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.

Monday, December 25, 2006

Season's Greetings

It is Christmas morning in the Holy Land and for the first time in very many months there is a glimmer of hope about the future.

The meeting this week between Olmert and Abbas in Jerusalem, the indications that some Palestinian prisoners will be freed within a week and that some security measures will be removed, make many of us here (be they Muslims, Christians, Jews and agnostics) feel the spirit of the season. It may even snow at the higher elevations in the Galilee, in Jerusalem and perhaps in Haifa.

Friday, December 22, 2006

Obseity, sprawl and teaching urban dynamics

How far away from ground level and from today do we need to go in our imagination so that we can understand urban evolution? What details in the puzzle can we discard without loosing the essence of urban phenomena that we are trying to understand? What is the characteristic time of cities? These are among the fundamental questions that I discuss with my students in urban economics.

Generally, it is easier to sink deep into the "technology" of economic reasoning. I find it fun to plow through the logic of maximization to generate rough explanations of crude phenomena. But such exercises, while elegant, leave too much out of the puzzle. The students find it fun to read papers on issues that they did not think economists consider. Such is the case with the new paper by Eid, Overman, Puga and Turner entitled: "Fat City: Questioning the Relationship Between Urban Sprawl and Obesity".

This year I am spending much less time on working through the typical topics in urban economic. This is despite the fact that the course is an introductory urban economics course. I decided to spend part of the semester on non-linear urban dynamics. The students seem to be fascinated by my presentation of cellular automaton simulation models and playing with them. They enjoy attempts to identify urban fractals. I insist on looking at detailed data sets and in comparing the results of the simulations to the data and to economic intuition.

I am wondering whether anyone else is doing something similar.

Thursday, December 21, 2006

Charlie Leven and Charlie Tiebout - the birth of a model

Charlie Leven was a guest in my urban economics class last week.

He lectured about some aspects of the Tiebout "voting with feet" model. He then proceeded to tell the class under what cinrcumstances the model was born. It turns out that a at a lunch at Northwestern University during the early 60s, the two Charlies and another person whose name Leven did not recall discussed the high property rates in Evanston. The third person at lunch, who was unmarried and had no kids, announced that he is moving a few miles away from campus into Chicago - where tax rates are lower.

In reaction, Charlie Tiebout proceeded to describe his model. At the end of the lunch he announced that he is going to write it up and publish it.

If I am not mistaken this was his only contribution to urban economics.

Cross border planning coordination in the Middle East

I just returned from a two-day annual meeting of the Israel Geography Association. I was asked to chair a session concerning regional planning issues.

An interesting paper was presented by an ex-representative of the Defense Department on the National Planning Board. The paper was concerned with coordination of planning actions on both sides of the "green line", the pre-1967 boundary between Israel and what is today the Palestinian Authority. Parts of the lands beyond the green line are controlled by the Israeli Military and managed by the Civilian Authority. Until recently, the author of the paper was the representative of the Defense Department on the planning board of the civilian authority as well.

I was amazed to hear that there is absolutely no coordination of land use plans for roads, trains, water supply, open spaces, etc. I would have thought that such coordination would be of interest to authorities on both sides of the green line. We live in a very small area with very high density of population. Furthermore, the ecological systems do not recognize borders.

At the same time there is a great deal of coordination across the border between Israel and Jordan. Yesterday on the news I heard of a new system of controlling rat infestation in open fields by means of small white owls. I understand that Muslims are averse to owls. There was much discussion between the agriculture ministries in the two countries before the system was successfully implemented.

Saturday, December 16, 2006

Urban sprawl and ecosystem fragmentation

Much of the public discourse among public policy types about the malaise of urban sprawl and its effect on ecosystems lacks an in-depth understanding of the dynamics of each system and of both at the place where the two interact.

As a result of population growth, the associated urbanization, the irregular nature of the boundaries of urban built-up space and urban leap-frogging the interface area between the two systems is ever increasing. The outcome of the interaction is an encroachment of the urban system into the ecosystem. Quite often, the interactions between these two lead to the disintegration of the “weaker” ecosystem. Despite wide interest in the phenomenon, the two systems have rarely been studied jointly. There is a need to understand their joint dynamics with a focus on ecosystem dynamics under the pressure of the sprawling city.

