ISRAEL15 Prof. Ricardo Hausmann

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ISRAEL15Prof. Ricardo Hausmann
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Agenda

• Between Growth and Leapfrog (????? ?????)
• Leapfrog Mechanics Implications for Israel
• Challenge of Public/Private Cooperation
• Is there a Leapfrog Recipe? The Problem with the
  Washington Consensus
• Political Challenges

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Between Growth and Leapfrog
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Israeli Growth, Observations
US Benchmark (1)
.8

• Israel leapt between 1950-70
• Since 70s stuck at 50 US
• No gain compared to West Europe
• 10 countries leapt e.g. Ireland, SK
• Israel has constraints yet did better than many
  countries without resources
• Could it do better?

Income Per Capita Relative to the US
.6
.4
.2
0
1950
1960
1970
1980
1990
2000
Year
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Some countries have been able to do better
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Income Per Capita Relative to the US
.6
.4
.2
Israel
Ireland
S. Korea
0
1950
1960
1970
1980
1990
2000
year
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Leapfrog Mechanics Implications for Israel
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How do countries grow

1. Increasing Quality of Existing Products
2. Moving to More Sophisticated Products
3. Inventing New Products

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Rich Countries Produce Rich Country Goods
Relationship between per-capita GDP and EXPY, 2003
Sophistication of exports is measured as the
income per capita of countries with a comparative
advantage in the countrys export basket

• Rich countries do not just produce more of the
  same
• They produce different goods
• To grow rich, countries need to change what they
  produce and export

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Sophistication Today Determines Tomorrows
Growth Countries become what they export
Strong evidence that countries converge to the
level of income of the countries they compete
with.
Growth in 1992-2004,controlling for initial
income
Sophistication in 1992
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Israels Export Sophistication is Mixed
ISR, No Diamonds
ISR, With Diamonds
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• Exports of business, professional and technical
  services to the US are outstanding

Exports per capita (per million) of other
professional and technical services to
businesses in the US, 2005 (BEA)
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How To Advance? Monkeys Trees

• Our metaphor
• Products are like trees
• Firms are like monkeys
• Structural transformation process whereby
  monkeys move from the poor part to the rich part
  of the forest
• Easier for monkeys to jump short distance
  (i.e. to change to products that use similar
  capabilities)

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Increasing Quality of Existing Products is
relatively Easy and Fast
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Countries with bigger quality gaps grow faster
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Israel at The Top of Its Trees
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Moving to different products is more difficult

• New products face a chicken and egg problem
• Why create inputs for an industry that does not
  exist?
• How can the industry exist, if the inputs are
  not there?
• In practice, new products use inputs that have
  been accumulated to serve other nearby products
• This creates very strong path dependence

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Comparatively, Israel is in a sparse part of the
forest
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Types of Product Spaces
Stairway to heaven Parsimonious industrial
policy Help jump short distances to other products
Let it be It aint broke Ample space to move in
all directions
High
Ease to jump to new products open forest
Bridge over troubled waters Strategic
bets Little space to improve quality and few
nearby trees
Hey Jude make it better Competitiveness
policy Improve the quality of what already exists
Low
Low
High
Space to improve quality
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Low Hanging Up-market Fruit, 2005
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Very Hard, Inventing New Products
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The Israeli RD Miracle highest RD spending in
the world
National Expenditure on RD as percentage of GDP,
2003
S. Fischer Israel Hi-Tech Conference June 2007

• Interpreting the Miracle
• Most is private
• Reflected in exports, FDI and MA

Source CBS, BoI.
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Two possible scenarios

• The RD boom was ignited because of serendipitous
  reasons (military procurement) but now can be
  sustained for a very long time because it has
  developed all the institutions that sustain it
• Universities, global markets, venture capital

The RD boom will fizzle out because it is
relatively concentrated in a few areas that were
initially favored (ICT), as more countries enter
and more applications are developed, the sector
will mature
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Is there a Leapfrog Recipe? The Problem with the
Washington Consensus
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Washington Consensus All Reforms are Equal
Fiscal Discipline
Reorientation of Public Expenditure
Reform as much and as best as you can
Tax Reform

• Working Assumptions
• Any reform is good
• The deeper the better
• The more areas reformed, the better

Financial Liberalization
Washington Consensus
Openness to DFI
Checklist Approach is Wrong!
Privatization

• The theory of second-best
• Latin America since 1990
• Policy dimensionality is high

Deregulation
Secure Property Rights
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Reforms are Contextual
Low social conflict
Finance
Removing Binding Constraints
Low taxes

• Working Assumptions
• Policy problems are high dimensional
• Identify most binding constraints on economic
  activity
• Expend scarce political capital on those reforms
  only

Human capital
Macro stability
Infrastructure
Get the Biggest Bang for the Buck
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Growth Diagnostics Reforms are Contextual
Problem Low levels of private investment and
entrepreneurship
High cost of finance
Low return to economic activity
Bad International Finance
Low Social Returns
Bad Local Finance
Low Appropriability
Government Failures
Market Failures
Poor Geography
Coordination externalities
Information externalities
Bad Infrastructure
Micro Risks Property Rights, Corruption, Taxes
Macro Risks Financial, Monetary, Fiscal
Low Domestic Saving
Poor Intermediation
Low Human Capital
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Challenge of Public/PrivateCooperation
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Transformation Requires Public / Private
Cooperation
Public / Private CooperationExchange of
Information / Shared Risks

• How to provide highly specific, high dimensional
  public inputs that are complements in private
  production?
• Private inputs
• Prices information
• Profit-motivated firms incentives
• Capital markets move resources
• Public inputs
• No price where to get the information?
• What are the incentives? Political?
• Even with incentives, how would resources move?

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Four Principles for Public / Private Cooperation
Open Architecture Whenever possible, elicit
information about required public
inputs Co-financing
Four principles
Transparency Demands, evaluations and decisions
should be public knowledge
Self-Organization Allow self-organization around
critical inputs. Imposing industry definitions
/ requiring agreement is inefficient
Experimentation and Evaluation Bold moves,
tolerance for failures, frequent monitoring,
correction over time
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A robust, flexible structure
No single, top-down institutionAn evolving
network of organizations
Specialized bypolicy instrument Infrastructure,
regulation, labor training, etc.
Specialized bytype of activity Sectors of
industry, trade, etc.
Examples NASA and World Bank
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Some policy initiatives

• Code of Dialogue
• Open participation
• Self-organization
• Co-financing
• Transparency
• Gov only public goods

• Google-likeSearch Mechanisms
• Create search mechanisms
• Focus them on space of possibilities
• Empower them to eliminate obstacles
• E.g., Development banks, Industrial parks

• Virtual
• Inter-MinistryMarket
• Budgetary mechanism to create an internal market
  within the government for public inputs

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Political Challenges
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Challenges to creating a broad constituency for
leaping

• Why would society at large support a deep
  commitment to public-private cooperation if the
  benefits seem to favor the talented and the
  lucky?
• Perceived as a social program for the already
  rich?
• How does society react to Bill Gates or Steve
  Jobs?
• Israel has very low labor force participation
• Those outside need to participate, but have less
  skills than average thus requires larger wage
  inequality
• Outside IDF network Israeli Arabs, religious Jews

• The likely characteristics of an Israeli leap is
  intensive in high skills and innovation
• Concentrated benefits
• As structural transformation happens, sectors
  will be abandoned
• Those that compete with poorer countries
• Conflict between culture of honest and effective
  public provision and concentrated gains of
  private profits

Development banks Traditionally conceived as
motivated by a financial market distortion or
failure Political Leadership