The Governor of the Bank of Israel, Dr. Karnit Flug, addressed the annual conference of the Israel Economic Association. Following are highlights of her remarks:

Israel's economy, as is known, made it through the global crisis better than most other advanced economies, and we benefit from a relatively good macroeconomic situation, among other things due to proper macroeconomic management in the years prior to the crisis, and determined management of policy during and after the crisis.

Correct macroeconomic policy is obviously a very important component in ensuring growth and prosperity. However, it must be remembered that at any given time, macroeconomic policy acts within a framework of long term economic variables. Macroeconomic policy, and monetary policy in particular, leads to full utilization of potential output in the short term - but that same potential output is determined, at the end of the day, on the basis of investments in education, infrastructures, and other growth drivers that were made more than two decades earlier.
 
In my remarks, I will focus on the issue of productivity, which has challenged us for years, and as we will see, is expected to continue to challenge us in the future in view of the global environment, as well as in light of long term processes occurring in Israel. The analysis I will present indicates that continuing the present conduct will ultimately lead us backward. We must focus policy on efforts to break the productivity barrier, in order to ensure inclusive and sustainable growth, prosperity, and a suitable standard of living, and at the same time to continue to maintain macroeconomic stability and strengthen the economy's resilience to shocks.
 

• Macroeconomic policy aims to achieve the potential growth in the short term. Potential output is determined on the basis of investment in growth drivers that we first made many years earlier. We need to focus long term policy on an effort to break the productivity barrier, in order to ensure sustainable and inclusive growth, prosperity, and a suitable standard of living.

 

• Despite the growth in labor input, the output gap between us and advanced economies isn't closing. This is a result of low capital stock and investment, poor infrastructures, inadequate government investment in research and development, and an inefficient business environment.

 

• Expected trends in world trade, global growth, demographics, and human capital development, will reduce the growth of Israel's economy in the coming decades. The convergence of employment rates among the Arab and ultra-Orthodox sectors, and of the relevant educational patterns among the ultra-Orthodox, to those of the overall population will be able to reduce the extent of the negative impact on per capita GDP and support a broadening of export industries and destinations.

 

• The economy's relatively good macro situation enables us to focus on dealing with the longer term economic challenges. There are many, complex, challenges, but dealing with them is critical to our success, and to the benefit of the entire population in the coming years.

 

• In order to ensure our economic and social future, we must courageously look at the current situation, and begin even now to work to ensure an increase in productivity that will allow an extended increase in the standard of living of all citizens of the country.

So what needs to be done?

• Populations should be integrated into employment - including active labor market policy.
• Human capital should be increased, with an emphasis on education and professional training.
• Factors supporting growth and productivity should be dealt with.
• Expand export industries and destinations. We have seen that in export industries, the need to compete vis-à-vis abroad leads to higher productivity.
  

Against the background of Israel’s relatively good macroeconomic situation, low unemployment, and moderate (but positive) growth, we are not required, as many other countries are, to deal with an immediate crisis. Therefore, we have the ability, but the obligation as well, to focus on dealing with the longer term challenges to the economy. As I have shown, they are many and complex, but dealing with them is critical to the success of the economy and to the welfare of the general population in the coming years.