The Crisis Was Too Short

By: Prof. Shlomo Maital
TIM Academic Director

Why am I saddened when Israel's politicians and some business leaders announce the current recession in Israel is over?  

Is it because I exaggerated the depth of the crisis, predicting 10 percent unemployment when it appears it will not exceed 8? Is it because the gloom and doom I forecasted has not occurred?

As witnesses for my defense, I call to the stand five leading economists, managers, investors and entrepreneurs: Stanley Fisher, Governor of the Bank of Israel; Yoram Gabai, Chair of Peilim Investment Fund and formerly head of Israel's Internal Revenue Service; Eran Goren, founder of Nesua Zanex Investment House; Yair Shamir, Chair of Israel Aerospace Industries (IAI) and partner in Catalyst, an investment fund; and Dr. Shuki Gleitman, formerly Chief Scientist and Director-General of the Ministry of Industry, now a partner in Platinum Fund. 

Fisher was extensively interviewed on Kol Israel; a Channel 10 poll ranked him most influential in Israel's economy, and a similar poll by business daily The Marker ranked him second, just behind Prime Minister Netanyahu. Gabai has published a new book, in Hebrew, Political Economy: The Gap Between Perception and Reality (Hakibbutz Hameuhad), and Goren, Shamir and Gleitman were interviewed by Kol Israel Reshet Bet's Pe'erli Shahar. I also spoke extensively with the latter three during a TIM best-practices benchmarking trip we shared to the UK, when we brought some 31 Israeli high-tech managers to visit leading British companies and meet with their CEO's. 

Economists rarely agree. But these five leading thinkers and doers mostly agree that Israel needs major structural changes in the way it does business and creates jobs. Israel needs a new growth engine. And the initiative must be taken by the government. But with the crisis declared over, will political leaders now turn to debate such crucial subjects as the cost of former Knesset Speaker Dalia Itzik's floor tiles and hotel rooms, and why Israel returned to standard time a full month before other civilized countries?   

Change in Israel happens mainly during crisis. If the crisis is over, so are hopes for major structural changes. As Technion Prof. Rachelle Alterman notes in her book Planning in the Face of Crisis, "skillful planners should…learn how to recognize crisis opportunities and… utilize them for desired change."

I fear we may have missed the crisis boat. It slid by too fast.

Here, in their own words, are what the experts think about reinventing Israel's growth engine, along with my own comments in italics.

Yoram Gabai, on Israel's lack of a long-term strategic plan: "During 1985-2008 the Finance Ministry and Bank of Israel had a clear strategy regarding financial stability and open free markets; the economic fruits that resulted were very impressive. But Israel had no strategy at all in most other realms. Resources invested in education were large but the strategic goals and outcomes were unclear. Every few months or years Israel changes its political and defense strategy. Israel never defined its defense goals nor its borders, nor how it sees its relations with its neighbors."

I took part in a project led by Eli Hurwitz, chair of Teva, called Israel 2028, aimed at creating a long-term competitive strategy for Israel. [See The Report, November 10, 2008]. The report was presented last year to the Olmert Government amid fanfare, and was even adopted in principle -- but there is no sign any of it is being implemented. Prime Minister Netanyahu boasts about his innovative two-year budget (in the past, the government budget was only for a single year), but in order for the Knesset to pass it in July, Israel was left without any government budget for months, after February elections, during the depths of the global financial crisis. And two years is far from being 'long term'. 

Stanley Fisher, on Bank of Israel policy toward the recession: "We could not use the government budget to stimulate the economy, like other countries did, in the critical months, because we did not have a budget for 2009 until June this year.  So we had to do everything through (Bank of Israel) buying foreign exchange, and lowering interest rates."

