Israel and the World Economy

Israel and the World Economy


hello everyone I’m going to get us
started so good evening and thank you for joining us my name is Marianne
Bitler and I’m a professor of economics and the interim director of the
Institute for Social Sciences here at UC Davis and it’s my pleasure to welcome
you to the second ISS distinguished lecture in October 2015 professor Gary
King of Harvard University delivered the inaugural lecture in this series and we
are fortunate to be welcoming an equally esteemed speaker this evening the
Department of Economics here at UC Davis is well known for its expertise in the
field of international trade and so it is particularly apt that our presenter
Assaf Razin should specialize in that area I’d like to thank everyone who has
helped to bring this event to fruition including Vicki Austin Jeremy Tilll and
Ben Hinshaw from the Institute for Social Sciences Laurie Odenweller from
the Department of Economics and Katie Russ from the Department of Economics
and I’d also like to acknowledge our co-sponsors the California Israel Fund
Davis faculty for Israel the Jewish Studies program and the Levine family
fund in economics and I’d like to advertise a few talks that are coming in
the Levine Family Fund speaker series our next speaker is from UC Berkeley followed by Pascaline Dupas from Stanford and
Richard Blundell from UCL introducing Assaf Razin this evening will be Rob
Feenstra professor of economics and holder of the C Brian Cameron
distinguished chair in international economics professor Feenstra is the
associate dean of academic affairs in the division of social sciences the
director of the Center for international data and of the
international trade and investment program at the National Bureau of
Economic Research please join me in welcoming him well thank you for that kind
introduction but really you’re not here for me we’re here for Assaf Razin to
begin my introduction of Assaf let me quote from a story of his life that was
written and illustrated by his son Ronnie and his grandson Edo they write Assaf Razin’s life story is one of extremes it follows Assaf from the kibbutz Shamir in the upper Galilee to the city of Tel
Aviv from Israel to different parts of the world from his childhood in the
nursery bed of socialism to the economics department at the University
of Chicago the cradle of intellectual capitalism our hero pursues a stellar
career and personal achievements while withstanding rather dramatic personal
events as they write Assaf received his PhD from the University of Chicago in
1969 and he was on the faculty at Tel Aviv University from 1970 to 2008
including serving as dean of the faculty in social sciences and as deputy Provost
assaf also held a chaired position at Cornell University from 2001 until last
year during this time he was active in discussions of economic policies in
Israel through the Ministry of Finance and various public committees he has
published 19 books in the United States dealing with topics such as
international migration foreign direct investment public policy and the welfare
state earlier this month Assaf was presented with the very
distinguished Emmet prize from the government of Israel the selection
committee for this prize writes that the Emmet prize is awarded to Professor
Razin for his pioneering and influential research in international
economics which has contributed to the understanding of a
range of macroeconomic issues and which has impacted on the economic policies of
countries and of international institutions now on a more personal note
let me say that I first met Assaf almost 30 years ago just a few years
after my wife and I arrived at Davis in 1986 I received an invitation to join a
group of international economists at the Hebrew University of Jerusalem which was
organized by Assaf and by his close colleague so my wife Gail and I spent a wonderful six months in Jerusalem in 1989 we can remember the
date very easily because our son had his first birthday there so it is very
fitting that now thirty years later nearly thirty years later Assaf would
spend several months here at Davis he has taught a course for our
undergraduates he has presented a research seminar on the topic of
immigration and now this afternoon he presents this public lecture on the
topic of his latest book as you can see the title here Israel and the world
economy the power of globalization please join me in recognizing and
welcoming Assaf so Assaf we’ll be speaking for 45
minutes or a little longer 45 minutes to an hour but there will be time for
questions at the end thank you Rob and thanks also Giovanni responsible for me
being here in this lovely place and it’s an opportunity to talk about my favorite
subject which is the Israeli economy something that I’ve now been doing in
terms of book writing for a long long time so the key words here is the power
of globalization and if you know the history of the Jews the Jews have been
part of globalization since centuries or millennia ago the Jewish dispersal most
of it involuntary of course across the world forced on the Jews to establish
global business and social connections there were two Jewish traditions that
contributed to this success one is the halakha and the other one is Beit din halakha the religious laws goes all the way back
