an overview of the israeli economy prof. manuel trajtenberg
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An Overview of the Israeli An Overview of the Israeli Economy Economy
Prof. Manuel TrajtenbergHead of the National Economic Council
The Prime Minister’s Office, Israel
May 2008
• BackgroundBackground
• Economic PolicyEconomic Policy
• Challenges and OpportunitiesChallenges and Opportunities
• R&D and InnovationR&D and Innovation
3 3
A Brief Economic History – 60 Years of Growth
Average annual
Growth rate
Total Growth over 60 Years
Product 7% 60-fold
Population 4% 10-fold
Product per Capita 3% 6-fold
4 4
8.1
10.59
6.99
8.62
1.34
0
1.41
6.5
-1.9
1.2
2.4
-0.1
3.4
-4
-2
0
2
4
6
8
10
12
GDP Growth (% per annum)
7.0%6.6%
5.4%
2.8%
4.2%
2.9%
8.9%
2.3%
5.2% 5.3% 5.2% 5.3%
4.2%
-0.4%-0.6%-1%
1%
3%
5%
7%
9%
Source: Central Bureau of Statistics and Ministry of Finance Projections
Current Economic Performance –Robust Growth, Low Inflation
Israel Average (4.2%)
OECD Average (3.2%)
Inflation rate
%
5 5
-1.3%
-3.5%
-5.1%
-3.3%
-4.3%
-2.1%
-5.1%
5.6%
0.3%
-1.2%
-1.5%
-1.2%
-1.3%
-0.6%
1.2%
2.4%
3.3%
3.2%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Sources: Central Bureau of Statistics and the Bank of Israel
The Current Account Current Account Deficit/Surplus
as % of GDP
• BackgroundBackground
• Economic PolicyEconomic Policy
• Challenges and OpportunitiesChallenges and Opportunities
• R&D and InnovationR&D and Innovation
7 7
2.6%2.3%
0.7%
4.2%
3.6%
5.4%
3.7%
1.8%
1.0%
0.0%
2.2%
3.6%
3.9%
1.6%
1.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Source: Bank of Israel and Ministry of Finance Projections
Fiscal Policy: Government Expenditure & Budget Deficits
Government Budget Deficit (% of GDP)
52.4% 52.2%
50.2%
48.4%
51.0%
52.2%
44.0%
52.6%
51.2%
48.1%
46.3%
45.6%
44.6%
51.0%
41%
43%
45%
47%
49%
51%
53%
55%
General Government Expenditure (% of GDP)
Deficit Ceilings
8 8
78.9
81.0
86.7
95.9
99.9101.7
99.8
91.9
87.1
97.5
103.3101.8102.5
104.5
75
80
85
90
95
100
105
110
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F
Public Debt as % of GDP
%
Source: Bank of Israel and Ministry of Finance Projections
9 9
Tax Burden
Year Tax rate
2003 36%
2004 35%
2005 34%
2006 31%
2007 29%
2008 27%
2009 26%
2010 25% Monthly income, NIS, 2007 prices
Average tax rate on personal incomeAverage tax rate on personal income
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
2007
2002
2010
Corporate tax rateCorporate tax rate
Source: Ministry of FinanceSource: Ministry of Finance
10 10
Oil Refinery Ashdod & Haifa
Bezeq (telecom corp)
Bank Leumi
Discount Bank
El Al Israel Airlines, Ltd
ZIM (Israel navigation corp)
Tax ReformsTax ReformsPension Pension
Fund Fund ReformsReforms
Capital Market Capital Market ReformsReforms
Investment Investment in in
InfrastructureInfrastructure
Domestic Domestic GovernmentGovernment
Bonds Bonds ReformsReforms
Sea Ports Sea Ports StructuralStructural ReformReform
Recent Reforms & Privatizations
• BackgroundBackground
• Economic PolicyEconomic Policy
• Challenges and OpportunitiesChallenges and Opportunities
• R&D and InnovationR&D and Innovation
12 12
Israel’s highly heterogeneous society, with a tremendous range of different
» backgrounds» cultures » religions
Exposed to the rigors of the global economy
Challenged by its geo-political situation
The Snapshot on the Israel’s Challenges
13 13
In the Global Environment:
A massive influx of new players in advanced R&D, challenging Israel’s standing in this field.
