FTHE FIRST SEMESTER OF LI at 60
I suppose the effect of becoming 60 on me was stronger than I thought it was going to be. I took it quite heavily and began to review my life a lot more than I had before. At my 60th birthday conference, I noted that in the Jewish tradition everyone lives for 120 years, and I viewed the conference on my sixtieth birthday as “a wonderful break between two semesters of my life.” I briefly summarized the highlights of my research career— one in which I have written a dozen books, edited a dozen others, and published over 120 articles. I observed that a rejected paper in 1975 led to my first book on globalization— a subject that still fascinates me. The book “A Theory of International Trade under Uncertainty”, written with Elhanan Helpman, argued that as
capital markets became more integrated, there would be a strong tendency for countries to specialize according to their comparative advantage. Three subsequent books continued to explore the implications of global integration. Fiscal Policy in an Integrated World Economy: An Inter- temporal Approach, written with Jacob
Frenkel in 1987, looked at the dynamics of the current account in a flexible price world; International Taxation, written with Jacob Frenkel and Efraim Sadka, examined the constraints that globalization imposes on the conduct of fiscal policies (the main problem is a “race to the bottom” among national tax authorities
in a globalized tax market); and, more recently, Labor, Capital, and Finance: International Flows, coauthored with Sadka, analyzed the side effects (good and bad) of globalization.
Research: Past and Present
There is a saying academics are only as good as their publications. Publications are also my legacy, I think.
Like many other peripatetic Israeli scholars, (see later on the gap between conditions for scholarship in the US and Israel) I have, over the course of my career, combined an academic affiliation at home (Tel Aviv University) with visiting positions at several U. S. (Minnesota, Penn, orthwestern, University of California at Berkeley, University of Chicago, Yale University, Harvard University, Stanford University, and now- a -days Cornell University) and European institutions (University of Stockholm and London School of Economics),
including many stints as a visiting scholar at the IMF, World Bank, Bank Of England and Hong Kong Monetary Authority. My professional life as an economist is covered in my vitae, as I already indicated in the opening sentences. A Bio, which addresses a non professional audience, is not the right forum to go into a serious discussion of my research. Nevertheless, I would like to highlight what I consider to be my main contribution to research.
In the early 1970s I believe that made a contribution to the theory of endogenous economic growth that
Became popular in the 1980s and 1990s. The book “A Theory of International Trade under Uncertainty”, jointly written with Elhanan Helpman, dealing with what is now called “Globalization” (the market regime were both goods and financial assets are internationally traded in the presence of uncertainty), which put research in international economics on a new track, is still cited today. Our other project on the comparison between fixed and flexible exchange rate regimes (The Canadian Journal of Economics, 1979; International Economic Review, 1982; and the American Economic Review, 1987) was quite influential in the literature
which attempted to nail down fundamental differences across exchange rate regimes. My joint
work with Lars Svensson (The Journal of Political Economy, 1983; Economic Letters, 1983),
followed by my joint work with Jacob Frenkel (Fiscal Policy In the World Economy: Inter- temporal,
dynamic, Approach, 1986), set up very early on (and independently of the great contributions by
Jeff Sachs and Maury Obstfeld) the inter- temporal approach to the analysis of the dynamics of
the balance of payments.
