There is much more to Israel’s economy than high-tech

By Alex Brummer, February 28, 2014
Bank of Israel head Karnit Flug

Bank of Israel head Karnit Flug

The International Monetary Fund’s annual inspection of national economies is a pivotal event that shapes political debate.

Israel’s latest report card, issued in Washington this month, must generally be regarded as favourable.

Output growth is seen as solid, unemployment low, the financial sector in good health and the international trade is strong.

But the IMF inspection team believes there is room for improvement in several areas of economic and social management — and they are not alone.

Karnit Flug, the new Bank of Israel governor and first woman to hold the post, recognised problems in a speech at Israel’s Central Bureau of Statistics.

Flug dares to say something that supporters of Israel, enamoured by its high-tech prowess, might find less palatable.

“The existing growth model based on high-tech has not been successful in bringing prosperity to all,” she said.

“A different more inclusive growth model is required”.

She believes it must reach “sections of the population with low rates of employment, while raising substantially earnings”.

Flug’s view is echoed in the IMF’s 100-pages of report and focus on Israel’s social inequality — especially among Arabs and Charedi Jews.

The narrative, it is has been noted in Israel, is somewhat different to that of Israeli Prime Minister Benjamin Netanyahu.

Flug argues that unless underemployment and underpay among low-income groups is addressed, Israel will not advance but go backwards.

It needs to strengthen its “human capital” and noted that the ratio of investment to gross national product is a disappointing 17 per cent in Israel against the average of 22 per cent in the world’s most prosperous countries.

An experienced economic policymaker, Flug worked in Washington in a senior role at the Inter-American Development Bank before taking over the Bank of Israel last year from Zimbabwe-born Stanley Fischer — one of the world’s most respected policymakers.

Fischer has returned to Washington and was nominated this month by President Obama as deputy chairman of the world’s most powerful monetary institution, the Federal Reserve Board. He will work in tandem with the new chairperson Janet Yellen. She, like Flug, is the first woman to hold the office.

The IMF staff forecast for Israeli growth in 2014 is 3.4 per cent, coincidentally the same robust rate that the Bank of England has pencilled in for the UK. The IMF believes that Israel’s output will be assisted by “new large-scale natural gas production” but constrained because of budget tightening and the rise in the shekel on the foreign exchange markets.

It will be assisted, however, by the recovery in major markets including Britain — now one of Israel’s biggest trading partners.

In its report, the IMF identifies a series of underlying problems that will need to be addressed. These include high public debt despite the Netanyahu-led government effort to reduce current borrowing.

Other problems are rapid house price inflation that if it persists could pose a threat to financial stability as property booms — as British property specialists know — invariably are followed by busts.

In an effort to deal with the potential instability caused by house price inflation the IMF suggests that Israel follows Britain’s lead in setting up a Financial Stability Committee, led by the Bank of Israel, with the purpose of monitoring so called macro-prudential policies.

In the UK the equivalent Financial Policy Committee monitors every aspect of the financial sector from bank credit, to mortgages and international issues such as the robustness of payments systems.

The IMF also calls for new legislation that would make it easier for Israel to deal with the “too big to fail” dilemma that requires governments to step in to rescue banking systems when things go wrong.

Most western democracies have created, or are in the process of settling up, such “resolution” regimes.

Like Klug, the IMF believes that it is imperative “to promote the participation of Charedi and Israeli-Arab populations in the labour force to reduce poverty and inequality and bolster the economy’s long — run productive growth.”

There has been a tendency, because of the success of the high-tech sector, to regard Israel’s economy through rose tinted glasses. Both the governor of the Bank of Israel and the IMF argue that the complacency must change if the successes are to be properly consolidated.

Alex Brummer is City Editor of the Daily Mail

Last updated: 10:45am, February 28 2014