Fischer: Adopt the Norwegian model

Governor of the Bank of Israel called today for the adoption of the Norwegian model, and for the setting up of a large investment fund that will take in the royalties and taxes received from the gas and oil discoveries in Israel, and invest the money overseas. Stanley Fischer was speaking at the 2010 "Globes" Israel Business Conference.
"If there is something out there (in the Mediterranean) that is big in relation to the size of the economy, then we should deal with it as other countries have done," Fischer said, referring to the gas discoveries, and the possibility of Israel being infected with "Dutch disease", that is, appreciation of the local currency thanks to royalty and tax receipts, harming the competitiveness of local industry.

"One looks first to Norway, which set up a fund to take the state's receipts from the discoveries and invest them," Fischer said. "This money must not be allowed to have too much impact, so that we do not suffer from Dutch disease. We must prevent this, and we will." Norway currently has the benefit of a fund that manages surpluses amounting to $440 billion, originating from the state's revenues from oil.

On a dramatic day in the energy sector, with Minister of Finance Yuval Steinitz issuing an ultimatum to the Tamar partnership to develop the reserve or return the license to the state, Fischer said that entrepreneurs should be encouraged to continue energy exploration, but at the same time he again expressed unequivocal support for the interim recommendations of the Sheshinski committee.

"I support the Sheshinski committee. It's aim was to arrive at a fair distribution of the profits from the gas discoveries between those who found the gas and the citizens of Israel," Fischer said. He repeated, in English and Hebrew, the statement issued on the day the Sheshinski committee's interim recommendations were published, to the effect that he supported the recommendations and believed that the hearing process for the oil and gas companies would be fair.

"Every decision here takes three times as long as in Western countries"

"We are in a good economic position, but we have problems," Fischer went on to say. "All the problems can be solved, but it will take tough decisions to deal with them."

Fischer listed some of the main problems he sees facing the economy, linking education and poverty: "Everyone understands the problem and sees that our standard continues to fall in international tests. Poverty is concentrated in two populations, Arabs and haredim. Among the haredim, the problem is that a small proportion of the men go out to work, and so it is no surprise that this population is poor. Among the Arabs, it is difficult for the women to find work, because in their culture there is discrimination, and a desire that the woman should be close to home. Unless we deal with these problems, we will not be able to continue to grow and progress as a developed country."

Fischer also mentioned another problem: backward infrastructures. "Every decision here takes three times as long as in Western countries," he said.

Fischer also spoke about macro-economic challenges facing Israel. "The Bank of Israel Law defines three goals for the Bank of Israel. The first is to maintain price stability, meaning inflation of 1-3%. This is the main goal under the law. Besides that, we have to support other goals of government policy, mainly growth and employment, and according to the new law, we need to deal with social gaps, insofar as we are able to have an effect on that matter."

The Governor of the Bank of Israel mentioned the recent rise in the unemployment rate, to 6.6%, but said, "This is good news, because this rise stems from a rapid rise in the rate of participation of the population in the labor market. In recent months, more people have gone out to work." According to data disclosed by Minister of Finance Yuval Steinitz at the conference, the rate of participation in the workforce has risen to 58%, compared with 56.5% last year.

As in every speech he has made recently, Fischer also commented on two burning issues in the economy: the appreciation of the shekel, and soaring home prices. He stressed that he would continue to buy dollars on the market, and said, "One of the threats to growth is the exchange rate. As people responsible for a small, open economy that exports 46% of its GDP, we have to be concerned about the exchange rate. We will continue to intervene in the foreign exchange market as the need arises, and we must be ready for all kinds of scenarios that are liable to happen."

"Home prices rise then, boom!"

In his comments on the rise in home prices, Fischer made veiled criticism of government sources that release contradictory data about prices. It will be recalled that the Ministry of Finance has been claiming in recent months that home prices are falling, while the Central Bureau of Statistics reports a steady rise.

"One day, we will discover what's really happening," Fischer said. "Meanwhile, we will not allow a bubble to swell up in the real estate market, because too many financial crises have originated in that market. When prices rise, everyone wants to buy, and then prices continue to rise, and in the end, someone realizes that they have risen too much, and then, boom! prices start to fall."

A meeting of governors took place at the conference, with Palestinian Monetary Authority Governor Jihad Al Wazir speaking alongside Fischer. Al Wazir congratulated Fischer on the awards he has received in recent months, saying "This is tribute to your wisdom and the way you have dealt with the crisis."

Al Wazir called for a rapid end to the occupation, and appealed to the Israeli business community to press the government on the matter. "Israel's greatest challenge is to end the occupation that began in 1967. There will be no peace unless the occupation ceases. Too much time has been invested in processes, and not enough in substance. There is no such thing as an economic peace. It is dangerous and mistaken to assume that, because of the quiet that prevails today, the conflict can be concealed. The second intifada began when Palestinian GDP was growing very nicely. I call upon you, the business community, to press the Israeli government not to close the current window of opportunity for peace. The time has come to move to action. Your voice must be heard."