The Israeli Tiger that Needs Taming

Israel’s economy is enjoying rapid growth, but various thinkers say there’s a need for vision and planning to ensure it doesn’t rise and fall like Ireland did.

By ZIV HELLMAN
Tiger (do not publish again) (photo credit: Avi Katz)
Tiger (do not publish again)
(photo credit: Avi Katz)
GIVEN RECENT ECONOMIC growth numbers, Israelis might justifiably feel a need to pinch themselves, to be sure that the blazing fast growth rate is real.
While most advanced economies are still struggling to dig their way out of the mess left by the global recession of 2008 and 2009, Israel’s economy seems intent on racing ahead. Gross domestic product (GDP) expanded at an annualized rate of 5.2 percent in the second quarter of last year, 4.4 percent in the third quarter, and an astounding 7.8 percent in the fourth quarter, driven by strong private consumption and investments.
Compare that with an average GDP rise among OECD (the Organization for Economic Co-operation and Development, essentially the developed nations) members of only 2.8 percent last year. Israel’s growth rate outpaced that of Sweden, Japan, the US, Britain and Germany.
As cheering as the numbers are, in a dynamic global economy, resting on one’s laurels is not a good idea. In recent years, several initiatives have sprung up, urging the fashioning of coherent national policies with definite aims for where the country’s economy should be taken in the years ahead.
One idea, initiated by the Reut Institute, a non-partisan, non-profit policy team based in Tel Aviv, has been taken up by no less than Prime Minister Benjamin Netanyahu: to place Israel, within a few years, within the top 15 countries in the world, in terms of income and quality of life. This is an ambitious target – the International Monetary Fund currently lists Israel 28th in the world in per capita GDP – requiring strong and sustained growth over an extended period of time.
“One of the reasons that the Reut Institute was created,” says Gahl Rinat, Reut’s director of external relations, “is that its founder, Gidi Grinstein, noticed… that there is a built-in bias against long-term professional systemic thinking in the governmental system.” Grinstein came to this conclusion when he served as secretary of the Israeli negotiating team with Yasser Arafat and the Palestine Liberation Organization between 1999 and 2001.
“To make things happen, it is not enough just to react to developments, without careful planning,” Rinat explains. “[Grinstein] was determined to try to change that.”
As part of its efforts to stimulate longerterm thinking, Reut teamed with the business daily “The Marker” in January to conduct an international conference titled “Israel 2021,” attended by world experts in economic development, alongside local business figures. There they rubbed shoulders with top government officials, including Finance Minister Yuval Steinitz and Prime Minister Netanyahu. The conference included both lectures and “round-table” discussions intended to bring together individuals with varied expertise to discuss topics crucial to Israel’s economic future.
Most of the participants at the conference were confident that moving Israel up into the top 15 countries in world quality-of-life rankings is a realistic aspiration, but it will require a national consensus that this is a goal worth striving towards, and will demand concerted efforts by several sectors.
Another theme that emerged is that what for decades was a dominant paradigm in international development circles – the “Washington Consensus” – is by many considered to be passé. The private sector is still regarded as the main engine of growth, but a strong public sector is considered just as vital in establishing conditions for sustained economic development.
NOBEL ECONOMICS LAUREATE Michael Spence of Stanford University’s Hoover Institution, who spoke at the conference, cautions that explosive growth, such as that of China, which has been growing at near 10 percent annual levels for some time, is not something that should be expected, but that steady, sustainable growth can definitely be attained.
“Advanced countries generally do not experience explosive growth,” Spence tells The Report. “China is booming now, but they will slow down eventually. Growth rates of 3.5 percent to 4 percent are about right for strong growth in an advanced economy.
Sustained, high growth is a subject that has been studied and can be implemented.”
Spence is a leading figure in the movement to adopt what is coming to be called a “New Washington Consensus,” after he was tapped by the World Bank to lead a commission studying economic growth, which led to the publication in May 2008 of the Spence Commission’s Report on Growth and Development.
The Washington Consensus refers to a general set of neoliberal policies that has been influential among economists, politicians and institutions such as the World Bank and the IMF since the era of Ronald Reagan’s presidency in the US and the premiership of Margret Thatcher in the UK. The main tenets of the consensus include fiscal policy discipline, tax reduction, redirection of public spending away from direct subsidies and towards education, health and infrastructure, liberalizing international trade, maintaining competitive currency exchange rates, attracting foreign direct investment, privatizing state enterprises, deregulation, and strong legal security of property rights. These policies have been advocated by influential international institutions as prescriptions for reducing government deficits and pushing forward export-led growth.
Many of the tenets of the Washington Consensus were embraced by Israel’s financial policymakers, and there is no doubt that the country has significantly changed its economic growth patterns in the past 20 years.
The Washington Consensus has, however, been the target of several prominent critics, such as Nobel economics laureate Joseph Stiglitz, who have argued that it is too simplistic and fails to take into account that changing conditions may dictate more flexibility in setting policy guidelines. There have also been critics who charged that inflexible application of its tenets may exacerbate income inequality and erode the economic standing of unskilled and semi-skilled workers.
It was partly in response to those critics that Spence was asked to lead a commission looking into the subject.
The Spence report deliberately avoided composing a universal rulebook, because it rejected the view that cookie-cutter policies can be advocated, devoid of context. While recognizing that macroeconomic stability, savings and investment and market-orientated incentives are key elements, it places a stress on identifying the most significant local bottlenecks and constraints and removing them.
Policy experimentation and targeted initiatives are also encouraged in the Spence report, and it was this message that he brought with him to Israel.
