U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

President Hayouth; Rector of the University Gad Gilbar; Rector-elect Aaron Ben-Ze'ev; Eliezar Rafaeli, Chairman of the Board of the Jewish Arab Center; my dear friend Amatzia Baram, whose invitation brought me here; deans, faculty, students, and distinguished guests. I would also like to recognize my Haifa relatives who are here today-the Frankels, Hochwalds and Hods.

Thank you. I appreciate the opportunity to address you today here at this great university in one of Israel's most vibrant and diverse cities. As the only liberal arts university in northern Israel, Haifa University is an academic leader within Israel's world-class higher education system. As a university whose student body is close to 20 percent Arab, it also serves as a symbol of diversity and cooperation to the rest of the country-a mission the University takes seriously by pioneering such institutions as its Jewish-Arab Center. I would like to acknowledge and thank Mr. Rafaeli and Dr. Baram, Director of the Center, for all their hard work on behalf of this special institution.

Like the university it houses, Haifa, too, is a picturesque and diverse city. At the turn of the century, Haifa was dubbed the city of the future- the main Mediterranean station for the Hijaz Railway was inaugurated here; a modern pier opened here; large cargoes began to be unloaded here; and warehouses and large shops were built here. Nearly a hundred years later, Haifa remains a city of the future. For just as Haifa led Israel's industrial revolution, so too is it today leading its Information Revolution, as home to a growing high-tech industry.

Throughout my career, I have been involved in my government's economic policies toward Israel, working to promote the peace process and regional economic cooperation and spearheading the recent and ongoing negotiations for Holocaust reparations. My attachment to Israel is deeply personal as well as professional: my wife and sons lived here and I have many relatives and friends here. I always enjoy returning to Israel, and it gives me great pleasure to return here again today to discuss Israel's promising future as a leader in the new global economy.

Israel today is a strong, independent, secure and self-reliant state. It is a modern and industrialized country well-positioned to participate fully in the new global economy. No other country which gained its independence after World War II has come so far and made more dramatic economic strides as Israel. In the short space of five decades it has grown from a developing and agrarian economy to a developed, high-tech society. Israel's thriving high tech industry is a testament to your country's capacity to seize new opportunities. As Israel takes its place as a leader in the Information Revolution, I would like to talk today about the opportunities and concomitant responsibilities that Israel will face going forward. In 50 years, Israel has gone from planting trees to wiring the world. Physical labor is being replaced by prowess in cyberspace. Only a half century after its birth, Israel is ready to join the group of fully developed industrial democracies.

Today, Israel is at the cutting edge of the Information Revolution of the 21st Century, which will transform the world in the same profound way as the Industrial Revolution of the 19th Century. You are remarkably well-positioned to be among the world's top leaders in the high tech field which will dominate the first part of the new Millenium. Israel is already a recognized worldwide leader in telecommunications and data networking: software and the Internet; semiconductors, electronics and digital printing; pharmaceuticals, biotechnology and medical equipment. In the 1990s, while exporting from your traditional industries remained constant, they increased four fold ($2.8 billion to $12 billion from 1990-1999) in your high tech industries.

Israel has all the building blocks for continued leadership and success in the high tech, global economy tomorrow:

1. You have a highly educated workforce, with more engineers per employee than any country in the world-almost twice as many by this measure as the US and more than that of Japan-and the third highest percentage of academic degree holders in math, science and engineering-the skills required to navigate in the Information Revolution.
2. This is significantly the result of the massive immigration from the Former Soviet Union. Of the one million immigrants who came to Israel in the last decade, nearly a quarter were engineers and more than half were highly skilled.
3. You have the highest proportion of scientists and engineers engaged in research and development in the world.
4. Israel is the only country with Free Trade Agreements with the U.S., Canada, the European Union and EFTA, giving you unequalled access to these markets and in the case of the US, tariff-free imports of US-made components.
5. You have a well-developed venture capital market willing to invest in cutting edge technology. Last year, fifty Israeli venture capital funds invested over $400 million in almost 500 deals involving Israeli high tech companies.
6. Your large public investments in your military have had important economic benefits. The Israeli military and its associated companies have served as incubators for high tech businesses by fostering technologies with significant commercial applications.

