00:00:02
hi I'm Bruce Brownstein senior fellow at the Wharton SEI Center and I'm here with
00:00:06
professors Vin dean of the Arison School of Business and the tiamson school of Economics at IDC
00:00:13
herzelia Professor exin is visiting at Wharton this semester and is the author of several books and is the former
00:00:20
deputy governor of the Bank of Israel where he successfully navigated Israel through the financial crisis welcome
00:00:26
Professor Einstein thank you thank you for having me uh Professor Einstein uh we'd like to cover a host of things but
00:00:33
the first thing we' like to find out is how's the Israeli economy doing today
00:00:36
overall well the Israeli economy now is growing lower than most of the than uh in the past in the past actually the
00:00:45
Israeli economy has been growing above 5% before the crisis and during the crisis only one uh two quarters of
00:00:54
negative small growth but actually got out and succeed to grow back into a four 5% uh now as World Trade uh become lower
00:01:06
uh from all Dimension especially uh Europe and even the US is not doing that great and Asia uh the export sector
00:01:14
which was the key engine of growth in the Israeli economy uh slow down a bit uh that's uh actually have to emphasize
00:01:22
that the Israeli economy is very resilient to shocks uh we had several geopolitical uh conflict
00:01:30
uh including minor Wars in Lebanon in Gaza and the economy responded very quickly overcoming those shocks and
00:01:40
that's from several reasons first of all and foremost the very uh vibrant and
00:01:46
high-tech uh oriented export sector uh the second is a very stable and uh uh I would say responsible government
00:01:56
policies in actually through all the period where uh debt and deficits are Skyrocket in all economies including the
00:02:04
US the Israeli uh budget has been under uh manage good management and uh debt to
00:02:11
GDP continue to decrease uh in addition uh we have actually a surplus uh during the war during the recession in 2009 and
00:02:21
2010 uh they found uh extensive uh um reserves of gas uh gas has start uh pumping into the economy in a much lower
00:02:32
price energy cost went down significantly electricity cost went down significantly and Israel actually has a
00:02:40
uh large source of energy coming from these gas Wells uh just 100 kilometers from the shore uh and in addition to all
00:02:49
that a very stable monetary policy uh and that's actually very important not
00:02:54
only monetary policy but very stable Financial uh system uh well functioning Banks uh High saving uh individuals uh
00:03:03
and actually the only main problem is that with a very low interest rate and actually not very effective government
00:03:10
policies housing prices Skyrocket uh since 2008 and cause a big burden especially to the younger population who
00:03:17
have to buy uh new housing so you mentioned that the government gets some of the credit for the success uh so who
00:03:24
and what areas of the government has made this possible well in fact uh I would say that a big change uh in uh
00:03:32
providing overall uh stable economic conditions started already with the Chiron government in the beginning of
00:03:41
2003 uh and Benjamin Nan at that time the Finance Minister they brought the government into a very responsible uh
00:03:50
low deficit and low expenditure growth and uh size of the government relative to the economy dropped
00:03:58
significantly uh in particular expenses on defense dropped significantly the stability provided very low interest
00:04:06
rate and with a very uh stable oriented uh price stability oriented uh policy that we had since 2004 and even before
00:04:17
uh interest rate went down and therefore the debt to GDP went down and therefore
00:04:22
expenditures on on uh interest payment of the government went down dramatically uh with much po government and a growing
00:04:31
economy throughout uh the decade uh that started at 2003 had a small downward in
00:04:39
2009 but back to gross in 2009 and 11 in particular 10 to 11 uh we actually had a debt to GDP to decrease
00:04:50
from almost uh 95% of GDP to today is uh something around 68% of GDP and still continue to be very stable where the
00:05:01
rest of the western world that to GDP are growing dramatically and cause a lot of internal instability in Europe even
00:05:09
in the US it's a big problem and so although it's not perfect it seems that relative to global
00:05:16
economic conditions Israel is doing okay Israel is doing uh okay very stable I mean I I would say that uh another thing
00:05:25
that we have to emphasize is employment Israel employment rate and unemployment ment rate are uh better than the US uh
00:05:33
the participation has increased dramatically we still suffer from s segments like uh female Arabs and uh
00:05:40
Ultra Orthodox men don't work as uh we expect them but if we look at the whole
00:05:45
total economy uh we have done a huge change a huge transformation with uh which was actually led by government
00:05:53
policies started in 2003 but continued throughout the period with changing the government and changing econom ecomic
00:05:59
