Address by Finance Minister Yair Lapid at the 2013 Eli Hurvitz Conference on Economy and Society

Good morning,

When I started my work at the Ministry of Finance and asked that we begin an orderly process of building an economic strategy for Israel, one of the things that surprised me was my discovery that there is no such thing. I went to all the relevant people and asked if there had ever been an organized process of building a comprehensive strategy, across the various offices, and it turned out that there had never been. There were quite a few starts, but nothing was ever completed. I imagine that I'm not saying anything new here. This room is full of brilliant and experienced people, but is there anyone here who can stand up and say that he understands or knows what the economic strategy of the State of Israel is? This country is 65 years old. Has it ever had one consistent and clear economic vision that we can hold up against reality in order to check if it was ever implemented? The answer is: of course not.

So, since we were starting from scratch, there was one challenge that I gave to the different groups that were dealing with the matter. I told them: "Keep it simple." Because the most successful economies in the world are always based on a simple principle that is easy to understand in just a few words: In South Korea, it's "let's create optimal conditions for huge industrial companies"; in Germany, it's "let's become the global standard for quality products"; in Singapore, it's "let's embark on an accelerated process of deregulation and low taxes that will bring us all the international companies." It's simple. And one of the problems that we had was that no one really knew how to define the State of Israel's economic strategy in two simple sentences.

So this was our first task. And after months of work, I want to give you a two-sentence definition of our economic strategy—the economic strategy of the Ministry of Finance—for the coming years:

What do we want? We want Israelis to earn more and to improve their quality of life. How will we achieve that? We will create an innovation-based economy.

I want to say it again, because if you say it enough times, it becomes a kind of song that enters your head and goes home with you, and that is what has to happen here today.

What do we want? We want Israelis to earn more and to improve their quality of life. How will we achieve that? We will create an innovation-based economy.

There is one statistic—I am not going to present a lot of data here, but there is one statistic—that I go to bed with at night and wake up with in the morning. It is: In the last ten years, from 2002 to 2012, growth in Israel was 26.8 %. In the same ten years, the real monthly wage increase for Israeli citizens was only 2.1 %.

In other words, the people who increased the country's profits by over 26% earned less than 2% for their own pockets. They built the Israeli economy, they made it a success, they put it at the top of the developed countries, and they themselves did not gain anything from it. The rich got richer, the poor got poorer, and Israelis in their 30's today are the first generation of Israelis whose standard of living is lower than that of their parents. Not only that, but they also are being financially supported by their parents and are still stuck in their parents' homes. This must  change.
I am not a socialist—far from it—but it is time that we admit that trickle-down economics, a Reaganite idea from the 1980s, which says that the rich should be allowed to make unlimited profit and the money will trickle down to the poor, simply doesn't work. It failed in the United States, it failed in England, and it failed in Israel. The money comes in at the top and it stays at the top.

The money should not be at the top. We need to invest the money in the middle class, in the middle area of the graph. From that point, it will flow down and it will flow up. We need the middle class to earn more money, because the middle class does not spend its money in Saint Tropez or Acapulco; it spends the money in Yokneam and Kiryat Gat and Be'er-Sheva. It spends the money on other people in the middle class, who spend it on other people in the middle-class, and on the way, the money narrows gaps and helps the disadvantaged who need help from us.

The next tax breaks should not be given to the rich but rather to the middle class. Government investments should focus on what is of greatest concern to the middle class: education, transportation, housing, and lowering the cost of living. Poverty and gaps should not be perpetuated by a variety of subsidies and allowances; rather, poverty should be defeated by helping the poor find employment so that they themselves can become the middle class. Closing gaps is the country's paramount interest. But the culture of distributing allowances has not closed the gaps; on the contrary, it is what has created them and it is what has maintained them. We need to replace the culture of allowances with a culture of systemic innovation that closes the gaps by giving tools to those who do not have them, thereby enabling those people to close the gaps themselves.

But in order for all this to happen, in order to realize this, there is one small thing we need: more money. We need to make the pie bigger. Current Israeli discourse deals with how to divide the pie: housing vs. bank stability, job tenure vs. profitability, the defense system vs. education and health. This is a worthy discussion, but first we need a pie, and in order for there to be enough to divide, the pie needs to be much bigger. And in Israel, it is impossible to make the pie bigger.

