February 2009 Prof. Rafi Melnick

The Herzliya ConferenceThe Economic Dimension

2009

Prof. Rafi Melnick Provost, Interdisciplinary Center (IDC)

Herzliya

February 2009 Prof. Rafi Melnick

The Big Issues

• The broken crystal ball

• A crisis that happens once in 100 years

• From a country oriented economy to a world global economy

• A need for a new architectural structure of the financial markets and Institutions

February 2009 Prof. Rafi Melnick

Identifying Business Cycles Turning Points in the Israeli

Economy

The Present Cyclical Position

February 2009 Prof. Rafi Melnick

The Melnick Index 1994-2008(2004 = 100)

70

80

90

100

110

120

130

Jan

-94

Jul-

94

Jan

-95

Jul-

95

Jan

-96

Jul-

96

Jan

-97

Jul-

97

Jan

-98

Jul-

98

Jan

-99

Jul-

99

Jan

-00

Jul-

00

Jan

-01

Jul-

01

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

The contraction recession

March 1996

The big crisis

October 2000

The high-tech bubble

May 1999

Growth and Recovery

August 2003

The Present Cycle

May 2008

February 2009 Prof. Rafi Melnick

The Source of Economic Resilience

February 2009 Prof. Rafi Melnick

General Government Expenditure 2000-2008

(Percent of GDP)

30

35

40

45

50

55

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

General Government Deficit 2000-2008 (Percent of GDP)

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

Public Debt 2000-2008 (Percent of GDP, Gross Debt)

60

65

70

75

80

85

90

95

100

105

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

Bank of Israel Interest Rate 2000-2009

0

2

4

6

8

10

12

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

February 2009 Prof. Rafi Melnick

International Reserves 2008 (In US dollars, millions end of the period)

20,000

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000

40,000

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

February 2009 Prof. Rafi Melnick

Labor Force Participation 2000-2008 (Percent)

52

53

54

55

56

57

58

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

GDP and Business GDP 2000-2008 (Rates of Growth, Percent)

-4

-2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008

GDP GDP Business

February 2009 Prof. Rafi Melnick

Unemployment 2000-2008 (Percent)

5

6

7

8

9

10

11

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

Current Account 2000-2008)Percent of GDP)

-2

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008*

February 2009 Prof. Rafi Melnick

Recommendations for Fiscal Policy The first priority of the new government is to approve the 2010 budget. For 2009, the government should make minor necessary adjustments to the 2008 budget.

Given the present uncertainties the government should not cut taxes and/or increase expenditure.

The government should allow the rise in the deficit, due to the reduction in tax collection. The fiscal deficit is expected to rise to 5% of GDP.

It is crucial that the 2010 budget signals a long term, credible, deficit reduction path – and a return to a trend of reduction in public debt.

February 2009 Prof. Rafi Melnick

Recommendations for Fiscal Policy 2

Up to 3% of the budget deficit, relative to GDP, should be financed by internal borrowing the rest should be financed abroad using the US loan guaranties if necessary.

The government should give priorities to: Research and Development Labor retraining and education Unemployment compensations

The government should initiate large infrastructure projects – in collaboration with the private sector

February 2009 Prof. Rafi Melnick

Recommendations for Monetary Policy

Monetary policy should continue to be expansionary

The Bank of Israel should set the lowest possible interest rate

The Bank of Israel should support the financial system and the banking system acting as “Lender of Last Resort”

The Bank of Israel should continue to support the Shekel

The Bank of Israel should take measures to restore proper functioning of the credit system