PowerPoint Template

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• An Overview of the Israeli Economy
• Prof. Manuel Trajtenberg
• Head of the National Economic Council
• The Prime Ministers Office, Israel
• May 2008

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• Background
• Economic Policy
• Challenges and Opportunities
• RD and Innovation

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A Brief Economic History 60 Years of Growth
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Current Economic Performance Robust Growth,
Low Inflation
GDP Growth ( per annum)

Israel Average (4.2)
OECD Average (3.2)
Inflation rate
Source Central Bureau of Statistics and Ministry
of Finance Projections
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The Current Account
Current Account Deficit/Surplus as of GDP
Sources Central Bureau of Statistics and the
Bank of Israel
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• Background
• Economic Policy
• Challenges and Opportunities
• RD and Innovation

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Fiscal Policy Government Expenditure Budget
Deficits
General Government Expenditure ( of GDP)
Government Budget Deficit ( of GDP)
Deficit Ceilings
Source Bank of Israel and Ministry of Finance
Projections
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Public Debt as of GDP

Source Bank of Israel and Ministry of Finance
Projections
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Tax Burden
Average tax rate on personal income
Corporate tax rate
2002
2007
2010
Monthly income, NIS, 2007 prices
Source Ministry of Finance
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Recent Reforms Privatizations
Tax Reforms
Pension Fund Reforms
Bank Leumi
Discount Bank
Domestic Government Bonds Reforms
Capital Market Reforms
Bezeq (telecom corp)
Oil Refinery Ashdod Haifa
El Al Israel Airlines, Ltd
Investment in Infrastructure
Sea Ports Structural Reform
ZIM (Israel navigation corp)
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• Background
• Economic Policy
• Challenges and Opportunities
• RD and Innovation

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The Snapshot on the Israels Challenges

• Israels 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

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Socio Economic Agenda 2008 2010 Main problems
and challenges

• In the Global Environment
• A massive influx of new players in advanced RD,
  challenging Israels 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).

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From Challenge to Action the Current Agenda

• Increase employment, reduce poverty.
• Reinvigorate the education system, expand and
  upgrade its pool of human capital
• Refocus innovation and RD in the incipient
  scientific and technological frontiers
• Improve Governance, reduce frictions within its
  governing bodies
• Pursue further structural reforms, investments
  in infrastructure.

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Socio Economic Agenda 2008 2010 Quantitative
Targets and Main Policy Tools
Negative Income Tax
Innovation in Traditional Services Sectors

• 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.
From Welfare to Work programs
Reduce the Number of Foreign Workers
Ultra-Orthodox and Minorities Targeted Tools
Enhanced enforcement of the Labor Law
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• Background
• Economic Policy
• Challenges and Opportunities
• RD and Innovation

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Background and Features of Policies

• Background (1970s)
• 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.

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Main RD-Support Programs in Israel

• Matching grants to commercial RD projects -
  criteria innovativeness, tech and commercial
  feasibility.
• Magnet Program for support of generic RD
  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

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Silicon Miracles from the Holy LandHighlights
of Israels 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 IPOs in Nasdaq
• Worlds fourth in US patents per capita
• Major innovations ICQ, disk-on-key, Centrino
  chip, advanced firewalls, GPS software,
  Pill-camera, etc.
• RD/GDP 4.6 (world highest)

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The Ingredients of Israels Silicon Miracle

• Entrepreneurship, Israeli style
• High-quality human capital, technical skills
• Government support for commercial RD.
• Venture Capital, local and US-based
• Very open economy, strong ties with the global
  main players

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But Israels 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.

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Why? Innovate here, benefit elsewhere

• 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 RD 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.

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Some lessons from the Israeli experience

• Cannot have economy-wide growth by relying just
  on one fast-growing sector (ICT),
• Need to encourage and channel innovativeness
• also 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.