It is important to note that urban and ecological systems are open, non-linear and self-organizing. Both display discontinuities in space and non-uniformity in time. These characteristics create a methodological challenge and require the use of innovative modeling tools. At the same time, the study of their joint dynamics can provide important insights of numerous interactive phenomena on the urban/non-urban fridge. In particular, a quantitative understanding of urban expansion and related retreat of the natural ecosystems may clarify how the functioning pieces of ecosystems could be preserved within the urban realm.

Together with a colleague from Tel Aviv University (Itzhak Benenson) and two colleagues form Civil and Environmental Engineering at the Technion (Yohay Carmel and Maxim Shoshany) we are making first steps to develop simulation models that will be capable to generate quantitative understanding of these phenomena.

I am looking forward to hearing from you concerning our project and to getting suggestions. Write to me at I will place your methodological comments in the blog.

Friday, December 15, 2006

How much would Israelis be willing to pay to have peace?

Israelis are news junkies. On the half hour they hear the "hourly news update". This morning I was greeted with "Another two Kassam rockets landed in Shderoth…" Acts of war and terrorism are a daily topic of discussion here.

Following Robert Barro's new paper [On the Welfare Costs of Consumption Uncertainty, by Robert J. Barro, NBER WP 12763, December 2006] I am wondering how much Israelis would be willing to pay to live in the peaceful environment of small town Canada or the USA.

Barro claims in the abstract of the paper that:

Satisfactory calculations of the welfare cost of aggregate consumption uncertainty require a framework that replicates major features of asset prices and returns, such as the high equity premium and low risk-free rate. A Lucas-tree model with rare but large disasters is such a framework. In a baseline simulation, the welfare cost of disaster risk is large -- society would be willing to lower real GDP by about 20% each year to eliminate all disaster risk, including wars. In contrast, the welfare cost from usual economic fluctuations is much smaller, though still important -- corresponding to lowering GDP by around 1.5% each year.

On the one hand, 20% of GDP per year sounds like a lot of money. On the other hand, my intuition says that Israelis would be willing to part with much more. Obviously there are culturally determined differences in the willingness to pay for certainty of peace.

Thursday, December 14, 2006

City planning MA curriculum

What should we teach people who want to be urban planners?

This is a recurring question in our planning department. This year we intend to upgrade our graduate professional MA program and to make our graduates highly competitive. This has become a particularly pressing issue since 3 of our colleagues retired this year and there are several universities that intend to compete with our program. What should be the profile of the replacement faculty members?

I admit that I am prejudiced concerning the answer to this question. The terms that come to mind are excellence and product differentiation. While some colleagues propose that we provide our students with a taste of all disciplinary approaches and others think that we should have courses concerned with current issues, I propose to enhance as much as possible the toolkit with which our graduates will face their professional world – GIS, statistics, economics, law…

If we wish to make our product competitive, we need to give more than other departments of some of these tools. This will have to come at the expense of something. I propose that we produce technical specialists.

Since many of our students have a geography BA degree, they will find it difficult to handle a rigorous stats, econ and law curriculum. I propose to reduce the number of students and to increase the quality of the incoming class.

Tuesday, December 12, 2006

Baumol, inoculations and my flu

For the last several days I am under the influence – the flu.

As I ache and moan, almost on an hourly basis, I remind myself of the Baumol model that points out the optimal number of people that a welfare maximizing government should inoculate. As the number of inoculated people increases, the probability of being adversely affected by the flu decreases. At some point the costs and benefits are balanced at the margin.

Having listened to the public ads by the government that people should be inoculated I could only think that the government's calculations are mistaken. In short, I did not take the shot. Now I am paying for it.

If you did not know it, Baumol paints. Here is an example.

Monday, December 11, 2006

The perils of electricity restructuring

Eleven years ago I was appointed by the government of Israel to head a task force to propose electricity restructuring in Israel. The task force proposed legislation intended to break up the vertically integrated monopoly and eventually to privatize the separated parts.

The struggle between the government and the union of electricity union started immediately. While I was testifying in the Parliament's economics sub-committee a group of labor leaders were outside the room sending messages to the politicians inside. The reforms were postponed for 10 years and then for another year. Now the time has come to implement.

During the first stage of the reform, the electricity system will consist of 4-5 generation companies, all subsidiaries of Israel Electricity Corporation (IEC), 3-4 regional distribution companies, also subsidiaries of Israel Electricity Corporation and one transmission company. The question that is being debated in Israel concerns the nature of the transmission entity.

