Improvements in Israel’s regulatory framework could pave the way for a more dynamic private sector, according to international economist Augusto Lopez-Claros.
“Obviously, there are features in play that say this should be a country that can take off and become an important global economic power,” he told The Jerusalem Post on Wednesday.
Israel continues to perform well on economic indicators such as the quantity and quality of scientific papers published, the number of patents granted to residents, and research and development expenditure, particularly within its high income group, Lopez-Claros said. He stressed, however, that the country also faces a number of stumbling blocks that impede its economic progress, such as regulatory uncertainty and bureaucratic squabbles.
Lopez-Claros, senior adviser in the Development Economics Vice Presidency of the World Bank Group, spoke to the Post by phone on Wednesday night ahead of his visit last week to Israel, when he is scheduled to address the Israel Democracy Institute’s 24th annual Eli Hurvitz Conference on Economy and Society.
During his tenure as chief economist at the World Economic Forum in December 2006, Lopez-Claros was cited by Israel’s Economy Ministry for pointing out the breakthrough areas in which Israel’s economy particularly excels.
“Israel does spectacularly well on those indicators that capture technology innovation, education, human capital and this accounts for the very rapid movement of the Israeli economy,” he said at the time.
More than a decade later, Lopez-Claros said his assessment would be broadly in line with his earlier comments, as he remains optimistic about the country’s potential in developing technology and innovation.
“Indeed, looking back at what has been achieved in the past 20 years, one cannot fail to be impressed,” he said.
“Having said this, there are, as in other countries, areas for improvement as well.”
Some shortcomings exist in both the quality of the public administration and of the investment climate, according to Lopez-Claros. He pointed out, for example, how the energy sector in particular has been hindered by “noisy internal debates.” Lopez-Claros was referring to the case over the past few years during which Israel’s natural gas sector, and the development of the Leviathan reservoir, was paralyzed as a result of disagreements between government officials and the gas developers.
Such disputes, he said, have at times “spilled over abroad and sent mixed signals to potential foreign investors that the rules governing foreign participation in the domestic economy are changeable and subject to considerable uncertainty.”
“This is important because the energy sector could be an important engine of growth in the future, provided it is able to attract adequate levels of foreign capital and know-how,” he added.
Although such regulatory uncertainty has long plagued Israel’s economy, Lopez-Claros expressed his hopes that the government would change this “troublesome and surprising” pattern of behavior, given the country’s progress in the hi-tech sector. The discovery of significant of gas deposits as well as the development of that industry could become an engine of economic growth for the country, enabling authorities to invest in other areas like education and infrastructure, he explained.
“It seems to be something that should have been a no-brainer,” he said. “You would have thought that a country with the sophistication of Israel would have already solved this issue years ago.”
As the main driver of job creation and economic growth is typically the private sector, Israel could also benefit from improving the ease with which companies can do business in the country, according to Lopez-Claros. In the latest “World Bank Doing Business Report,” Israel ranked 52nd globally in the “ease of doing business” index, a far cry from top-10 countries like New Zealand, Singapore, Denmark, Korea and Sweden, he explained.
“For its level of income per capita, the high degree of sophistication that one sees in particular sectors and industries, this performance suggests there is scope for improvements in the regulatory framework in Israel in a way that will encourage the creation of a more dynamic private sector,” Lopez-Claros said. “There is no reason why Israel could not join the upper echelons of the Doing Business ranks.”
Acknowledging that Israel’s business environment could also benefit from an improved geopolitical and security situation, which he described as “a thorny issue,” Lopez-Claros pointed out the potential advantages of greater intraregional trade and investment.
Having met with a number of senior Israeli officials over the past few years, Lopez-Claros said that he feels that the country’s government does recognize the importance of maintaining a good investment climate and intelligent regulation.
“It isn’t an issue of lack of understanding,” he said. “I think the understanding is there. It is more a question of the priority that the government gives to that particular area.”
As part of the World Bank Doing Business project, Lopez-Claros said they he and his colleagues have substantial engagements with governments from all over the world, who come to Washington to consult with them on best potential practices. South Korea, which sends a delegation every year, has risen in the rankings over the past five years, after implementing many of the suggested reforms, he explained.
“I don’t think we have ever received a visit from Israel in Washington to talk about doing business,” he said. “The interest that you see at the higher levels is there, but somehow it hasn’t translated into a work program; it hasn’t become central to public policy.”
While Israel may globally be known as the Start-Up Nation, Lopez-Claros said he feels that the country has the potential to both maintain that status and also become home to larger companies.
“The two are not mutually exclusive,” he said. “Israel can continue to be a leading incubator of ideas and new technologies but also see the emergence of companies that grow and acquire a global footprint.”
Such parallel growth, he explained, has occurred in countries with similar population sizes, such as Finland, Sweden, Switzerland and the Netherlands.
Continuing to be a hub of innovation while attracting bigger businesses requires “having a supportive public sector, creating sensible and predictable rules is obviously and important ingredient of success,” Lopez-Claros explained.
“Israel has vast, generous reservoirs of human capital that it can tap into to generate ideas that can find a niche in the global marketplace,” he said.