HOWARD EPSTEIN: A TALE OF TWO COUNTRIES
Writing in last Friday’s Jerusalem Post, Steven Scheer painted a pessimistic picture of the Israeli economy in setting out the collapse of citrus exports (for one grower at least) by 80%, and of diamonds (at one time 25% to 30% of Israel’s industrial exports) by “30% in the past few years, mainly on slower global demand”. He reported that, recently, The Bank of Israel and the Ministry of Finance reduced their growth estimates for the next few years by somewhere in the region of 2.5% – “well below the average of 4.5% from 2004-2011”. Adjusted for an annual population growth of 2% pa, the per capita growth would be, he wrote, a mere 0.5%-1.0% – or in other words flat-lining.
Scheer went on to say that net exports were now around 31% of output (down from around 40% ten years ago), but that for the USA the like indicator is 13% and for Europe 27%. He then quoted the president of the Manufacturers Association of Israel as saying that Israel needs to target growth of 4% to 5% (without saying whether that was adjusted for population growth or not) and that “the government needs to invest more in research and development and encourage small- and medium-sized factories to become more efficient through tax incentives” (to which the more-cynical reader might say: He would say that wouldn’t he?).
Well, I am not going to argue with such illustrious authority, nor with the suggested therapy, but the information provided appears somewhat selective. Whilst Mr Scheer and I are also agreed on the strength of the shekel (about which I have written in several previous blogs), I have also pointed out that Israel’s export performance, although apparently not to everyone’s satisfaction (nor do I encourage any element of complaisance), is, as compared with that other great export-led economy, Germany’s, nothing short of awesome. As I have previously written, if the Germans were to switch to deutschmarks tomorrow, their currency would do what the Swiss franc did upon being decoupled from the euro in early 2015: soar, at first, and then settle to a value at which exports would cost the buyers of German goods around ten per cent more. Some regard this as an underestimate of around 50%. (Israel has had no such assistance as Germany has had from the weaker European economies.)
By analogy only, it may be reasonably “guesstimated” that Israeli exports are 10% to 20% more expensive than they might be, were the shekel not to be so strong. Indeed, at a time when, following Brexit, sterling is the world’s weakest currency, thereby assisting almost immediately after its collapse British exporters, the shekel continues to be (outside the unreal and certainly non-diversified economies of the Gulf) one of the very strongest currencies in the world, and certainly one of its most stable over the past six years and upwards.
Taking all that into account, it may be seen that the performance of Israeli exporters is most creditable (not that it should not be improved).
Yet there is more. According to the Bank of Israel website as at 19 June last (http://www.boi.org.il/en/NewsAndPublications/PressReleases/Pages/19-06-2016IIP.aspx):-
In the first quarter of 2016, Israel’s surplus of assets over liabilities vis-à-vis abroad increased by about $10.7 billion (about 15.7 percent), further to an increase of about $3.8 billion (5.9 percent) in 2015. ….
The “bottom line” is not easy to come by, but the Central Bureau for Statistics gives the balance of payments surplus as $11.23 billion for 2014.
Looking again at the UK, the traditional, not to say chronic, UK balance of payments problem is one of substantial deficit. The British balance today is minus GB£32.60, which six weeks ago would have been ‑US$50 billion.
Why is the shekel so strong? There are multiple reasons for this, the main one being that, by reason of the Israeli banking crisis of 1983, there was imposed a prohibition for the banks on dealing with both banking business and investment business, whereas in the UK and the USA, the sweeping away of such a restriction led to the feeding frenzy that became the Credit Crunch of 2007 to 2009 (and continuing).
In London, the problem was caused by Margaret Thatcher’s Big Bang of 1986, according to which financial institutions were allowed to handle both banking and investment business. In the USA, the Democrat President Clinton, a man of irrational exuberance and recklessness (as seen in his philandering within the confines of the Oval Office with an intern (Monica Lewinsky) less than half his age, while already fighting the Paula Jones sexual harassment action), in November 1999 recklessly abandoned the Glass-Steagall legislation that had, since 1933, protected the American nation from its banks and the banks from themselves.
As the end of the first decade of the third millennium saw meltdown in the USA and the UK, Israel sailed through, not in crisis and not printing silly money (the Quantitive Easing seen in the USA and the UK) to stay solvent. At the same time, the world decided that it needed many of the things that Israel (sometimes alone) produced, irrespective of its premium price, by reason of the shekel’s strength. (Think how much more might have been sold had it been less expensive.)
Since the justifiably greatly-lauded Stanley Fischer governorship of the Bank of Israel, the BoI has had a policy of seeking to weaken the shekel by buying (cheap) dollars. At the 16th Caesarea Economic Forum of 2008, Fischer stated:-
We have seen the shekel strengthen due to global factors, such as the worldwide weakness of the dollar, and domestic factors, such as the current account surplus and the inflow of investments into Israel. That said, the strengthening of the shekel recently was unexpected, and is difficult to explain. The Bank of Israel will persist with its current policy, although I have always said that a central banker never says “never.”