A variety of models exist in the world. TRANSCOs are transmission companies that own the wires. In some places these companies manage the wires business, including the dispatch of electricity and the congestion that sometimes occurs in the wires. Transmission System Operators sometimes are TRANSCOs and sometimes they do not own the wires. In such cases they are called Independent System Operators (ISO).

The legislation proposed that in Israel there should be an ISO. If we want to create some measure of competition among the generators in a wholesale market we need to have a level playing field and the ISO should be separated from the rest of IEC. We should follow the good examples of Alberta in Canada and of Norway.

For a non-technical review of such issues you may wish to look at my somewhat outdated book:

Czamanski, D. Privatization and Restructuring of Electricity Provision, Prager, Greenwood Press 1999.

Sunday, December 10, 2006

Co-existence during the Holiday of Holidays in Haifa

Each year around this time Haifa celebrates the Holiday of Holidays. Depending on the lunar calendar the Jews and Muslims celebrate their major holidays around Christmas.

The celebration consists of four consecutive weekends during which artists and artisans of all faiths display their work, musicians and theater groups perform and food is sold. It is a joyous time and it feels good to be together.

While few foreign tourists have discovered this event, Israelis flock in. Having read in the New York Times recently about Boston's effort to woo Black tourists (December 8, 2006), I was aware yesterday that there were very many Arab Israelis in the crowd looking in, buying and celebrating.

Later on I found myself in a coffee house along Ben-Gurion Avenue that is lined up with coffee houses and restaurants. Again, the crowd was mixed. There were tables with young professional at which Arabic was spoken and tables with Hebrew speakers. For the most part, the tables were separated. I was delighted to see a table at which there were young Arabs and Jews together.

Haifa is a city with indications of co-existence.

Friday, December 8, 2006

Infrastructure and economic growth

Many in Israel consider the government's expenditures on higher education and on research (not R&D) as insufficient. There is no disagreement that the country is not spending sufficient amounts on physical infrastructure such as land transportation, energy, etc. Some suggest that eventually this will affect the quality of life to such extent that many will leave the country and affect its future performance.

Recently I agreed to participate in a strategic planning exercise concerned with the possibility that a small open economy, such as Israel or a big urban area elsewhere can increase drastically its rate of economic growth in a very short time. While the project is concerned with all aspects of economic life, the working group that I participate in is concerned with infrastructure. In particular, I was asked to lead the energy infrastructure team.

The issues that I have started to consider include possible obstacles that the absence of appropriate infrastructure can create on the path to accelerated growth. Energy infrastructure consists of the physical elements required for:

· The exploration, development and production of primary energy,
· The transformation of primary energy into useable forms by means such as electricity generation and oil refining,
· The transmission and distribution of energy to end-users by means such as wires, pipelines and end-use stations, and
· The storage of energy in various forms.

The required infrastructure in Israel should grow in some relation to population growth and that of the national economy. The nature of the future infrastructure will be also influenced by technological changes and relative to the world energy prices.

As in many other aspects of this country, also here special attention must be devoted to the special conditions of Israel, i.e., scarcity of local energy resources and economic distance from sources and markets.

Among the issues that we are considering are the following:

1. What infrastructure will be needed? This is perhaps the most difficult issue that this report will address. Lack of “appropriate” infrastructure will be felt in the future and unevenly over time and space.
2. How can we decide what is enough and what is optimal?
3. Will insufficient infrastructure affect the quality of life to the extent that it will generate out-migration and impact the desired rate of economic growth?
4. Who should supply this infrastructure?
5. What should be the preferred method of financing the infrastructure?

Thursday, December 7, 2006

High tax rates, alienation and black markets

I just returned from a PhD exam. The candidate presented some data that were startling and illuminating.

The study was concerned with the impact of new by-pass roads on smaller cities and towns, especially Arab settlements in Israel. As part of the study, Wafa presented official Israel Central Bureau of Statistics data concerning income levels by neighborhoods. She then declared that the data are unreliable. The numbers cannot reflect the actual income in the towns. The NIS 3,000 per month (some US$ 700) does not permit the housing and car ownership that she observed. It is noteworthy that the per capita GDP in Israel today places it among the richer countries of the world.

Wafa conducted an extensive survey and reported that most people interviewed were quite willing to report black market transactions of major proportions. Indeed, the real income seems to be four times the official income.

