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We're emerging from the global crisis and beginning to grow again, but we still have to be cautious. There's no way to know whether the global economy will return to the same trajectory of growth as before. In fact, I think there are still considerable risks out there. The question is how we can ensure that our economic growth will outpace our competitors. I don’t mean China or India, but those countries that have a similar GDP and per capita income to Israel.
We have to grow faster than them and guarantee that when the global crisis eventually passes, we move up a class. This growth is essential for our country’s most basic needs. There's no failsafe way to ensure our critical security requirements. Clearly, no other country has to confront similar threats to ours. Now, we can overcome them, but only if we are able to fund expensive defense systems. And the only way to meet these needs, as I understand them from my vantage point, is to generate growth.
Economic growth will also help us to meet our expanding social needs, as our population – like everywhere else in the world – grows older. It's a great blessing that people are living longer, but it also means a greater demand for services. And growth will also help us fund the kind of education you all discussed this morning. In other words, the only thing that will allow us to answer the most basic and important needs of the State of Israel over the coming years is continued growth. The constant and sustainable growth of per capita income, year after year. This is only a first step, but it will be a good one for the next few years.
After per capita income has increased, the only way to sustain growth will be by upgrading both education and our human capital. Economic growth will make it possible to finance our existential needs and our educational needs – and better education will, in turn, ensure further growth. That's why I want to divide my remarks into two parts: First, I want to talk about the direction we're taking so that we can return to the same pattern of growth that we experienced before, and then I'm going to talk about the education policy that we already need to promoting. We won’t be able to reap the benefits in a few years unless start investing and making certain changes in education right now.
On the issue of growth, there were those who said that this crisis broke all the rules, but I don’t believe that's true. As the dust settles, two fundamental truths are becoming clear: Firstly, and most fundamentally, people have to be careful not to widen the gap between their income and expenses. This simple rule is true for families, for businesses and for the economy at large. Nobody can afford to spend carelessly. And secondly, if anyone thought this could be addressed with a small, short-term correction, well the fix had to be proportional to the extent of the crisis. But for the most part, the recent crisis came about because people spent much more than they had. And in the end, the laws of physics and gravity catch up with everybody. They can't be escaped.
So the first rule is that expenditures have to be curbed. One reason our economy didn't crash was that we limited spending. In 2003, when I was finance minister, I made a very difficult decision to put the brakes on public expenditure. It hurt me and my party politically. In 2003-2005, when the population was growing at a rate of 1.7%, the budget was growing at a rate of 1%. Later, the government increased the budget by 1.7%, matching the rate of population growth. And then, at the height of the crisis, it went up another 1.3% – to 3%. We'll be working to bring it back down.
Relative to other economies, this restraint allowed us to prevent a gap from opening up between public expenditures and revenues, reducing the debt/GDP ratio from about 100% to 80%. Countries that didn't exercise such restraint fared no better, and many were even worse off. We're running at a deficit of about 5%, but there are some countries operating at 10% or 12% deficits. These are developed countries whose debt-to GDP- ratio exceeds ours. We're in a position like never before.
Let me be clear: It's extremely hard to cut back expenditures. We need to maintain the budget framework, so when other expenses arise – like swine flu vaccinations or other threats – we don’t require additional funds, but are actually able to cut the budget. We have to prioritize. But I want to emphasize that this first rule of maintaining a balance between expenses and income will only prevent a crash. It won't create growth.
It's just like balancing your personal checkbook. You'll avoid going bankrupt, but you won’t increase your wealth. I don’t want to belittle the importance of staying within the budget. It's a necessary precondition for growth – and Finance Minister Yuval Steinitz is making sure that we stay on course – but it won't be enough to stimulate growth on its own.
The second essential component for growth is the removal of bureaucratic obstacles. This will power entrepreneurship and innovation – mainly in the private sector, but hopefully also in government, as we work to steer this huge ship of State. The fundamental reforms that removed obstacles, led to increased competition and availability of resources, propelling our economy forward.
The first reform – the removal of foreign currency supervision – was implemented in the late 1990s. There were some adjustments of course, but one day, we just made the major decision to remove foreign currency oversight and we that was it. There was tremendous criticism and concern that a large amount of money would be moved outside the country. But it actually came into Israel. Investments, commerce and trade flow into free markets and run away from closed ones. The amazing thing is that the State of Israel, which built the computer platform for globalization, could have been called a third-world country, especially with regard to currency oversight. Currency deregulation was a fundamental condition; none of this growth would have been possible if Israeli companies had been unable to invest overseas or if foreign currency could not have come here.
The second thing we did was lower taxes. People work harder, invent and innovate, and take greater risks when they know that there are profits to be made. It has to be worthwhile to work and invest. We started out on this path back in 2003 and we're still continuing today. I'll talk more about this in a moment.
The third thing was the reform of the capital markets. And I'm also talking about pensions and what are called the Bachar reforms, which generated alternative sources of credit. Most credit decisions used to be made by two institutions next to each other in Tel Aviv. Decisions were focused and centralized, and 70% of available credit went to just 1% of the customers. The economy could never evolve this way so, capital reform was essential. There are still some things that require regulation and there is still room for improvement, but it was critical for us to move in this general direction and we've created business credit that was previously lacking in the Israeli economy.
There are dozens of other reforms that I could discuss, but the last thing I want to note in this context is the shift away from welfare allowances toward encouraging participation in the work force. This was one of the most difficult reforms to push through, especially with child allowances increasing for each additional child. It was a recipe for the economic, social and demographic ruin of the State of Israel. The truth of the matter is that the employment has risen and this is a welcome development. Not enough, but we're on the right track.
These changes have removed obstacles, increased competition, facilitated greater mobility and bolstered productivity, and I'm very proud to have played a part in all this. We have to continue in this direction and work to ensure growth. For five years, from 2004 to 2008, we experienced 5% growth – per capita growth of over 3% per annum. Such exceptionally high rate of growth is a sign of a developed economy.
Now we have to work to ensure steady growth. The first thing we need to do is continue reducing taxes. Even though we had to make temporary adjustments in income tax and corporate tax this year, because of the crisis, they were still less severe than in other countries. We're part of a global, competitive economy. And we'll continue to attract entrepreneurs, investors, managers and employees if we continue to lower taxes.
The second thing we have to do is foster a positive business environment. There are a number of things we can do, such as creating a court for economic affairs. A ministerial committee has already authorized it and we'll soon complete the necessary steps so that the State of Israel can introduce “economic jurisprudence” that synchronizes with economic developments in Israel and around the world.
The third thing we need is a national transportation network. We can't remain a “Hadera-Gadera” country. It doesn’t make economic, social or security sense. There's remarkable development here in Israel – we are truly a first-world nation – but we finally have to develop the Galilee and the Negev. It can be done, but we first have to develop the transportation network – highways and trains running north and south. This is a basic and essential step for the future of the State of Israel.
I'll soon be presenting a national transportation map to the Government, a map that will change the face of Israel. It will be a conduit for investment and development, connect the periphery to the heart of the country and help solve the problem of astronomical housing costs here in the center. The periphery has to be developed. It's not a trivial matter. It can be a powerful economic engine that will enhance mobility in the labor market because people will be able to get around easier. We live in a small country and there's no justification for a periphery in the State of Israel. Maybe the area south of Beersheva toward the Arava Desert can be considered peripheral, but certainly not Netivot, just 50 kilometers or 30 miles from Tel Aviv. There is no justification for the Galilee, only a short distance from the coastal plain, to be peripheral. We can fix this and accelerate the process of connecting all parts of the country to each other.
Aside from an improved transportation network, we also need a faster communication network. We want faster transportation, but we want faster communications too. It's no less an important resource for economic growth because we need to move not only people and merchandise, but also information. Israel has relatively narrow pipelines to transfer information.
Finally, we also need to reform planning and construction. We rank very low in terms of competitiveness, not only because of problems in our education system, but first and foremost because of the time it takes to build anything here. We're almost last among the developed nations: 120th. And we're 150th in registering assets. These things impede construction, development and investment, and create the huge distortion in housing prices that adversely affects the disadvantaged, young couples and demobilized soldiers who cannot afford to buy apartments.