In order to realize the basic vision—the overall objective that says that quality of life is our goal—Israel must strive for an average growth of upwards of 5% per year in the next decade. We need to increase our worth every year by 5–6 %. This is not in the heavens; we had such numbers in the not so distant past. But this kind of growth can only come from international markets. Israel is a small and isolated country, and its domestic consumption is limited. If we want to increase the size of the pie, we need to export more. We don't have another 6% to sell here; we must sell it in the U.S., in the Far East, in Europe, and in Africa. The world is our customer, and growth will only come if the world wants to buy our product.

And what is the one Israeli product that everyone wants to buy? Innovation. What is the product that does not depend on the political situation, that is injured least in economic downturns, and that does not rely on natural resources? Innovation. What can evolve almost endlessly if given the right conditions? Innovation.

There are several reasons why we are good at innovation. The first reason is the Israel Defense Forces. There is no other country in the world that has an HR system—a system of identification and guidance—on a national level. The IDF knows how to lay down a dense network for identifying talent that spans the entire country. It identifies not just those with the highest grades, that is easy, but it also locates the Steve Jobses and the Bill Gateses—those whose parents have even given up on them. In one of the IDF computer units, there is an amazing group of young people with autism who are interpreting aerial photographs. Why? Because they are better at it than other people who are not autistic. Think about the identification and guidance capacity that is necessary in order to find such a group. The level of identification and direction that we have reaches far beyond the top graduates of the prestigious Alliance High School in Tel Aviv, the Reali High School in Haifa, and the Leyad HaUniversita High School in Jerusalem. We also know how to find the people we are looking for in schools in the periphery and in schools for students with special needs. There is no other country that knows how to do that. If someone is talented at something, the army will find them and use them. The army does not do this for economic reasons but for completely different reasons, but after three or four years, when the soldier is discharged from the army, he  will be more experienced, more innovative, and more focused than any graduate of MIT or Stanford.

The second reason why we are an innovation-oriented society is because we are a society of diverse immigrants, which, as in the United States, always produces a very productive intellectual environment.

And the third reason, which no one talks about because no one knows how to quantify it, is because there is something in our DNA. That is our founding ethos. It is what created Einstein and Freud and Jesus and Kafka and the wonderful lineage that resulted in the fact that a people that makes up just two tenths of a percent of the world's population gave humanity the Book of Psalms and the theory of relativity, the writings of Maimonides and a quarter of the Nobel laureates, the atom bomb and the songs of Bob Dylan. We do not know how to fully explain it, but there is something in two thousand years of Talmud study that honed the Jewish consciousness in a way that prepared it—in a somewhat miraculous manner—for the arena of technology. We see this very clearly when Haredi youth leave the yeshiva and go into high tech. They simply think differently. In a world in which the most "in the box" statement is "let's think outside the box," they truly think differently.

So that's our comparative advantage. Innovation. This, of course, is not a big secret. In fact, if you think about it, we are the only country that is completely associated with innovation. There are companies in the world that are associated with innovation, like Apple or Google, but there are no countries that are associated with innovation except for the United States and Israel. That's what the mythological book Start-Up Nation is based on. That's why Israel is the third-largest country in terms of the number of companies that are traded on the U.S. stock exchange. And that is why huge companies like Cisco, Siemens, IBM, AT&T, Microsoft, and Google are setting up research and development centers specifically in Israel.

So we are at a particularly good starting block. Because it is easy to sell us as "the innovation nation." That's a campaign that writes itself: "The people of the book becomes the people of the tablet." But there is a problem. And the problem is us—the government of Israel, Israeli bureaucracy, Israel's public sector, Israeli regulation (which has become a kind of bureaucratic tyranny), and the atmosphere in Israel, which is distancing many people and companies from Israel. These are the reasons why within six years—only six years!—from 2006 to 2012, Israel plummeted from the 14th to 26th place in the global competitiveness ranking.

The graph on screen is the only graph that I am going to show you today, because I find it nothing less than terrible, since it shows that we are losing our comparative advantage at an alarming rate. It is slipping through our fingers now, not in the future, and we need to do something about it now, not in the future. We need a strategic plan, and we need it fast. We must take the vision of an innovation-based society and build Israeli society and the Israeli economy around it.

