Herzlia. Conference. Dr. Yacov. Prepared by

Transcription

1 Herzlia Conference Dr. Yacov Prepared by Yacov Sheinin and Sani Ziv

2 Introduction This presentation is a model of the development of the Israeli economy for the next 20 years (to 2025) in order to model Israel s growth opportunities and the main generators of growth. The importance of this model is for the planning needs of long term economic policy whose chief requirement is to improve the economic standing of Israel (even under unplanned conditions). The Israeli economy is in a macroeconomic situation which allows for a historic change and move to accelerated growth. The main assumption of this model is a decline in terrorism, dominating Israel since 2001, to 1990 s levels (see section 7). 2

3 1. Introduction and Conclusions

4 Where is Israel s economy going? Israel s workforce will grow from 2.7 million workers today to 4.2 million in This is a net addition of 1.5 million workers or 60% growth, unmatched in the Western world (which will maintain a stable workforce). The Israeli economy must find employment for 1.5 million new workers, reduce unemployment (by 100,000 people) and substantially increase the standard of living. The high growth in workforce requires an immediate shift to high sustainable growth, to head-off a prolonged period of unemployment. 4 In this situation, it is of high importance to focus on areas and sectors that can absorb a large amount of workers.

5 Required Rise in Employment for the Years (at 4.5% unemployment in 2025) Rise in Employment by Source Total Rise in Employment From Rise in Population From Rise in Participation in the Workforce From Reduction in Unemployment In 000 s 1,625 1, In % 100% 69% 25% 6% 5

6 Historical Growth Rate Only 1.5% GDP per capita annual growth on a 25 multi-year ( ) average (3.2% annual growth at current population growth levels). If GDP continues to rise at the historical rate, Israel will fall to 26th place (from 22nd) in the world by 2025 (Global Insight projections). In this scenario, the tax burden will increase on the majority population, which will decline from 75% today to 69% in An increasing proportion of Arabs and Ultra-Orthodox will be in the subsidized population group. We believe, this path will lead to a serious social crisis. 6

7 Conclusions I 7 1. If we implement the changes presented here, we can develop an economy that will employ 4.3 million workers in GDP growth can rise to 6%, placing Israel in 16th place (from 22nd today) in the world in 20 years. 3. Growth generators will be a combination of exports from the Technology sector (which will comprise 55%-70% of exports) balanced against commodity imports, investments and raw materials. 4. While the growth generators will be the various Technology sectors, most of the workforce will be employed by sales and services while only 11% will be employed in Technology.

8 Conclusions II 5. The current economic plan is in the right direction and includes: efficiency measures in the public sector, reduction of reasons for not working, reduction in foreign workers and reducing the tax burden. 6. For this plan to work, there must be implemented in parallel a massive increase in investments in infrastructure (another NIS 50 billion) that will be financed through extra-budgetary sources (BOT & PFI). 7. The investments in infrastructure will lead to a significant increase in employment of Israelis and will be the first driver of growth. 8

9 Conclusions III 9 8. Reforms in education and academia will be necessary in order to achieve more than 18,000 graduates a year in the exact sciences and engineering required for employment in Technology (currently there are 9,000 graduates a year). 9. To ensure continued rapid development of the Technology sector (entrepreneurs, scientists and investors), an intelligent and complex system of initiatives must be set in place to boost Israel s public profile as a center of technological activity. 10. Israel must put into place competitive economic incentives to compete with other global centers of technology (taxation, infrastructure, bureaucracy, R&D and other incentives). 11. A developed infrastructure is a chief condition for development of the Technology sector.

