From Recession to Growth: Macroeconomic Policy
Today (Dec 14th) the Israel Democracy Institute’s Eli Hurvitz's Conference on Economics and Society, opened today in Jerusalem with a session " From Recession to Growth: Macroeconomic Policy," which focused on ways to accelerate the Israeli economy.
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The Israel Democracy Institute's Eli Hurvitz's Conference on Economics and Society opened today (December 14th) in Jerusalem with the session "From Recession to Growth: Macroeconomic Policy," which focused on ways to accelerate the Israeli economy. The panel was overseen by the conference co-chairs Prof. Eugene Kandel, CEO of Start-Up Nation Central and Prof. Karnit Flug, IDI's vice-president for research and William Davidson Senior Fellow for Economic Policy and former governor of the Bank of Israel.
Yohanan Plesner, president of IDI, opened the conference saying: “The combination of the economic and political global crisis revealed weaknesses in Israel's democracy and economy. Many of them were known and discussed before the outbreak of the pandemic: a lack of institutional ability and long-term planning culture, a lack of integrated methods for the effective management of civilian crises and for knowing how to learn from mistakes throughout the event, a severe decline in trust between citizens and democratic institutions, an education system not adapted to the needs of the 21st century, gaps in the investment in health infrastructure and green infrastructure, and more. Although the vaccination campaign in Israel is expected to begin next week, it will not inoculate us from economic crisis. To ensure our exit from the crisis, it is our duty to plan and lay the foundations, right now, for the post-COVID economy – an economy based on long-term thinking that takes into account the changes taking place in the world. Crises are precisely the time when we must ensure that democratic institutions function – that there is oversight, that there are those making sure that there is no abuse of power and authority, that in-depth processes take place, and that various alternatives are explored. The crisis and the state of emergency cannot be used to weaken and dwarf institutions and professionals whose job it is to be loyal to the law of facts; all professionals should be encouraged to tell their professional truth openly and without fear.”
Prof. Avi Simhon, chair of the National Economic Council: “There are three things that characterize this crisis. The interest rate we are working with is very, very low, and we are paying less than 1% on 10-year loans. This is a negative real interest rate, even before the Bank of Israel used the entire arsenal at its disposal and bought bonds for only NIS 40 billion instead of NIS 80 million, at a time when other central banks threw much more money into the market. The interest rate is very significant because the problem with government debt is that it must be upheld and interest on the loan must be paid. Another important thing is that the crisis has an expiry date. It's not just that all government plans were aimed at June 2021. Not because we will not need them, but for temporary reasons and for fear of contagion. We did not close trade because it's not productive. We closed restaurants but want them to return in six months. I don't think the demand for restaurants will open in the summer of 2021. This crisis is not a classic crisis of destruction…. There was destruction here and we will not go back to exactly where we were a year ago. And what we want is to see all the businesses that were here in February 2020 go back and running as soon as we finish the process of population immunization. Israel's macro outlook is very strong. Our problem is micro. We have to use the money that the economy can spare to help the weakest.”
Eran Yaakov, director of the Israel Tax Authority and acting director general of the Ministry of Finance: “We are facing a two-dose vaccine, and I think that two doses are also necessary to take care of the economy. Trade should be allowed and opened as much as possible – this is the first and immediate dose. The second dose is significant for looking ahead: to neutralize barriers, to open up the economy, and to make it much more competitive. The treasury has at least 40 reforms to implement and many processes that should accelerate the economy significantly, such as open banking and establishing a new bank. In addition, in an economy where it is a disadvantage to be small, bureaucratic barriers must be lowered, such as standards that make trade very difficult for businesses and importers. We will probably end 2020 successfully compared to other countries around the world. I think we can get the economy back on track very quickly.
Yogev Gradus, acting director of the Ministry of Finance’s Budget Department: “There is no substitute for a functioning economy. Any assistance given will not replace the activities of the businesses, so our approach is to let the economy work in times of crisis and open up the economy as much as possible; this is in constant dialogue with the Ministry of Health. For the 11 years that I have been in the Budget Department, it has always been the "wrong year" to increase debt. With the crisis we increased the debt within two months – something we strived to avoid for years. But we must remember that in the long run we must be in a declining debt-to-GDP ratio, because crises do not end and the next crisis will always be lying in wait. In the next budget we will propose a new fiscal rule that deals with capitalizing the debt-to-GDP ratio in the long run and a multi-year consolidation process through to the stage where the economy will recover. On the day after the crisis, we will need to take more aggressive steps to solve the problems that have arisen.
