ISRAEL15 Prof. Ricardo Hausmann. -2--2- Agenda Between Growth and Leapfrog (קפיצת מדרגה) Leapfrog Mechanics: Implications for Israel Challenge of Public/Private

ISRAEL15Prof. Ricardo Hausmann

ISRAEL15 Prof. Ricardo Hausmann -2-

Agenda

•Between Growth and Leapfrog ( קפיצת(מדרגה

•Leapfrog Mechanics: Implications for Israel

•Challenge of Public/Private Cooperation

•Is there a Leapfrog Recipe?: The Problem with the Washington Consensus

•Political Challenges

Between Growth and

Leapfrog


Israeli Growth, Observations0

.2

.4

.6

.8

Inco

me

Pe

r C

apit

a R

ela

tiv

e to

th

e U

S

1950 1960 1970 1980 1990 2000Year

Israel leapt between 1950-70;

Since 70s stuck at 50% US;

No gain compared to West Europe;

~10 countries leapt e.g. Ireland, SK;

Israel has constraints yet did better than many countries without resources;

Could it do better?

US Benchmark (=1)

Luxemburg (=1.2)


0.

2.

4.

6.

8

1950 1960 1970 1980 1990 2000year

Some countries have been able to do better

Israel

Ireland

S. Korea

US Benchmark (=1)

Luxemburg (=1.2)

Inco

me

Pe

r C

apit

a R

ela

tiv

e to

th

e U

S

Leapfrog Mechanics: Implications for Israel


How do countries grow

1. Increasing Quality of Existing Products

2. Moving to More Sophisticated Products

3. Inventing New Products


Sophistication of exports is measured as the income per capita of countries with a comparative advantage in the country’s export basket

Rich Countries Produce Rich Country Goods Relationship between per-capita GDP and EXPY, 2003

• Rich countries do not just produce more of the same

•They produce different goods

• To grow rich, countries need to change what they produce and export


Sophistication in 1992

Gro

wth

in

1992-2

004,

con

trollin

g f

or

init

ial in

com

e

Sophistication Today Determines Tomorrow’s Growth: Countries become what they export

e( g

row

thgd

p | X

,lexp

y199

2 ) +

b*l

expy

1992

lexpy1992

Residuals Linear prediction

8.10487 9.83871

.31443

.429625

MDG

PRY

BGD

JAM

ECU

BOL LCA

LKA

COL

HTI

PER

KEN

IDN

BLZ

CHL

DZASAU

OMNTUR

TTO

IND

GRC

ROM

THA

CYP

CHN

HRV

PRT

MYS

BRA

HUN

AUS

MEX

ESP

KOR

NZL

SGP

NLD

CANUSADNKSWE

DEU

IRL

FINISL

CHE

Strong evidence that countries converge to the level of income of the countries they compete with.


Israel’s Export Sophistication is Mixed

ARG

AUS

AUTBEL

CAN

CHE

CHL

CRI

CZE

DEU

DNKESP

EST

FINFRAGBR

GRCHRV

HUN

IRL

ISL

ISRITA

JPN

KNA

KOR

LTU

LUX

LVA

MEX MLT

MUS

MYS

NLD

NOR

NZLPOL

PRT

ROM

RUS

SAU

SGPSVK

SVN SWE

TTOURY

USA

ZAF

ISR_no_diamonds

ISR

9.2

9.4

9.6

9.8

1010

.2ln

expy

ppp

9 9.5 10 10.5 11

Log of GDP per capita at PPPLog

of

EX

PY

at

PP

P (

exp

ort

sop

his

ticati

on

)

ISR, No Diamonds

ISR, With Diamonds


Exports of business, professional and technical services to the US are outstanding

ARG

AUS

BRA

CAN

CHE

CHL

CHN

DEU

ESP

FRA

GBR

HKG

IDNIND

ISR

ITA JPNKORMEXMYS

NLD

NOR

NZLPHL SAU SGPTHA VENZAF

05

000

100

001

5000

200

002

5000

exp

ort

spc

6 7 8 9 10 11lngdppc

Exports per capita (per million) of ‘other professional and technical services to businesses’ in the US, 2005 (BEA)


How To Advance? Monkeys & Trees

Our metaphor:• Products are like trees• Firms are like monkeys

• Structural transformation: process whereby monkeys move from the poor part to the rich part of the forest• Easier for monkeys to jump short distance (i.e. to change to products that use similar capabilities)


Increasing Quality of Existing Products is relatively Easy and Fast


Countries with bigger quality gaps grow faster


Israel – at The Top of Its Trees

Room for Quality Upgrading (1998-2000 uv gap avg)

0

0.5

1

1.5

2

2.5

3

3.5

4

KOR CAN SGP NZL NLD FIN GBR IRL PRT ISR


Moving to different products is more difficult

New products face a chicken and egg problem:• Why create inputs for an industry that does not exist?• How can the industry exist, if the inputs are not there?