Roughly a quarter of your population is on the Internet. You have more cell phones per person than the United States and more than twice as many per person as the European Union. Today, Israel's Silicon Wadi is one of the most prolific incubators of technology in the world.

Check Point, a company in only its fourth year on the market, already has a market cap larger than Bezeq and Bank Hapoalim combined. Internet gurus like Yossi Vardi and Gil Shwed are being lionized in the media in terms formerly reserved for war heroes and Zionist pioneers.

The implications of the new global economy for Israeli society are profound. For a country founded on the principles of self-sufficiency and self-defense, Israel's economic well-being is becoming increasingly intertwined with global developments. Almost a hundred Israeli companies are traded on Wall Street, making Israel the second largest foreign presence, after Canada, in NASDAQ. When the U.S. stock market rises or falls, the Tel Aviv Stock Exchange (TASE) often follows right along.

The link between the high tech economies of the United States and Israel has grown particularly strong in the last few years. More and more Israeli firms are opening U.S. offices, while at the same time more and more U.S. firms are investing in Israeli companies. Last year, more than $1 billion in U.S. venture capital was invested in Israel-more than the U.S. currently provides Israel each year in economic assistance. Earlier this month, Lucent Technologies bought Chromatis Networks for $4.5 billion-more than 10 times what AOL paid just two years ago for Mirabilis in a highly-publicized deal that confirmed Israel's place as a key player in the new global economy. The relationship between our two countries is shifting from assistance in development to partnership in globalization. The U.S. is helping incubate Israeli high tech firms through the Joint U.S.-Israel Binational Research and Development Foundation (BIRD). The BIRD, through an endowment equally financed by our two governments, funds high tech joint venture research and development in Israel.

As a result, Israel's economic prospects look increasingly bright. Following three years of slow growth, the IMF forecasts that Israel is now on the threshold of a marked improvement and could grow between three and a half and four percent for the next two years, and some in Israel believe even that estimate is too conservative. Israel today is close to joining the select group of developed nations. Israel today has a GDP per capita of approximately $16,500, more than that of Spain and three-quarters that of the European Union average. Inflation dropped sharply in 1999, ending at 1.3 percent, the lowest level in thirty years.

To ensure that this transition continues and Israel reaches its full potential, Israel must recognize the responsibilities and challenges that accompany your new economic status. The U.S. government has a strong interest and desire to see your economy succeed. With that in mind, I would like to touch upon what we in the U.S. believe to be the greatest challenges facing Israel as you leave behind your days as a developing country. This will require a combination of fiscal discipline, real structural reforms and special efforts to avoid a digital divide in Israel and with your neighbors. This will not be easy. It will involve difficult choices and require discipline and restraint, but will pay many dividends for your people. Now that Israel is finally enjoying an economic rebound, you have a narrow window of opportunity to lock into place reforms that will ensure continued high growth and jobs for young people and new immigrants.

The United States makes formal recommendations on Israeli economic policy through the Joint Economic Development Group (JEDG), which I chaired when I was at the State Department. In its last communique, the Group encouraged Israel to continue reducing the size of government expenditures relative to GDP while increasing public investment in education and infrastructure, thereby making more resources available to stimulate growth through the private sector. It also called for deeper capital markets, more competition and transparency, budgetary restraint and broadening of the tax base.

A key ingredient is fiscal discipline. In the U.S., we have learned that fiscal discipline pays off. Our current economic prosperity has stemmed from the determination of President Clinton and Vice President Gore to stop a generation of public borrowing, reverse fiscal deficits and forge a new national consensus around sound budget policy. It makes possible a virtuous cycle where interest rates can be reduced, which spurs private investment, which in turn produces further economic growth, which increases available tax revenues, reducing what the government has to borrow, which in turn can lower interest rates and start the cycle all over again.