10 The Israeli Economy s Potential for Development Relative Rank Present Situation nd Place Current Trend 26 th Place Year 2025 High Growth Trend 16 th Place GDP, US$ Billions GDP per Capita, US$ Billions Growth Rate from %* 3.8% 5.9% Exports, US$ Billions Investments as a % of GDP 17% 22% 22% Government Expenses as % of GDP 43% 33% 29% National Debt/GDP 103% 48% 21% 10 * Multi-year average from

11 Summary The Israeli economy can achieve accelerated growth but must implement a multi-year plan to change the historical trend. The significance of accelerated growth means that Technology exports must reach $133 Billion in 2025, compared with $20 Billion in The current infrastructure cannot support this growth (physical infrastructure, academics, taxation conditions, bureaucracy, investment incentives). Without appropriate infrastructure, there is no way to achieve this target! We require the development of a suitable environment. The current economic plan is taking the appropriate efficiency steps for the public sector but is not assisting the proper building of infrastructure. 11

12 2. Israel s Current Situation

13 The Status Quo 2004 experienced a turnaround in the economy, with GDP per capita rising by more than 2% (vs. a 1% contraction in 2003). The economic plan made an important contribution to the turnaround but additional drivers were the reduction in terrorism, defeat of Iraq and global economic growth. Unemployment remains above 10%, even though only 55% of the population above the age of 15 participate in the workforce (vs. 66% in the U.S. and 58% in Europe). In addition, the switch to growth is on a background of the 7 lean years of the Israeli economy, , where GDP per capita showed no overall change. 13

14 GDP per Capita In 2003 US$ Thousands '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 14

15 GDP Growth per Capita, the Last 7 Years An International Comparison (Average Annual Change ) GDP Growth per Capita GDP Growth Accumulated per capita Differential w/israel Israel 0% 2.4% - Germany 1.2% 1.3% 9% EU 1.9% 2.1% 14% France 1.9% 2.3% 14% USA 2.3% 3.2% 17% UK 2.5% 2.7% 19% Spain 2.9% 3.4% 22% Ireland % 8.1% 58%

16 Israel s Economic Rank The Israeli economy is ranked 22nd in the world by GDP per capita. Rising up by one rank, to the 21st place, requires 17% growth in GDP per capita while falling to 23rd place will require a contraction of only 7%. Potentially, Israel can have one of the leading economies but the past 30 years of activity have not fulfilled this potential. The vast differential between Israel s potential and the actuality is both extremely frustrating and also engenders great hope. 16

17 Israel s Rank Relative to the 30 developed OECD economies Israel OECD Avg. Relative Rank GDP per capita (US$ 2004) Unemployment (2004) 10.4% 7.5% 25 Gini Index of Distribution of Wealth (2002) (of 28) Science Achievements of 8 th Graders (2000) (of 28) R&D Expenses (% of GDP) 4.5% 2.0% 1 University Education (% of year olds in 2002) 26% 15% 2 17 Life Expectancy (2002)

18 Israel s Future Rank Israel s relative rank is unchanged since 1980 (22nd place). Historically, Israel averaged only 1.5% GDP growth per capita in this period. This situation will change in the next 20 years if Israel does not increase its rate of growth. In the next decade, formerly communist Eastern European countries, which have joined the European Union, are expected to see especially high growth. Southeast Asian countries such as Singapore, South Korea, Thailand and others are expecting high rates of growth and will become competing technology centers to Israel. 18

19 3. Alternative Growth Scenarios

20 I. A Decline in the Historical Growth Rate Israel s GDP per capita has grown at an average annual rate of only 1.5% in the past 25 years ( ). If GDP continues to rise at the historical rate, Israel will fall to 26th place (from 22nd) in the world by 2025 (Global Insight projections). In this scenario, the tax burden will increase on the majority population, which will decline from 75% today to 69% in An increasing proportion of Arabs and Ultra-Orthodox will be in the subsidized population group. We believe, this path will lead to a serious social crisis both in the distribution of wealth and in education and health. 20

21 II. The Irish Growth Scenario Ireland recorded an aggressive annualized average 5.4% GDP growth per capita in a 20 year period ( ). The Irish case is especially relevant for Israel, though to imitate Ireland, Israel will be required to make some very significant changes. Under the Irish Growth Scenario, GDP per capita will reach $50,000 in 2025 and Israel s GDP will grow at a 7% annualized rate and rank 10th worldwide. We estimate, that the current political and domestic situation will make it difficult to undertake the necessary reforms in the next few years, though our goal should be the Irish Growth Scenario. 21

