Speech by Bank of Israel Governor Frenkel
(Communicated by Bank of Israel Spokesman)
Following are excerpts from a speech given by Bank of Israel Governor
Yaacov Frenkel at the Technion "Yitzhak Moda'i Chair and Annual Lecture on
Technology and Economics" on Wednesday, May 26, 1999:
* Economic policy must continue to be managed in accordance with the
important challenges facing it. This is particularly important given the
fact that the Israeli economy has been for a long time now an integral
part of the global economy. The Israeli economy's successful integration
in the globalization process is expressed by, among other things, the
increasing involvement of foreign investors in the Israeli economy over
the past few years and the fact that the economy maintained its strength
in international financial markets.
* The central challenge facing economic policy continues to be the renewal
of economic growth to a sustainable level, in accordance with the
economy's growth potential. This is also the proper solution to the
problem of unemployment, which is Israel's most important economic and
social problem. For this purpose, an economic policy whose key component
is government spending that focuses on investment in physical
infrastructure -- chiefly in transportation and communications -- and
human infrastructure -- education and R&D is needed. This must be done
without breaching the budget framework. In addition, it is important to
gradually and consistently reduce overall government spending by 1% of
GDP, thus enabling a reduction of the heavy tax burden on the economy.
Furthermore, structural and general tax reforms must be continued with
increased determination, which will improve Israel's competitiveness and
productivity. Such an economic policy must be accompanied by policies to
strengthen the economy's stability and robustness.
* The Israeli economy and Israel's economic policies are continually
examined by global financial markets. These markets reward correct
policies and show no patience in the face of wrong ones. This reality
requires sticking to economic strategies that strive to establish the
economy's stability. This strategy is essentially founded on budget
policies managed in accordance with the multi- year parameters set in the
Deficit Reduction Law, and on monetary policies that aim to achieve low
inflation, in accordance with government targets. These have reduced the
budget and current account deficits and significantly lowered inflation.
These achievements, along with the interest rate policy taken last
November and the policy on non-intervention in the foreign currency
market, enabled the Israeli economy to successfully handle the effects of
the massive devaluations that occurred at that time against the background
of global financial shocks. As a result, inflation was quickly returned to
its declining trend and the local capital markets became relatively calm.
It is important to continue this policy, especially in light of the
selectiveness that currently characterizes global capital markets.
* It is vital to take as soon as possible, within the budget framework,
the steps necessary to achieve the deficit target of 2% of GDP in 1999,
especially in light of the worrying breach in the planned deficit since
the beginning of the year. It is necessary to strengthen trust in economic
policy, to encourage foreign and local investment and to develop the
economy's growth potential.
* Monetary policy has succeeded in bringing about a persistent reduction
in inflation -- except for the one- time jump in prices at the end of 1998
-- so that the 4% estimated inflation target for 1999 should be
achievable. However, there are inflationary dangers beyond this horizon.
This evaluation is based on various 12-month and longer time frame indices
that project greater than 4% inflation. These inflationary dangers require
continued strict monitoring of inflationary developments in order to
re-examine as necessary monetary policy that is striving to guarantee
stability. Low inflation and price stability characterize industrial
countries and form the basis for the economic stability necessary for
renewed sustainable growth.
* The new era opening in Europe -- the European Monetary Union and the
Euro -- strongly bring home the need to persevere with the long-term
economic strategy designed to accelerate Israel's integration in the
globalization process and improve its ranking in international capital
markets. This can be done by continuing to take the steps that will
guarantee the openness of the economy and to adopt the Maastricht criteria
and by other countries in the world regarding policies for long-term
economic stability and growth.
Bank of Israel website: http://www.boi.gov.il