In 2005 I completed a monograph, The Decline of the Welfare State: Ageing and Globalization , with my colleague and life- long collaborator, Efraim Sadka. The main theme of the book is this: In much of the developed world, the proportion of the population aged 60 and over is expected to rise dramatically over the coming, which may necessitate higher tax burdens and greater public debt to maintain national pension systems
at current levels. Low- skill migration produces additional strains on welfare- state financing because such migrants typically receive benefits that exceed what they pay in taxes. Higher capital taxation, which could potentially be used to finance welfare benefits, is made unlikely by international tax competition brought about by globalization of the capital market. Applying a political economy model and drawing on empirical data from the EU and the United States, we draw an unconventional and provocative conclusion from these developments. We argue that the political pressure from both aging and migrant populations indirectly generates political processes that favor trimming rather than expanding the welfare state. The combined pressures of aging, migration, and globalization will shift the balance of political power and generate public support from the majority of the voting population for cutting back traditional welfare state benefits. In my earlier joint work with Efraim Sadka (Economics Letters 1989, and the book: International Taxation, 1991), about tax harmonization was viewed by many as a standard model to evaluate tax competition when national capital markets are integrated, set a trend in research. The book Population Economics, written jointly with Efraim Sadka in 1995, became quite influential in the public economics literature. My work on international
migration with Efraim Sadka, in Labor, Capital, and Finance: International Flows, provides a useful
analytical framework in which migration policy can be rationally discussed. [As many people know, the forecasts of population trends make gloomy reading. The old age dependency ratio (the ratio of those aged 60 or older to those aged 15– 59) is already rising fast and will rise even more dramatically in the next few decades. In the 15 countries of the European Union (EU), that ratio is set to increase from 35 per cent in 2000
to 66 per cent in 2050. For the USA the figures are 27 per cent and 47 per cent, respectively. These trends dealt with in my work with Efraim Sadka, on the political economics of the welfare state (integrated into the 2005 MIT Press book: The Decline of the Welfare State: Demography and Globalization) has been a great intellectual joy to write. A reviewer had this to say:” The (book) is a compelling political economy analysis that comes to the conclusion that the welfare state is not sustainable as it currently exists in most of the OECD (Organization for Economic Cooperation and Development) countries. ” In 2007 I completed a monograph, Foreign Direct Investment: Analysis of Aggregate Flows, written jointly with Efraim Sadka. The main theme of the book is this. The 1990s saw global flows of foreign direct investment increase some sevenfold, spurring economists to explore FDI from a micro- or trade- based perspective. The book is one of the first books to analyze the macroeconomics of FDI, treating FDI as a unique form of international capital flow between specific pairs of countries. By examining the determinants of the aggregate flows of FDI at the bilateral, source- host- country level, we present the first systematic global analysis of the singular features of FDI flows. Drawing on a wealth of fresh data, they provide new theoretical models and empirical techniques that illuminate the vital country- pair characteristics that drive these flows. Uniquely, Foreign Direct Investment examines FDI between developed and developing countries, and not just between developed countries. Among many other insights, the book shows that tax competition vis- à- vis FDI need not lead to a "race to the bottom”. That is, a situation that governments vying for incoming FDI that benefit their industries,
compete to the point that at the equilibrium the business taxes are reduced to zero. The study of foreign direct investment is interesting because this type of international capital flows are both an engine and an outcome of globalization. The project started a few years ago by an attempt to find the unique aspects of foreign direct investment (FDI) that distinguish this type of international capital flows from bank loans and portfolio flows. The process of developing the ideas worked through the writing of several working papers (a few of my own, a few with Efraim Sadka, a few with Prakash Loungani, and a few with the young economists, Yona Rubinstein and Itay Goldstein; Itay was my student at Tel Aviv University. As a reviewer of my forthcoming book with Efraim Sadka Foreign Direct Investment : Analysis of Aggregate Flows (Princeton University Press, 2007) writes: “It is commonly heard in policy circles that FDI is illiquid and that foreign direct investors trade off any potential cost or other advantage they may bring against the fact that their investments will be illiquid. This chapter provides a very nice model that captures this intuition formally. In particular, ownership is modeled as conveying earlier access to information about the productivity of the firm. This conveys a benefit in terms of
planning investment. However, because this information is private to the foreign direct investor, it also leads to a market failure phenomenon known as lemons problem. That is, if the investor needs to sell the project, they face the problem that potential buyers fear that the sale is motivated by private information about low productivity (instead of a genuine need for liquidity). This means that firms that are sold attract a lower price than otherwise: they are illiquid. In the light of this and other issues, this book seems
especially topical and ambitious.”
My collaboration over the last 30 years with Efraim Sadka have been intensive, and always great fun. It
has been a good double act! We also became very close. In a most tragic moment of my life, December
16, 1996, my son Ronny called me from Washington DC to Tel Aviv to let me know that Ofair died. I
called Efraim within minutes to let him know. He came to our Tel Aviv house, on 16 Pilichovsky Street,
and drove me quietly to the airport, to catch an overnight flight. My mission was to carry Ofer back to
have the funeral in Israel . This was a memorable moment of a strong support, when I needed it mostly.
I recalled how I had a window seat on this night flight through NYC, that lasted more than 18 hours. I
was not able to sleep. I had been crying in a non visible way throughout the flight. I arrived in Ofer’s rented
apartment in Virginia and met Ronny and Daphna there. I plunged into the complex logistics of moving
the casket and arranging the funeral. We were able to have at the end a most dignified in Kibbutz Einat.
Efraim never missed the annual event of the Alyiah al Hekever since Ofer’s death!