In practice, new products use inputs that have been accumulated to serve other “nearby” products• This creates very strong path dependence


Comparatively, Israel is in a sparse part of the forest

ALB

ARG AUS

AUTBEL

BGR

BLZ

BRB

CAN

CHE

CHL

CHN

CRI CYP

CZE

DNK

ECU

ESP

EST

FIN

FRA

GBR

GEO

GRC

HKG

HND

HRVHUNIDN

IRL

ISL

ISR

ITA

JPN

KORLTU

MDA

MDV

MEX

MLT

MUS

MWI

NER

NIC

NLD

NOR

NZL

PHL

POL

PRT

ROM

SGP

SVK

SVNSWE

TGO

TUN

TUR TWN

URY

USA

VEN

ZAF

01

0000

002

0000

003

0000

004

0000

005

0000

00o

pen_

fore

st1b

0 10000 20000 30000 40000real GDPpc constant prices (chain), PWT

ISRAEL15 Prof. Ricardo Hausmann -18-Space to improve quality

Ease t

o ju

mp

to n

ew

p

rod

ucts

: op

en

fore

st

Low High

Low

High

Bridge over troubled waters

Strategic betsLittle space to improve

quality and few nearby trees

Stairway to heaven

Parsimonious industrial policy

Help jump short distances to other products

Let it be

It ain’t brokeAmple space to move

in all directions

Hey Jude: make it better

Competitiveness

policyImprove the quality of what

already exists

Types of Product Spaces


Low Hanging ‘Up-market’ Fruit, 2005


Very Hard, Inventing New Products


The Israeli R&D Miracle: highest R&D spending in the world

National Expenditure on R&D aNational Expenditure on R&D as percentage of GDP, s percentage of GDP, 20032003

0.60.9 1.0 1.1 1.1

1.31.6 1.6 1.6 1.7

1.9 2.02.2 2.2

2.5 2.6 2.6

3.1

3.53.7

4.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Source: CBS, BoI.

Interpreting the Miracle:• Most is private• Reflected in exports, FDI and M&A

S. Fischer – Israel Hi-Tech Conference June 2007


Two possible scenarios

The R&D boom was ignited because of serendipitous reasons (military procurement) but now can be sustained for a very long time because it has developed all the institutions that sustain it

Universities, global markets, venture capital

The R&D boom will fizzle out because it is relatively concentrated in a few areas that were initially favored (ICT), as more countries enter and more applications are developed, the sector will mature

Is there a Leapfrog

Recipe? The Problem with

the Washington

Consensus


Fiscal Discipline

Reorientation of Public Expenditure

Tax Reform

Financial LiberalizationOpenness to

DFI

Privatization

Deregulation

Secure Property Rights

Washington

Consensus

Washington Consensus: All Reforms are Equal

Checklist Approach is Wrong!

Reform as much and as best as you canWorking Assumptions: Any reform is good The deeper the better The more areas reformed, the

better

The theory of second-best Latin America since 1990 Policy dimensionality is high Low social conflict

Macro stability

Infrastructure

Human capital

Low taxes

Finance


Reforms are Contextual

Removing Binding Constraints

Working Assumptions: Policy problems are

“high dimensional” Identify most binding

constraints on economic activity

Expend scarce political capital on those reforms only

Low

socia

l con

flict

Macro

sta

bility

Infra

stru

ctu

re

Hu

man

cap

ital

Low

taxes

Fin

an

ce

Get the Biggest Bang for the Buck


High cost of financeLow return to economic activity

Problem: Low levels of private investment and entrepreneurship

Low Social Returns

Low AppropriabilityBad

International

Finance

Bad Local

Finance

Poor Geograph

y

Low Human Capital

Bad Infrastruct

ure

Government Failures

Market Failures

Micro Risks:

Property Rights,

Corruption, Taxes

Macro Risks:

Financial, Monetary,

Fiscal

Coordination

externalities

Information

externalities Low

Domestic Saving

Poor Intermedi

ation

Growth Diagnostics: Reforms are Contextual

Challenge of

Public/Private

Cooperation


Transformation Requires Public / Private Cooperation

Private Inputs

Information, Incentives, Resources

Public Inputs

Public / Private Cooperation

Exchange of Information / Shared Risks

• How to provide highly specific, high dimensional public inputs that are complements in private production?

• Private inputs: – Prices: information– Profit-motivated firms: incentives– Capital markets: move resources

• Public inputs:– No price: where to get the

information?– What are the incentives?

Political?– Even with incentives, how would

resources move?


Four Principles for Public / Private Cooperation

Four principlesTransparenc

yDemands,

evaluations and decisions should

be public knowledge

Open Architecture

Whenever possible, elicit

information about required public inputsCo-financing

Self-Organizatio

nAllow self-

organization around critical

inputs. Imposing “industry”

definitions / requiring

agreement is inefficient

Experimentation and

EvaluationBold moves, tolerance for

failures, frequent

monitoring, correction over

time


A robust, flexible structure

No single, top-down institutionAn evolving network of organizations

Specialized bypolicy

instrument

Infrastructure, regulation, labor

training, etc.

Specialized bytype of activity

Sectors of industry, trade, etc.

Examples: NASA and World Bank


Some policy initiatives

Code of Dialogue•Open participation•Self-organization•Co-financing•Transparency•Gov: only public goods

Google-likeSearch Mechanisms

•Create search mechanisms•Focus them on space of

possibilities•Empower them to eliminate

obstacles•E.g., Development banks,

Industrial parks

VirtualInter-Ministry

Market •Budgetary mechanism

to create an internal market within the government for public inputs

Political Challenges


Challenges to creating a broad constituency for leaping

1. Why would society at large support a deep commitment to public-private cooperation if the benefits seem to favor the talented and the lucky? • Perceived as a social

program for the already rich?

• How does society react to Bill Gates or Steve Jobs?

2. Israel has very low labor force participation• Those outside need to

participate, but have less skills than average; thus requires larger wage inequality

• Outside IDF network: Israeli Arabs, religious Jews

3. The likely characteristics of an Israeli leap is intensive in high skills and innovation• Concentrated benefits

4. As structural transformation happens, sectors will be abandoned• Those that compete with

poorer countries

5. Conflict between culture of honest and effective public provision and concentrated gains of private profits

Documents

ISRAEL15 Prof. Ricardo Hausmann. -2--2- Agenda Between Growth and Leapfrog (קפיצת מדרגה) Leapfrog Mechanics: Implications for Israel Challenge of Public/Private