2,000 years ago and the Beit din is the rabbinic courts also very very old
and it was our colleague Avner greif who is now at Stanford who wrote his first
fascinating work on the Gineza which was the storage of all the Jewish documents
in Cairo about the connection that is across Jews in the Diaspora and he
stressed the fact that these two contributing fact the religious law the
halakha and the rabbinic courts which were more than just in one location but
use the trust and enabled credit in earlier era that really underpinned the
globalization of the Jewish activities so as you know there are now
anti-globalization sentiments rising in Europe and in the u.s. and the problem
is that the increasingly integrated global economy that I studied in many
many ways in different places is blamed for the domestic economic distress
in this particular book I argue that Israel which had a remarkable
development offers a nice counter example to this view so what is the
globalization it is the integration of markets in goods
in services in capital and also with people moving between different
locations and nations this process of globalization was accelerated in the
1990s with the fall of communism the consolidation of the European single
market the growing openness of China and India and as I said it’s currently under
attack in Europe and the United States so in Israel case how should I put it
back okay so in Israel case the
disintegration of the former communist bloc allowed full integration of many
Jews who left the communist bloc and moved to Israel the fall of Berlin Wall
brought unification of Germany which was underpinned the European Union and the
single market there and this globalization process came to the
pinnacle when both Russia and China became members of the World Trade
Organization so Israel’s successful globalization is
responsible in my mind to the economic success and it was consistent this
globalization based economic path was consistent with the enthusiasm with
which policymakers around the world push forward globalization wave until
few years ago now since we are very much part of the global arena there were
recently several unprecedented global episodes that impacted a lot on Israel
first the Israeli immigration story as I just mentioned the collapse of the
Soviet Union brought a massive wave of high scale
immigration to Israel it was the taming of inflation which was a constant fight
in Israel which was enabled also by globalization and the fact that we built
institutions which are consistent with the global policy making very recently
there was this financial global financial crisis starting in 2007 and
2008 but Israel showed robustness to the
global crisis which is an amazing feat and Israel has pivoted itself toward Asia when China and India opened the gates to Israel and China and India were
embarking on this open-door policies and Israel high tech power is obviously
related to the global information information technology search epicenter
of course in California and it spilled spill overs were not unified across the
world but Israel was one of the benefactors so just short summary Israel
as a state was founded in 1948 and you remember that after world war ii the
world economic order was reorganized in a globalization fashion
and Israel basically put itself right there on the wave globalized in trade in
terms of labor market in terms of Finance and in 2010 Israel became a
member of the OECD which is the club of the rich countries in the world but
there are some things to be concerned about that maybe I will deal with at the
end of the talk at the end of the lecture there is a rising cost of West
Bank occupation direct and indirect social and political there is brain
drain of top Israeli talents which is assisted greatly by Israel advanced
higher education system and helped by the pro skill bias immigration policies
in Europe Australia and North America and there is a steep there was a steep
rise in income inequality and social polarization I’ll start with the
remarkable Israel’s immigration story let me remind that we economists don’t
only treat migration and immigration as movement of Labor from one place to
another although it’s an important piece of it there was the Swiss playwright Max Frisch that wrote because he was in Switzerland and it’s a place where there
is a lot of immigration he said poetically we asked for workers
but we got people and from the economic point of view the people part of it is
the fact that it is interacting with the welfare state policies it has fiscal
consequences and it is part of the political scene in terms of policymaking
and as you know immigration has significant fiscal implications the key
distinction is between high wage migrants that are net contributors to
the fiscal system because they pay progressive taxation and they get
benefits which are uniform but they paid in net more than they get from whereas
low skilled migrants are likely to be net recipients net consumers of the
welfare state because they pay relatively smaller amount of taxes
relative to what the benefits are get from the welfare state and there are two
important books in America that basically documented the fiscal
consequences of immigration to America first one was new Americans second one
