Friday, December 29, 2006

An optimistic economic 2007

Israel is a small country with a very strong economy. 2006 was a very good economic year for Israel, perhaps a record year.

There were a number of events and processes during the year that suggested that the economy will stumble. First, there was a nasty war, the Second Lebanon War. Second, the dollar kept sliding and with it the ability of Israeli exporters to sell in the dollar zone. Yet, the economy came through like a lion. Growth was record breaking. Unemployment continued to decline. And inflation is non-existent.

The 4.8 per cent economic growth placed Israel at the front of western economies. While in 2003 unemployment was almost 11 per cent, this year it is at 8.5 per cent. Despite the very strong Israeli currency, for the first time in the country's history we experienced a positive balance of foreign trade, the value of exports was 2.2 billion dollars bigger than the value of imports. The stock market broke records and the interest rate is lower than that in the USA. Foreign investors brought in US $ 20 billions.

Perhaps the dream of those who would like to see Israel with per capita GNP among the top in the world is not impossible.

So, how did it happen? In the mid-1980s Israel suffered from hyper-inflation and government expenditures were close to 3/4 of the GDP. Today government expenditures represent less than 50 per cent. In addition to privatization, a series of reforms introduced price signals and incentives into decision-making processes. The market responded.

As I am fond of repeating, hi-tech exports can be expected to continue only if we cherish our human resources. The quality of life in Israel must be as close as possible to the best in the world. Only high quality of life will ensure that our investments in higher education will not lead to a brain-drain. While we cannot manage geopolitics through economic policies, it is important that those aspects of life that are manageable by us alone should be performed well.

So it is not surprising that the expected huge investments in infrastructure are a welcome step towards improving Israel's quality of life. There are some tens of billions of dollars worth of infrastructure projects being advanced. Much of the money is private investments. The projects include light rail systems in the three big cities, Israel turnpike from the north of the country to the south, Carmel tunnels in Haifa, a major water desalinization plant, several private power plants that could provide as much as 3,000 MW and the red-dead canal on the Jordanian-Israeli border.

The important thing is that much of the money that will finance these investments will come from the private sector, and from the world's money markets without government guarantees.

So, while the Central Bank of Israel is reducing the prime rate by 1/2 per cent in anticipation of deflation, I am optimistic that in 2007 we will experience a good economic year – InShaa'la.

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