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hi I'm Bruce Brownstein senior fellow at
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the Wharton SEI Center and I'm here with
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professors Vin dean of the Arison School
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of Business and the tiamson school of
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Economics at IDC
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herzelia Professor exin is visiting at
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Wharton this semester and is the author
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of several books and is the former
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deputy governor of the Bank of Israel
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where he successfully navigated Israel
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through the financial crisis welcome
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Professor Einstein thank you thank you
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for having me uh Professor Einstein uh
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we'd like to cover a host of things but
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the first thing we' like to find out is
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how's the Israeli economy doing today
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overall well the Israeli economy now is
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growing lower than most of the than uh
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in the past in the past actually the
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Israeli economy has been growing above
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5% before the crisis and during the
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crisis only one uh two quarters of
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negative small growth but actually got
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out and succeed to grow back into a four
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5% uh now as World Trade uh become lower
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uh from all Dimension especially uh
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Europe and even the US is not doing that
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great and Asia uh the export sector
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which was the key engine of growth in
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the Israeli economy uh slow down a bit
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uh that's uh actually have to emphasize
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that the Israeli economy is very
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resilient to shocks uh we had several
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geopolitical uh conflict
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uh including minor Wars in Lebanon in
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Gaza and the economy responded very
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quickly overcoming those shocks and
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that's from several reasons first of all
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and foremost the very uh vibrant and
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high-tech uh oriented export sector uh
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the second is a very stable and uh uh I
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would say responsible government
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policies in actually through all the
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period where uh debt and deficits are
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Skyrocket in all economies including the
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US the Israeli uh budget has been under
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uh manage good management and uh debt to
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GDP continue to decrease uh in addition
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uh we have actually a surplus uh during
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the war during the recession in 2009 and
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2010 uh they found uh extensive uh um
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reserves of gas uh gas has start uh
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pumping into the economy in a much lower
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price energy cost went down
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significantly electricity cost went down
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significantly and Israel actually has a
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uh large source of energy coming from
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these gas Wells uh just 100 kilometers
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from the shore uh and in addition to all
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that a very stable monetary policy uh
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and that's actually very important not
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only monetary policy but very stable
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Financial uh system uh well functioning
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Banks uh High saving uh individuals uh
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and actually the only main problem is
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that with a very low interest rate and
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actually not very effective government
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policies housing prices Skyrocket uh
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since 2008 and cause a big burden
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especially to the younger population who
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have to buy uh new housing so you
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mentioned that the government gets some
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of the credit for the success uh so who
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and what areas of the government has
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made this possible well in fact uh I
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would say that a big change uh in uh
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providing overall uh stable economic
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conditions started already with the
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Chiron government in the beginning of
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2003 uh and Benjamin Nan at that time
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the Finance Minister they brought the
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government into a very responsible uh
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low deficit and low expenditure growth
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and uh size of the government relative
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to the economy dropped
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significantly uh in particular expenses
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on defense dropped significantly the
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stability provided very low interest
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rate and with a very uh stable oriented
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uh price stability oriented uh policy
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that we had since 2004 and even before
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uh interest rate went down and therefore
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the debt to GDP went down and therefore
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expenditures on on uh interest payment
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of the government went down dramatically
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uh with much po government and a growing
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economy throughout uh the decade uh that
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started at 2003 had a small downward in
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2009 but back to gross in
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2009 and 11 in particular 10 to 11 uh we
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actually had a debt to GDP to decrease
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from almost uh 95% of GDP to today is uh
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something around 68% of GDP and still
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continue to be very stable where the
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rest of the western world that to GDP
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are growing dramatically and cause a lot
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of internal instability in Europe even
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in the US it's a big
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problem and so although it's not perfect
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it seems that relative to global
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economic conditions Israel is doing okay
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Israel is doing uh okay very stable I
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mean I I would say that uh another thing
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that we have to emphasize is employment
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Israel employment rate and unemployment
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ment rate are uh better than the US uh
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the participation has increased
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dramatically we still suffer from s
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segments like uh female Arabs and uh
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Ultra Orthodox men don't work as uh we
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expect them but if we look at the whole
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total economy uh we have done a huge
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change a huge transformation with uh
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which was actually led by government
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policies started in 2003 but continued
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throughout the period with changing the
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government and changing econom ecomic
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conditions uh we are below 5% of