was economic and fiscal consequences of immigration and the second one one of
the person that is sitting here Giovanni was a contributor to now people may ask
why control migration why not have free migration so here is a quote from
Jeff Sachs he says if people were told they could move no questions asked
probably a billion would shift around the planet within five years with many
coming to Europe and the US no society would tolerate even a
fraction of this billion any politician who says let us be generous without
saying we are not going to let the door wide open will of course lose and will
be replaced so why Israel is an outlier to this thing of controlled migration
because from the start we have a semi constitutional although we don’t have
constitutions a law of return from the first day of the state 1948 which
enables free immigration but not only free immigration to the Jews but also
grant these immigrants immediate citizenship the minute they land from
the sea or from the air and also enable them to exercise voting rights just from
the beginning there is no other place in the world that has from the economic
social political point of view this kind of situation where migration immigration
albeit only for the Jews is free uncontrolled in Israel which is the land of
immigrants who came in waves pushed around by different forces it was always
a situation where you have to absorb big chunk of migrants as a proportionate
relation back in the 1920s the wave of migrants amounted to 8.2 percent of the
established population in the early 50s immediately after the state was born
they amounted in two years to 13% 13.2 of the established population and
remarkably in the 1990s in a span of 11-12 years about 19% immigrants for the
Soviet Union and the satellites countries communist countries came to
Israel 19% of the established population and I would like to focus a little bit
on immigration of the last wave from the former Soviet Union and they will let go
after the collapse of the Soviet Union but as you can see from this graph they
had several options they could stay in the Soviet Union which is now Russia and
the republics that used to be under the Soviet Union or they can go to USA or to Germany or to other countries and by default if the
other countries will not receive them because all of their other countries
have quota they are controlling their immigration Israel was the safe haven so
there was a choice by these guys to do either one of the four or five options
and many of them came to Israel what was important about this wave of immigrants
which was unique in terms of the Israeli history is that they were basically with
no many dependents they come with a small size of the household relative to
the size of the population of the national average
they had better schooling they had better academic degrees in the
established population and even in the first decades after they arrived when
they had to catch up with going up the economic ladder they are still
have better salary than the average national average and in terms of
academic degrees they are much above Israeli national average forty one point
one percent of the families the head of the family had a bachelor degree
relative to the national average which was twenty nine point five but they also assimilated extremely well
by the way I gave a talk in San Diego and there they have the experts gordon
Hansen and he told me which was right that if you try to rank assimilation of
immigrants across different countries of course European come the last the
anglo-saxon world is a bit better including the US of course but Israel is
so much above and one way to measure this assimilation is if the children
outrank of their parents in terms of economic performance so in this
particular figure we look at the earning deciles whether they are in the
first deciles poor secon deciles less poor until the tens decile which is the
richest so if they come if the parents were in the first decide the poorest
poorest decile what will be the children position in the income distribution and
you can see in this graph that relative to the national average the children of
the former Soviet Union parents who were from the poor background from the lower
decile lowest decile we are very much prominent in the upper deciles what Oh
thank you I’m I could talk for ages and and you are so quiet until you came so
you see the graph now and another way to do it is to measure the probability of
outranking parents by their kids and the FSU former Soviet Union guys outrank
their parents in probability better than the national average and in that
particular figure also the Arab sector I’ll come to the Arab sector at the end
of the talk if I’ll not talk too much before so one important thing that I
noticed and I put it in my research is the fact that they had rights to vote
these guys from the start which is amazing but usually immigrants don’t
exercise these rights so there is a political scientist here professor
so he knows Orion and shamea who were studying you know turnouts of different
segments of the population and they didn’t find anything different than the
other country that immigrants didn’t really turn out in elections
except they found that these former Soviet Union guys had similar turnout