There are four factors that combine synergistically to produce innovation: Infrastructures, education, human capital, and available capital. Let's go through them one by one.

Infrastructures for innovation: Israel today is not a digital country. We need to speed up the deployment of optical fibers over the entire country and to move over to fourth generation cellular communication. It is inconceivable that international companies are not bringing large development projects to Israel just because we do not have the infrastructure for 4G or an adequate infrastructure for ultra-fast Internet. In the long run, this will kill the industry. And the State, of course, is not helping. The situation today is that the Prime Minister's Office has a "Digital Israel" project; the Ministry of Finance has the "Government Information and Communications Technology Division" (ICT); the Economy Ministry has the Chief Scientist; the Ministry of Science, Technology, and Space has the Space Agency, which deals with satellites, the R & D Council, which advises the government on civilian research and development, and studies in the fields of computers and cyber. And all that is before I mention the Israel Defense Forces's signal intelligence unit 8200 and the IDF's cyber system. That's an administrative absurdity, and it paralyzes us. What should be done instead—and this is what we will indeed do—is to unite all those bodies under one roof, produce a single platform for the entire country, and then give budgetary and organizational priority to information and communications technology, and make all the government's services accessible to its civilians—from the tax system through building permits.
Why hasn't this happened until now? Because investing in technology infrastructure is problematic for the government, because the government is always facing something that seems more urgent—investing in the periphery, helping the poor, achieving social goals. We are going to stand behind this with all our might and explain that investing in technology infrastructure is ultimately the best investment in the periphery, is the best help for the poor, and is the social goal that will best serve other social goals.

Which brings us to the second leg of the program: Innovation education and higher education. The education system must be part of this effort. This is why in the recent budget of cuts—which I did not like and am not proud of, but which we did for lack of choice—we added 8.5 billion to education nonetheless. The Minister of Education and I—along with Prof. Manuel Trajtenberg, head of the Planning and Budget Committee of the Council of Higher Education—will make sure that the education system is part of this effort. We will increase English studies, improve achievement in mathematics, and will establish a network of what Americans call "community colleges," where a future IT engineer or an electrician in Ofakim or Ramat Gan, Netivot or Kfar Saba, can study for a diploma that will both train him for quality employment and allow him to continue on to higher education if he so desires. At the same time, we will take steps to return Israel's universities to the highest levels of academic excellence and we will not be ashamed to direct them toward that. Israel does not need more lawyers and accountants and there is no reason for the state to subsidize their studies. What Israel does need is more computer engineers and biochemists and experts in clean-tech, and they are the ones we will help.

And I would like to say another thing about these people, these young people: they will also stay here. If they know that the State sees them as its main asset, and as part of the attempt to build a model society here, they will not move to Berlin and Los Angeles. These young people love the country and if they know that the country loves them back, if they know that the country does not take them for granted but sees them as change agents and as people who are indispensable, they will not go anywhere, and we will not lose a generation.

Which leads me to the third leg: human capital. Part of the program of equal sharing of the burden, which the government already approved and which is being passed by the Knesset these days, is a large effort to integrate the ultra-Orthodox into the Israeli labor market. The Haredim must be integrated into the innovation industries. They are suited to it and they will earn more money there. They bring to the table originality, freshness, and sharp thinking. Along with them, two additional populations must be integrated into the circle of innovation: Arab women and people over the ages of 40 and 50 who are starting their second and third careers. We do not need these people as seamstresses and cleaning women, and we do not need them as security guards at the mall. We need them—men and women—in front of computers, because it increases their productivity and their earnings, and improves their quality of life.

Israel has experience in this. In the great wave of immigration that began in 1990, nearly one million immigrants from the former Soviet Union came here almost all at once. Do the math: that is approximately the equivalent of 60 million new immigrants coming to the United States at the same time. Most countries would have collapsed, but in Israel this became one of the biggest economic "booms" in our history. Now we need to—and we have the ability to—produce a new "boom." This time, airplanes will not be landing at Ben Gurion airport; the planes are already here. Parked on the runway is an ultra-Orthodox Jumbo jet, a 737 full of Arab women, and a 767 full of 50 year olds. Together with the Ministry of Economy we are developing a series of training programs for them, and together with the Manufacturers Association, we are building them a series of goal-oriented training, in which people begin their training when they already know the facility or company in which they are going to work.