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unemployment which is the lowest ever in
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Israel among the lowest among Western
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economies and we have a very high
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employment rate and very high overall
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participation rate which has not been uh
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count down so overall that side of the
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economy is excellent what is not doing
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very well is the productivity we are
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really lagging in productivity quite
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significantly from Europe and the the US
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in the Dom domc economy not in the
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high-tech sector and um this low
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productivity in the domestic economy and
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the high sector which is blooming uh
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generate uh wide uh income distribution
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taking into consideration also the hike
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of uh almost 50% increase in the housing
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prices uh and enhance the inequality
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problems that generat some social unrest
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and that's actually the main challenge
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of the government today is take taking
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control of the housing sector taking
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control of the uh of the inequality and
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in particular enhancing the productivity
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of the low skill and medium skill uh
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individual those who enter to the market
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and those who coming with low skill like
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the Arab population and the uh Ultra
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Orthodox who don't uh get maybe the
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right uh uh I would say education
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background and uh and knowledge how to
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deal in a modern and uh changing
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environment
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to really push up productivity and get
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their wages going up okay so on the
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housing issue if you had a magic wand
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what would be the solution to the
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housing issue the the housing issue
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comes all of it from uh a problem of
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supply of land uh the government has a
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huge uh uh share how how big how big a
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share well overall people put the 97%
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but it is more in the areas which
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supposed to be urbanized where we built
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it's around 80 % some location it's 50%
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60% but other location it's 100% And the
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government has been very uh inefficient
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in uh regulating the whole planning uh
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and and the economy is growing most
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people don't understand that Israel is
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among the highest population growth in
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all Western economy so if you go to
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countries which are as developed as
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Israel which have GDP per capita above
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$30,000 we are the highest growth
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economy we are growing almost 2% a year
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uh just the US is growing now 7% a year
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so oneir and the and the planning of uh
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development of new housing has not been
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uh adjusted to this large grow of
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population it's true that a lot and a
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lot of this is among uh the lowest uh uh
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income groups and that's actually is a
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challenge uh to deal with it but but the
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one point it's a it's but it's a huge
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one is to really reorganize the planning
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and making more land available for uh
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development and more land available for
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urbanization uh of the growing
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population uh that has been neglected
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totally in the last uh 15 years and we
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are and the young people paying the
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price and the price is huge mhm okay so
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uh how about the tech sector well uh the
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strongest part of uh Israel is the high
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Tech sector the high-tech sector is
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built basically on the shoulders of
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young Innovative smart Israelis who are
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uh having actually a very strong
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educational system although on the
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average we don't do as great but if you
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look at the top one uh the the main
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problem of the culture is a culture of
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innovation Innovation is not only
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mathematics and not only school it's a
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culture of thinking uh how to make
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things better
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in all dimension in Social in uh in
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technology and biotech and uh and uh in
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is the advantage of of discontent yeah
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and uh and that that is an an Innovative
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Society so there is a culture of that
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this culture also exist uh when the top
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individuals uh finish High School uh
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they go to the Army a large percentage
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of them actually going to the
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intelligence unit where they basically
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going into incubating and learning how
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to uh invent uh new methods of uh
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related to Army activities but it's
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really given them a very strong uh
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background on Innovative uh uh using
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computers using new programming using
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the high memory using the speed using
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the imaginary world of this new
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technology and uh when they leave the
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army they actually in the army they
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provide a huge infrastructure structure
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of uh knowledge uh for the Army on all
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Dimensions from intelligence uh to
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methods of protection to methods of
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security and to method of uh
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intelligence and uh when they go out of
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the army uh they are basically uh start
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going into the Innovative sector and
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when you look at uh Israel there are
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almost uh 2,000 startups uh just around
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uh a radius of uh
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100 kilometers uh around the center of
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Tel Aviv uh and uh it's probably one of
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the most Innovative uh economy on this
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Dimension only in the last uh year there
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were um IPOs of uh corporations uh who
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went out and uh were bought by either
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larger corporations or by uh by
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themselves start producing in uh all the
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areas that require new applications and
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uh new methods of uh uh in the era of uh
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Innovative society and do a couple of
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names of either entrepreneurs or
