The global economic arena: playing with the big boys

It is the task of the government to ensure that the economic environment in which it operates allows it to compete fairly.

By AMIR HAYEK

SEPTEMBER 23, 2018 09:01

Amir Hayek (photo credit: Courtesy) — Amir Hayek

(photo credit: Courtesy)

Since the establishment of the state in 1948 and even before, the productive industries of agriculture, tourism (hotels) and construction were at the center of Israel’s economic ethos. They were the engines of economic growth. They created the country’s economic base, and their taxes paid for education, health and welfare needs, as well as Israel’s hefty security needs.

During the early years of the state, the importance of these economic sectors was recognized by all; consequently, the government was eager to promote the geese that laid the golden eggs. At times certain sectors were more important than others, but their collective importance was always paramount.

In the early years, the most important sector was agriculture in general and citrus in particular. They were the country’s most important foreign currency earners. Tourism was an important foreign currency earner as well. Nevertheless, by the late 1950s, the government began to promote industry. It set up the Industrial Development Bank of Israel as a means to channel soft government loans and government grants to industry. This was the foundation of the country’s strong and diverse industrial base.

The productive industries are still of prime importance, but the emphasis is changing. Globalization -- the global village syndrome where there is free flow of goods and capital -- is affecting the local economy, which to a large extent is very much integrated in global economic trends. This means that services are now a very important part of the economy. It also means that the country’s technological prowess has catapulted the hi- tech sector into the top slot of the economy. But despite the importance of hi-tech and services, the conventional economic sectors -- industrial production, tourism, construction and agriculture -- are still a vital part of the economy. Together with the hi-tech industry, they are attracting billions in overseas investments.

Israel’s economic policy is that of a liberal economy with minimum involvement of the state in the economic process with all that it entails. The government is busily opening up all sectors of the economy to free trade and, consequently, competition. Israel is a very small economy, with barely 0.5% of the world economy -- some $400 billion versus $80 trillion. The idea is that if we open up our economy to the world, the world will open up its in return. A beautiful theory but not so in practice.

The global economy is entering a period of increased protection. While we are busily abolishing tariffs, many nations that are declaratively free trade are increasing tariffs at an alarming rate and protecting their industries in other ways. The US is using tariffs to protect its productive industries. The same holds true for other countries such as India, China and Brazil.

In this context, a non-tariff policy, especially in a country as small as Israel, may spell disaster – i.e., the gradual destruction of our productive capacity and export trade. I am all for free trade, but there must be reciprocity. Otherwise, the local economy and primarily its export trade will be competing in an unfair environment. Local industrialists will be forced to close down or relocate their production lines overseas.

It is the task of the government to ensure that the economic environment in which it operates allows it to compete fairly. In the not so distant past, it was task of the government to ensure that a textile manufacturer in, say, Yeroham could compete fairly with a manufacturer in Tel Aviv or that a hotel in Tiberias could compete with one in Jerusalem. However, the rules of the game have changed. Now a textile manufacturer not only in Yeroham but also in Tel Aviv must compete with textile manufacturers in India, Italy or Brazil; and a hotel in Tiberias or Tel Aviv must compete with similar hostelries in Spain, Turkey or Greece. Local hotels are facing unfair competition with similar establishments overseas due to a regulatory environment that drives up operational costs. Hotels in Tel Aviv are also facing unfair competition from Airbnb’s. There are nearly 10,000 of them in Tel Aviv alone.

The writer is the president of the Israel Hotel Association and former director general of the Ministry of Industry and Trade.