There is no doubt that black markets exist. However, their extent here is beyond what I would have expected, even in the high tax environment that we live in. The marginal tax rate on a professor's salary is above 50 per cent.

I suspect that part of the explanation of this phenomenon is related to alienation in light of the prolonged disregard by the government of the plight of marginal populations.

Wednesday, December 6, 2006

Is Haifa aging?

I just received the following comment from a colleague at the Technion:

Glad to read that you are optimistic about the future of Haifa. Less glad to see that you join the false common statement about the "continuous outflow of young people from Haifa".

First, as we all know, young people tend to move from place to place much more often than older ones. Hence, we find considerable turnover of young persons everywhere, especially in bigger cities.

Second, in my work for the Master Plan of Haifa, I made a special analysis of the migration balance of Haifa's 20-44 age group in four years: 1998-2001. I found that in each of the four years a large number of this age group left Haifa - 5,000 to 7,000 persons a year - but very similar number of persons from the same age group entered the city in each year.

A most serious disadvantage of Haifa is the bad reputation of the city in specific fields. As detailed above, and as your student - Lilach Berger Roth - found in a different field, much of the bad reputation is based on false rumors that people tend to spread around. Let's try to avoid it.

Naomi Carmon
Professor of Sociology and Urban Planning

Here is some additional information that may shed some light on Haifa demographics.

The municipality of Haifa is home to 268,000 residents, or nearly 103 thousand households. The population is heterogeneous. Jews comprise some 82 per cent of the population, some 4 per cent are Muslims and almost 14 per cent are Christians (both Arab and non-Arab). Immigrants from the former Soviet Union, having arrived since 1989, make up nearly a quarter of Haifa's residents.

The Haifa metropolitan area is home to 530,000 residents, or 175,000 households. The metro area includes the group of towns that surround the Haifa municipality and rural communities that increasingly serve as bedroom communities for people who work in Haifa and desire to live in suburban, single family housing.

Despite the influx of immigrants in the 1990s, the population of Haifa has been declining, especially since 2001. There are conflicting forecasts for Haifa’s population growth in the coming decade. The skeptical scenario suggests that the population of Haifa will continue to decline. The more optimistic approach, based on the performance of the hi-tech industry and encouraged by the Haifa municipality, is that the negative immigration trend will cease, or even reverse itself in the near future
Population growth in Haifa
Source: Central Bureau of Statistics, Statistical Abstract of Israel, no. 56, 2005

Despite the declining population, since 2001 the total number of households in Haifa has been constant and is expected to increase slightly due to the decreasing number of persons per household and to the improving quality of life in the city.

An associated demographic characteristic of Haifa is the relatively low percentage of children. The share of older people (age groups over 45) is high compared to both Tel Aviv and the rest of Israel. Haifa's population is ageing. Younger people seek education and better jobs in central part of Israel and families with kids migrate out to bedroom communities in the vicinity of Haifa.

The balance between the religious groups in Haifa is slowly shifting, as the Jewish residents are growing older and the younger ones leaving, while the number of Christians and Muslims is growing. Unlike elsewhere, the national and religious tensions between the main ethnic and religious population groups in Haifa (mainly between Jews and Arabs, and between Muslim Arabs and Christian Arabs) appear to be of a subdued nature. This situation is evident both at the municipal government level, as political frictions that appear on the national level, do not influence the daily management of the city, and in daily life. While there are distinctly Arab neighborhoods in Haifa, there is an increasing integration of populations, especially as well-to-do Arab families move into affluent, mostly Jewish neighborhoods.

On the issue of urban branding I posted a note some two weeks ago, on November 23rd.

Monday, December 4, 2006

The impact of immigrants

In his blog today Matthew Kahn ( discusses the relationship between immigrants and urban crime. This question is certainly not unrelated to the situation in Haifa, my home town.

Within less than a decade, Israel's population increased by almost 1,000,000 immigrants. The wave from the former Soviet Union started in 1990 immediately after the fall of the Iron Wall.

However, the increase in crime, especially petty theft and drunk driving, is dwarfed by the positive impact of this immigrations wave. There can be no doubt that the increase in the country's human capital has contributed tremendously to the expansion of Israel's hi-tech industry. At the same time, Israel has become a good example of growth that is demand-driven. The new population, given transfer payments and housing subsidies, created growth that is unprecedented.