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companies come to mind that are your
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favorites well I think one of them is uh
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for example is ways uh which uh grew up
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to be a leading under Google Google both
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ways ways is a introduce a new method of
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how to navigate G GPS of cars uh that's
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uh uh in particular uh there are many
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others that I don't remember all the
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names but they are in advertisement in
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Securities uh we have a corporation that
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actually checkpoint that grew up also
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from the intelligence in the Army which
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is a leading company in all the
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important issues of U providing
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Securities uh and cyber security
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actually become a huge uh area of uh
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Innovation activities and there are many
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small and mediumsized companies that
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merge into this uh growing industry so
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you're a Gil schwed flan or Dr darit D I
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mean I am I don't I mean I fan of uh
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many people I think the key point is
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that it's really provides uh a huge uh
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uh a huge success and uh and um
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investment in new ideas that provide
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both individual gain for the people who
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are working in this but also for uh the
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entire Society on on on a range of uh uh
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products including biotech uh Israel
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some people like Jacob RTO which were
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initiating the stand to basically save
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thousand and million maybe of Life uh
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it's another example that started in the
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early '90s but the range is uh is uh is
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huge and and how about financial Capital
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uh is patango doing a good job job or
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jvp and and what do you think of our
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crowd well uh I think many people uh
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know about Israel actually it's
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worldwide it's not only the funds we
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have now people coming from China people
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coming from Korea people coming from uh
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the US people coming from Europe and uh
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actually they realize it's really the
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people it's the people in Israel who has
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this uh knowledge who has this ambition
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who has this drive and this uh sector
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H doesn't suffer from uh the excess
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regulation of for example the what we
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discussed before the real estate sector
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this sector is completely free it's uh
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basically uh all uh export oriented in
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fact the Israeli economy provide a lot
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of export oriented uh subsidies I would
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say tax incentives in uh in many
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Dimension and since there are no uh
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restrictions on the uh forming the the
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company and uh selling the company and
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uh being uh recognized worldwide and
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there are some uh advantages like the
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Academia the strong Academia the strong
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knowledge uh and uh the the the
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preparation I mentioned in terms of the
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army of the workforce uh or in addition
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uh the universities we have uh about
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five departments in computer science
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which are uh almost all of them are top
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20 in the US so they uh have a uh top
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professors and they teach them all the
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upto-date methods which are changing all
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the time and that's that's all
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echosystem uh Pro Hightech um has
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generated I would say relative to the
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size of the economy but even not just
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relative to the size of an economy of 8
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million and a half people relative to
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the world it become kind of what we call
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called the startup Nation or if I want
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to say uh we say silicon uh Wy meaning
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that W is a is a valley in Arabic and uh
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the Silicon uh taking from the US West
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Coast uh location creating the second
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largest cluster outside of Silicon
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Valley yeah yeah okay so to summarize
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the challenges and opportunities you see
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over the near and long term for Israel
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well I think uh the main challenge I
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mentioned this uh before is uh the uh
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large inequality within Israel uh which
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is to some extent has been stabilized
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and reduced in the last few years due to
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the increase in employment uh however it
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can decrease the inequality quite
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further by really uh improving the
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productivity of uh the new workers who
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are coming from a population that does
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not have the access uh to the high-tech
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sector so the challenge is to take some
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of these people and train them to be
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also in Hightech sector but also to take
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all the what I call the uh domestic
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economy and make it more uh productive
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more efficient reduced regulation
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reduced the uh increase the availability
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of Housing and reduce the uh prices uh
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does uh uh actually uh the current
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Finance Minister put on his agenda I
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hope to see him actually fulfilling uh
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his promises by reducing housing prices
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increasing productivity of the low
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skills and uh decreasing inequality more
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competition we have a lot of domestic uh
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Goods which are very expensive uh
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compared to the world we can really work
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on more competition and reduce it uh we
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haven't been very uh good on regulating
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our new uh gas wells in making them uh
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actually pumping the gas out and getting
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it internal to the Israeli economy and
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and probably exporting them so we should
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really improve uh the bureaucracy and
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the local regulation such that uh the
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knowledge and the ability and the
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incentives of the local people to really
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push the economy forward would not be
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blocked by a lot of uh government
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inefficiency
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[Music]