Israel has talented and motivated human capital,” says Spence, “but to succeed now it will need adaptive systems that can change rapidly in accordance with changes in the global economy. Remaining nimble is important.”
RICARDO HAUSMANN, DIRECTOR of the Center for International Development at Harvard University, also attended the conference, presenting an overall message similar to that of Spence.
Hausmann, who has practical experience as Minister of Planning in the Venezuelan government, tells The Report that it is “a realistic aspiration” for Israel to move into the top 15 countries in world rankings.
“One major key to achieving this is developing a national consensus on how to move up,” he explains. “For example, to get successful start-up companies to grow into global corporations, you need a business environment that supports moving to the next stage.
Conferences, such as the Israel 2021 conference, are important because they bring together the leaders of society, and give them the freedom to work on issues while unleashing a great deal of energy.”
Rinat, who worked in the President’s Office before joining Reut, says that the idea for the conference has long been planned by Reut. Grinstein and others were concerned by what they perceived as a lack of vision and meaningful discourse over Israel’s future, with respect to quality of life, social issues, political issues, and the balance between government and private industry.
“There is a myth that all growth comes only from the private sector,” says Rinat, “but the public sector can make all the difference, because the private sector can only grow in the proper ecosystem and given the right platform.
This requires cultivating public dialogue on important issues, cooperation between various sectors for achieving particular goals, and developing an ethos of elites serving the nation. The media also have a role in this: Financial papers such as “The Marker” and “Globes” are already going beyond reporting only about what happened in the stock market today, and considering deeper and longer-term trends.”
ACCORDING TO RINAT, WHEN Reut first opened its doors in 2004, it operated as a typical think tank, staffed by experts, each writing about his or her expertise. “That paradigm was dropped,” Rinat explains, “because it was a 20th-century model of what a think tank ought to be. In the 21st century, there is less need for experts in order to obtain knowledge, because technology gives us access to so much knowledge.
What is needed is understanding.”
Funding for Reut, which has 28 employees, is 75 percent from private donors in Europe and the US, and 25 percent from Israeli sources. In principle, Reut insists that all its funding sources be non-governmental, whether foreign or domestic, to preserve its independence. Reut’s main focus areas are national security and socioeconomics, but it has also recently opened a new division studying the Jewish world and ideas, beyond technology alone, which Israel can contribute to the world. Reut employees stress the interdisciplinary approach of the institute, comparing themselves to a policy SWAT team, and they point out, for example, that their team looking at economic issues includes, in addition to economists, an architect, a historian and a sociologist.
“Isaiah Berlin’s metaphor of the fox and the hedgehog is relevant here,” says Yuval Holtzman, an analyst at Reut, referring to a famous essay by philosopher Isaiah Berlin. In it, thinkers are divided into two categories: hedgehogs, who view the world through the lens of a single defining idea, and foxes, who draw on a wide variety of experiences.
Holtzman uses the metaphor as a way of distinguishing the “fox” approach at Reut from the “hedgehog” approach typically associated with academic experts.
“Experts probe deeply into specialized subjects,” says Holtzman. “That is necessary and important, but we also need the ability to move rapidly and flexibly between disciplines, to get a broad picture. We also need to study ‘complementary opposites,’ which are often the key to dynamics. For example, government regulation versus the invisible hand of the market are opposites, but they are complementary, and in the right combination, they are just what is needed to induce dynamism in the complex system of the economy.”
Omri Zegen, an analyst team leader at Reut, describes the institute as striving for “21st-century Zionism,’ which is flexible and forward-moving. “We aim to identify gaps that need to be filled,” says Zegen, “and to catalyze change in the right direction.”
ONE OF THE MOST INTERESTING participants in the Israel 2021 conference was Rory O’Donnell, Director of the Irish National and Economic Social Council. With a twinkle in his eyes, O’Donnell points to similarities between Israel and Ireland. “They are both small countries, and both were created by ‘partition plans,’” says O’Donnell, “and they both have electoral systems that seem to create weak governments.”
Mention Ireland and economics now, and everyone immediately thinks about the hard blow to its economy that the country has suffered over the past two years, and the recent bond market threats against Ireland that forced the country to accept an EU bailout in late November 2010. O’Donnell admits that it is a painful subject that must be faced squarely.
“The main problem was inadequate supervision of banks,” O’Donnell tells The Report.
“This was long recognized and written about, but not enough was done about it. Too much bank regulation was conducted at the level of individual states, and not enough at the general EU level. The Irish economic success led to employment increase and higher incomes, which in turn led to a jump in housing demand. That was not bad in itself, but with the lax bank regulation, we suffered a lot.”
Despite this, O’Donnell also says that Israel can learn a lot from Ireland’s impressive economic leap in the late 1990s and early 2000s, when it added a huge number of highvalue added jobs for its citizens and attained such high growth rates that it was dubbed the “Celtic Tiger.” O’Donnell says that one of the most important aspects of the Irish growth period that is too often overlooked, and has relevance for Israel, was the increase in the participation rate of workers in Ireland.
“Our productivity per worker was already near the EU average, but increasing the number of workers in the workforce was what enabled us to attain a significant jump in GDP per capita,” says O’Donnell. “There was also a concerted effort to ‘turn the macroeconomic corner,’ meaning reduce national debt and increase foreign investments.
That did not immediately lead to the creation of new jobs, but it was important in setting the stage for the later job growth.
What was very important was that there was a national push for ending unemployment in the 1990s, as a consensus project that everyone joined. That made a big difference.”