Steinitz Plugs High-technology, Not the Infrastructure Dear to His Boss

Istanbul - Consider the world saved. Or at least, well on its way to recovery. That's the mood at the annual International Monetary Fund conference this year here in Istanbul. The last one had been held three weeks after Lehman Bros. crumbled into dust. The fear was palpable, the talk was how to save the day and the mood was pitch black.

In that dark, Israel is perceived as a ray of light.

Represented at the Istanbul conference by Finance Minister Yuval Steinitz, among others, Israel can claim to have returned to growth (albeit not in per capita terms) in the second quarter of 2009. Although the signs of rebound are mounting, leading nations such as the U.S., Britain and emerging market giants, including Brazil and Mexico, remain deeply embedded in trouble. In Spain, unemployment is running at 17%. So although the mood has improved, the topic of the day is coping with the aftermath of the storm.

Steinitz - a philosopher, not an economist by training - isn't the gloating type. "The pats on our back create high expectations. I feel a need to cool the enthusiasm," he says. "We are expected to produce high rates of growth, which obligates us."

The government has taken some steps to help Israeli exporters. "But I don't understand the 26% increase in exports during the third quarter," the minister admits. That is a purely astonishing pace, especially given that the low dollar is bad for Israeli exporters, and that global trade remains depressed.

If something bothers him, it's that Israel hasn't had a chance to fix all the ills exposed by the crisis. This indicates that with the sense of urgency gone, reforms may be doubly hard to push through. So far Steinitz seems to perceive the formulation of a budget for two years, rather than one, as his main achievement (though just last week - a few months after the budget was finalized - the government decided to cut NIS 2 billion from ministerial budgets, in part to pay for swine-flu shots for the population). The ministers, who hadn't been consulted, were outraged. But Steinitz explains that part of the NIS 2 billion being diverted to the defense budget involved confidentiality regarding the specific use.

Upon taking his seat as finance minister, Steinitz met with a wave of skepticism, based on his inexperience in economics. Also, Prime Minister Benjamin Netanyahu is widely perceived as having been the best finance minister Israel ever had, one who pushed through a number of reforms. Steinitz, while not an expert on economics, does have opinions of his own and reservations about some of Netanyahu's pet concepts regarding the future direction of Israel's economy.

Netanyahu has placed all his weight on reform in real estate and transportation. He envisions a flood of land being sold for housing development, removing bureaucratic obstacles to property development and developing the road and train systems to bring the periphery closer to the center. But Infrastructure doesn't seem to do it for Steinitz. "The state of infrastructure in Israel isn't good. It's medium ...I don't believe, as Bibi [Netanyahu] does, in investment in infrastructures. I don't accept that Keynesian policies of the 1930s apply today. What worries me is how to preserve the leadership of Israeli high-tech. It doesn't have to be just software. It could also be investment in defense industries, developing drones and satellites," Steinitz said.

His choice for director general of the Finance Ministry was Haim Shani, a high-tech leader oriented toward entrepreneurship. "I didn't know him beforehand. I simply asked for them to locate managers for me with a record in advanced technology and chose him."

Steinitz's top priorities are maintaining the superiority of Israeli technology, inducing more ultra-Orthodox to join the workforce (including through training programs) and routing more Israeli exports to Asia. Treaties and joint investment funds are nice, but what's needed is a change of orientation, urges the minister.

Like many economists, Steinitz believes consumption will be diverted from the West to the East, and it is incumbent upon Israel to prepare for that day. This belief concurs with the the thinking of Western bankers at the conference. They do not foresee American consumption recovering any time soon. America still has to cut back its leverage and handle the vast overhangs in mortgages and credit spending. The huge deficits that Washington is creating also portend ill. Sooner or later the debts have to be repaid, which means Americans will face tax hikes that will further diminish purchasing power.

Today Steinitz will be addressing the conference plenum. His speech will be devoted to a positive description of Israel's economy. If he were wearing his philosopher's cap, he'd surely share his view that the world still doesn't understand what happened in the last two years. "Pointing at a series of events doesn't explain what happened," he says. "This crisis couldn't have been predicted. The conclusion is we live in a state of great uncertainty. The next two or three years are also enshrouded in uncertainty. I can't say how the consumers and investors of the world will act."