Taking Stock / The Done Deal

The battle for the financial markets' top position is drawing to a close.

Finance Ministry director-general Joseph Bachar and Prime Minister's Office director-general Ilan Cohen will reveal their primary pick for Bank of Israel governor next month, ahead of the end of the reign of current governor David Klein in January.

Israeli banking and financial leaders are most interested in knowing the identity of the next governor, but not necessarily for macroeconomic reasons.

The Bank of Israel governor has not just involved himself in macroeconomic issues, like setting interest rates in recent years. Microeconomic issues like bank management and restrictions on major borrowers have also kept him busy.

Of the six candidates Haaretz has identified, only one, Dr. Avi Ben-Bassat, is an academic who rarely gets mixed up in the business world.

The remainder of the far from final short list is a mixture of businessmen and economists with plenty of connections in the business sector, including Prof. Leonardo Leiderman, David Brodet, Aharon Fogel, and Prof. Itzhak Swary.

It's only natural that each of these candidates has his set of business and political cronies who would just love to see their buddy taking up such a powerful position.

Officials at the Prime Minister's Office and the treasury told Haaretz over the weekend that they were compiling a prefered profile for the position. The profile, they said, would respond to the question of which type of governor would best serve Israel over the next five years. They offer examples like "a governor who believes in a loose monetary policy or a governor who believes in restrictive monetary or perhaps a governor sensitive to social issues."

However, the profile builders are bound for disappointment. They will discover in a year or two, well after the new governor has settled in, that the governor's profile was determined long ago - neither by the treasury director-general, nor even the Prime Minister's Office director-general. To a major degree, Prof. Jacob Frenkel and Klein, the past two governors, already solidified the profile.

How did they do it? Very simple: During their terms in office, they led a policy of opening Israeli capital markets to the world and total liberalization of foreign currency, a move that will be complete in another 54 days when the discriminatory tax on foreign investments is canceled.

They lowered inflation in Israel to Western levels and proved to all the skeptics that international economic rules pertain to Israel too. They demonstrated that we do not possess any special characteristics that excuse us from the duty to heed international rules and that we do not possess alternative medications to solve our local economic ills.

The preordained profile of the next Bank of Israel governor is as follows: The next governor will have to speedily and fiercely obey the order of the local and world financial markets; he won't be able to adopt a creative monetary policy, nor does it matter if he believes in loose or restrictive policies, for he will quickly grasp that investors here and abroad won't be prepared to tolerate a surge in inflation. Monetary policy must ensure this.

The new governor will be fortunate to inherit an economy with stable prices, and he will be exempt from having to explain that Israel, despite being a minor economy surrounded by enemies, need not suffer from high inflation.

The next governor will need to be an economic consultant to the government and not just on matters of inflation. He will need to continue leading structural reform, to develop financial markets, and to help the government prepare strategic plans to narrow its expenditure to Western levels.

With each successive year, the degree of freedom for the next Bank of Israel governor, like that of the next finance minister, will shrink. Odds are good that the economy will move in coming years, for better or for worse, in tandem with international developments.

We're not talking just about an Israeli phenomenon. The correlation between econo-mies in the world has grown at an alarming rate in recent years. Variance from the average in percentage growth of the 30 major world economies declined in the past decade from an average of 4 percent to a mere 1 percent.

In Israel, the captains of the economy tend to credit economic upturns or downturns to local successes or failures. Yet, truth be told, one of the primary reasons for Israel's tremendous economic recovery this year is the fact that the rate of global growth skyrocketed to its highest level of the past 30 years.

Of course, we'll continue to see our captains calling out "Follow me!" as they run after financial markets; but at the end of the day, they know that at best, they set the pace - the direction is not determined here.