22 III. Maintain Rank Scenario According to the forecasts of the U.S. economic consultancy Global Insight, Israel s GDP per capita must grow by an annualized 2.4% in order to maintain an international rank of 22nd place in This rate of growth is 60% higher than the historical rate of the Israeli economy. We believe this rate can be achieved for the next 20 years but also by requiring significant market reforms. This is a very disappointing target as it will not lead to any relative change in the Israeli economy and does not fulfill Israel s full market potential. 22

23 IV. The Accelerated Growth Scenario (Rank 16th in 2025) To improve our economic rank to 16th (a compromise between our current place and the Irish Growth Scenario), GDP per capita must grow at an aggressive 4.5% annually for 20 years (3 times the historical growth rate). This high rate of growth, of 6% annual growth in GDP (at a population growth rate of 1.4%) requires a revolution in economic behavior. Aggressive growth incentives for the Technology Sector, similar to the Irish Growth Scenario, must be created in order to achieve 16th place. 23 The Accelerated Growth Scenario will realize most of the economic potential of Israel in 20 years.

24 Israel s Relative Economic Rank in 2025 by Growth Scenario Rate of GDP per capita growth GDP per capita (US$ 000 s) Rank Irish Growth Scenario 5.4% Accelerated Growth Scenario 4.5% Maintain Rank Scenario 2.4% The Historical Growth Rate 1.5%

25 Growth Range The relevant range of growth for the next 20 years falls between the Accelerated Growth Scenario and Maintain Rank Scenario. Thus, GDP per capita growth may range from 2.4%-4.5%, or a 4%- 6% annual increase in GDP. We believe that Maintain Rank Scenario is a waste of Israel s potential and it is desirable to enter the Accelerated Growth Scenario. The shift from the historical trend to the desired rate of growth will require significant structural changes in the economy and in longterm planning. 25

26 The Main Scenarios in 2025 Year 2025 Current Situation 2004 Maintain Rank Scenario Accelerated Growth Scenario Relative Rank 22 nd Place 22 nd Place 16 th Place GDP, US$ Billions GDP per Capita, US$ Billions Growth Rate from * 3.8% 5.9% Exports, US$ Billions Investments as a % of GDP 17% 22% 22% Government Expenses as % of GDP 43% 33% 29% National Debt/GDP 26 * Multi-year average from % 48% 21%

27 The Required Economic Action The shift from GDP per capita growth of 1.5% annualized to 4.5% is not simple. The shift requires three activities: Discovery of a capital intensive export that will allow significant export growth but with a relatively low requirement for additional employees. A massive increase in employment in the service industries that will enable a rise in the general standard of living. A significant rise in participation in the workforce (increasing the number of laborers in relation to population) that will enable a better distribution of wealth. 27

28 4. Growth Drivers

29 Development of Growth Drivers Israeli exports are a real long-term growth engine that will allow an increase in consumption and imports. Israel s growth engines are based on technological expertise developed in Israel and on the demand abroad for Israeli developments. The Defense Industries played a critical role in the founding of the Israel Technology sector. The accumulated knowledge encompasses a wide and varied range of areas including: communications, electronic components, inspection equipment, medical devices, optics, avionics, chemicals, pharmaceuticals, software and more. Demand for these technologies launched an entire industry of Israeli startups whose income is based on sale of their core R&D. 29

30 Expertise and Relative Advantage Israel, as a small and open market, can always benefit from relative advantages and capitalizing on opportunities. Israel has developed a broad range of hi-tech sectors where it is considered to have a relative advantage. The dynamic shifts in the hi-tech markets require Israel to make rapid shifts in technologies, but can benefit from a common infrastructure. With the fall of communism, awakening of China and India, and the rapid advances in communication, it has become more difficult to capitalize on opportunities. Israel geographic location, between the East and West, and the economic ties it has developed, can heavily contribute to Israel s relative advantages. 30

31 Agriculture 1950 s Diamonds 1950 s Textiles and Clothing 1960 s Plastics and Irrigation 1960 s Defense 1970 s Past Growth Drivers Main Export Sectors 31