All this has to change. I think that the steps I've outlined, and several others that I didn't mention today, will lead us to growth over the next few years. But they're not enough. We'll have the resources we need to continue driving our economy forward, but in the end, we all live in a world where the primary added value will come from information and innovation.
But aside from spending limits and lower taxes, another reason we were better off than other countries was that the State of Israel adapted itself to the global market – particularly in the field of advanced technology. We may not be competitive with the likes of China or in the area of car manufacturing, but we've already moved in the direction of knowledge-intensive industry. This is going to be the engine that drives our economy. And it's all about investing in human capital, which can only happen through education. I'm talking about education in economic terms not because it's just a commodity; education is also about values that give meaning to our lives, and unite us as a nation and a country – but today, I want to focus on the nexus between education and the economy.
Israel’s education system is in trouble, and has been for a long time. If you look at the research – Dan Ben David’s work, for instance – you'll see a gradual decline over the 1980s and 1990s in the reading test scores and overall literacy of IDF soldiers. This coincided with increased investment in education – maybe not enough, but still an investment per student and throughout the whole system. When we compare these two facts, greater investment alongside underachievement, it's clear that there are a number of different problems here. I'll say more about this, but we're definitely in trouble. The only difference is that, today, the whole world knows it. And now, when we look closely at our education system, we're no longer blinded by the spark of genius; it's still there, but the picture is more complicated.
How can we tackle the problems with education? First, we have to appoint the right people for the job. I appointed Gidon Sa’ar as Education Minister and encouraged him to appoint Shimon Shoshani and Manuel Trachtenberg. We're talking qualified people who can bring change. Changes don't just happen by themselves. We all know that it can't happen without the right people making and then implementing the right policies. Secondly, we have to offer support – and my government will indeed support necessary reform in education.
And what is it that we want to do about education? I look at the student body of Israel like a pyramid: At the top, there are sparks of brilliance, even real geniuses, but we're not taking advantage of this excellence in the economy and among the population. Women are not included, and neither are two, large communities with great talent, but which don't participate in this enterprise. I'm talking about the ultra-Orthodox and minority sectors. There are great talents there and we want to include them in an education system that gives them both the basic and sophisticated tools they need to play a role in our knowledge-based industries. There are some great private initiatives, but there will also be some Government ventures.
On that note, I want to congratulate our friend Elisha Yanai on his retirement. When I was prime minister in the 1990s, he told me that we would be making a big mistake if we didn't increase the number of students training in engineering or other technology-related professions. Together with the Council for Higher Education, we developed a program to double the number of engineering graduates within just a few years. And we were successful.
We face a similar situation today, but the solution can be found among those populations I talked about. They are our wellspring of excellence. I'm talking about the women who belong in this field that was once considered a male preserve, and also about Israel’s Arab and ultra-Orthodox citizens. We've already taken a number of steps and we have to continue cultivating those students at the top of the pyramid.
As for the majority of students in the middle of the pyramid,, the most important thing is to focus on the core curriculum. We have to concentrate on those subjects that enable all Israelis to participate in the workforce. Not everyone has to be at the top. They don’t all have to work in hi-tech, but they do need to know basic mathematics, , language and computers.
Once upon a time, people would learn through memorization. Today, you can just go to Google or Wikipedia, but you have to know how. You need a foreign language; English is the lingua franca, but I told Gidon Sa’ar that we should be teaching Chinese. Not to the same extent as English, but we should at least start introducing Chinese. It's important. We want to provide our students with the basic tools they'll need to take part in the global economy. I'm not talking about grades or discipline or Jewish values; I've talked about them before. Now, I'm talking about the basics to allow Israeli children – from Tel Aviv, an Arab village in the Galilee or an ultra-Orthodox family – to be a part of our economic life. That's the job of the education system.
It won't just help the students; it will help all of us. The industrialists once asked me to bring in foreign workers. They told me about other countries where technology experts are approved for immigration. And I said: “Why should we? They’re already here!” They are here. So we're working to help ourselves, but I also want to talk about the bottom of the pyramid.
