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Israel and the OECD: A Triple-Win Partnership

 

Remarks by Angel Gurría, OECD Secretary-General

The Prime Minister’s Conference for Export and International Co-operation
Tel Aviv, 1 November 2007


Mr. President, Mr. Prime Minister, Ministers, Ladies and Gentlemen:

It is a great pleasure to be in Israel to participate in the Prime Minister’s Conference for Export and International Cooperation. I can feel the economic vitality of Israel in these rooms and corridors. I can sense the powerful creative impulses of a truly emerging economy. 

Being in Tel Aviv before such a relevant and plural audience, I will start my presentation talking about the important decision by our Ministerial Council to start accession negotiations with Israel. Then I will say a few words on how we see the Israeli economy from the OECD perspective.

Israel’s accession to the OECD: a triple-win partnership

The accession of Israel to the OECD has been a process, not a happening. Since the mid-1990s, Israel has been making a deliberate effort to strengthen its ties with the OECD. This effort has finally borne fruit. In May 2007, the OECD Council at Ministerial level took the decision of formally inviting Israel and four other countries to open discussions for accession; at the same time it instructed the Secretariat to strengthen relations with five other emerging economies through an “enhanced engagement” with a view to membership. This decision opens a new phase of hard work and collaboration that will test the consistency of Israel’s economic policies with the aquit of the OECD. 

The benefits of this accession process are manifold. It is a triple-win partnership: Israel wins, the OECD wins and the world economy will win too.  

For Israel, being part of the OECD will translate into a wide range of opportunities and benefits. As a full member, Israel will join a unique organisation; one that brings together the more developed and some of the most successful countries of the world. The OECD member countries, now counting 30, will share their policy experience and best practices with Israel. Through this process Israel will become an even more appreciated partner in the eyes of international investors; it will be able to discuss the details of its economic agenda and to benchmark its economic reforms with OECD standards. In a nutshell, OECD membership will translate into better policy performance in key areas like trade, investment, innovation, international migration, energy, competition, the political economy of reform or the development of competitive regions, the issue that brought us here today.

For the OECD, the eventual accession of Israel represents a factor of balance; a big step towards fulfilling our new mandate: to become more global; more inclusive. Having Israel on board will broaden the OECD’s perspective. As an important emerging economy and as the first member from an increasingly relevant world region, Israel will enrich our Organisation with different economic experiences; but also with a different cultural perspective of the major global economic and social issues. This will refine our global understanding and enhance our capacity to make the world economy work better. “Reality”, said that visionary Spanish philosopher José Ortega y Gasset, “is the sum of all perspectives”. 

The world will also benefit from this association. Israel has a lot to contribute; not only as a successful emerging economy with vast development experience, but also as a source of avant-garde solutions to key global challenges like water scarcity and agricultural optimisation. Israel is now a powerhouse in the field of information technology and software. As an observer in several committees, Israel has already made important contributions to the OECD’s work programme in fields like taxes and science and technology. The participation of Israel as a full-member in our Committees will enhance OECD’s role in the Middle-East region, where already now our MENA-OECD Investment Programme is helping to mobilise private investment. 

To sum it up, we all stand to gain from Israel’s accession.

The way Israel prepared its candidacy has made it a role model for others. However, membership cannot be taken for granted: the accession “roadmap” will take time to discuss. There are no shortcuts towards accession.

However, very few worthy goals have been achieved without hard effort, solid commitment and intelligent leadership; three essential elements with which Israel is amply endowed. Thus, I am confident the accession process will progress steadily. No deadlines. No rush. It is too important to be urgent.

Let me now say a few words about the Israeli economy from the perspective of the OECD. 

The economy of Israel: a call for cautious optimism

The first thing that strikes an observer of the Israeli economy today are its recent remarkable achievements. In spite of difficult times, the economy has been growing steadily since the summer of 2003 at a solid annual average of 5% a year.

As my friend Stanley Fischer reported some days ago in Washington, inflation is expected to be within the target range of 1-3%, the budget is likely to close the year in equilibrium, while the balance of payments registers a surplus of nearly 5% of GDP. The record levels of foreign investment have helped the Shekel strengthen within a free-floating exchange rate system. Behind this panorama lies the progressive liberalisation of capital flows. In fact, the development of a pro-business environment that promotes foreign investment has been underpinned by comprehensive deregulation across all sectors of the economy. 
With these achievements, the future for the Israeli economy looks bright. Private think-tanks forecast an annual average GDP growth of 4% between 2008 and 2012 -led by exports and investment-, with a public budget close to balance and a strong currency that will help keep inflation low. However, I would call for caution here. In spite of its remarkable progress, Israel still has to address important economic challenges to make the most out of globalisation. 

The privatisation agenda is still work in progress. The independence of the Central Bank is getting closer. The banking sector needs some adjustments to gain competitiveness. But let me focus on three structural challenges that I believe will be determinant for the future economic performance of Israel:

 

1 - Fostering competitiveness will be strategic. Israel still cannot reap the full benefits of globalisation. Its attractiveness as an investment and export platform is still hampered by several factors. A falling level of productivity in traditional industries; a still developing transport and communications infrastructure; and red tape in key areas for doing business, like dealing with licenses, employing workers or registering property. But most of all, the psychological impact of the recent armed conflicts on investment decisions. Important sectors for the Israeli economy, like tourism and airlines, have already suffered the consequences. The road to Israel’s economic prosperity passes inevitably through the gradual normalisation of relations with its neighbours.  

 

2 - Secondly, there needs to be special focus on combating poverty and inequality. There is growing evidence that Israel is becoming more unequal. According to recent analyses, the proportion of families living below the poverty line “has risen from 17% in 1998 to 20% today”. Another report by the Saban Center for Middle East Policy estimates that almost 1 in 3 Israeli children live in a poor family. The National Insurance Institute reports a recent halt in this trend, but admits persistently high poverty rates and difficulties in reducing income distribution disparities. The Government’s recently adopted “socio-economic agenda”, aiming at reducing poverty and increasing employment (each by 3%), is a step in the right direction.

 

3 - Finally, the economic future of Israel will also be defined by its current capacity to design and implement structural reforms. Israel has made remarkable progress with economic reforms, but it has to pursue further structural changes to reduce market access restrictions or distortions resulting from past heavy government involvement in the economy. As a parliamentary democracy with several multi-party coalitions, Israel has to facilitate the necessary changes in policies and institutions through a careful design and execution of the reform process.

The OECD has developed a wide range of co-operation instruments, international standards and policy recommendations to help governments address these and many other socio-economic challenges. In a highly integrated and competitive global economy, multilateral co-operation has become instrumental. 

Ladies and gentlemen,

The Israeli economy is going through a remarkable transformation. Its achievements in a relatively short period of time are outstanding; its economic future looks bright. What we see ahead gives us every reason for cautious optimism.  Like they say in music: “allegro ma non troppo”. 

I am optimistic that Israel’s accession to the OECD will give a great impulse to your project of making this a stable, prosperous and blooming economy for the benefit of all your people. The OECD is looking forward to the opportunity of making its own contribution to this process.

Thank you very much.

 

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