32 Current Growth Drivers Defense Electronics and Communications Chemicals and Pharmaceuticals Software Start-up Companies 32

33 Future Growth Drivers All current growth drivers Investments in Infrastructure (temporary boosters) Biotechnology New Industries and Services Tourists in times of peace A Transportation Hub in times of peace 33

34 The Defense Industries as a Foundation for Israeli Activities The Defense Industries created a foundation for Hi-Tech in Israel through the need that Israel develop and manufacturer all of its own defense products. During the 1990 s a slew of commercial applications developed, including many that had no connection to defense systems. Defense exports now compose only 15% of total technology exports and is no longer the chief driver of growth of the Technology sector in Israel. Therefore, there is required a system of civil incentives that will attract technology companies to choose Israel as an R&D center. 34

35 Development of Defense Exports (US$ Billions) As a % of all Technology Exports Defense Exports (US$ Billions) % 28% 23% 18% 13% 8% Defense as a % of all Technology Exports 35

36 Israel s Foundation for Commercial Technologies Continuation of the Technology sector (entrepreneurs, scientists and investors), to see Israel as an activity hub is the main requirement for future high growth. Israel must put into place competitive economic incentives to compete with other global centers of technology (taxation, infrastructure, bureaucracy, R&D and other incentives). The level of education must insure the doubling of graduates in the exact sciences in 20 years time. Israel must provide a modern infrastructure that 10 times more active than the current infrastructure. 36

37 37 Investment Drivers in Infrastructure (Temporary Booster Drivers) NIS 50 Billion of near-term investments in infrastructure is necessary for the shift to sustainable high growth. Investments in infrastructure must be made in the areas of: road improvement and interchanges, train/rail to all parts of the country, desalination of 500 million cubic meters water per year, power plants for providing 3,000 megawatts and an increase in residential construction. Employment of Israelis for these undertakings will allow an increase in employment and a decline in poverty. Increasing investments in infrastructure will be accomplished through the PFI method.

38 5. Export Sectors

39 Required Growth in Exports A massive growth in exports is a key requirement to achieving high growth. Export growth will finance import growth due to higher consumption, investments and need for raw materials. Israel has a wide variety of exports but Technology exports already comprise 40% of total exports (compared with 23% at the end of the 1980 s). An analysis of areas of export show that Technology has the greatest potential to grow in proportion with global growth rates, and maintaining Israel s market share. 39 High growth of exports from more traditional industries does not promote Israel s relative advantages and the need to increase Israel s market share.

40 Projected Technology Exports Maintain Rank Scenario US$ Millions of Avg. Growth Rate Chemicals & Pharmaceuticals % Metal, Machinery, Avionix % Electronics % Software Services % Start-Ups* % Technology Sectors % % of Total Exports 40% 49% 55% - Other Exports % As a % of Total Exports 60% 51% 45% - Total Exports % 40 *In 2004, there was no exports from Start-ups

41 Projected Exports Maintain Rank Scenario US$ Millions of Avg. Growth Rate Technology % Other Industry % Tourism % Services (not incl. Tourism) % Other Sectors % Total Exports % 41

42 Chemicals & Pharmaceuticals Metal, Machinery, Avionix Electronics Software Services Start-Ups* Technology Sectors % of Total Exports Other Exports As a % of Total Exports Total Exports 42 Projected Technology Exports Accelerated Growth Scenario US$ Millions of 2003 *In 2004, there was no exports from Start-ups % % % % % % Avg. Growth Rate 8.1% 6.6% 10.9% 9.7% 12.6% 9.6% - 3.4% - 6.7%

43 Projected Exports Accelerated Growth Scenario US$ Millions of Avg. Growth Rate Technology % Other Industry % Tourism % Services (not incl. Tourism) % Other Sectors % Total Exports % 43

44 6. Population and Employment

45 The Demographic Model Population and employment projections are based on Economic Models demographic model that was prepared for and presented at the Herzlia Conference in Low productivity, high fertility rates and low participation in the workforce that are characteristic of the Arab and Ultra-Orthodox populations, in comparison with the Majority population, will lead to a rise in the economic burden on the Majority population. The demographic scenario as portrayed here, is based on an increase in investments in education and academic levels, bringing a gradual shift in fertility rates and in participation in the workforce of Arabs and Ultra-Orthodox. 45 Optimistically, this will bring these populations demographic aspects in line with the Majority population by 2003.