Israel needs to pursue a policy of fiscal discipline anchored in debt reduction, given your large public debt. Today, Israel continues to maintain a large public debt, more than 100 percent (112%) of GDP at the end of last year. Israel's budget deficit reached 2.75% of GDP last year. This year seems to be bringing a slight improvement, as evidence suggests that even the estimated budget deficit of 2.5% of GDP may be reduced. Already in the first quarter tax revenues rose sharply over the same period last year.

The Government of Israel is to be praised for maintaining fiscal discipline in the current budget. We hope that as additional or unanticipated revenues may become available, the government will continue its responsible fiscal policies so that the Israeli economy is placed on a long-term glide path to lower deficits.

We recognize that Israel has unique needs. Even with progress in the peace process, Israel has ongoing defense requirements to maintain its security in a difficult region. Moreover, Israel continues to have a special mission to absorb tens of thousands of immigrants each year-one million in the last decade alone. At the same time, however, Israel's budget is 44 percent of its GDP. That compares with total U.S. government spending, which is approximately 30 percent of GDP, and with the average government spending of all OECD countries, which is approximately 38 percent of GDP. This high level of government spending places a huge burden on your economy. Israel should gradually decrease the size of its budget relative to its economy, while shifting its priorities to greater infrastructure investments, both physical and social, in order to stimulate higher growth.

Fiscal discipline alone, however, is not enough. Regardless of how well fiscal policy is managed, in order to retain the high-tech businesses and talent that will propel Israel's economy forward, Israel will also need to implement genuine structural reforms.

A recent report from the Israel Democracy Institute found that 90 percent of Israeli-rooted companies are registered abroad at least in part because of high taxes, onerous regulations and bureaucratic red-tape. Many American investors require Israeli companies to open headquarters in the U.S. and have relocated many Israeli workers to the U.S. It is estimated that there are 10,000 Israelis working in Silicon Valley today, many for companies that originated in Israel.

In order to retain capital and talent, and thereby reach the next stage of your development, Israel must pursue reforms such as deregulation, market liberalization and privatization in the energy, telecommunications and transportation sectors. The benefits of such measures were demonstrated when Israel opened the international telecommunications market to competition in 1997. As a result, prices dropped by roughly 80 percent across the board, overnight. But because Israel's domestic telecom market has not been liberalized, a call to Eilat from Tel Aviv could cost more than a call to New York City.

Other reforms Israel should implement include continued capital market liberalization and increased competition in the banking sector. We also hope the government will act quickly to lay out measures to broaden the tax base and reduce inequities in the overall tax structure. These initiatives hold promise but they must be implemented rapidly to keep pace with changes in the new global economy; those economies that are the most innovative and open will reap the most benefits from investment and growth.

The development of high technology must also be accompanied by intellectual property laws and effective enforcement mechanisms to protect the rights of the inventors of new technology. Israel has shown a welcome commitment to improving the enforcement of its intellectual property laws with specially-formed enforcement units at Ben-Gurion Airport, in Tel Aviv and here in Haifa. Still, further steps should still be taken to reduce the high rate of software, music and video piracy. There is no substitute for tougher enforcement. We look to the Government of Israel to commit the kinds of resources necessary to bring its intellectual property laws and enforcement standards up to the same high levels as its high tech industries.

One specific legal reform that is critically important to allow Israel's unfettered participation in the new global economy concerns money laundering. Although Israel has an effective bank regulatory regime and excellent domestic law enforcement agencies, Israel today has no law that makes money laundering a crime. This places Israel nearly alone among developed nations and in direct conflict with well-established international anti-money laundering standards. Just a few days ago, the world's leading anti-money laundering authority, the 26-nation Financial Action Task Force (FATF), named Israel as among the nations that are non-cooperative with international efforts to combat money laundering.