Geo-political instability.
Domestic Issues:
A high incidence of poverty, particularly among the ultra-orthodox and the minorities.
High inequality – (Gini Index of 0.38).
Socio Economic Agenda 2008 – 2010 Main problems and challenges
14 14
1. Increase employment, reduce poverty.
2.Reinvigorate the education system, expand and upgrade its pool of human capital
3.Refocus innovation and R&D in the incipient scientific and technological frontiers
4. Improve Governance, reduce frictions within its governing bodies
5. Pursue further structural reforms, investments in infrastructure.
From Challenge to Action: the Current Agenda
15 15
Ultra-Orthodox Ultra-Orthodox and Minoritiesand Minorities
Targeted ToolsTargeted Tools
Enhanced Enhanced enforcementenforcement
of theof the Labor Law Labor Law
Negative Negative Income TaxIncome Tax
Reduce the Reduce the NumberNumber
of Foreign of Foreign WorkersWorkers
Innovation in Innovation in Traditional & Traditional &
Services Services Sectors Sectors
From Welfare to From Welfare to Work programsWork programs
Socio Economic Agenda 2008 – 2010 Quantitative Targets and Main Policy Tools
(1)The employment target: “increase the employment rate to the OECD average ”
(2)The poverty reduction target: “increase the income of the lowest quintile by more than the per capita growth rate. ”
• BackgroundBackground
• Economic PolicyEconomic Policy
• Challenges and OpportunitiesChallenges and Opportunities
• R&D and InnovationR&D and Innovation
17 17
Background and Features of Policies
Background (1970’s):
Israel had little resources, but highly skilled manpower, scientific prowess – how to mobilize them for growth?
Strategic Decision: Jump-start a “science-based” sector by providing broad financial support, and making up for market failures.
Hallmark of policies: “Neutrality”: respond to market demand/signals, do not
“pick winners.” Dynamic/Innovative: create new and varied support
programs according to evolving needs; avoid “self-perpetuating” programs.
18 18
Main R&D-Support Programs in Israel
Matching grants to commercial R&D projects - criteria: innovativeness, tech and commercial feasibility.
“Magnet” Program for support of generic R&D consortia: corporations + academia; longer term, higher support. Examples: Nano Functional Materials, Streaming Media Messaging, Digital Printing.
Technological “Incubators” Program: from innovative ideas to start-ups.
“Yozma” Program 1993-97: Jump-started the Venture Capital Industry – success, hence discontinued
19 19
Silicon Miracles from the Holy Land:Highlights of Israel’s High Tech Sector
ICT growth since 1990: ~ 15% per year
~ 4,000 high tech companies, most of them start-ups.
2nd largest VC market after the US
The most foreign IPO’s in Nasdaq
World’s fourth in US patents per capita
Major innovations: ICQ, disk-on-key, Centrino chip, advanced firewalls, GPS software, Pill-camera, etc.;
R&D/GDP= 4.6% (world highest)
20 20
The Ingredients of Israel’s “Silicon Miracle”
1.Entrepreneurship, Israeli style
2.High-quality human capital, technical skills
3.Government support for commercial R&D.
4.Venture Capital, local and US-based
5.Very open economy, strong ties with the global main players
21 21
But Israel’s Silicon miracle not for all
Wide disparity between thriving High Tech and rest of the economy: HighT grew 5 times as fast!
Low productivity of non-tradables, non-ICT sectors – a “dual economy”.
Rising socio-economic inequality, in part consequence of dual economy : concern in itself, and narrowing future pool of human capital.
22 22
Why? Innovate here, benefit elsewhere…
1. Innovations mainly for exports, some spillovers internal, but benefits realized mostly abroad.
• not much “Wal-Mart effect” in Israel
2. Gov. supports mostly product rather than process innovations; hence little R&D in traditional industries, services.
3. VC-backed startups: must exit, mostly by selling off to US-based corporations – who benefits?
Israel: powerhouse in generating innovations, but not quite in benefiting from them.
23 23
Some lessons from the Israeli experience
1.Cannot have economy-wide growth by relying just on one fast-growing sector (ICT),
Need to encourage and channel innovativenessalso to non-High Tech sectors
2. Cannot have sustained growth with widening socio-economic gaps :
Need policies of inclusion, of expanding the pool of human capital.
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