than the established population so they were very active politically and I claim
although I will not be able to prove it that they were responsible to reversal
of policies in Israel because they had there was a huge number of them the exercise of power and in terms of economics they made the welfare state
less progressive okay but I’ll not have time to talk about it I’ll just in my
model I was trying to find out with the model who are the winners and losers
from this wave of migrants that were basically triggered by shock
which is the collapse of the Soviet Union and the model tells me that who
are the winners and the losers from this shock which is the collapse of the
Soviet Union as far as immigration to Israel is concerned so all native borns skilled and and low skill gained for
various reasons that you have to look at the model the only people that were
crowded out were lowest skilled immigrants so they they were the losers
but it is a remarkable situation where most of the population all the
native-born population were gaining from this shock political shock to the
system I’ll skip the story of taming inflation which is remarkable I’ll just
say a few words that we are like a latin-american country in the 1980s I
can attest to it because I was the chief economic adviser to the government at
the time and we had a political revolution which is called in Hebrew
Mata and the opposition party which is now called the Likud took over after
being 29 years in opposition and they were very very populistic at
the time in terms of the economic policy and then generated hyperinflation
and it took us 20 years to get rid of it so the story I’m basically telling in my
book is how this conquering triumph over hyperinflation took place how we beat
the populistic attitudes of that then the government under the Likud basically it was a unity national unity government that was
basically able to to put – to take down on the inflation but not quite and it
took ten more years where we became more and more globalized especially
financially globalized that helped us to move it the whole thing down to the
world level the advanced countries level but I’ll skip that I just show you the
picture of this high high inflation crisis around the end of the 1970s and
the success of the stabilization policy in 1985 but which did not quite move it
down completely and then there was a lot of economic analysis that I had to do in
order to to tell you that the fact that we build you know better institutions of
macro policy through independence of the central bank everything that we imported
from the rest of the world including inflation targets and very importantly
the trade effects the pass-through from low inflation in the West into Israel
that created this elimination of inflation let me just say
that when I did it I was reminded about my classmate dornbusch because he wrote
a lot about macro populism in Latin America and there were two phases of
populism macroeconomic populism the first phase I should call sugar high phase where you know things looked good the economy is
booming and so forth but the second stage is a fiscal
meltdown financial meltdown stock market meltdown and very persistent recession
and the picture that you know in Israel that tells you about the two phases of
macro populism is here but they don’t have time to develop the story here then
there was a remarkable well I already covered a little bit of the fact that
the Great Moderation in the world in the advanced countries world helped us to
moderate our inflation but I’ll skip that here and we withstood the global depression of
2008 and I will also skip that a little bit and I’ll move into informational
information technology so here I’m talking like Rob Feenstra who is an
expert on international trade world expert innovation requires scale and
scale requires trade an isolated small economy can never be a center for
innovation so this is why globalization is key to the emergence of high-tech
industry which is based on innovation of course because to innovate you have to
think what are the incentives to innovate you innovate in order to
generate valuable services and to be valuable this innovation should be resulting in repeated use of this knowledge on a
large scale over time one thing that was a bit little studied is the role of
foreign direct investment and more particularly the role of foreign venture
capital in the emergence of the Israeli high-tech
industry obviously the the incentive of the innovator is to for the pecuniary incentives are to to sell its product to exit in the big market but
you need financing of that the financing of such innovation is very risky of
course and this was really the strengths of the Silicon Valley North America capitalism that had this for that is venture capital working like no other
countries in the world and the fact that Israel was a beneficiary of venture
capital from abroad which is a specific form of foreign direct investment
created an incentive for the Israelis to innovate of course because they were
able to go through this dry early period of not getting any income by this
venture capitalist and then be linked to selling the product in the world market
like only venture capitalists can do it for you so the story of Israel is not