Money laundering-the act of making the proceeds of crimes appear to be legitimate funds-allows criminals the full benefit of their illegal acts, and facilitates their financing of new crimes, operations and terrorist acts. The United States has for years encouraged Israel to pass a law criminalizing money laundering. We are pleased to note that with strong government support a bill is finally in front of the Knesset. If it is FATF-compliant, passed and successfully implemented, the U.S. would strongly advocate for FATF to remove Israel from its list of non-compliant countries.

Passing this law will do more for Israel than merely generate international approbation and crack down on international criminals; it will also remove an important obstacle to Israel's economic growth and development. Cracking down on money laundering both requires more transparency in financial systems and helps provide for a more inviting environment for foreign investment. We are pleased that the Barak Government recognizes this important fact, and is committed to joining the international consensus to combat money laundering.

In order to provide for Israel's continued economic growth, it will become increasingly important to make sure that all groups in society benefit. Ultimately, an Information Revolution that fails to include large parts of the Israeli population will fail all Israelis.

Access to computers and the Internet, and the ability to use this technology effectively, are becoming increasingly important to fully participate in the Information Revolution. All developed countries face a digital divide that increase economic gaps in our societies-a divide between those who are computer literate and those who are not, between those with access to the Internet and those without, between those who have the skills to make it in the Information Age and those who do not.

In the United States, even while we are enjoying the longest economic expansion in our nation's history, there is strong evidence of a gap between those individuals and communities that have access to the tools of the Information Age and those who do not. In the U.S., we are growing more and more concerned about our own digital divide and developing programs to address it:

1. Better educated Americans are more likely to be connected. Sixty-nine percent of households with a bachelor's degree or higher have computers, compared to only 16 percent for households that have not completed high school.
2. The divide between high- and low-income Americans is significant. Eighty percent of households with an income of $75,000 or above have computers, compared to 16 percent of households earning $10,000 to $15,000.
3. Whites are more likely to be connected than African-Americans and Hispanics. Forty-seven percent of white households have computers, compared to 23 percent of African-American and 26 percent of Hispanic households.

In Israel, the gap may grow between those at the top and bottom of the economic ladder, and the rapid growth in Israel's high tech sector threatens to widen this gap in the coming years. Eighteen percent of the country's population now lives in poverty. Despite the boom in its high tech sector, Israel's unemployment rate remains high-it was 9% in April. The specific challenge to Israel of a digital divide is that it could deepen the existing divisions in your society and with your neighbors. You face three particular digital divides: with Israeli Arabs, with lower income Israeli Jews, and with your regional neighbors.

One of the most critical chasms in Israeli society is between its Jewish and Arab citizens-a chasm this University is working to close. Arab Israelis have long complained of their situation. Today, Arab Israelis account for 20 percent of the Israeli population, yet comprise almost half of Israel's poor. The socioeconomic divisions within Israeli society are not limited to Arabs and Jews. Even among Israeli Jews, there exist significant income and inequality, especially among those living in developing towns. This has also led to a growing geographic disparity: while northern and central metropolitan areas like Tel Aviv, Haifa and Jerusalem have benefited from Israel's blossoming high tech sector, southern development towns lag behind economically. Just one indicator is that per capita income in Beersheba is only about 70 percent of the national average.

Israel stands on the brink of a critical policy decision for a country founded on an egalitarian vision by the pioneers of the Yishuv. The digital divide can exacerbate existing divisions and contribute to minorities' feelings of alienation and exclusion, or the Information Revolution can be used to uplift everyone and unite a nation in growth and economic prosperity. Israel's swift immersion into the new global economy cannot be stopped-nor should it. The question will be whether all groups in Israeli society will be part of this new economy, or whether the Israel of the future will comprise, in effect, two economies-the new high tech economy for the educated, multilingual elite and the older low tech economy for those without the skills to keep up. Israel's future identity, values and vision will be defined by how Israel responds to this epochal challenge.