Nothing has changed in the ensuing eight years (apart from Fischer going on to become Vice-Chairman of the US Federal Reserve Board of Governors): the strength of the shekel has continued to be a mystery and the BoI has continued to buy dollars, to the extent that today Israel holds some $92 billion. To the extent that America ran out of the stuff and had to print some $4.5 trillion of liquidity in QEs 1 to 3 from 2008 to 2014, one might say that Israel had (perhaps has) fiscally more dollar liquidity than the US!
Presently concerned by the sluggish exports illuminated by Steven Scheer, the central bank continues to buy dollars to try to prevent further shekel strength. It has bought about $70 billion of foreign currency since 2008, but the shekel has still not weakened enough to spur an export recovery.
This article is supposed to be about two, and not three economies, so let us now ignore America and concentrate on two much smaller countries and economies: Israel and the UK. One more set of statistics will assist. A country with a population of some 63 million people, the UK has less foreign reserves than Israel (eight times smaller by population). Israel’s foreign reserves stand at some $96.6 billion, whilst those of the UK now stand at around $40 billion.
What have they in common? Both Israel and the UK:-
- presently boast effectively “no unemployment” (there is always a hard core of those out of work at any one time when a snap-shot reading is taken) and record numbers of people in employment; and
- share certain strengths and weaknesses: traditionally short of natural resources but chock full of resourceful human capital. (I ignore oil and gas for this purpose. Heaven forfend that, like Scotland, we should ever become heavily dependent on it.)
Now that the UK has to negotiate its way out of Europe and forge a more independent role for itself and its economy, it could do worse than learn from Israel. Many countries are beating a path to Israel’s door today to see why every self-respecting corporate has or is planning an R&D facility here. Less developed countries and less well-established nations than Britain want to buy Israeli goods and buy into Israeli techniques. The UK should do the same, and Israel should work hard to persuade them. What’s that? We are? We need to redouble our efforts.
What can Israel learn from the UK? In the past fortnight, following the bloodless change of government within the governing Conservative party, politicians and political commentators, fearful of recession taking hold in the UK following the dramatic fall of sterling and other fall-out from Brexit, have been urging on Westminster that the time had come for a large-scale programme of investment in public works and national infrastructure, to create jobs to replace those that could be on the cusp of being lost.
Given Israel’s comparative strengths in terms of balance of payments and foreign reserves (especially US dollars) providing cushions on which the UK cannot rely, should Israel be doing less? Whilst, as we have seen, Israel’s economy has been doing more than hold its own and its exporters doing well despite the strength of the shekel, it is time to recognize two structural weaknesses (the first not unique to Israel, while that offers no comfort).
Firstly, the wealth gap in this country should be an embarrassment to us all but most of all the government, in receipt of comfortable levels of tax receipts, every quarter. The Jewish state should be able to do better in terms of comparative incomes. The ratio of the average income of the richest 20% to the poorest 20% shows Israel is at 7.9 – slap bang between the UK at 7.2 and the USA at 8.4. All three are way behind nations with more equality in earnings ratios such as:-
the Scandinavian countries (of course) all hovering around 4; South Korea: 4.7; Belgium: 4.9; Egypt: 5.1; Canada: 5.5; Switzerland: 5.5; France: 5.6; Ireland: 5.6; Poland: 5.6; Spain: 6.0; Italy: 6.5; Australia: 7.0.
A country with our economic and intellectual strengths should urgently be finding ways of assisting the poor.
Secondly, we need to recognize that our economy is not as nearly as diversified as it ought to be. In 2013, the Israel Export Institute warned that “Israel is dangerously reliant on just 10 companies for close to half of its exports…”. There is no evidence that there has been any material change. Indeed, only two years on the situation is unlikely to have changed materially.
Here is the challenge: the establishment of new labor-intensive industries, that will appeal to the traditionally unemployed: the generally disadvantaged, the Haredim and the Arab sector. Just as the UK, with its fiscal weaknesses, is about to borrow money to invest in its future, so too must Israel, starting from a much stronger fiscal position. We should form panels of experts to look at investment in the new industries that will be coming along, especially the labor-intensive ones, and the more so if they will contribute to exports.
We can never be complaisant and as the Jewish State, we must take care of the weak, preferably by giving them something productive to do (fishing rod not fish) – especially as we can afford to do so. Perhaps, instead of just demanding tax breaks, the Manufacturers Association of Israel might like to take the initiative.
Coda: given the anticipated takeover of middle management and back-office jobs by artificial intelligence and robotization (Google the words in italics and be afraid), this exercise would be a useful dry run for similar ones that will be forced on all vaguely capitalist nations from the near future onwards. If Israel were to work out a paradigm for that, it would have some seriously-valuable intellectual property on offer.
© Howard Epstein – July 2016
Howard Epstein’s book will be on sale on Kindle this coming week, price $9.99:
