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.

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.

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.

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.

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 ardaniel@tx.technion.ac.il. I will place your methodological comments in the blog.

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.