Israel's Globalization Episodes: Lessons for Open Economies

A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Razin, Assaf Article Israel’s Globalization Episodes: Lessons for Open Economies CESifo Forum Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Razin, Assaf (2018) : Israel’s Globalization Episodes: Lessons for Open Economies, CESifo Forum, ISSN 2190-717X, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München, Vol. 19, Iss. 2, pp. 55-58 This Version is available at: http://hdl.handle.net/10419/181210 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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For a researcher, it is like a laboratory experiment on Israel’s Globali how free migration can function without non- economic forces and anti-migration sentiments. zation Episodes: Brexit may have been a leading indicator of anti- globalization and rising economic nationalism. Lessons for Open Continental Europe has not followed through to date. There is still the looming problem of settling the Assaf Razin Tel Aviv University Middle East in the EU. Economies The political backlash against trade treaties in the United States has postponed multilateral trade agreements like the Transatlantic Trade and Investment Partnership (a US-EU trade deal), the Trans-Pacific Partnership (a US-Asia trade deal), and many others. The open-border model, which INTRODUCTION AND SCOPE governed the global economy for over seventy years, is under threat. However, the acceleration of finance, Anti-globalization sentiment is growing, especially in technology and telecommunication and global supply Europe and the United States, with the increasingly chains makes the reversal from globalization self- integrated global economy blamed for domestic defeating. Against this background, it is desirable to economic distress. Razin (2018) shows that Israel offers bring to the fore how Israel has been able to advance a counterexample to this view, by demonstrating the the political-economy process of globalization, decisively positive economic effects of globalized notwithstanding domestic and external crises. Israel’s finance, trade and immigration. Israel has seen a globalization story provides a counterexample to the remarkable development, emerging from a low- current trends. income, high-inflation developing economy in the Several unprecedented economic episodes have 1970s to a medium to high-income advanced economy buffeted the global economy the past few decades. in the 2000s, while becoming increasingly integrated These episodes have had transforming effects on into the world economy in trade, supply chains and Israel’s economy: the collapse of the Soviet Union, through financial links. At the same time, the global and the massive wave of high-skill immigration to economy has been buffeted by several unprecedented Israel that followed; the Great Moderation in inflation economic events over the past four decades. This and decreased employment fluctuations in advanced article attempts to provide a brief analysis of the economies, which helped open emerging economies impact of these events on Israel’s development, to converge to world inflation rates; the 2008 global institutions and economic policies. financial crisis, whose epicentre was in the United Globalization is currently facing some challenging States, but which spread violently to Europe; the rise political tests that are tougher than in previous of the Asian markets as export targets and as new decades. Migration is the core of the emerging trend origins for outward foreign direct investment (FDI); towards economic nationalism. Sachs (2017) puts and the global information technology surge and its it succinctly when he says, “if people were told that spill-overs, reinforced by FDI. The brain drain of top they could move, no questions asked, probably a talents has also been encouraged, enabled by the billion would shift around the planet within five pro-skill immigration rules in advanced countries on years, with many coming to Europe and the US. No the demand side; and facilitated by Israel’s highly society would tolerate even a fraction of that flow. advanced higher education system on the supply Any politician who says, ‘let’s be generous’, without side. The Great Moderation in advanced economies saying ‘we’re not going to let the doors stand wide occurred from 1985 to 2007, during the low-inflation open’ will lose”.1 Rational and generous policy that era when the US Federal Reserve and other advanced also resonates politically will not eliminate national economies’ central banks provided a broadly stable borders altogether. Instead, it will elicit calls for limits macroeconomic environment to facilitate rational on the flow of migrants. The core of the wall-building private-sector choice. coalition in the United States consists of white males with low educational attainment. Low-income citizens THE HYPER INFLATION CRISIS were also far more likely to support Brexit in Britain. The call for a ‘points-based’ immigration system from The political upheaval in 1977, the so-called Maapach, the Brexit campaign was an explicit call to increase was a game changer for economic policy in Israel. The the skill composition of UK immigrants. Israel’s Law newly elected government abruptly switched away from a long-running economic regime, which had 1 See http://politicalcritique.org/world/2017/new-abnormal-con- versation-sachs-sierakowski/. been able to maintain fiscal discipline in the presence CESifo Forum 2 / 2018 June Volume 19 55 SPECIAL of strong external shocks (the Yom Kippur War HEADING OFF EXTERNAL DEPRESSION PRESSURE and the first oil crisis). Monetary policy was mode- rately accommodative, underpinned by a fixed The 2008 global depression crisis came to the world exchange rate regime and shielded from capital as a surprising outcome. Pre-2008 macroeconomic flights by capital controls. Notwithstanding the models did not adequately capture the features oil price shock, inflation was in the low double digits. of real-world business cycles: small recessions In the first phase after their policies are enacted, that occur in the interval between deep and populists tend to be vindicated. Growth and wages long depression-recessions. All this was because do indeed rise, as a combination of profligate traditional macroeconomic models ignored the spending and intrusive government control does role of financial intermediaries. These financial expand the economy. Surging government spending institutions were simply treated like a neutral conduit and mandated wage hikes tend to produce a between savers and investors, and not as a source of temporary ‘sugar high’, followed by a crash. Populist crisis by themselves. This deficiency may have been policies, because they are unsustainable, encourage remedied, but uncertainties remain. These are crucial people to shift their spending away from an to understanding the 2008 global financial crisis and uncertain future to the present, when the economy is its aftermath. Until they are resolved, Israel and the temporarily booming. Beneath the surface, however, global economy may generally have difficulty coping the country’s economic potential deteriorates and with the Great Recession, the Eurozone crisis, and financial disorders start to emerge. Rather than make perhaps secular stagnation in some of the advanced the hard choice of returning to principled economic economies, and especially in Europe. oversight, the populist leader recommits to harmful policies and steers the country toward decline, capital ISRAEL’S IMMIGRATION STORY flight and sometimes debt crises. In all cases, there are disastrous effects for those groups who were Migration has become a huge political-economic issue. supposed to be the beneficiaries of the populistic There are several problems with the argument that policies. immigrants are an unmitigated economic boon. One is that almost any major economic event like a large- CURBING INFLATION scale immigration has far-reaching distributional effects, very much like a big cut in trade barriers. Israel avidly globalized during this period, and its Another is the fiscal burden arising from low-skill inflation decelerated from three-digit rates in the immigrants. By contrast, high-skill immigration brings 1980s to

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