Those who are familiar with Israel's productivity indices know that there is a growing gap between productivity in traditional industries and productivity in innovation industries. Our instinct is to help traditional industries, but the real help—the real thinking in terms of systemic innovation—is not to artificially maintain factories that are not profitable, but to take their workers, equip them with professional tools, improve their training, and bring them to a point at which they will work in industries in which they will be earning more, and exporting more, which will lead to their earning even more.

The fourth leg is available capital for innovation. Available capital is the basis for all development, but Israel has succeeded in strangling its capital with regulation. We have reached the point at which companies like Check Point, Caesarstone, and SodaStream, are being traded on NASDAQ rather than on the Israeli stock exchange. We want them here, and we—along with Shmuel Hauser, chairman of the SEC—will implement dramatic measures of deregulation. We would also like to allow the Israeli capital that is sitting in institutions—the insurance companies and the pension funds—to enter new industries, either via the banks or directly. We are going to take steps so that the institutional market will diversify its investment portfolio and will increase its investment in innovation industries—including through the development of new means, such as securitization.

And in parallel, we have another tool called "tax benefits," and all the populist shouting in the world won't make any difference: we are going to use this tool. Because when I entered the Finance Ministry, I discovered that an Intel factory that was supposed to be built in the south of the country had moved to Ireland instead. Why? Because Ireland gave them better tax benefits than we did. So all the shouters were happy, but we lost jobs, and we lost our connection to the cutting edge of global technology, and lost the opportunity to develop Israel's periphery, and lost thousands of workers in the second circle who pay taxes.

We need to oversee the tax benefits for large companies, we need to create better mechanisms for checking and increasing efficiency, but we must continue to use tax benefits in order to bring Intel and Cisco and Siemens and Google to Israel, because that is also what makes us innovative—our relationship with the leading technology companies in the world.

"Innovation" is a word that can be misleading. People immediately think that we are only talking about high-tech and about people with round glasses wearing white coats sitting in front of a computer. This is simply not true. First of all, because innovation is not just start-ups; it is also chemical industries, and medical industries, and green-tech, and agricultural technologies in which we lead the world. All this is innovation.
Beyond this, there is always a second circle around these industries, which is much bigger than the first. It is made up of suppliers, and employees, and leaders, and small businesses. A company like Checkpoint produces many more jobs than what appears in its ledger. Gil Shwed and his employees need printer paper, and a restaurant near the office, and a moving company that will deliver the chairs that they buy for their employees, and a company that will make those chairs. And when those people go to the hairdresser for a haircut, they will add an extra ten shekel tip because they are not earning badly. This is what happened, for example, in Digital Media City, which the Koreans built near Seoul, which almost immediately created no less than 400 medium-sized companies that created 30,000 new jobs.

We can't leave innovation only in Herzliya, or even in the hi-tech park in Be'er Sheva. It must be integrated everywhere. A good garage is also innovative, as is a good dairy farmer. "Systemic innovation" is innovation not just in the realm of products but also innovation in all the social and economic processes that surround our lives. It includes innovation in marketing, innovation in business models, and innovation in using advanced technologies in order to give everyone the same services no matter where they live. The first example that comes to mind is that it is possible to receive many medical services from home via inexpensive equipment and ultra-fast internet. We will be able to decrease the number of days of hospitalization for many patients if follow-up take places in their homes using inexpensive webcams. In a country that has systemic innovation, the system raises the possibility of innovation upwards, as an integral part of its work. The innovation gets to Health Minister Yael German, she calls me, we both call Naftali Bennett as well as three companies that produce medical-technological equipment, and we all sit down at a round table and say: "Okay, how do we reach this goal within two years?"

Another example, perhaps even more dramatic in the current Israeli reality, is that systemic innovation also means that it need not take nine years to identify land for construction, and it need not take seven years to get permits from the local administration and planning and building committee. Systemic innovation means that building contractors use the most advanced methods in the world and houses are cheaper and greener. Systemic innovation means that there is not just one business model, but a variety of business models, such as the BOT financing model for rental apartments, which we are currently promoting with all our might. Systemic innovation means that the Interior Ministry and Housing Ministry and Ministry of Finance and the Mayor all use one computer system and all know how to talk to each other in order to promote construction projects.

