Remarks by the Director of the Research Department, Prof. Michel Strawczynski, at the farewell conference for the Governor: Karnit Flug and providing economic advice to the government

04/11/2018 |  Strawczynski Michel
We are here today to say farewell to the Governor of the Bank of Israel, Dr. Karnit Flug. Karnit is finishing her role after five successful years: the economy benefited from a positive macroeconomic situation, among other things with the support of the monetary policy that the Bank led during her tenure. In this first session, I will discuss providing economic advice to the government—a very important function that the Governor fulfills in accordance with the new Bank of Israel Law; Karnit impacted on the formulation of the law when she managed the Research Department.


However before I get to the topic, I will wish Dr. Nadine Baudot-Trajtenberg success in managing the Bank in the coming period and congratulate Prof. Amir Yaron on being chosen for the position of Governor by the Prime Minister and the Minister of Finance. Their success is our success. In addition, I will note that the during the course of the conference we will speak about two of the issues for which the Governor is responsible—in the morning about providing economic advice to the government and in the afternoon about monetary policy. However, it is important to emphasize that her role encompassed many more issues that have considerable importance in all of our daily lives. The list is long, and it includes the supervision of banks, significant steps to promote competition in the banking system, including reducing the capital required to establish a new bank. In addition, the Governor dealt with creating an overall view of the financial system through establishing the Financial Stability Committee, in which the regulators in various areas are members. Of course, there is also the ongoing management of the Bank, a task that requires dealing with many different areas.


I would like to emphasize three aspects of providing economic advice to the government, and I will of course refer to them through the prism of Karnit’s work over the course of her career. These are, in my opinion, the three unique and relevant aspects of providing economic advice to the government: (1) research; (2) analysis of the reality and the policy recommendations central to the economy. (One could say that just as representatives of the public are responsible for setting policy, and just as the Budget Division and the Accountant General are responsible for the state’s budget and treasury, so too the Research Department and the economic advice are responsible for obligatory and precise analysis of the economic reality over time); and (3) formulation of recommendations that are usable and relevant to daily life.


With regard to research, I decided simply to read to you a list of Karnit’s papers because it speaks for itself: it testifies both to Karnit’s significant achievement and to the importance of research in fulfilling the function of economic advisor to the government.


The Absorption in the Labor Market of Immigrants from the CIS—the Short Run


Compliance with the Minimum Wage Law in the Business Sector


Unemployment and Schooling in Israel: On the Business Cycle, Structural Changes, and Technological Changes


A Proposed Change of Policy Regarding Minimum Wage


The Effect of Minimum Wage on Employment in Unskilled Labor Intensive Industries in the Israeli Economy


Poverty and Employment, and the Gulf between them


Sustainable Growth: Is it around the Corner?


The Single Parent Law, Labor Supply, and Poverty


Persistent Growth Episodes and Macroeconomic Policy Performance in Israel


This list represents a desire to investigate issues that are important to Israel’s economy, analysis (labor market, persistent growth), and the desire to be relevant in terms through recommendations regarding policy (minimum wage, poverty).


That note leads me to the second aspect I wanted to discuss: The importance of extensive analysis and of highlighting the advantages and disadvantages of a given situation relative to the advantages and disadvantages of the recommendations to improve it. In this regard, I note in short that Karnit stood out in the past year because she stood up for the principles of professional analysis and its importance in economic policy discussions in Israel. However, this stance only continues her unique approach as Governor: She knew how to fulfill the function of economic advisor to the government from a special place, as for a long time she managed the Department that fulfills that function—the Research Department. Karnit knew the relevant issues and did not wait for them to become reality—she highlighted them in advance. I was also able to follow the activity from the perspective of an outsider, and I can testify that during her tenure the Bank of Israel put on the public agenda the relevant aspects of civilian expenditure—from health through education, including the long-term challenges posed to these areas by demographic trends. It is sufficient to enter the Bank of Israel website to get an idea—it is possible to find there presentations on the health system in Israel, labor productivity of the elderly in Israel, the need to increase investment in education, and the need to make significant decisions about transportation. Someone who deals with these issues regularly can also identify the issues that serve as an infrastructure for analysis that is at the foundation of the policy. Therefore, Karnit supported, for example, Israel’s participation in PIAAC—a skills survey conducted by the OECD; Israel’s participation in the survey is due to Karnit’s (and other entities’) urging. Karnit identified the importance of good diagnosis, and together with the research that developed due to the survey, a world of analysis developed that will help to improve the reality in our country. We heard additional insights about our reality from her at the most recent Eli Hurvitz Conference for Economy and Society: she discussed there the government’s frequently making important and required decisions but not implementing them.


