External factors drive local growth, BOI research shows

Among the most outstanding policy variables contributing to persistent growth were the reduction in direct taxation, such as income taxes and corporation taxes.

Since the founding days of the Israeli state, the country experienced only four periods of continuous growth, and those were mainly driven by external factors such as world trade expansion and improvement in the security situation rather than domestic policy-making, Bank of Israel of Israel research revealed Tuesday. "Israel experienced four periods of continuous growth since 1960 - two periods in the 1960s, the period of mass immigration from the Soviet Union, and the present period, which began in the second half of 2003, assuming that economic growth will continue for the next two quarters," research conducted by Dr. Karnit Flug and Dr. Michel Strawczynski of the central bank's Research Department and presented at the department's annual conference on Tuesday indicated. Defining persistent growth as a period in which GDP per capita grows by an average annual rate of 3 percent or more for at least four years, the research found that external factors such as world trade and security events had a more significant impact on growth periods than government policy factors. "Examining the factors that contributed to the transition from recession to growth, from the end of 2000 to mid-2003 and in the period from the second half of 2003 to the present, showed that two- thirds of the contribution of variables that positively influenced growth, came from external variables such as the improvement in the security situation and growth in world trade, while the remaining third resulted from the reduction in tax rates, government investment and the improvement in macroeconomic policy," Flug and Strawczynski said. Among the most outstanding policy variables contributing to persistent growth were the reduction in direct taxation, such as income taxes and corporation taxes. The improved management of macroeconomic policy occurred in the fields of inflation, fiscal discipline and liberalization in the foreign currency market.