Israel emerged from the recession, no thanks to government policy. The Bank of Israel was the first among Western Central Banks to lower interest rates, and is now the first to begin raising them. Fisher spent seven years at the International Monetary Fund as its Deputy Managing Director, dealing with crises in Thailand, Russia and elsewhere. Having a top "fireman" running the Bank of Israel, during a global conflagration and during political stalemate due to elections, was very fortunate.

Stanley Fisher, on Bank of Israel policy toward the falling shekel-dollar exchange rate, which hurts exports: "Even though the dollar has weakened relative to the shekel, it has also fallen all over the world. We (Bank of Israel) cannot preserve the value of the dollar in the world! In the past six months, the dollar fell 13 percent relative to the euro, but only 10 percent relative to the shekel. So there was a shekel appreciation relative to the dollar, but a devaluation relative to the euro. Our exporters are smart, they will shift from US markets, where exports are less profitable, to Europe and other markets, where they are more profitable."

World trade crashed during 2008-9. This is a huge problem for Israel, whose growth is driven by high-tech exports. Israel's total goods exports fell by a third during January-August, compared to a year ago, and exports to the US fell by 27 percent. Israel sold $6.5 billion more to the U.S. than it imported in January-August, while running a deficit in trade with other nations. World trade will recover slowly, but already we see signs of countries erecting barriers to imports. The strong shekel, which makes Israeli exports expensive and foreign imports cheap, will make life hard for Israeli exporters. They will need help.

Eran Goren: "The American consumer bought hysterically, on credit; America provided a quarter of world consumption. This moved the wheels of the world economy. But basic conceptions changed. It will take people a long time to recover their losses. That growth engine will not recur. Credit is much harder to get. This will moderate the growth engine of the past."

Israel's growth engine relied on America in two ways: For imported capital, and for export markets, perhaps more than other nations. Both of these have been badly damaged by the U.S. financial crisis. What is Israel's strategic plan for finding growth elsewhere? Is there one? Is there a task force working on the problem? Is Prime Minister Netanyahu losing sleep over this? I doubt it.

Shuki Gleitman: "We had a crisis [in Israel's technology-based industry] before the world crisis. It began 10 years ago. We do not succeed in growing big global companies. From 1995, only four companies were founded that sell abroad in 2008/9 more than $100 million yearly. You have to find a wide basis of employment. We did not succeed in this. We failed to leverage the crisis to address this problem. …The government is the only institution that can help. But it does not! It seems to have no interest in this."

Israel's business model was based on selling its brains, as startups, at inflated prices. These baby companies were 'adopted' and their know-how shipped overseas, before they could mature and create well-paying jobs and incomes for middle-class Israelis. Why has Israel failed to grow global companies in the past 10-15 years? What is government policy in this area? I see no evidence any ministry is trying to deal with this key problem.

Yair Shamir: "We need economy-wide change! We (at IAI) want to go into wind energy. This creates many jobs. It is a huge business, but it requires billions in investment. If the government would participate in these investments, it would be attractive. But the government is not. We at IAI have $1.2 - $1.3 bilion in cash. If no one joins us, we will do it alone."

Eran Goren: "Israel's new market is not China or India but alternate energy! This is the next place where Israel has innovative advantage. Speed! Flexibility! If there is one area ready for leadership, this is it! This can be the next growth engine, infinite in its potential size. It is a new world. We must create a whole support system: Tax concessions, government-sponsored investment funds, new faculties in universities, a complete chain. If we do, we could be world leaders. This can be our new growth engine!"

Israel should make alternative energy a key strategic objective. Nothing could help Israel's economy and security more, by weakening the political power of hostile oil-producing Moslem states while generating jobs and exports. This will only happen with strong clear government intervention. But as Shamir notes, there is little sign of it.

The Netanyahu government believes in free markets. But sometimes, as we learned in 2007-9, free markets destroy the world rather than build it. Did Israel elect a dogmatic Thatcherite pro-free-market government precisely at a time when we need a pro-active one? 

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*This article originally appeared in the Jerusalem Report's Marketplace column, October 12, 2009.