Dear Reader

Business Development is a complex topic. In such case the questions raised are more important than potential answers. Therefore, this blog will focus on presenting questions. There will be answers, full or partial, to be supplamented by links presented when relevant. The answers from my experience will be clearer once the questions are clearer.

While this is not a discussion forum, readers are invited to comment, and the comments will help determine the topics and current issues to be explained in the future.


Thursday, September 20, 2012

Getting out from an economic slowdown and into growth

A recently published article placed Spain in the group of the top ten countries around the world (from 144 countries) regarding developed infrastructure. When considering the current economic situation in Spain and comparing to the economic situation on the other countries in the top ten (Honk-Kong, Singapore, Switzerland, Germany, France etc.) none of which has had a down grading in their national credit rating lately, this achievement is most remarkable.
In view of the recent slowdown and the downgrading of the national credit rating, one has to ask is that a way to get out of the slowdown?
It has long been known that one of the ways to get out of a slowdown is to increase government spending. Government spending fuels the economy, increases the GDP, and helps to increase the available cash in private hand thus leading in many cases for increased private spending and a further growth of the GDP.
The downside is of course that increased government spending will lead to increase in the national budget deficit, an increase in the national debt and later on inflation and other negative influences, and unwanted results.
An interesting solution would be to increase government spending in a way that will increase Government income so the budget deficit is short term and therefore most of the negative results can be avoided.
The Israeli case could be an interesting case. The current solution of getting out of the slowdown is a reduced budget, cut across the board, combined with increased taxation – just the opposite than what is needed in order to increase the DGP and create growth. However, we may be saved by luck. We are entering an election year, in which even with threatening budgetary cuts it is normal to have an increase both in government spending and in private sector spending, which may be our way out of the slowdown, but as it will not generate government income the long term results could be problematic. But is there another way?
How about increasing government spending in a way that will allow more companies to generate sales and market share, grow, and increase the number of their employees (a good result by itself), thus generating more taxes both from the employees and from the firms. as the Israeli economy is fueled by the high-tech industry, if the growth could be in that sector it could pull up the rest of the economy as it has been doing since the mid 1990’s.
So, we are looking for increasing government spending by investing in the high-tech sector in a way that will allow it to grow and increase its sales and market share in the world, is there such a way?
Could the Spanish solution be the answer? Not in the case of Israel, as investment in infrastructure would take too long to bear the relevant fruits in terms of economic growth, especially for the high-tech sector. There is already a significant infrastructure regarding communications, wireless and other high-tech relevant infrastructure, and investment in transportation and other “hard” infrastructure would have little impact on the high-tech sector in Israel.
There is another solution in the case of Israel. The Ministry of Industry, Trade and Labor has supported the high-tech sector for decades via the Office of the ChiefScientist (OCS) . The support has been given as R&D loans and grants. This mechanism could provide the desired income to government in several stages. The R&D support, would allow the high-tech sector to increase its competitiveness, as it has been doing for many years, thus increasing employment and tax income. It would also allow recuperation of some of the funds via the repayment of the loans back to the OCS – allowing for the funds to be reused, but also for the governmental section of the OCS budget to be reduced while keeping the overall OCS budget intact.
The increased government spending in this way, would allow the generation of the wished for results, and would allow the increase of government spending without the negative implications. This would be a better way of getting out of the slowdown than just election spending.