This speaks volumes about his rather exceptional generous character.
Frank Knight is Right!
Frank Knight was a Professor at the University of Chicago and one of the greatest economists of the middle part of the twentieth century. Here is an application of his wisdom to my family.
He said: "The Ultimate Difficulties of any rational reconstruction of society center around maintaining social continuity in a world where individuals are born naked, helpless, untrained and must spend a third of their lives in acquiring the prerequisites of a free contractual existence. The existing order, with the institutions of the private family and private property (in self as well as goods), inheritance and bequest and parental responsibility, affords one way for securing more or less tolerable results in grappling with this problem."
I can see the miracle in my own eyes when I observe my grandchildren : Iddo (ten year old) and Neeve (five year old). My aunt Gita Alexandroni, who is now the only person who can testify about how helpless and totally untrained I was when I was born in Kibbutz Shamir, when it was still in a temporary place near Kibbutz
Ramat Yochanan, in 1941, and what was the role played by my father and mother (and by my aunt during
my father’s service in WWII)) in my upbringing. But I have also traveled a long distance since then.
At the age of 67, I still feel a bit like Bob Dylan (who is almost exactly my age) when he writes: “You
think I’m over the hill/ You think I’m past my prime/ Let me see what you got/ We can have a whoppin’
good time”. And, in December 16 2010, 14 years after Ofer's death, Einat, Shula and I were all alone in the annual memorializing grave even in Kibbutz Einat. Ronny, daphna, Iddo and Neeve were in London. We asked Iddo to prepare for us something. This 11 year old gifted boy said no problem. He emailed us in literally 5 minutes this poem which he wrote to read on the grave:
I knew you not.
Your string was cut so soon,
And mine so slowly formed.
If only god had mercy.
Man would roam atop this world,
Without death grasping the innocent.
But my wish does not come true.
I plead and beg but matter it does not,
For god has no mercy and death cannot be stopped.
Two Major Historical Transformations in Israel during my Life
Thinking about what my father witnessed in his (short) lifetime concerning the collapse of things he
believed in, I should feel rather lucky. My father, and many in his generation, believed in Marxism, and
the Soviet Union as its implementation on earth. To him this sets a good example as to where civilization is
heading. But, according to the Black Book of Communism, published in 1997 by a group of French scholars,
communist regimes were responsible for the “class genocide” of almost 100m people during the 20th
century. Apologists for Joseph Stalin used to justify such brutality by arguing that you could not make an
omelette without breaking eggs. But, as George Orwell once famously responded: where’s the omelet?
It seems that the communist idea could never be successfully modified or revived. Here is where I have witnessed some of my beliefs tested harshly.
Two of the Israel greatest Israeli institutions, the Kibbutz and the research universities, most prominently
Tel Aviv University, which during almost my entire life I have been affiliated with, are currently undergoing thunderstorms of major transformations. These changes are so fundamental that some say that the very principles behind them are being challenged. Built to Last is the title of a best- selling management book that analyses what makes a company succeed over the long term. It also happens to two great institutions in Israel: the Kibbutz system and graduate economic departments, that unfortunately were not built to last. The Kibbutz system, a unique institution in the history of mankind, is now in the midst of an irreversible privatization process. The transition, as in the case of the collapse of communism in East Europe, is painful.
The transition to a private- property based economy in the Soviet Union started with Mikhail Gorbachev. In a series of remarkable statements and speeches in 1988, he threw out what Marx, Engels, Lenin and Stalin
had bequeathed over more than a century. Class struggle, the need for a violent revolution to overthrow capitalism, the state ownership of the means of production, distribution and exchange, all fell before what he
called, in his great speech to the United Nations in December 1988, and co- development”. He said the new world order would be “co-creation driven by “the compelling necessity of the principle of the freedom of
choice” The transition to a private- property based economy in the former of China has been long but relatively smooth process. On March 16, 2007 — after more than a quarter- century of market- oriented economic policies and record- setting growth, communistic-economy China on enacted its first law to protect private
property explicitly. The landmark measure, which was delayed for years amid vocal opposition from resurgent socialist intellectuals and old- line, left- leaning members of the ruling Communist Party, is viewed by its supporters as building a new and more secure legal foundation for private entrepreneurs and the country’s urban middle- class home and car owners.
