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

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Presentation on theme: "ISRAEL15 Prof. Ricardo Hausmann. -2--2- Agenda Between Growth and Leapfrog Leapfrog Mechanics: Implications for Israel Challenge of Public/Private Cooperation."— Presentation transcript:

1 ISRAEL15 Prof. Ricardo Hausmann

2 Agenda Between Growth and Leapfrog Leapfrog Mechanics: Implications for Israel Challenge of Public/Private Cooperation Is there a Leapfrog Recipe?: The Problem with the Washington Consensus Political Challenges

3 Between Growth and Leapfrog

4 ISRAEL15 Prof. Ricardo Hausmann Accelerated Growth V. Leapfrogging Current situation – Israel has grown since 2003 But so has the rest of the world Leapfrog involves improving the relative performance vs. the rest of the world Catch-up element Question – can Israel only grow fast when everyone else is growing as well? Or can it outperform the other economies so that it increases its relative standing over the long run?

5 ISRAEL15 Prof. Ricardo Hausmann Israeli Growth, Observations Income Per Capita Relative to the US Year  Israel leapt between ;  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)

6 ISRAEL15 Prof. Ricardo Hausmann year Some countries have been able to do better Israel Ireland S. Korea US Benchmark (=1) Luxemburg (=1.2) Income Per Capita Relative to the US

7 Leapfrog Mechanics: Implications for Israel

8 ISRAEL15 Prof. Ricardo Hausmann How do countries grow 1.Increasing Quality of Existing Products 2.Moving to More Sophisticated Products 3.Inventing New Products

9 ISRAEL15 Prof. Ricardo Hausmann 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

10 ISRAEL15 Prof. Ricardo Hausmann -10- Sophistication in 1992 Growth in , controlling for initial income Sophistication Today Determines Tomorrow’s Growth: Countries become what they export Strong evidence that countries converge to the level of income of the countries they compete with.

11 ISRAEL15 Prof. Ricardo Hausmann -11- Israel’s Export Sophistication is Mixed ISR, No Diamonds ISR, With Diamonds

12 ISRAEL15 Prof. Ricardo Hausmann -12- But has Improved

13 ISRAEL15 Prof. Ricardo Hausmann -13- Top Contributors to Export Sophistication (2005) Goods with PRODY > 1.5*EXPY, sorted by overall contribution to EXPY

14 ISRAEL15 Prof. Ricardo Hausmann -14- IL: not a large exporter of services per capita

15 ISRAEL15 Prof. Ricardo Hausmann -15- Total service exports per capita to USA (log) vs GDPpc (log), 2005 (BEA) Israel: a major service exporter to US

16 ISRAEL15 Prof. Ricardo Hausmann -16- Particularly in category of earnings by owned businesses abroad ISR Exports (pc) to the USA by Category, Business professional and technical services telecommunications Financial services R & D services Accounting, auditing and business consulting Data processing Industrial engineering services Database and other information services Legal services Construction, architecture and civil engineering services Education Advertising

17 ISRAEL15 Prof. Ricardo Hausmann -17- Exports of business, professional and technical services to the US are outstanding Exports per capita (per million) of ‘other professional and technical services to businesses’ in the US, 2005 (BEA)

18 ISRAEL15 Prof. Ricardo Hausmann -18- 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)

19 ISRAEL15 Prof. Ricardo Hausmann -19- Increasing Quality of Existing Products is relatively Easy and Fast

20 ISRAEL15 Prof. Ricardo Hausmann -20- Countries with bigger quality gaps grow faster

21 ISRAEL15 Prof. Ricardo Hausmann -21- Israel – at The Top of Its Trees

22 ISRAEL15 Prof. Ricardo Hausmann -22- 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

23 ISRAEL15 Prof. Ricardo Hausmann -23- Step 1: Maximum Spanning Tree Our Approach: Distance between trees depends on similarities of required capabilities Distance measured by probability that, if a country is good in one product, it’s also good in another product. What is the shape of a forest? –Homogenous or Heterogeneous? What does it look like?

24 ISRAEL15 Prof. Ricardo Hausmann -24- Step 2: Overlay Strong Links 0.4 > 0.4 – – <

25 ISRAEL15 Prof. Ricardo Hausmann -25- Nodes sized according to PRODY, darker links are stronger (red is strongest) Step 3: Insert Products

26 ISRAEL15 Prof. Ricardo Hausmann -26- Israel 2000 Garments Agriculture Textiles Electronics Pharmaceuticals Chemicals Israel’s Product Space in 2000

27 ISRAEL15 Prof. Ricardo Hausmann -27- Comparatively, Israel is in a sparse part of the forest

28 ISRAEL15 Prof. Ricardo Hausmann -28- Space to improve quality Ease to jump to new products: open forest LowHigh Low High Bridge over troubled waters Strategic bets Little 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 broke Ample space to move in all directions Hey Jude: make it better Competitiveness policy Improve the quality of what already exists Types of Product Spaces