An interesting side phenomenon concerns the behavior of the housing market. In the years 1990-1992 housing prices fluctuated widely as a result of the demand shock. It is interesting that it took the market only 2 -3 years to settle to a new equilibrium with only slightly higher price levels.

Sunday, December 3, 2006

Palestinian and Israeli artificial islands

One of the main issues at the heart of the Israeli-Palestinian conflict is the division of land west of the Jordan River among the two entities. For some time now Professor (emeritus) Michael Burt from my faculty claims that there is a way to reduce the conflict between the two nations that stems from, among other things, shortage of land.

The Israel coastal plain is home to 70 per cent of the country's population, some 4.5 million people. There are some 3,500 sq. k. in the coastal plain. In a business as usual scenario, by the year 2040 this population is expected to increase to above 9 millions.

In the Ghaza strip of the Palestinian Authority there are some 1.1 million people. The strip is 350 sq. k. The population is expected to increase relatively quickly and by the year 2040 it will be 4.4 millions. This is an unbearable density.

Burt proposes that we utilize the relatively shallow coastal waters of the southern Mediterranean, along the Ghaza and Israeli coast, to build a series of artificial islands that will relieve the expected future population pressures. Burt proposes a "Blue Avenue" in a form of chain of islands with "Blue Parks" that will be equivalent to green parks.

Lest you think that this is just a dream, Burt assembled a team of engineers and proceeded to analyze various aspects of the endeavor. Burt invented sponge like water breakers and designed various types of artificial islands.

At one point Burt asked me to perform some simple economic calculations. The economics of the islands is doable. For example, the cost of building an island is 8 times the value of land in the Haifa Bay area. Luck would have it that Haifa Bay is the home of Israel's petrochemical industry. It occupies a piece of land that creates a polluted corridor 8 times its size. By removing the petrochemicals, the power station, the airport and some smaller activities to the proposed islands, it is possible to create a new city next to Haifa and double Haifa's population. The resulting total value of land ex post the construction of the city will pay for the land needed for the current activities on the islands and land for future expansion of 100 per cent.

Saturday, December 2, 2006

Tourism is a good predictor

There is good news for Haifa, my hometown.

At present and for the last few decades, there is continuous outflow of young people from Haifa. This is somewhat surprising. The city is endowed with natural beauty and two leading institutions of higher learning – Technion and Haifa University. Many young people come to Haifa to study. But I know of almost no middle-aged family in Haifa who has not experienced the discomfort of the kids leaving the city as soon as they reached the age of leaving home. Fortunately, the age at which kids leave home is increasing.

The result of this out-migration by young people has created a stigma. In some sense, Haifa is a "has-been city". Despite its burgeoning hi-tech industry young professionals prefer to commute to the city from as far as 100 km. Many hi-tech companies provide shuttles to Haifa from as far as Tel Aviv as well as from the local train and inter-urban bus stations.

To emphasize the dire situation of Haifa, I should mention that the traditional industries on which the city was built have been declining for a long time now. The Haifa port and the refinery have competitors to the south. And so have many other smoke stack industries. Fortunately, the leaders in Haifa are not advocating that we invest effort in bringing to Haifa growing industries in which we have no competitive advantage.

What can be done to change this trend? How can we keep skilled people from leaving the city?

The ongoing debate between Richard Florida and Ed Glaeser concerning the means to keep people, and skilled people in particular, from leaving a city makes me optimistic about the future of Haifa. The Florida vision is that the by creating dense, bohemian downtowns, tolerance and arts it is possible to attract the creative class. The Glaeser vision is that good schools, relatively short commuting times by car and street safety are the key. Well, we have good schools and commute times in Haifa, including from the outer burbs, are relatively small. Also, Haifa is has the reputation of co-existence of Arabs and Jews. Finally, the mayor is an arts freak.

But what make me most optimistic is that tourists are coming to Haifa. Despite the fact that the city has only 700 modern hotel rooms, the tourists have discovered the 8th wonder in the world of tourism… The Bahai hanging gardens are unsurpassed by any place in the world. Also, before long the Carmelite Order will complete the renovation of their sacred gardens at Stella Maris, the spiritual home of the Order. Haifa will become the world's capital of gardens and parks.

As Ed Glaeser claims, tourism is a greater predictor of how well a city is doing. Intensive tourism reflects a positive view of a place. A city with tourists suggests that the city has positive characteristics.