46 Israel s Population Optimistic Scenario (millions) Population, Millions Total Majority Ultra-Orthodox Arab As % of Total Population Majority 74% 71% 69% Ultra-Orthodox 7% 8% 8% Arab 46 19% 21% 23%

47 Characteristics of Israel s Population Optimistic Scenario Fertility Rate (per Woman) Total Majority Ultra-Orthodox Arab Rate of Participation in the Workforce Total 55% 58% 61% Majority 59% 61% 62% Ultra-Orthodox 42% 51% 59% Arab 47 41% 50% 59%

48 Expected Growth in Employment The Israeli economy will need to absorb an additional 1.6 million workers by 2025 as a result in population growth and the expected rise in participation in the workforce. The public sector is expected to assimilate only 100,000 workers while the private sector will bear most of the burden of assimilating new workers (1.5 million workers). The Technology sector is characterized by high productivity and only 160,000 workers will be assimilated by this sector (about 11% of the rise in employment). Most other workers, who are not professional, will be assimilated by service sectors, where productivity per worker is lower. 48

49 Projected Employment - Maintain Rank Scenario (Thousands) Ann. Avg. Growth Rate Technology % % of Total Employment 11% 11% 11% - Other Sectors 1,418 2,148 2, % % of Total Employment 59% 65% 69% - Public Sector % % of Total Employment 30% 23% 21% - Total Employed 49 2,408 3,280 4, %

50 Projected Employment Accelerated Growth Scenario (Thousands) Ann. Avg. Growth Rate Technology % % of Total Employment 11% 11% 11% - Other Sectors 1,418 2,136 2, % % of Total Employment 59% 66% 68% - Public Sector % % of Total Employment 30% 23% 21% - Total Employed 50 2,408 3,280 4, %

51 7. Education in Exact Sciences

52 Supply and Demand for Graduates of Exact Sciences Most Technology sector employees have degrees in exact sciences (engineers, programmers, life sciences). Projections for the demand for Technology sector employees with degrees in exact sciences are based on historical demand. Projections for demand for employees with degrees in exact sciences are based on the Optimistic Scenario of investment in education. Breakdown by age category was done by graduates of working age (up to 67). 52 When weighing supply and demand, it appears that most demand for professionals can be filled for the Accelerated Growth Scenario when coinciding with the Optimistic Scenario of investment in education.

53 Projected Demand for Graduates of Exact Sciences Technology Sector Maintain Rank Scenario (Thousands, % of Sector) Ann. Avg. Growth Rate 3.5% % of Total Tech. Sector 32% 38% 41% - Other Sectors % % of Total Other Sector 7% 6% 6% - Public Sector % % of Public Sector 7% 7% 7% - Unemployed with Degrees % Total Employed with Degrees in Exact Sciences %

54 Projected Demand for Graduates of Exact Sciences Accelerated Growth Scenario (Thousands, % of Sector) Technology Sector Ann. Avg. Growth Rate 4.2% % of Total Tech. Sector 32% 39% 44% - Other Sectors % % of Total Other Sector 7% 6% 6% - Public Sector % % of Public Sector 7% 7% 7% - Unemployed with Degrees % Total Employed with Degrees in Exact Sciences %

55 Projected Numbers of Graduates (till age 67) in Engineering and Exact Sciences (Thousands) Total Certified Graduates Annual Increase in Graduates Graduates as a % of Population (age 25+) % % % % % 55

56 Unmet Demand for Workers with Degrees in Exact Sciences Total Supply of Science Graduates Demand for Science Graduates Maintain Rank Scenario Unmet Demand for Science Graduates Maintain Rank Scenario Demand for Science Graduates Accelerated Growth Scenario Unmet Demand for Science Graduates Accelerated Growth Scenario

