person is a monetarist or that person
is a Keynesian. Since 2008, everyone has to be a pragmatist. The Chinese leader
Deng [Xiaoping] said he it doesn’t matter what color the cat is as long as it
The shekel appears to just keep strengthening, but BoI
interventions have moderated it. What’s the right balance between market forces
Given the current world monetary setup, it’s extremely
difficult to resist very fundamental long-term market forces. What we try to do
is strike a balance between allowing long-term forces coming in to play while
taking the edge off in terms of the damage that large and unjustified deviations
Unlike financial markets, the real economy has a memory, in
the sense that if a currency is overvalued for too long, contracts are missed,
markets are lost, production lines are shut, or in the worst case, employees are
dismissed. Once the currency returns to its true value, those effects remain,
because there is overhead, there’s tremendous lag. You don’t immediately get a
contract back, you don’t immediately move a production line back from overseas,
so we try to strike a balance between allowing market forces to come into play,
leaning against the wind when the deviations are very large and clearly
What would you say are the most pressing issues Israel’s
economy faces today?
You always have the problem of letting the urgent delay the
The immediate items on the table include dealing with the
slowdown in the international economy, especially international trade. Exporting
is the key to the performance of this economy, highly dependent on international
trade, dealing with the spillover of the monetary policies of advanced
economies, including the exchange rates, which aggravates the previous
It’s important to mention the areas we don’t have problems, so
evident in the rest of the world. For example, financial stability. People take
it for granted, but it’s the result of years for hard work on the part of the
regulators, on the part of the institutions themselves. And you have to throw in
a good word for the economy itself. People keep talking about the Ministry of
Finance, the Bank of Israel. But we talk about how we got through the crisis,
how we got through the crisis was with an economy that functions well –
productive private sector, productive workers, managers, exporters, the hi-tech
They deserve the lion’s share of the credit.
For the most
part, we can manage to help and constantly ensure we don’t make things worse. We
can provide a good environment. Which brings me to the important but less urgent
things. One of them is increasing productivity of Israeli workers, which is
still low compared to other economies. The demographic challenges we’re facing
in terms of participation in the workforce.
Health, education, which is
the key, and this country of all countries should make a tremendous effort
And I would add something: The moral underpinnings of a
wellfunctioning economy – lack of corruption, enforcement of laws – and
unfortunately we’ve seen some backsliding. It’s not just a matter of judgement.
There are surveys from places like Transparency International that rate it, and
corruption or its perception can have an effect on performance, and I think
these shouldn’t be taken for granted.
How can Israel increase its lagging
From a macro perspective, the capital per worker here is
fairly low. In the hi-tech sector we create solutions to help productivity
everywhere else in the world, but we’re less advanced in using them and applying
We should be the first guys off the block in terms of digital
revolution, in terms of fiber-optical and a totally wired or wireless economy.
Educational system, we mentioned, work, lack of professional and vocational
training – there are bottlenecks in certain areas.
Red tape, bureaucracy
and labor market has become much more flexible, but there are still a lot of
factors inhibiting that, like lack of rental housing. Workers place a higher
priority on being at a job near a purchased home. There are a lot of factors,
even though it’s a dynamic economy, that keep the economy hidebound.
liquidity at the Tel Aviv Stock Exchange is down and both its CEO and chairman
have resigned. What needs to happen to revitalize it?
It’s obviously in
everyone’s interest to have an adequately liquid and functional capital market,
but that’s in my mind primarily a function of the underlying economy and
financial system. Specific steps can always be taken to heighten liquidity, but
the problem is a global one, and I don’t see it as a crisis by any
Some experts think Tel Aviv should be a financial center like
London or New York. Is that something you think is desirable and possible?
As far as I know, every country in the world from Grenada to Fiji to Trinidad
and Tobago has at one time or another decided that they want to become an
international financial center.
The requirements for being an
international financial center are very specific. There are very few of them,
and the international financial world is becoming more concentrated rather than
less concentrated. It would be very nice, but you just don’t have the conditions
here – be them population, be them market size, be them geopolitical position –
that you need to become an international financial center.
said, where we could excel is in supplying services to the international
financial industry in the area of technology, in the area of expertise, in the
area of economic modeling. But those are very specific; given the size of
Israel’s economy we would be a niche player.
What is the source of
Israel’s income inequality? What’s the solution?
It’s easy to say that income
inequality is an unpleasant phenomenon.
Beyond that a lot of studies show
it has a deleterious effect on economic performance, so it’s not just equity or
fairness. The sources – there’s considerable debate in the profession what they
are, but we’re looking at something that’s a global phenomenon. I don’t know if
there’s anything specific to Israel other than the factors operating here
sometimes have different weight. For example, we are more heavily involved in
areas with increased returns to high-end talent, such as tech or R&D, so it
is more pronounced in Israel.
So is the solution to get more people into
Obviously we’d like to increase the size of the cake, not just
the way it’s divided. A rising tide raises all boats.
We’d like to see
the gap close by bringing the lower end up, not just pressing the upper
Speaking personally, not as a central- bank economist, I think you
can’t look to policy makers to solve all issues. Some of them are ethical and
behavioral. If you ask me if there’s been a problem with the incentives in the
economy, I would say yes. But I don’t think that’s a legal and or economic
issue; that’s an issue of norms and appropriate behavior.
people should look for the solution, not to legal or policy steps.
if managers and owners have the ability to extract a certain return from their
business legally and financially and economically, I think they have a duty to
ensure that it’s appropriate and proportional to their own contribution and the
contribution of others.
The US seems in danger of hitting its debt
ceiling. Should Israel be worried?
If America defaults on its debts, it would be
worse than the crisis we experienced a few years ago. But I don’t think that’s
possible. We can throw in the Winston Churchill quote about how America always
does what’s right, but only after exhausting all other
After a long tenure in the job, what message would you
want the public to know about the economy or your work specifically? I think
people should pay less attention to headlines. I think there’s been a drift
towards overemphasizing the public relations and headline quality of decisions
at the cost of a more fundamental analysis of dealing with the problems. There’s
been a tremendous compression in attention spans. Economic performance by
definition transpires over different period of time. People are too focused on
the short term. I think people have to pay attention to the moral and ethical
aspects of their behavior.