Can the growth engine keep humming?

Shlomo Maoz, chief economist at Excellence Nessuah, forsees trouble ahead for 2008, but his suggested remedy is to continue on the reform path.

'I think most investors are cautious about the prospects of stock market returns around the world in 2008," says Neil Cohen of Israel Seed Partners. "We've seen a rocky start to the year and there's no reason to believe that that isn't a fairly good indicator as to how this year is going to play out. I don't think anyone expects the kind of performance in 2008 that we've seen in 2007 and 2006, whether in Israel or in the main stock markets." The answer, says Cohen, is Asia. Looking for an example of the tantalizing potential of the region? Try the 97% rise on Singapore's stock exchange in 2007. "It's becoming increasingly apparent, on a number of levels," Cohen says, "that Asia and the oil-producing world generally (including Russia and the Gulf States) are generating amazing growth. When the heads of the major American banks get into trouble, they are flying east for help - to Singapore, to China, to Dubai and to Abu Dhabi. That's where an increasing proportion of economic wealth and power are being concentrated. "Where many investors have thought primarily in terms of the US as the bellwether of their investing, investors need to think more and more about how they can get exposure to the wealth and growth that is happening in Asia." Shlomo Maoz, chief economist at Excellence Nessuah, also foresees trouble ahead for 2008, but his suggested remedy is to continue on the reform path. He would like to see the government make further inroads in the Arab and haredi communities, whose participation in the workforce remains low, and to help poorer Israelis enjoy the fruits of economic growth. "We have seen the weaker population of the Tel Aviv area benefit from the growth in the economy, but not others," says Maoz. "Why? Because there is infrastructure in the center of the country. Without investment in infrastructure for those in the periphery, they will not have access to jobs or to higher education, or to housing near jobs and higher education." Maoz also says that resources should be allocated to early childhood education, to help weaker segments of the population develop the skills to compete in the job market down the road. "The government heavily subsidizes university education, but it doesn't pay for public schooling for three-year-olds. Yet studies show that many children, without such schooling at the age of three, will never make it to university," he says. "Why should my daughter get a subsidy to go to university in Tel Aviv, while children in Sderot are not given the tools to reach higher education?" Along those lines, Maoz suggests a reversal in the government's recent habit of cutting funds for vocational training. Such training, he says, is a key to helping Arabs and haredim participate in the workforce by working from home, either in computer-related fields or in cottage industries. Furthermore, he points out, blue-collar workers suffer from the government's policy of allowing armies of foreign workers into the country to perform manual labor. "It is fashionable to scream 'Free markets! Open competition!'" says Maoz, who admittedly is far from an anti-capitalist himself. "Well, if you really believe in free markets and open competition, you should be importing foreigners to compete for high-paying jobs. But you don't see that, do you? No, we want to preserve those jobs for our own people. So why is it that the government allows 240,000 foreigners to take jobs from those Israelis who can't work as engineers and computer programmers? Why do we leave them with working for the army as their only employment option?" The theme for Maoz, then, is this: Smart government policies got the country out of financial trouble in the past, and more smart government policies will keep it out of financial trouble in the future. In the meantime, it's anyone's guess as to how much longer our economic strength will continue to grow.