The Herzliya Conference The Economic Dimension 2009 Provost, Interdisciplinary Center (IDC) Herzliya
The Big Issues The broken crystal ball A crisis that happens once in 100 years From a country oriented economy to a world global economy A need for a new architectural structure of the financial markets and Institutions
Identifying Business Cycles Turning Points in the Israeli Economy The Present Cyclical Position
The Melnick Index 1994-2008 (2004 = 100) 130 120 The Present Cycle May 2008 110 The big crisis October 2000 100 The contraction recession March 1996 90 80 The high-tech bubble May 1999 Growth and Recovery August 2003 70 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
The Source of Economic Resilience
General Government Expenditure 2000-2008 (Percent of GDP) 55 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008*
General Government Deficit 2000-2008 (Percent of GDP) 8 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008*
Public Debt 2000-2008 (Percent of GDP, Gross Debt) 105 100 95 90 85 80 75 70 65 60 2000 2001 2002 2003 2004 2005 2006 2007 2008*
Bank of Israel Interest Rate 2000-2009 12 10 8 6 4 2 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
International Reserves 2008 (In US dollars, millions end of the period) 40,000 38,000 36,000 34,000 32,000 30,000 28,000 26,000 24,000 22,000 20,000 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
Labor Force Participation 2000-2008 (Percent) 58 57 56 55 54 53 52 2000 2001 2002 2003 2004 2005 2006 2007 2008*
GDP and Business GDP 2000-2008 (Rates of Growth, Percent) 12 10 8 6 4 2 0-2 2000 2001 2002 2003 2004 2005 2006 2007 2008-4 GDP GDP Business
Unemployment 2000-2008 (Percent) 11 10 9 8 7 6 5 2000 2001 2002 2003 2004 2005 2006 2007 2008*
Current Account 2000-2008 )Percent of GDP) 6 5 4 3 2 1 0-1 2000 2001 2002 2003 2004 2005 2006 2007 2008* -2
Recommendations for Fiscal Policy The first priority of the new government is to approve the 2010 budget. For 2009, the government should make minor necessary adjustments to the 2008 budget. Given the present uncertainties the government should not cut taxes and/or increase expenditure. The government should allow the rise in the deficit, due to the reduction in tax collection. The fiscal deficit is expected to rise to 5% of GDP. It is crucial that the 2010 budget signals a long term, credible, deficit reduction path and a return to a trend of reduction in public debt.
Recommendations for Fiscal Policy 2 Up to 3% of the budget deficit, relative to GDP, should be financed by internal borrowing the rest should be financed abroad using the US loan guaranties if necessary. The government should give priorities to: Research and Development Labor retraining and education Unemployment compensations The government should initiate large infrastructure projects in collaboration with the private sector
Recommendations for Monetary Policy Monetary policy should continue to be expansionary The Bank of Israel should set the lowest possible interest rate The Bank of Israel should support the financial system and the banking system acting as Lender of Last Resort The Bank of Israel should continue to support the Shekel The Bank of Israel should take measures to restore proper functioning of the credit system