conditions uh we are below 5% of unemployment which is the lowest ever in Israel among the lowest among Western
00:06:07
economies and we have a very high employment rate and very high overall participation rate which has not been uh
00:06:15
count down so overall that side of the economy is excellent what is not doing very well is the productivity we are
00:06:23
really lagging in productivity quite significantly from Europe and the the US in the Dom domc economy not in the
00:06:30
high-tech sector and um this low productivity in the domestic economy and the high sector which is blooming uh
00:06:39
generate uh wide uh income distribution taking into consideration also the hike of uh almost 50% increase in the housing
00:06:48
prices uh and enhance the inequality problems that generat some social unrest and that's actually the main challenge
00:06:57
of the government today is take taking control of the housing sector taking control of the uh of the inequality and
00:07:05
in particular enhancing the productivity of the low skill and medium skill uh individual those who enter to the market
00:07:13
and those who coming with low skill like the Arab population and the uh Ultra Orthodox who don't uh get maybe the
00:07:20
right uh uh I would say education background and uh and knowledge how to deal in a modern and uh changing
00:07:28
environment to really push up productivity and get their wages going up okay so on the
00:07:35
housing issue if you had a magic wand what would be the solution to the housing issue the the housing issue
00:07:41
comes all of it from uh a problem of supply of land uh the government has a huge uh uh share how how big how big a
00:07:50
share well overall people put the 97% but it is more in the areas which supposed to be urbanized where we built
00:07:58
it's around 80 % some location it's 50% 60% but other location it's 100% And the
00:08:05
government has been very uh inefficient in uh regulating the whole planning uh and and the economy is growing most
00:08:15
people don't understand that Israel is among the highest population growth in
00:08:20
all Western economy so if you go to countries which are as developed as Israel which have GDP per capita above
00:08:28
$30,000 we are the highest growth economy we are growing almost 2% a year uh just the US is growing now 7% a year
00:08:37
so oneir and the and the planning of uh development of new housing has not been uh adjusted to this large grow of
00:08:47
population it's true that a lot and a lot of this is among uh the lowest uh uh
00:08:53
income groups and that's actually is a challenge uh to deal with it but but the
00:08:59
one point it's a it's but it's a huge one is to really reorganize the planning
00:09:05
and making more land available for uh development and more land available for urbanization uh of the growing
00:09:12
population uh that has been neglected totally in the last uh 15 years and we are and the young people paying the
00:09:20
price and the price is huge mhm okay so uh how about the tech sector well uh the
00:09:26
strongest part of uh Israel is the high Tech sector the high-tech sector is built basically on the shoulders of
00:09:34
young Innovative smart Israelis who are uh having actually a very strong educational system although on the
00:09:43
average we don't do as great but if you look at the top one uh the the main problem of the culture is a culture of
00:09:49
innovation Innovation is not only mathematics and not only school it's a culture of thinking uh how to make
00:09:58
things better in all dimension in Social in uh in technology and biotech and uh and uh in
00:10:06
is the advantage of of discontent yeah and uh and that that is an an Innovative Society so there is a culture of that
00:10:16
this culture also exist uh when the top individuals uh finish High School uh they go to the Army a large percentage
00:10:25
of them actually going to the intelligence unit where they basically going into incubating and learning how
00:10:33
to uh invent uh new methods of uh related to Army activities but it's really given them a very strong uh
00:10:41
background on Innovative uh uh using computers using new programming using the high memory using the speed using
00:10:50
the imaginary world of this new technology and uh when they leave the army they actually in the army they
00:10:57
provide a huge infrastructure structure of uh knowledge uh for the Army on all Dimensions from intelligence uh to
00:11:06
methods of protection to methods of security and to method of uh intelligence and uh when they go out of
00:11:13
the army uh they are basically uh start going into the Innovative sector and when you look at uh Israel there are
00:11:22
almost uh 2,000 startups uh just around uh a radius of uh 100 kilometers uh around the center of
00:11:33
Tel Aviv uh and uh it's probably one of the most Innovative uh economy on this
00:11:40
Dimension only in the last uh year there were um IPOs of uh corporations uh who went out and uh were bought by either
00:11:51
larger corporations or by uh by themselves start producing in uh all the areas that require new applications and
00:12:01
uh new methods of uh uh in the era of uh Innovative society and do a couple of names of either entrepreneurs or
