It's not the deficit, it's the demographics - that in brief is the message from Anthony De Lannoy to Israel. The senior economist, who represents Israel and another thirteen countries on the executive board of the International Monetary Fund (IMF), believes that for all the importance of dealing with the large fiscal deficit that the current Israeli government will leave its successor after the election in September, that is not the Israeli economy's main macro-economic problem. What he finds much more disturbing is the fact that the government is not currently taking steps to promote the integration of Arabs and haredi (ultra-Orthodox) Jews in high-paying, high-productivity jobs.
"On the whole, the economic situation in Israel is good. You can talk about the deficit, but you have to remember that this is an election year. In general, the situation is reasonable. I wouldn't be concerned about Israel today, but I'd be very concerned about Israel in another ten to fifteen years. In fact, I'm less worried about the fiscal deficit, which is a problem that can be solved through expenditure cuts, than about long-term problems such as demographic trends that create much more complex challenges. When it comes to demography, if you don't act today, the problem becomes bigger and bigger, and in another ten to fifteen years you are dealing with an almost insoluble problem. In Israel, you have to think about demography and what needs to be done so that the Israeli system will be sustainable.
"I'm thinking specifically about a group like the haredim, which has a substantially lower rate of participation in the workforce than other groups, while on the other hand it receives most of the social support. At some point, if this group grows, then the rest, who finance the social benefits, will no longer be able to do so, or else they won't want to, and they'll emigrate. A cybersecurity expert from Israel can easily find work anywhere in the world - it's one of the most easily mobile professions. If you want them to stay here, you have to ensure a future that will be acceptable to them."
De Lannoy stresses that his remarks stem from genuine concern for the State of Israel. He declares that he likes visiting Israel very much, and that many of his friends are Israelis. He even demonstrates surprising expertise in transportation routes, when the interviewer complains about the traffic jams that await him on his way back from the interview, which is conducted at De Lannoy's Tel Aviv hotel.
"Israel has special security needs, which are entirely justified," De Lannoy says. "You have to think not just about how to raise the workforce participation rate, but also about the jobs that you want the haredim to go into. In order to continue to be able to afford to spend so much on defense, you have to maintain the proportion of high productivity jobs."
The idea is to develop vocational training.
"Vocational training is important, but it's not enough close the gap for someone who has never learned basic subjects at school. The challenge in education is that even if you change the education system now, you will see the results only in another 10-15 years.
"It's important for me to emphasize that I don't judge the choices people make. If they want a haredi education and not to learn core subjects, that's their choice. We at the IMF cannot be judgmental about it. We can only say what the effect of these choices will be in 10-15 years' time, and we see that if current trends continue, Israel will have a tough problem affording a high-tech economy and providing its residents with security at a high quality level."
What about the fiscal deficit? Is the IMF's approach to large deficits more tolerant these days?
"Fiscal discipline is important, because access to markets is not guaranteed. At a certain point, the markets can decide that that's it, they're not prepared to give you more finance. This point can differ from one country to another: Japan, for example, has a very high public debt, and they manage to continue to finance themselves. There are countries that find themselves shut off from the markets at a much lower point, such as Argentina. So you can't grow the debt endlessly and say 'we'll see what happens' - that would be highly irresponsible. The most common mistake is focus on one measure and to say 'monetary policy will solve all our problems.' You saw what happened in Greece - there was austerity, the deficit was cut, but GDP also shrank, and as a result the debt rose rather than fell. You therefore need a combination of monetary policy, fiscal policy, and structural changes."
The cyber race will endanger the small banks
De Lannoy, who is married to a cybersecurity expert, came to Israel to take part in Cyber Week, an annual conference for cybersecurity experts that takes place at Tel Aviv University. He took on his current role at the IMF in 2016, after serving in a series of advisory posts on financial stability and the global economy for the Ministry of Finance and the central bank in Belgium. At the start of his professional career, he worked in Kinshasa, capital of the Democratic Republic of the Congo, as an expert on micro-finance for a non-government organization called Trias. This experience helps him in his work at the IMF, and is also connected to cybersecurity. "At the IMF, we are currently promoting fintech solutions that help people in poor countries who have no bank account to obtain access to financial services via their mobile telephones, for example through payment apps. Today we understand that it's important to protect these systems from hackers and cyber-attacks."
To what extent can cyber-attacks undermine the stability of national financial systems?
"Think for example of a country like Sweden, where only 15% of payments are made in cash. All the rest is electronic. Imagine what will happen if someone tries to attack Sweden by disrupting the country's digital payment systems and people have to go back to cash. It could happen in Israel too, and the economic damage is liable to be huge, certainly much more than is caused by firing a few missiles."
Do you propose that we should stop using cash?
"There are substantial economic advantages to ending the use of cash; it's much cheaper and more efficient than transferring cash. You just have to remember that every electronic system and every fintech solution comes with built-in cybersecurity risk. The understanding that every system will ultimately be exposed to hacking attempts makes it obligatory to maintain back-up systems in order to preserve confidence in the system."
What back-up systems, for example?
"The central bank has an important role: maintaining liquidity. In Israel there is exceptional cooperation between the public and private sectors. Israel has a fairly unique solution in the shape of the National Cyber Directorate, which understands that cyber threats must be dealt with holistically, and that there must be coordination between all public and private bodies."
Are you concerned about the gaps between countries in preparedness for cyber threats?
"Certainly. There are very substantial gaps between the leading countries, such as the US, the UK, and Israel, and other countries that do not have the resources required to reach this level, neither financial resources nor the kind of manpower required. One of the problems is that what happens in the non-advanced countries also reaches the developed countries. The hackers who broke into the central bank in Bangladesh used the SWIFT network to transfer money. Even though the network itself was not hacked, the hackers used it with the user name of the Bangladesh Bank. That's something that obliges the IMF and the World Bank to think about how to strengthen the weak links in the chain and close the gaps."
Does that mean standardization?
"I presume that at some stage there will be an international security standard, but the problem is, how will we be able to update it? The threats are very rapidly becoming more sophisticated. That means there has to be a pro-active approach. Cybersecurity is a very expensive business for the banks, and that produces a considerable advantage for the big banks over small banks that find it hard to finance the necessary security. In the end, all the banks are coping with the same hackers and the same threats. Since security costs are constantly growing, there is a danger that in the long run this cyber race will put at risk the existence of the small banks and only the large ones will survive, and that will increase concentration in banking."
It sounds like a market failure that the regulator needs to deal with.
"Yes, but it means that cybersecurity needs to be defined as a vital public service, like water or power. At present, the prevailing approach is that the private sector should be left to deal with cyber threats, but private businesses are incapable of dealing with cyber threats that come from a state actor."
Is the growth of cyber threats liable to hold back the process of digitalization and adoption of fintech by the banks?
"We hope not. Innovation and fintech have great advantages, and I hope we'll be successful in managing the risk as we advance."
Published by Globes, Israel business news - en.globes.co.il - on August 18, 2019
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