Analysis

The Bank of Israel's New Chief Faces a Steep Learning Curve

Yaron may have an impressive resume but he will need to work closely with the central bank’s top officials to learn the ins and outs of Israel’s major economic issues

Prof. Amir Yaron
Wharton School of Business

The immediate test facing Prof. Amir Yaron following his appointment Tuesday as governor of the Bank of Israel is establishing himself as a force vis-a-vis the politicians who appointed him – and during an election year too, to boot.

Yaron may have grown up in Israel (in the Tel Aviv suburbs of Ramat Hasharon and Ramat Gan), but he left for the United States after finishing his Master's at Tel Aviv University. The U.S. is where he had the rest of his impressive academic career – at institutions including the University of Pennsylvania’s Wharton School of Business and the University of Chicago. His résumé spans 11 pages and includes many research projects and articles. His acquaintances say he’s one of the best economists in the world. From an academic perspective, he’s a fantastic pick.

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But Yaron lacks expertise about the Israeli economy, and his academic articles address global or American financial issues. You can’t really advance in academia by writing about the Israeli economy. His knowledge of macroeconomics and finance are in line with what’s needed from a central bank governor, but the Bank of Israel’s governor needs a few more things that aren’t on Yaron’s resume – chief among them management experience.

The Bank of Israel employs some 800 people, and the governor is their boss. Prof. Stanley Fischer came to the post as a top economist, but spent his first two years on the job embroiled in labor disputes and manpower issues. Fischer was aided by his extensive experience at international institutions such as the World Bank and the International Monetary Fund, as well as by having held a senior position at Citibank.

Prime Minister Benjamin Netanyahu was trying to find another central bank governor on par with Fischer – an internationally renowned economist with strong ties to the United States and its socioeconomic viewpoints. Yaron is no Fischer. He lacks significant private sector experience and in-depth experience dealing with politicians. In some ways this is an advantage – he’s not tied to any power centers, he doesn’t owe anyone anything, and he has no personal connections to any influential Israelis. From this standpoint, his appointment is excellent; another final contender for the job, Mario Blejer, is a board member at Eduardo Elsztain’s IDB Corporation, Israel’s largest holding company.

No such cloud hangs over Yaron’s head. But his appointment still raises three major issues, and he’ll have to address them quickly. The first is the management of the Bank of Israel, from the lowest levels of operation to the top. The second is relationships with politicians. The third is handling Israel’s financial sector as a whole, particularly the banking sector.

The biggest challenge at the moment is the politicians. For the past year, Israel's elected officials have been in a pre-election atmosphere. Burning issues are being put off for some time in the future, and decision-making is tainted by electoral considerations. The outgoing central bank governor, Karnit Flug, has no great relationship with Finance Minister Moshe Kahlon. Her criticism of Kahlon’s handling of the housing market made her an enemy as far as Kahlon’s confidants were concerned. Under the law delineating the bank governor’s job, Yaron is supposed to serve as an economic adviser to Netanyahu and Kahlon, both of whom chose him. Serving as an economic adviser to the government during an election year means raising red flags as well as occasionally steering toward head-on collisions.

The first year on the job – any job – involves a learning curve. In one respect, Yaron is coming into the job at a comfortable time: the economy is in good shape, unemployment is low, GDP is growing and the financial system is stable. But during these periods, and certainly during an election year, the seeds of future crises are sown, and Yaron will need to identify them and respond quickly.

Yaron visited Israel relatively often over the past few years, and he’s a member of the scientific board of the Aaron Institute for Economic Policy at the Interdisciplinary Center of Herzliya. He was exposed there to some of the central issues in Israel’s economy, but that is nearly his only knowledge of them. He worked in the Israel Defense Forces chief of staff’s financial advisory unit during his military service, and he surely learned something about the defense budget there.

Since then, that budget has expanded by tens of billions of shekels. Yaron will need to work closely with the central bank’s top officials to learn the ins and outs of Israel’s major economic issues. It’s reasonable to expect he’ll learn how to manage the bank while on the job. But as for the immediate concerns regarding the budget – for instance, Netanyahu’s plan to increase the defense budget by 30 billion shekels ($8.25 billion), or Kahlon’s intent to increase the Mehir Lemishtaken (Buyer’s Price) affordable housing program’s budget by billions of shekels – he’ll need to learn quickly, and also know how to respond.

Someone who knows him from his years of academic work stated: “Amir is great. He’ll say what needs to be said simply and pleasantly. He has a backbone.”