only the human capital that is created in our universities and the fact that
you know we had the former Soviet Union immigrants coming with some of them with
high skill and and the kids are better skilled so all of that was very
important to create the pool from which the high sector high tech sector
started but also the fact that we are financing it from venture capital that
came from abroad and you can see that Israel foreign direct investment is much
above in recent times during the time that the high-tech sector has emerged
than the average of developed countries and part of it is this venture capital
and here is the before in venture capital how it was emerging at the same
time that the high-tech sector was moving up but it’s also true that in a
related way the amount of spending on R&D research and development in Israel
exceed that of the OECD by much out of it is of course the army R&D that Israel
excelling but part of it is civilian uses so all this phenomenon put together
we’re responsible for this take off of the high sector in Israel which is a
locomotive of the Israeli economy in many ways so after telling these good
things about what has been with the Israeli economy and society and really
unparalleled development you just remember that
in 1948 it was one of the low-income countries trying to absorb 15-20 percent
of immigrants that came mostly from North Africa of refugees from World War
two but they came with no skill many of them were dependent old and all of that
and we are isolated by hostility around us so to think about the fact that we
became a member of the OECD in 2010 and we are now doing better than countries
like Portugal for example and we are competing with Ireland which has a lot
of common features to what happened in Israel this is a remarkable story and my
point here is that the fact that we we benefited remarkably from the new global
order economic global order that came out after World War Two not many
countries really put themselves into this wave of globalization Israel did
but here is some issues that are trends maybe negative trends for the future in
economics we measure inequality but by the so-called Gini coefficient that it’s
one measure and if the number is high it’s more unequal if the number is low
it’s less unequal but with we distinguish between market-based Gini
coefficient what the market inequality comes out and
disposable income Gini coefficient because this is the bottom line disposable income is what matters but it comes after the market is doing his job
and then redistribution by the welfare state is doing its job so the difference
between the two coefficients is a measure of redistribution if there is
small difference it means that redistribution is small if it is large
difference redistribution is large first of all how Israel is ranked across the
world this is a snapshot view in recent times you can’t really read everything
but you have to watch two things I guess one is that the first three bars the top
bars are USA UK and Israel the length of the bar is the disposable income
inequality but the bar is split between redistribution and market-based
inequality and you can see that Israel in a snapshot of recent times is bad in
both fronts and especially it’s bad in terms of the
gap between the two which means that redistribution is lessened and this is a
view over time of what happened now I will not be able to convince you and
it’s a bit conjecture on my part and a bit of research on my part
but there was a turnaround of inequality following the former Soviet Union
immigrant so it’s basically ended in a big way in the late 1990s so
you can see that there were many changes in the 2000s so the first change is that the
market-based inequality went down and that’s logically consistent with the
view that these guys the former Soviet Union guys were skilled and they moved
into building a middle class in Israel they are not rich because they didn’t
bring any capital with them so that particular effect is to improve the
market-based inequality and you can see them but the second point is that if you
look at the disposable income inequality it has been growing following the wave
of FSU immigrants and the gap between them which is a measure of
redistribution is becoming smaller and smaller and I argue in my book that they
were basically active guys in the political economy new equilibrium which
had a coalition of people of higher skill and income that tilted the welfare
state towards more aggressive posture so this is one concern there was a
declining market income inequality which is more than offset by the fall in
redistribution second point which is remarkable and unique to Israel Israel
among the OECD countries almost 40 countries in this club has by far the
highest fertility rate and this higher fertility rate like in Gary Becker
theory a little bit although I have different versions of it in my book
comes who is relatively low skill acquisition but it is centered among two
segments of the population in Israel the Arab sector and the Jew and the
ultra-orthodox sector because they have higher population rate than the rest of
the society they are becoming a larger larger share of the economy the good news
something that I will come back to is that the Arab sector fertility rate is