As you consider ways to deal with the digital divide within Israel, you might look to some of the proposals that the Clinton Administration has put forth to address our own digital divide. In the U.S., the Clinton Administration has responded with numerous initiatives to ensure that every child is technologically literate. These include: increased educational technology funding, incentives for employer-based computer training, connecting schools and libraries to the Internet, and working to expand technology access to people in under-served communities and to people with disabilities.

The United States, as a global power, is concerned not just with its own digital divide, but also with the increasing technological gap between developed and developing nations. As Israel takes up its place as a leader in the new global economy, there is a concern with your neighbors in the region. This global Digital Divide can be seen clearly here in the Middle East as a result of Israel's rapid technological progress in recent years. Today, Israel has a GDP per capita roughly 12 times that of Jordan, Egypt or the West Bank and Gaza. As the most technologically advanced nation in the Middle East, Israel has a special interest in doing what it can to spread prosperity to its neighbors, just as the U.S. and other developed countries must do for the developing world as a whole.

Taking steps to promote regional economic growth will benefit you as well as your Arab neighbors. For just as your security cannot be divorced from the Middle East as whole, neither can your economic prosperity. Your economic and political well-being will be enhanced as the economies of your neighbors grow. Increased economic prosperity is one of the primary ways to bolster public support for the peace process throughout the region. And progress in the peace process would further improve the regional economy by allowing governments to divert precious resources away from defense expenditures and into productive civilian investments. Further, by reducing the amount of risk, it would generate significant new foreign investment in Israel, as well as other countries in the Middle East. Ultimately, economic interdependency will foster peace as every nation becomes more and more dependent on the productive economies of its neighbors.

Yet neither Jordan nor the Palestinians have realized a full economic dividend from the peace process. Although the West Bank/Gaza has had three years of rising economic growth and unemployment has declined, real per capita income is still 10% below what it was in 1993, before the Oslo Accords.

This task will not be easy. Today regional trade is relatively low: less than 10 percent of all trade in the Middle East is between countries in the region. Although the level of non-oil regional trade is higher, it is still below the intra-regional levels of 20 percent in the Americas, 30 percent in Asia and 60 percent in Europe. There remain significant obstacles to expanding economic activity between you and your Arab neighbors. Key among them is your security concerns, making the flow of goods and people across regional borders more onerous, costly and time-consuming. When I was Under Secretary of State, I maintained a dialogue with the Israeli government on such issues. For example, I proposed the creation of an expanded list of business people who posed no security risk, for whom travel between the West Bank/Gaza and Israel should be made easier; and another list of workers with good security records who would have the privilege of working even in times of closure. The opening of a safe passage route between the West Bank and Gaza was an important advancement in this regard. Clearly, Israel has an obligation to protect its citizens from terrorist attacks. The challenge is to balance this near-term security need with your long-term security interests in reducing poverty in the West Bank/Gaza and Jordan.

But continued donor assistance, more Palestinian workers in Israel and greater trade with Israel, while important, cannot sustain high-level, self-sustaining growth. For this private sector investment is critical. And this will only come in large amounts when the Palestinian Authority fully implements Chairman Arafat's January Decree to consolidate all tax revenues under the Finance Ministry, creates a Palestinian Investment Fund to develop a privatization strategy, and coordinates economic development. When there is greater transparency in the publication of financial data; when a modern legal framework for investment is passed; and when corruption is rooted out, investment will flow in and your Palestinian neighbors will feel the economic benefits of peace.

Despite the difficulty in addressing such critical concerns, we have begun to make progress thanks to the active participation and cooperation of all countries in the region and the international donor community and international financial institutions like the IMF and the World Bank.