00:12:09
companies come to mind that are your favorites well I think one of them is uh for example is ways uh which uh grew up
00:12:17
to be a leading under Google Google both ways ways is a introduce a new method of
00:12:23
how to navigate G GPS of cars uh that's uh uh in particular uh there are many
00:12:31
others that I don't remember all the names but they are in advertisement in Securities uh we have a corporation that
00:12:39
actually checkpoint that grew up also from the intelligence in the Army which is a leading company in all the
00:12:46
important issues of U providing Securities uh and cyber security actually become a huge uh area of uh
00:12:55
Innovation activities and there are many small and mediumsized companies that merge into this uh growing industry so
00:13:03
you're a Gil schwed flan or Dr darit D I mean I am I don't I mean I fan of uh
00:13:09
many people I think the key point is that it's really provides uh a huge uh uh a huge success and uh and um
00:13:20
investment in new ideas that provide both individual gain for the people who are working in this but also for uh the
00:13:28
entire Society on on on a range of uh uh products including biotech uh Israel some people like Jacob RTO which were
00:13:40
initiating the stand to basically save thousand and million maybe of Life uh it's another example that started in the
00:13:49
early '90s but the range is uh is uh is huge and and how about financial Capital
00:13:57
uh is patango doing a good job job or jvp and and what do you think of our crowd well uh I think many people uh
00:14:04
know about Israel actually it's worldwide it's not only the funds we have now people coming from China people
00:14:11
coming from Korea people coming from uh the US people coming from Europe and uh actually they realize it's really the
00:14:19
people it's the people in Israel who has this uh knowledge who has this ambition
00:14:25
who has this drive and this uh sector H doesn't suffer from uh the excess regulation of for example the what we
00:14:35
discussed before the real estate sector this sector is completely free it's uh
00:14:41
basically uh all uh export oriented in fact the Israeli economy provide a lot of export oriented uh subsidies I would
00:14:50
say tax incentives in uh in many Dimension and since there are no uh restrictions on the uh forming the the
00:14:58
company and uh selling the company and uh being uh recognized worldwide and there are some uh advantages like the
00:15:08
Academia the strong Academia the strong knowledge uh and uh the the the preparation I mentioned in terms of the
00:15:17
army of the workforce uh or in addition uh the universities we have uh about five departments in computer science
00:15:25
which are uh almost all of them are top 20 in the US so they uh have a uh top professors and they teach them all the
00:15:36
upto-date methods which are changing all the time and that's that's all echosystem uh Pro Hightech um has
00:15:46
generated I would say relative to the size of the economy but even not just relative to the size of an economy of 8
00:15:53
million and a half people relative to the world it become kind of what we call called the startup Nation or if I want
00:16:00
to say uh we say silicon uh Wy meaning that W is a is a valley in Arabic and uh the Silicon uh taking from the US West
00:16:12
Coast uh location creating the second largest cluster outside of Silicon Valley yeah yeah okay so to summarize
00:16:20
the challenges and opportunities you see over the near and long term for Israel well I think uh the main challenge I
00:16:28
mentioned this uh before is uh the uh large inequality within Israel uh which is to some extent has been stabilized
00:16:39
and reduced in the last few years due to the increase in employment uh however it
00:16:46
can decrease the inequality quite further by really uh improving the productivity of uh the new workers who
00:16:55
are coming from a population that does not have the access uh to the high-tech sector so the challenge is to take some
00:17:02
of these people and train them to be also in Hightech sector but also to take all the what I call the uh domestic
00:17:10
economy and make it more uh productive more efficient reduced regulation reduced the uh increase the availability
00:17:20
of Housing and reduce the uh prices uh does uh uh actually uh the current Finance Minister put on his agenda I
00:17:30
hope to see him actually fulfilling uh his promises by reducing housing prices increasing productivity of the low
00:17:39
skills and uh decreasing inequality more competition we have a lot of domestic uh
00:17:45
Goods which are very expensive uh compared to the world we can really work on more competition and reduce it uh we
00:17:53
haven't been very uh good on regulating our new uh gas wells in making them uh
00:18:01
actually pumping the gas out and getting it internal to the Israeli economy and and probably exporting them so we should
00:18:10
really improve uh the bureaucracy and the local regulation such that uh the knowledge and the ability and the
00:18:18
incentives of the local people to really push the economy forward would not be blocked by a lot of uh government
00:18:27
inefficiency [Music]