Yael Mevorach, director general of the Ministry for Social Equality: “This crisis has widened gaps and deepened problems in the Israeli economy. For example, in relation to women in the labor market, additional work at home was done entirely by women and childcare was provided by mothers to a greater extent than fathers, so women in almost all sectors submitted requests for unemployment benefits. The crisis has opened up a gap in which the number of job seekers is higher than the number of people returning to the labor market. It is a failure of these growing populations and will affect poverty in the future.”
Dr. Ron Tomer, president of the Manufacturers Association of Israel and chair of the Israel Chamber of Independent Organizations and Businesses, expressed harsh criticism of the government's inability to return workers to employment: “The Ministry of Finance wants all companies to compete for pennies. The factories in the peripheral areas cannot compete with the meager wages paid in Turkey and China and the lack of professional human resources that the country has not trained. The same government that sets the expensive, and sometimes the most expensive, production costs in the world is buying from factories that would not have complied with any law if they had tried to produce in Israel. This is how the government creates jobs in Turkey instead of in the periphery of Israel. I visited the UAE last week and saw their desire for us to export industry but not produce. The business environment there is much more advanced than in Israel and much less bureaucratic.”
Dubi Amitai, chair of the Farmers' Federation of Israel and chair of the Presidium of Israeli Business Organizations: “Due to a mistaken policy, the economic plan preferred paying people to stay at home instead of accelerating and developing the economy. Of the NIS 138.6 billion allocated to the 2020 corona economic plan, only 4.6 billion, which is 3.3%, was allocated to the acceleration and development of the economy category compared to almost 10 times that amount allocated to non-profit organizations and social security payments (NIS 49.6 billion). In the business continuity category as well, businesses were burdened rather than helped – with about two-thirds of the budget being loans to businesses and not aid grants due to declining demand (NIS 42 billion out of NIS 69 billion). The economic failure of the crisis stems from the apathy or worse, from the lack of understanding of the need for targeted intervention to encourage demand and growth and not in providing loans and "artificial respiration" to businesses as happens in such a severe market failure.”
Amitai concluded: “The government must act immediately in a number of critical areas: it must immediately set budgets for the accelerated growth and development of the economy, implement its decision to boost demand through local government procurement, encourage private consumption, promote professional training for the purpose of adapting the labor force to the changing needs of the economy, and approve flexible unemployment pay to allow for the gradual absorption of workers back into the labor market.”
Dr. Bruce Kasman, chief economist and managing director of global research at J.P. Morgan: “We think 2021 is going to be an unprecedented year because, alongside strong growth, the virus will have left us a legacy. A legacy in terms of an incomplete recovery; a legacy in terms of very significant imbalances regionally and sectorally, and that's going to create enormous challenges for policymakers looking beyond 2021 to complete the recovery from this terrible shock. Right now, we're not overly optimistic how policymakers will handle it, so the tension for next year is going to be about very strong growth, but these are underlying challenges that we don't think will ultimately be met.”
Christian Esters, senior director and analytical manager in S&P Global Ratings’ Sovereign and International Public Finance Ratings: “We expect the Israeli economy to recover at some point in the next half year. Israel's rating remains high and with a positive outlook in contrast to other countries' ratings, and the recovery in these countries will be slower, especially in developing markets. We confirmed Israel's ranking last November. This is the result of a stable economy that will begin to recover in 2021 in our estimation. Israel has a rich economy and good economic policies over the years. Most of the company rankings in Israel continued to be good last year as well. Although government debt has risen, it will stabilize later in 2021. The structure of government debt is good and the Israeli government has good access to the global capital market and debt raising. Overall, Israel maintains fiscal and monetary stability. At present, we do not expect Israel's ranking to change in the next two years.”
The Eli Hurvitz Conference on Economy and Society – formerly the Caesarea Economic Policy Planning Forum – is widely recognized as Israel's most influential economic conference. For 27 years, the conference has served as a crossroads where public discourse and professional knowledge in economics and society meet, with the aim of improving decision-making processes in the administration and improving the quality of Israel's social and economic policy for the benefit of the entire public. The conference this year focuses on: macroeconomic policy in times of economic crisis; the labor market; the Israeli education system; governance in a time of crisis; strengthening the health system's readiness for crisis situations; and the relationship between local and central government. The conference is the apex of research and theoretical and practical research by working and thinking groups comprised of senior officials in the Ministry of Economy, Ministry of Labor, Ministry of Finance, the Prime Minister's Office, academics, IDI experts, civil society representatives, and other partners. Together, the teams led research and developed policy recommendations on issues closely related to the conference sessions, which will be presented during the conference, held online this year from December 14 to December 16.