The United States government, for its part, has actively pursued a range of cooperative projects between Israel and your Arab neighbors to promote greater economic growth and cooperation. Some of these projects have been very successful. Let me briefly touch on three:

1. First, as part of the Wye Accords, we are providing assistance to the Palestinians for a variety of projects designed to improve regional trade and economic cooperation, such as industrial zones in the West Bank and Gaza, and truck/cargo scanners to facilitate quick movement of goods between the West Bank and Gaza and Israel, Jordan and Egypt. These scanners, for example, should enable Palestinians trucks to carry out door-to-door trucking and thereby resolve a significant impediment to increased Jordanian-Palestinian trade. The Gaza Industrial Estate, which we promoted, is now off and running, with some 30 companies locating there.
2. Second, my government is also cooperating with yours and Jordan's to promote the rapidly expanding Qualifying Industrial Zone (QIZ) program. Existing industrial zones have fostered new joint ventures and huge employment increases, dramatically expanding Jordanian exports to the U.S., and new zones are being constructed rapidly. Since Iit was designated a QIZ, over 5,000 jobs have been created for Jordanians in Irbid, which I visited just yesterday. By March, we expect the QIZs to support as many as 15,000 jobs in Jordan.
3. Third, we are continuing to nurture discussions between Israel and Jordan on the Aqaba-Eilat Airport project, just one of the regional ideas to arise out of the U.S.-Israel-Jordan trilateral process.

In addition to such cooperative projects, there are important steps that individual countries can take to lay the groundwork for increased trade and economic growth. Many of your neighbors have worked to get their fiscal houses in order and have begun implementing structural reforms, increasing fiscal transparency, privatizing, and deregulating. The Palestinian Authority agreed as of April to consolidate their finances and build transparency into their economic system, for example by directly transferring all funds collected by Israel to the Finance Ministry. The U.S. and Jordan have agreed to open their markets to each other. We are enthusiastic about a U.S.-Jordan Free Trade Agreement and this week we will be beginning preliminary discussions with Jordan. The Israeli-Jordanian pilot project on door-to-door trucking is a prime example of the kind of cooperation that can help improve prospects for greater regional trade. I hope both Israel and Jordan will work hard to expand this program and make it a successful example of the great economic potential in the region.

As your neighbors try to catch up to the fast pace of the Information Age, Israel can help through technology transfers and by opening your market in those areas where they have a competitive advantage. I also understand that Israel and Jordan recently signed the Eilat-Aqaba Protocol to allow limited Jordanian workers into Israel for day jobs. I am confident this project will help create and sustain employment for Jordanians while filling a labor shortage in Israel. I urge the Israeli government to look at ways to expand such projects to help the regional atmosphere and improve prospects for peaceful coexistence. As we in the U.S. know from our trade agreements with our neighbors, Mexico and Canada, free and fair trade involves opening your markets to countries with all different levels of development. This allows all economies to take advantage of the resulting synergies. For example, the Palestinian and Jordanian economy can find in Israel a high-income market for its agricultural goods, textiles and other labor-intensive products. The resulting economic growth will increase the demand for technology in the West Bank/Gaza and Jordan-providing Israel with a new and easily-accessible local market for expanding its technology services. At the same time, growing middle classes will serve as an anchor of stability.

All countries in the region ultimately benefit from expanded trade and cooperation. The common quest for economic prosperity can serve as a powerful impetus for old enemies to set aside their internecine differences and work together in the new global economy.

Israel truly stands at a pivotal juncture in its history. For a country characterized by intense and continuous change, the Information Revolution is poised to fundamentally alter Israeli society at a speed you have not experienced before. Your economic independence will be tried; your commitment to egalitarianism and pluralism will be challenged; your ingenuity and resourcefulness will be tested.

By making the right choices, Israel can be a leader in technological innovation; bring all its citizens-Arabs and Jews-into the economic mainstream; bolster support for the peace process; and contribute to new levels of prosperity in the region by opening up its market and know-how to its neighbors.

The task will not be easy, but we know there are few things Israel cannot accomplish. Emerging from the ashes of a decimated European Jewry, surviving repeated conflicts with much larger neighboring armies, Israel has proven its mettle time and again. So often, Theodore Herzl's vision- im tirtzu ein zo agada, if you will it, it is no dream-has been realized. I am confident, as I am sure you are too, that Israel can meet the challenges posed by, and responsibilities concomitant with, its rapid integration into the new global economy.