29 ISRAEL15 Prof. Ricardo Hausmann -29- Stairway to Heaven: move to nearby products that are more sophisticated and strategic Distance vs. sophistication

30 ISRAEL15 Prof. Ricardo Hausmann -30- Low Hanging ‘Up-market’ Fruit, 2005

31 ISRAEL15 Prof. Ricardo Hausmann -31- Low Hanging ‘Up-market’ Fruit, 2005 Goods with RCA 1.5*EXPY (PPP), sorted by density

32 ISRAEL15 Prof. Ricardo Hausmann -32- Very Hard, Inventing New Products

33 ISRAEL15 Prof. Ricardo Hausmann -33- The Israeli R&D Miracle: highest R&D spending in the world National Expenditure on R&D a s percentage of GDP, 2003 Source: CBS, BoI. Interpreting the Miracle: Most is private Reflected in exports, FDI and M&A S. Fischer – Israel Hi-Tech Conference June 2007

34 ISRAEL15 Prof. Ricardo Hausmann -34- A reinterpretation Israeli “monkeys” achieved a very successful jump to a relatively distant part of the product space that is particularly dense and fertile Due to de facto industrial policy based on military procurement –ICT products for military use spilled-over into civilian products More successful than previous attempts –Kfir, Lavi, Sussita This time, start-ups were very numerous and happened in many products which were unpredictable ex ante Other related activities – such as venture capital – developed to sustain the private expansion of new applications

35 ISRAEL15 Prof. Ricardo Hausmann -35- ICT Value Added a s % of business sector product 2003 Contribution is concentrated in ICT related areas ICT Value Added a s % of business sector product 2003 Source: CBS. S. Fischer – Israel Hi-Tech Conference June 2007

36 ISRAEL15 Prof. Ricardo Hausmann -36- …and some fundamental questions Is ICT an example of successful intervention to reduce coordination problems? Can it be replicated in other areas where military involvement plays less of a coordinating role? –Water-tech, drug development, nanotechnology, energy, genetics What would it take? Would it be worthwhile? What are the implications on income equality?

37 ISRAEL15 Prof. Ricardo Hausmann -37- 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

38 ISRAEL15 Prof. Ricardo Hausmann -38- Intermission

39 Challenge of Public/Private Cooperation

40 ISRAEL15 Prof. Ricardo Hausmann -40- 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?

41 ISRAEL15 Prof. Ricardo Hausmann -41- Four Principles for Public / Private Cooperation Four principles Transparency Demands, evaluations and decisions should be public knowledge Open Architecture Whenever possible, elicit information about required public inputs Co-financing Self- Organization Allow self- organization around critical inputs. Imposing “industry” definitions / requiring agreement is inefficient Experimentatio n and Evaluation Bold moves, tolerance for failures, frequent monitoring, correction over time

42 ISRAEL15 Prof. Ricardo Hausmann -42- A robust, flexible structure No single, top-down institution An evolving network of organizations Specialized by policy instrument Infrastructure, regulation, labor training, etc. Specialized by type of activity Sectors of industry, trade, etc. Examples: NASA and World Bank

43 ISRAEL15 Prof. Ricardo Hausmann -43- Some policy initiatives Code of Dialogue Open participation Self-organization Co-financing Transparency Gov: only public goods Google-like Search Mechanisms Create search mechanisms Focus them on space of possibilities Empower them to eliminate obstacles E.g., Development banks, Industrial parks Virtual Inter-Ministry Market Budgetary mechanism to create an internal market within the government for public inputs

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

45 ISRAEL15 Prof. Ricardo Hausmann -45- Fiscal Discipline Reorientation of Public Expenditure Tax Reform Financial Liberalization Openness 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 can Working 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

46 ISRAEL15 Prof. Ricardo Hausmann -46- 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 social conflict Macro stability Infrastructure Human capital Low taxes Finance Get the Biggest Bang for the Buck

47 ISRAEL15 Prof. Ricardo Hausmann -47- High cost of finance Low return to economic activity Problem: Low levels of private investment and entrepreneurship Low Social Returns Low Appropriability Bad Internation al Finance Bad Local Finance Poor Geography Low Human Capital Bad Infrastructur e Government Failures Market Failures Micro Risks: Property Rights, Corruption, Taxes Macro Risks: Financial, Monetary, Fiscal Coordinatio n externalities Information externalities Low Domestic Saving Poor Intermediati on Growth Diagnostics: Reforms are Contextual

48 Political Challenges

49 ISRAEL15 Prof. Ricardo Hausmann -49- Challenges to creating a broad constituency for leaping Development banks Traditionally conceived as motivated by a financial market distortion or failure Political Leadership 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


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