falling very significantly recently and there is a remarkable integration of the
Arab sector into the labor market and universities in Israel and I will give
you some figures about it this is something that I’ve not seen in my life
such a remarkable situation where you go to Tel Aviv University and especially
Arab women coming from Muslim background that didn’t really
traditionally permitted the girls to to move out of the home they are now
entering universities even in economics but in any case that’s the good news the
bad news is that the ultra-orthodox guys are getting more numerous and they don’t
show any tendency to lower fertility and their skill acquisition because of the
unique situation of the ultra-orthodox guys that are dependent on government
subsidies and a man in general don’t go to work they are basically staying at
home not at home in the Torah places where you cannot really get any market
skills basically it’s extremely bad news for this segment of the population that
should have been contributing to Israel society they are segmenting away from it
and especially the labor market and in my book I also talked about a unique
problem that creates this fertility low skill acquisition among these
ultra-orthodox guys that has to do with the fact that they are like a club where
the social incentives the peer group pressures the wise men or the rabbis
that you know inspires the peer group pressures is much is dominant relative
to the private incentives the parents would like the kids possibly to be
successful but social incentives would not permit it
and the whole club is putting up walls so that it will preserve itself in some way
so this is sort of a socially economically a difficult issue to solve
finally Israeli Arabs which is something that again let me just confess I’m not
young anymore I was young when I saw Rob in Jerusalem in 1989 not anymore
but I’ve seen two remarkable changes in my life one that I’ll not dwell on is
you know what happens to the integration of women in universities and in the
labor force I’m not an expert on that but I still remember that when I went to
the University of Chicago we’re a class of 40 50 depending you know what stage
you count because in Chicago at the time after the first year 30 percent of the
students will have to drop out but only two ladies were there one of them
is this lady from Harvard’s Claudia Goldein classmate of mine but she was one
of the two nowadays it’s 50/50 or more women but I’ll not dwell on that
because this is a remarkable situation but this what happens in the last three
four years in my eyes to the integration of Israeli Arabs is remarkable so in the late 1980s only 2,950 EAs were granted to
Arabs out of forty six thousand five one nine twenty-five years later the picture
is very different the undergrad undergraduate student population at top
university increased by 52% and it reached almost seventy one thousand
students and the Arab students population increased by listen to that
296 percent and you can bring more numbers the Technion which is typically
hard sciences which was a barrier to people in the Arab sector now has more
than 20% of its students from the Arab sector so I’ll just say and also in the engineering colleges outside of the
Technion which is the prime you you have a lot of Arabs so this is a
phenomenon that it looks to be trending up which is the good news about what’s
going on now in Israel and I’ll stop here –as i said we’ll have plenty of time for questions so I suggest that if someone is
courageous enough to ask a question she or he should stand up tell his name or
her name and ask the questions go ahead yes –Hi Joel Haas so you talked about the
skill sets of the Israeli immigrants and how they contributed to the Israeli
economy how does that compare with the skill sets of the United States
immigrants and how they contributed the US economy –well it’s it’s extremely good
question that I have not done research on giovanni can say more because
especially about scientific manpower that is now well represented from the
immigration pools so US is also a success story in terms of assimilation
in the u.s. in general you can divide it into two phases in the nineteenth
century all the way until World War one the welfare state was minimal only
Woodrow Wilson created the income tax I guess in nineteen twelve or thirteen and
then there was the war so you don’t talk about immigration during the war but the
point is that there was no welfare state and immigration was essentially free so they benefited of course what you see in the u.s. today
has a lot to do with what happened in the 19th century in the early 20th century
there was a free migration but then of course things started to be much more
problematic in terms of immigration policies they didn’t like the Chinese to
come so they put requirement on language they also developed the welfare state
also in stages started in a big way under Franklin Delano Roosevelt Franklin
Roosevelt FDR Social Security and many many welfare state institutions and
then the next turning point was under Lyndon Johnson in the 1960s Medicare and
so forth and then all the way under Obama the Obamacare which was again a
major welfare state institution that didn’t exist before but and now the u.s.
