Fischer: Treasury should give up some control of the economy

Other gov’t ministries must be stronger and independent, he says.

February 4, 2010 15:32
4 minute read.
BOI Governer Stanley Fischer.

stanley fischer. (photo credit: Louise Green)


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The government should strengthen the execution power of its ministries and transfer the management of the economy from the Treasury, Bank of Israel Governor Stanley Fischer said Wednesday.

“We need to take out the management of the economy from the Finance Ministry and transfer it to the relevant ministries in the government,” he said at the Herzliya Conference. “Today, the majority of government ministries are not independent and have a very limited ability to initiate, act or execute. This situation is part of the problem of bureaucracy we have in this country, since most actions related to government ministries go through the Finance Ministry.

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“My appeal is not intended to weaken the Treasury, but the message is that we need to strengthen the other ministries for the economy to work efficiently and grow stronger.”

Commenting on the lessons to be learned from the global financial crisis, Fischer said shortcomings of Israel’s regulatory system must be dealt with as soon as possible.

“Without efficient financial regulation, we are likely to encounter problems,” he said. “This is what happened in the US as some instruments active in the financial industry were not supervised, such as subprime mortgages.

“There is a general consensus that there are too many financial regulators. One model that has been suggested is akin to the Dutch model, which consists of two main regulators, one of which is focused on risk management and the other one regulates business conduct and consumer protection.”

Fischer said he was sympathetic to US President Barack Obama’s policy to limit the risks banks can take.

“We need to be very careful and prevent the banks from taking risks that are not related to their main activities, which are retail and commercial banking,” he said.

Regarding steps needed for the economy to return to strong growth of 5 percent to 7% and to close socioeconomic gaps, Fischer said fiscal rules relating to the government’s public-expenditure ceiling set at 1.7% of GDP should be changed.

“At some point – and we are close to this point – the public-expenditure ceiling should be set higher than 1.7% to deal with education and other issues and strengthen the country’s engines of growth,” he said. “However, the change is a political issue and not just an economic issue.”

In response to plans to gradually cut income and corporate taxes by 2016, Fischer said the government must take into account the country’s debt-to-GDP ratio.

“Despite the success of the Israeli economy during the crisis, which managed to keep debt-to-GDP lower than in the US or Europe, the ratio is still high,” he said. “We will need to continue reducing the country’s debt-to-GDP ratio to build an economy that is flexible and strong enough to cope with future crises.”

Also speaking at the conference, Finance Ministry Director-General Haim Shani said the ministry was working on a strategic plan to identify and examine problems in the economy that have not been dealt with.

“We have not yet officially revised our growth forecast from nine months ago of 1.5% for 2010,” he said. “We expect the economy in 2010 to grow closer to the upper end of the Bank of Israel’s projection of 3.5%.”

Last month, the central bank raised its growth forecast for this year to 3.5% from 2.5%.

Shani said for the economy to return to sustainable growth and maintain its strong position at the outset of the crisis, the government needed to focus on three main areas: innovation, cutting bureaucracy and higher participation rates of minority groups in the labor market.

“We need to make sure that Israel continues to invest in innovation and improves the conditions of doing business by reducing bureaucracy,” he said. “In addition, we need to encourage and support the entry of Israeli business into new markets such as China and India.”

While Israel’s market share of the export of goods to the United States was relatively high, it was relatively low for other developed countries and for large emerging economies such as Brazil, India, China and Russia, the Bank of Israel reported Wednesday.

“Over the past decade, the share of the large emerging economies in global output and imports has increased significantly, while the share of the US in global imports has fallen, a trend that is working against Israeli exports,” the central bank’s report said. “The findings indicate that it is important to find ways of encouraging trade with other countries, and primarily large emerging economies such as China and Russia.”

The report showed that Israel’s market share was relatively high in countries whose imports include a high share of chemicals and office and communication equipment. In contrast, Israel’s market share was relatively low in countries whose imports have a high share of traditional manufactured goods.

Israel’s share of exports to the US, India and Brazil was higher than predicted relative to the majority of countries in the sample. In contrast, its share of exports to China and most of the EU countries, especially Germany and France, was relatively low.

From 2000 to 2008 a significant improvement was found in Israel’s share of exports to Cyprus, Turkey, Brazil and Finland. But there was a significant worsening in its share of exports to China, Russia and most of the European countries, including Austria, Switzerland and Germany.

In 2007 and 2008, Israeli exports to large economies, including Germany, France and China, were lower than their potential levels by more than $100 million for each of those countries.

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