I am left now only with referring to the third aspect of providing economic advice to the government—and it is the dream of every advisor to impact on actual activity through the advice. In this regard, I can tell you a story that took place in 2010, and refers to the next topic at the Conference—work grants (earned income tax credit). It is known that the US has been implementing a similar program since the mid-1970s, and by us the idea began to gain momentum in the early 2000s. The Bank of Israel was very involved, it formulated and published recommendations and plans. Karnit herself participated in the Poverty Committee, the group that began to analyze the need to increase employment among Arabs and the ultra-Orthodox, as in those population groups the poverty rate exceeds 50 percent and they are characterized by households with only one wage earner. As such, already at early stage, it was clear that the program is very appropriate to Israel. However, how do you implement it? Like with every good program, it was decided to begin a pilot run: in 2008 the program began to be implemented in the pilot areas—the localities that had implemented the “Lights to Employment” and “Mehalev” programs, and it was said that the program’s continuation would depend on the success of the pilot. In 2010, the “Mehalev” program was ended, but the Earned Income Tax Credit program also paid the price of the termination, under the reasoning that the pilot areas were not defined in law. Indeed, we became aware, from reliable sources, that ahead of the preparation of the 2011 budget, the Ministry of Finance decided that the pilot stage had failed and the “work grant” would be cancelled and not included in the 2011 budget. Here is where the importance of standing up for your principles and the belief in the proper recommendations comes into play. In the summer of 2010, at Karnit’s request, we accelerated the pace of the work of the Committee tracking the program and published a report showing that it contributed markedly to reducing poverty and that most of its resources reached the proper people—that is, the population groups for which the legislature had aimed. Karnit’s stubbornness, and the desire and identification on our side, led to a special effort being made to publish the report in the summer of 2010. I remember that I traveled then to London for a summer vacation, and when I got ready to watch a World Cup game on TV, I received a call from Israel. On the other end of the line was Karnit, and she described for me the following situation: she was in a meeting of policy makers who were discussing the proposal for a further increase in the minimum wage—a proposal that failed at that time because there already was an accelerated process, which continued until today; but at that meeting, they also discussed the need to implement an alternative plan that would contribute to the working poor. Karnit was at the right place at the right time, with the right report, and she shared with me the satisfying experience: she was able to show ministers that the pilot was a success, the program contributed to reducing poverty, and that all the resources reach the individuals that the policy makers had intended. I will never forget the satisfaction that Karnit derived from the opportunity that came across her path. Obviously, she succeeded in convincing the participants in the meeting that the pilot was a success and that the program should be funded in the budget—which was done at the last minute and allowed the program to continue. In 2012, the program was expanded nationwide, and as they say, the rest is history.


I would like to thank Karnit for her unique contribution to providing economic advice to the government, and for her belief in the path, which guided not only her words but primarily her actions. In conclusion, I would like to mention a significant characteristic of Karnit’s management, a characteristic that has been mentioned in all the farewell parties that were held recently. Karnit managed the Bank with cooperation from management and employees and created in fact an excellent infrastructure for collaboration between the Bank’s departments. I am convinced that this infrastructure will stay with us in the future as well.