is of course not as generous welfare state as Europe but it still you know a
very important welfare state and there’s a strict immigrants laws not all the time according to merits they include family
reunions in order to bring you know more Europeans rather than bring Chinese or
Vietnamese so there are all sort of Congress legislation that you know what
making immigration policies a bit distortive in in the eyes of an
economist but there is no question that the u.s. is a land of immigration but
it’s a different story Israel always had free
immigration of Jews they had to receive them even they they come with no skill
old sick you name it that was basically the 1950s luckily in 1990s we got these
influx of Jews from the Soviet Union which gave you know a big push to Israel
but but maybe it will be it will be the next time it will be something else
I don’t know it depends very much on the push factor from a world not on Israel
policies because Israel is not restricting anything yes –Ken Firestein I when way back to the beginning of the
talk you suggested inserted that it’s a counterexample
for most of the current criticism of globalization so my question is in a
country such as Portugal or Greece or how might this look and play out if they
were to follow some of the historical events and fortunes of how Israel
progressed since 48 that’s so the question is how would it play out in another country in another situation –for many reasons they didn’t have it so basically have first of all they didn’t
have democracy from the start Israel remarkably was founded as a
democracy second of all they didn’t have these links to the rest of the world
that we had we had less corruption with more
democratic ways we built our institutions so it’s very difficult to
answer this question Israel is standing out in terms of these
things and I’m and I don’t know whether historically Portugal and and Greece
could have could have made it unless they were to have a different regime if
the European Union would have established itself not in 1992 single
market act but say in the 1960s or 1950s Greece institution would have been
completely different they will have a democracy they will have a law in order
of their policies that you know make sense but the integration of Europe was
much more difficult anyway it’s just a speculation but it has to do with
different histories –Tippie Goldcorn I was intrigued by well maybe it is a
small point but it is a very important one now the Gini difference and you
showed us that Israel is now number 3 in the section of USA and United Kingdom
and you said something that I was not sure I’m not sure that I understood and
maybe you could explain it a little bit or enlarge it a little bit more you say
that if I got it right that there are some interests and groups that want to
keep it this way I’m talking about Israel and I just wonder if you are
ready to explain it a little bit further
–well in that regard we are not different than any other country nowadays the way
the political system works itself see what happens now in the u.s. in terms of
standstill in legislation because they are very polarized and the system
cannot really break this gridlock in Israel we have different politics but
still in many ways very harmful to growth and and to innovation if you like
oh maybe not innovation but to growth I mean I just told you about the ultra
orthodox guys so they just the fact that because of our parliamentary system
there are always the people in the government in the coalition they extract
this particular subsidies that they preserve their isolation from the rest
of the economy and there is you cannot really break the political system there
easily because in democracy and in parliamentary systems like we have in
Israel this is how we you get it so the short answer is politics is very very
complicated and in many ways in recent times it works against you know some of
the economic progress and social progress in Israel I didn’t talk about arab-israeli relationship and all of
that which has also something to do with the deterioration
of our politics [inaudible] –I don’t think so because the technology story came later after we
already tamed the inflation so it played no important role the important thing
was to beat populism by the crisis that created the necessity of national unity
government that spoke to different interest groups that were able to
withstand you know a big big reform that made the hyperinflation moved to about
two-digit low two-digit but then it was a very slow process where globalization
was key especially financial globalization but also trade
globalization that allowed us to build institutions and to mimic the advanced
countries policymaking and institutions that allowed us to move inflation down
all the way to zero but technology which was very important but was not part of
the story yes [inaudible] well it’s it’s a good question it’s
something that I don’t have ready-made the answer but let me give you two or
three thoughts about it you know the big push was the peace with Egypt in the
1980s even though we are under hyperinflation we are allowed to move
down defense expenditure because Egypt was our main rival militarily
speaking and there was a remarkable shift down in defense so first of all
you had to beat the inflation but then we started you know growing and you know
putting something into high-tech industry and all that but it’s so much
indirect ways but if you just look at the the main turning point in defense
which is the follow-up of the peace with Egypt it contributes a lot to moderating
inflation creating better institutions of government and and moving also growth
a little bit upward and productivity started to pick up because of the
technology boom in the late 1990s but it was bit two decades later but there is
no linear relationship between today’s defence expenditure and growth there is
no you know the cost of occupation okay which is something it’s very difficult to argue that it translates easily to
lower economic growth and part of the defense is you know triggered some
innovation all the cyber innovation in Israel started in some elite units in
the defense community but it’s it’s a great question I don’t have ready-made