57 8. State Budget and the Debt Burden

58 State Budget and the Debt Burden A large surplus is expected to accumulate in the state budget, whether in the Accelerated Growth Scenario or in the Maintain Rank Scenario. Under both scenarios, it is possible to reduce the tax burden as well as sharply reduce government debt (as a % of GDP). In the Accelerated Growth Scenario, government debt will decline to below 60% (as required by Maastricht) by In the Maintain Rank Scenario, government debt will decline to below 60% by In both scenarios, it will become possible to reduce both the direct and indirect tax burden, currently high in an international comparison. 58

59 State Budget Expenditures In both scenarios, it will be possible to increase the Education and Health budgets as a % of GDP while remaining a consistent portion of the total budget. We are assuming a multi-year flat Defense budget of NIS 35 billion/year, reducing the defense burden to 2.5% of GDP by As the expected state budget is not a barrier for either scenario, it is possible to already implement in 2005 an investment plan to increase infrastructure spending through PFI. A policy of investing in infrastructure through PFI will allow us to take the path of aggressive growth and fulfill the growth potential of the Israeli economy through widening this bottleneck. 59

60 State Budget and the Debt Burden Maintain Rank Scenario As a % of GDP State Income 39% 36% 33% Tax Income 30% 30% 28% State Expenditures 43% 36% 33% Budget Deficit 3.5% -0.3% -0.3% Government Debt 103% 70% 48% Average Tax Levels VAT 17% 15.5% 13% Income Taxes 30% 28% 26% Corporate Taxes 60 36% 30% 30%

61 State Budget and the Debt Burden Accelerated Growth Scenario As a % of GDP State Income 39% 34% 30% Tax Income 30% 29% 27% State Expenditures 43% 33% 29% Budget Deficit 3.5% -1.2% -1.0% Government Debt 103% 53% 21% Average Tax Levels VAT 17% 15% 11% Income Taxes 30% 27% 24% Corporate Taxes 61 36% 29% 28%

62 9. Political Influences

63 Assumptions on the Political Situation The central assumption is that the level of terrorism will subside to 1990 s levels. We assume completion of the Security Fence and implementation of the Disengagement Plan from the Gaza Strip and Northern Samaria. We assume continual slow progress in the political progress between Israel and the Palestinian Authority, retaining the political situation of the 1990 s. If there is significant progress in the political process, towards a final arrangement, we believe this will trigger higher growth than outlined in the scenarios in this presentation. 63

64 Economic Models Index of the Level of Terrorism 180 Index 2003 = month moving avg

65 Expected Effects of Progress in the Political Process A dramatic rise in incoming tourists. Entry of additional international enterprises to Israel. An increase in foreign investments in traditional industries. A narrowing of Israel s political risk, leading to a decline in the interest rate and closer ties with international capital markets. A rise in international demand for commerce and services from Israel. A rise in commerce and services with the Palestinians. 65

66 Higher Growth from a Political Breakthrough We expect, any influence on the Israel economy from progress on the political front will happen gradually and contribute about 1% growth per year. Over a 21 year period, this can lead to an accumulate rise of 22% in GDP (about $80 Billion) in excess of growth that can be achieved under the current defense requirements (Accelerated Growth Scenario). In such a case, growth can reach 7% a year for the next 20 years. The Israeli economy can reproduce the Irish Model and reach 10th place globally for GDP per capita in

67 Projected Tourists Entries via Air (In Thousands of Tourists) Tourist Entries Trendline, with a Peace Process, 6.0% annual growth Trendline, at 4.2% annual growth 67

68 In Short. Ireland, a small and lonely Isle, managed to rise from 20th place to 5th in only 20 years. If they managed to change from shepherds to technology adepts, we can too. Remember, 1,900 years ago we also managed this transformation. Rabbi Akiva, recognized as one of Israel s all-time greatest sages, was an uneducated shepherd till the age of