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Photo: Amit Shabi
Hirchson (L) with Olmert
Photo: Amit Shabi
Sever Plocker

Even better than China

Olmert and finance minister have inherited a terrific economy; I just hope they don’t screw it up

Israel continues to gallop forward. As expected, Israel's economic growth for the first quarter of 2006 was impressive, coming in at 6.6 percent. Production in the business sector jumped to 10.6 percent, the sharpest rise in 20 years.

 

How does all this compare to other countries? During the first quarter, the US economy grew 4.8 percent. It was 2.5 in Europe, and Israel's growth outstripped Ireland.

 

Israel's economy has joined such Asian giants as Singapore, Hong Kong and South Korea at the top of the economic ladder. China? Here's a surprise: In the first quarter of this year Israel's business output was greater than Chinas.

 

Dream market

 

It would be correct to say that no incoming finance minister has inherited a macro-economy in as good shape as Avraham Hirchson. It's a dream market; "They'll have to work hard to screw it up," said Benjamin Netanyahu.

 

There is no question about Bibi's contribution to haughtiness. He himself views his main contribution as his economic reforms, not all of which have yet been successful, but in any event will take years until their affects are felt. But I think Netanyahu's revolution will mainly be felt in a different way: In the power of the optimism he brought to his position.

 

Netanyahu projected a message of success, that "we can weather the storm and be successful." His message of self-confidence was contagious, and he infected us with an extremely positive virus: Even when announcing his reforms, he took care to calm the waters: "It is only temporary, it will pass. This is a temporary window of pain, which we must endure in order to get to a bright future."

 

He undertook many steps that had, and continue to have, a stiff social price: he slashed deficits, reigned in spending, lowered taxes for high-income earners. But at the same time, his policies dedicated funds for expanding the "thin" business sector.

 

Distributing praise

 

So where should the praise rightly be placed? To you, the reader. Thanks to the daily efforts of average Israelis who refused to be beaten, changes have taken place. You folks, who have gone out to work, even during the darkest days of the intifada, when your real wages were pulverized and when the specter of unemployment hung over your heads. You continued to work, and to create.

 

You, independent contractors and businesses alike, who ground your teeth and absorbed sharp drops in demand and threats that it could all collapse – and you continued to do business. And you exporters, who conquered markets even when no foreign marketers dared set foot in this country. The Israeli market failed to collapse because those who make this market what it is refused to break. It is in their merit we have emerged from the darkness.

 

Predictions

 

And more: This time, growth has not only been faster, but it also has a better composition, and has managed to calm the fears of even the most skeptical economists. Due to the breadth of our growth outlook, its fruits will also reach the lower rungs of the income ladder. Write this down: Poverty levels can be expected to drop as early as the next report. In addition:

  

 

  • Manufacturing investments in our market have finally been emerged from the long winter brought on by the intifada. Businesses are buying more machinery and equipment, building more factories, and expanding their export abilities.

 

  • Industry is the engine: Not counting diamonds, this sector's output grew at an annual rate of 21.7 percent during the first quarter of this year. Even China's industry isn't taking such huge strides forward.

 

  • Israel's accelerated industrial growth is no longer driven by capricious young start-up companies, as it was six years ago. The current prosperity is divided across the market, across the breadth of all sectors. Pay attention: Without hi-tech companies, our national product grew faster than with them.

 

  • Despite oil and despite purchases of private cars, Israel's real imports have dropped, while exports have risen. As a result, Israel's commercial balance has improved by about 50 percent over the last year! Consider three numbers: During the first quarter of 2003 our commercial debt stood at NIS 5.5 billion (USD 1.24 billion). For the first quarter of 2005, it was NIS 2.9 billion (USD 655 million). For this year, it dropped to an almost negligible NIS 1.5 billion (USD 339 million) – just one percent of total production. That's nothing: In the United States, for instance, commercial debt can easily reach eight percent of production.

 

  • Jumps in living standards rest on productivity: Productivity per work hour in the business sector jumped several levels all at once, at a seven-to-eight percent annual rate.

 

  • The public sector continues to shrink, much more than the levels proscribed by Netanyahu. When Bibi took over the finance ministry, government/public businesses produced about 30.6 percent of the total market output. Just three years later, governmental percentage of total output is down to just 25.6 percent – the lowest number in Israeli history. The reason for this drop: Subcontracting of government funding and slashing of salaries for public workers.

 

Looking at the past three years of recovery, we have reason to be satisfied, even moderately proud: Over the past 36 months our production has jumped 14.5 percent, or 8.5 percent per capita. Exports are up 27.5 percent, business manufacturing by 20 percent and average living standards in Israel by 10 percent. These numbers easily beat the records set in the summer of 2000. That's pretty good, no?

 

Inflation won't spoil the party

 

Will the current rate of growth continue? The answer depends on Israel's geo-political position, on security, oil prices, on US President Bush's popularity ratings – and on cautious, measured economic policies supported by the finance ministry and the Bank of Israel. Overall, there is no reason to foresee a drop in the current numbers. Israel's market still has untapped potential and the production resources to sustain growth of six percent a year. And other sectors, such as building, infrastructure and finance have yet to spring into action.

 

The ministry of finance is not expected to make mistakes, and the integrated plan to lower taxes – NIS 4-to-5 million – will contribute much towards continued growth. And with clear budget surpluses, we can assume that the billions needed to fight poverty will be invested, because there is money and there is a need.

 

The Bank of Israel must deal with inflation pressures on the markets. The tremendous growth in the amount of money, the rise in personal capital and feelings of economic wellbeing of the middle class cause consumers to be less concerned about each shekel they spend.

 

Slowly, inflation is creeping back. April's Consumer Price Index rose by 0.9 percent, and has jumped 3.8 percent over the past 12 months – higher than the government wanted, and first amongst industrialized nations.

 

Inflation and stability

 

Will rising inflation threaten stability? Not necessarily. There are also strong factors working to reign in inflation, such as shekel reevaluation, improved business returns and a drop in the price of production per hour.

So there is nothing to worry about – we are not standing at the threshold of a wave of inflation.

 

Stanley Fischer, the governor of the Bank of Israel, is not considered – and correctly so – as an alarmist, and in his public appearances he has expressed a clear preference for growth. He will raise interest rates another quarter-percent, as he has already hinted, perhaps by even another quarter next month. Whatever it takes to reign in inflation.

 

The prime minister and finance ministers are lucky, indeed: They don't only have an ideal market, they also have an ideal Bank of Israel governor. I only hope they don't screw it all up. Let them think about the poor. They are the problem to fix, not a quarter-percent deficit here or there.

 


פרסום ראשון: 05.17.06, 11:43
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