answer I don’t think you can actually say that one causes growth or less
growth but I I’m just say seeing that the turning point in Israel was the
peace treaty with Egypt under Sadat and that created a situation where the
defense went down from say 15 percent of GNP to 7 percent of GNP and that started
a new new era in terms of taming inflation creating better institutions
of government and finally growth Bob Rigler in the u.s. it seems that a lot
of the resistance to globalization has to do with the perceived dislocations
domestically caused by that that are blamed on globalization does Israel have
any examples to guide a big country like the u.s. in this regard –well first of
all with respect to the US here we have Rob sitting and he’s now challenging a
very publicized study by three authors one was Otto second was dawn and the
third was gordon Hansen and they claimed that trade from China really created
the Rust Belt in the Midwest and created a lot of difficulties in
employment there and losing jobs what Rob is showing that NAFTA and other
trade agreement created also a boom for exports so there were shifting of jobs
because of trade and in net I don’t know if the u.s. gained or lost jobs
it’s also depending on the the time interval that you’re talking about so in
general in the long run trade allows you to reshuffle resources reshuffling labor
from one from imports to exports and does it have a direct effect a net
effect of job loss but it has a positive effect on wages okay but everything what
I’m saying is subject to scrutiny and some different things but you know it’s
a debatable point in Israel obviously the wave of immigration in the 1950s was
very bad for jobs I mean there were no manufacturing industry there was nothing
so everything was related to creating new jobs so the job and job and job was
the main the main issue housing was the second issue but when we talk about the
the last wave of immigration from the former Soviet Union there was no
apparent effect on jobs on the number of jobs unemployment in Israel maybe went a
little bit up in the in the beginning but not very much so the issue was
different of course some of the segments of our population were crowded out but
it was mostly first the those Arabs that came from the territories that
were not that were driven out because the Russian when they came they took
any job available but later on I think because the economy
was growing I don’t think the jobs was the main issue housing was a problem but
not jobs usually in general trade people like Rob and me and Giovanni and Ellen
Taylor don’t think that there is a direct long-term effect on jobs on the
number of jobs of trade liberalization dan goldcourt I know that there are no
more prophets around but are there any predictions as to the direction that the
Israeli economy is heading you know we remember the days of the
oranges and in diamonds now high-tech what next –well we have a very thriving
high-tech industry we have great financial services that allow us to
withstand the global depression in 2008 so we have a broad-based economy
obviously centered around the center of the country and I am from Tel Aviv which
sometimes regarded as a separate city like California is a different stage and
separate state in the u.s. so it’s very much like Tel Aviv and California in that
regard play a similar role so I have no predictions about the economy moving
down not in the foreseeable future I might be wrong of course you remember
that the Queen asks us economists how come that no one of us saw the global
depression coming that was Queen Elizabeth question
so all these predictions are with a grain of salt but I’ve no no
reason to believe that the macro economy is faltering I have a lot of concern
about the periphery about the inequality and especially about the lack of
integration of a growing share of the population of the ultra orthodox
guys and I have of course a lot of concern about whether we’ll be able to
reconcile our conflict with the Palestinians because that really
infiltrates into everything now in politics in undermining our
democratic institutions you name it we have sort of trump-like
situation in many ways by the governing coalition in Israel and mostly it is
because of the fact that we are occupying these guys and we are not
moving towards the reconciliation Katie Russ economics I noticed that you
mentioned important role of foreign direct investment in Israel’s
development story I wonder if you have thoughts about any tax policies that
might have been helpful in that respect and if there are lessons there to be
learned as the u.s. considers its own tax reform –it’s a good question coming
from Katie if you remember she wrote a review article in the Journal of
economic literature on my one of my previous books called foreign direct investment so she’s the one that should ask this
question actually we have as far as venture capital capitalist and is
financing coming from abroad we’re not a lot of tax incentives I’m not sure that
they are on a cost-benefit analysis was it or not but the fact is that they are
there and also respect to some other FDI flows so in general we are friendly
towards foreign direct investment not as friendly as Ireland
I asked Alan Taylor to write a paper with me he will write it at some point
about comparing the Irish experience to the Israeli experience and the common
thing is that contact investment was flooding into Ireland because they was
were low taxed they were part of the European Union so all these foreign investors would like to go to the European market and
the main gate was through Ireland in Israel for different reason we also had
as I just show in the figure a remarkable hiring FDI then the OECD
countries and we departed a little bit from
Ireland where in the 2008 they were some of the first casualties of the of
the depression and now they are trying to find out whether they can maintain
some trade with the UK that is Brexiting so they have some different
problems but in some ways as far as the foreign direct investment we are
comparable to Ireland is there a final question or shall we stop there –thank you very much

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