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Opening Israel to the New Global Economy
A speech by David Klein Governor of the Bank of Israel At the Annual Meeting of the IMF and IBRD Sept.2000
Mr. Chairman, distinguished Governors ,
Mr. Horst Kohler, Managing Director of the International Monetary Fund,
Mr. James Wolfensohn, President of the World Bank Group,
delegation members, ladies and gentlemen,
Ten years ago the government of Israel decided on a strategic change in its
economic policy. The change was designed to prepare the economy for a
new era of deeper integration with the world economy, and was composed of
two major elements:
First, commitment to inflation targeting and declining fiscal deficits and, as a
result, declining government debt to GDP ratio.
With regard to the first two we are on the threshold of attaining the EU
criteria. Last month the government decided:
- To attain price stability, defined as annual inflation in the range of 1% - 3%,
by the year 2003;
- And to reach a general government deficit ratio of 3% at the same time.
In the current year, 2000, we are already in the neighborhood of these two
goals. Our medium - term aim is, thus, to learn to live within these goals.
In terms of the government debt ratio we are still behind. We had a ratio of
140% at the beginning of the '90s; we start the new millenium with a ratio of
100%. A linear extrapolation implies that it is going to take us another decade
until we reach the 60% mark. Nevertheless, it is not impossible that we will
make it quicker.
The second element of the strategic change was liberalization on two fronts:
- Extensive deregulation of the domestic financial markets and liberalization
of the capital account;
- And lifting, on a large and wide scale, barriers to trade - custom duties and
non-tariff barriers.
In this sense too we are almost at the end of the road. At the same time, we
were able to absorb a large wave of immigrants, that brought the average
annual change in our labour force to 3.9% in the last decade, to an economy
that keeps restructuring itself.
This policy, shared by all Israeli governments, was cemented by a series of
international agreements, bilateral and multilateral, with the US government,
the IMF, the European Union, and the WTO. By adding its signature to the
latest financial services round, under the auspices of the WTO, Israel
reconfirmed its policy to grant equal treatment to whoever wishes to compete
in the domestic market.
Since Israel became a member of the IBRD and the IMF in 1954, the nature
of our participation in the Bretton Woods organizations has undergone a
significant change, from a country that receives support to being a member,
although on a small scale, of the donor community. Until the second half of
the 1970's, Israel benefited from World Bank loans for infrastructure projects.
In 1975, based on its economic achievements, Israel "graduated" from being
eligible for World Bank assistance. More than two decades later, the country's
further economic achievements allowed it to raise its status to becoming a
donor country in the World Bank group. Starting in the late 1990's, Israel
announced its commitment to joining the efforts of the International
Development Association (IDA11 and IDA12) in providing concessional
resources to low income countries to help them in their efforts to reduce
poverty and achieve sustainable growth. Since 1996 Israel established also
Consultant Trust Funds, one at the IBRD and the other at the IFC. In addition,
Israel recently announced its participation as a Donor Country to HIPC, by
willing to write off a portion of these countries' debt to Israel.
Furthermore, Israel willingly shares its economic experience and accumulated
knowledge with other policy makers and actively participates in providing
technical assistance to other countries. In recent years, the Bank of Israel has
become involved in the international effort to assist the transition process of
economies which formerly were centrally planned. Staff members of the Bank
of Israel took part in technical assistance missions of the IMF to the countries
of the former Soviet Union and Eastern Europe. More recently, Israel agreed
to provide technical assistance also to IMF-WB missions that assess financial
stability.
The growth of the economy of Israel, at an annual rate of 4% - 5% is now built around
advanced industries and advanced technology. This is the driving power behind the
surge in foreign direct investment in Israel, the leading force in our exports, the active
factor in the restructuring of our traditional industries, the pushing element in
designing our educational programs at all levels.
As far as we can see - this is the way forward in a globalized world.
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