Experience has taught us the one simple truth that the way to help weaker students is by working with on a constant daily basis, one lesson at a time. We can't let the gaps grow wider and then say, at the end of the semester or the year that "now, we have a problem so, let’s fix it.” We have to help them right here and right now. This is the attitude we need to take so that, eventually, all our students will be able to express themselves and maximize their potential. Again, not everyone is cut out to be an engineer, but each and every child, each and every student, should be encouraged to realize their full promise. This is our real goal. For the sake of every individual and for the good of our economy, we have to push these changes through.
The question is how we do it? What means do we have at our disposal?
The first thing is the budget. I said that the budget could be expanded only if there is growth. I do believe that we will grow and so will the budget. But I also think that the management issue is just as critical. You can have a situation where more and more money is spent and yet, if one checks student achievement against increased investment per student, there will still be no correlation between them. It's exceedingly problematic that previous investments did not lead to a commensurate increase in ability. The test scores kept going down, both domestically and internationally.
We want to ensure that more budgets lead to enhanced capabilities, and this depends mainly on how we manage both the money and the entire education system. Gidon Sa’ar is working toward this goal and he's talked about two things in particular. The first is to improve the status of teachers and we have concrete plans for how to do this. The second thing is to upgrade the quality of management. I think it was Dov Lautman who once told me that every good school also had a talented principal, and that they should be given greater autonomy and better management skills. We're still short-handed here.
The CEO of Intel Israel wanted to be promoted to management at the school where she was a teacher, but they told that she wasn't qualified enough. So she left to run Intel.
We need to raise the level of our teachers and of principals. This means providing money for teachers, improving the quality of principals and introducing technology for instruction purposes. We are world leaders in inventing new technologies and writing educational software, but we 're doing it for others. We're not doing it for ourselves. It's great that we're doing it, but it's time to put it to work in Israel too. It's amazing what can be achieved with technology. You can drill down on the basics and allow teachers to track the progress of their students in real time. We can, and will, do much more.
Finally, I want to talk about higher education. Manuel Trachtenberg and Gidon Sa’ar are going to make changes. We don’t want to do this unilaterally, but together with the students, the faculty and the administration of the universities. We have to give a real boost to our institutions of higher learning. We know that we're competing against another country that continues to attract our best and brightest. Not only us. And we have to make a focused effort to bring our students back home. We actually have an opportunity now because we are in a relatively better position than many other countries. Now, we need to persuade the many Israelis in the United States to come home and create centers of knowledge and research.
I talked to Ada Yonath about this when I called to congratulate her after her Nobel speech. I told her that we have to make a concentrated effort to promote basic research because this is where the prize winners come from. It's the root of the entire chain of knowledge and development. We have to turn our universities into centers of excellence in specific fields and mobilize them in the service of industry.
I believe this is possible. I believe that, in this recovering world, the State of Israel will bounce back faster and is capable of doing extraordinary things. That's why, alongside our economic policy, we have to continue the fundamental reform of both the school system and higher education. Some of this will be complicated and have to contend with other significant interests.
I also know that there are many voluntary initiatives in which many of you here are involved – giving of your energy, your talent and your heart to promote education. Many of those who participate come from private business and it's no coincidence.. You should know that this engagement contributes a great deal. I've spent a great deal of time working with you. I know that Gidon Sa’ar and Manuel Trachtenberg have also. It's not that you're a replacement for government, but that you're giving the huge gift of your creativity, your understanding of the problems and your perspective as go-getters who don’t have to worry about the constraints of bureaucracy, which allows you to take stock of which programs can help us. I encourage you to continue your important work.
We need to join forces. The State of Israel is at a point where it can thrust forward economically, giving us the ability to continue making our country stronger – in education too – so that we can guarantee our future. Growth will provide an answer to our needs over the next decade; education will provide an answer for the next century. The next century will be all about knowledge, and both Israel and the Jewish people are wired for this future. All we need to do is join forces, and combine our economic and educational muscle That's what I'm proposing to do.
Happy Hanukkah and thank you.
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