And where will all of this get to? The answer is: to everyone. Because there is one topic that people speak about endlessly in its social and political sense, but do not usually talk about in the context of economics, and that is the right of every person to realize his or her potential. Let's set aside the injustice of not being able to realize potential for a moment, and look at this right purely from the economic perspective. Ask yourself the following simple question: If there is a child in Ofakim or Kiryat Shmona who has the potential to be a computer whiz and to found a start-up company that will be sold for 100 million dollars, but he does not become a computer whiz, and he does not sell his start-up for 100 million dollars because we didn't give him extra English lessons when he was nine years old and did not give him a scholarship to university when he was 21, who lost? Did he lose? Did the State of Israel lose? Did the Israeli economy lose? Or are all of the above correct?

Economics is not numbers and indices and Excel sheets. These are technical expressions that represent people, and when we lose eye-contact with the people who are behind the representations, we hurt the economy. Because a good economy—above all—gives you the right to realize your personal potential. This is the most basic thing about being a citizen. It is included in the Israeli Declaration of Independence: "The State of Israel... will foster the development of the country for the benefit of all its inhabitants." For the benefit of all its inhabitants! In this case, the micro and the macro are the same. What does any person need in order to feel that he has realized his personal potential? Education, available capital to get started, infrastructure, international accessibility, and one more thing that no one knows how to quantify but is essential: He needs to feel that he is appreciated, that he is seen, that he is not transparent. This is true when he is looking for investors; it is also true when he is sitting in the back row in a classroom in the periphery and the teacher ignores his existence.

And even if all of the conditions are met, there is another component that allows people to realize their potential and allows countries to develop, and that is a fundamental sense of success and pride. This has been proven a thousand times in a thousand studies: people who feel they are part of a successful organization try harder and are more successful.
Which brings us back to the beginning of this discussion. Because innovation is not the goal; innovation is the tool. Systemic innovation is the economic engine that creates an economy in which the middle class is at the center, the middle class earns more, and the middle class is not crushed by the cost of living. "Quality of life" is a broad concept. In a world in which women earn less or gays and lesbians do not have rights, my quality of life is impaired. But quality of life begins with something much simpler. It starts with the fact that people can make ends meet. They earn enough so that even after they have paid their mortgage or rent, they still manage to make it to the end of the month.

In order for this to come about, it is not enough for us to produce an appropriate infrastructure for innovation; we must also lay an appropriate foundation for a good life. This will happen if we get to a situation in which the Israeli tax system ensures that the middle class will be the first beneficiary of the successes of the innovation society; if we utilize the natural gas that was discovered not to increase government bureaucracy, but to evolve from a country that is based on expensive and polluting fuels, to a country that is green, that is less expensive, and that uses the revenues from the gas to open day care centers and schools and to improve the health and welfare systems; if we conduct a relentless war against the cost of living in Israel by removing quotas, opening the market to real competition, waging a determined battle against black capital, and dealing with the Israeli housing crisis in a consistent and uncompromising manner.

Our job—the job of the government—is to address both sides of this equation: to make sure that by implementing systemic innovation we will enable Israelis to succeed much more than they were able to succeed to date and to make sure that this time—for a change—they will also enjoy the fruit of their success.

Formulating a plan of action is sometimes complicated, but formulating a vision is not complicated. A vision is a question you ask yourself. You say to yourself: "I am here. Where do I want to be?"

Where do we want to be?

We want to be—and we can be—the global leader in innovation. You know that we can. It was true in the past. We have the conditions; we have the desire. All we need is the road map.

We want to be—and we can be—one of the top ten countries in terms of exports and per capita income, by the end of the decade.

We want to be—and we can be—a model society that is more just, and a model society is a society where everyone has a fair chance to succeed and to enjoy the fruit of his success. This speech is about economics, and I hold an economic post, so I am telling you that there is nothing more economic than a sane, enlightened, fair, law-abiding, non-racist, peace-loving society in which you can maintain your own identity—gay or straight, man or woman, Jew or Arab, religious or secular—and still know that it does not disqualify you from any opportunity. Not a single one.

Or in other words:

What do we want? We want Israelis to earn more and to improve their quality of life. How will we achieve that? We will create an innovation-based economy.

Thank you