The transition in the Kibbutz economy to a private property based system is only in its initial stages. The
beginning is full of difficulties. Many of the Kibbutzim are virtually bankrupt. Even in those that are not,
there is no minimal pension system in place. Patched up benefits to retirees are even below the minimum
wage. I am thinking about my parents (Kibbutz Shamir, where I was born, is still an exception). The
“victims” in the transition process are typically the old. The system’s safety net, with defined benefits
pensions, is emerging slowly, a bit too late to comfort them.
A defined- benefit pension system should be backed up by funding plans that are demonstrably capable of
meeting the promise to pay the retiree certain fraction of her /his wage in most circumstances. We expect
trustees to give the interests of the pension scheme their proper status: any shortfall must be recognized
as a key material unsecured creditor of the business. In designing a pension system there are concerns
of two types: the sponsoring employer is concerned that the pension rules may be two generous and as
such will impose burdens on business; and the potential retiree’s concern is that the employer will not put
sufficient cash outside the firm to be able to meet its obligation . There must be a Pension Regulator,
which regulates the funding regime for any defined benefit firm pension scheme, be it in a Kibbutz, or in
the rest of the economy. None of these exist during the present transition of the Kibbutz from collective
system to a privatized system.
How lucky they are that they died before they had to see members of their generation fall into poverty because solidarity among members of the Kibbutz and egalitarianism vanish, while modern social insurance institutions are yet to be developed. The working age population, to a large extent, lacks skills necessary to rebuild decent rewarding life. A counter- factual in which I am still a member of the Kibbutz at an old age, makes me feel that I am lucky. I gave my children and grandchildren a more sustainable and rewarding way to live, than my parents gave to me. As I just said, a truly great Israeli institution, the research university, is currently enduring a big change and faces its biggest challenge ever. Main problems are the internal organization within the
university, the inter- university allocation of funds by the state, and the lack of leadership on the national
political level in regard to higher education. A grand coalition of politicians from the left to the right of the
political spectrum, joined by vested interest groups within the academic institutions, block necessary
structural reforms, by repeatedly raising equity, or student accessibility issues, for the wrong reasons. The
case of providing large- scale subsidies to higher education, in the form of low tuition is dubious, because
subsidies for higher education are fundamentally regressive. The vast majority of students in higher
education belong to the richest half of the population. They can afford to pay real cost tuition. Low tuition
does not entice them to attend the university, at all. In other words, low tuition amounts to a “pure rent” (in
the economics jargon). The state does not provides the requisite funds (as Scandinavian countries do), or
allow universities to charge realistic tuition (as the US universities do). The German- based model that
Israel took on, of how to organize higher education and research, is an anachronism. We did not adopt the
more successful US model (State as well as Private universities) that provides access to higher education to
those who deserve it (poor and rich), provides salary incentives to faculty members to concentrate their
intellectual energy on advanced teaching and research.
Brain drain from the Israel Universities is becoming widespread; especially in my field, economics.
Perhaps, in my generation our identification with the life in Israel helped us to trade off a fulfilling life in
Israel for better academic careers abroad. The fact that a group of us chose the same resolution of the trade
off, and chose to be a full fledged member of the Israeli University, rather than be on the faculty of one of
the top 20 US university, allowed our school to prosper, thanks to immensely successful academic
interactions among us. This feature served as a magnet for young faculty members. I could not have asked
for a better research interactions than the one I had in the Berglas School of Economics. But this is not the case today. Our school is not able to get almost anyone who is academically successful abroad. To make the problem even more acute, it was enough that one prominent member of our school decided to pursue his own non academic agenda, in direct conflict of the school needs for resources, the recruitment of young faculty fields of teaching and research that the that dried up, that the positive interactions among members of the school had collapsed. The “bad blood” among us serves as a deterrent for young faculty members from joining the school. Existing members chose early retirement, some middle aged active faculty turned to either successful business, or to policy making careers. The School of economics as we have known it over the last 3- 4 decades is now virtually gone. Has it gone for ever?
Few events have served the Israeli economy as well as the collapse of the Berlin Wall. As the
Soviet bloc started to crumble, a wave of Jewish immigrants headed for Israel from present- day
Russia, Ukraine, Belarus, Georgia and central Asia. Many of the 1m newcomers were highly educated. They placed a great emphasis on the education of their Israeli born children. They included scientists, engineers and doctors – providing Israel's soon- to- sparkle high- technology industries with an able corps of workers and
inventors. In recent years, however, the flow of talent has not been going Israel's way, sparking frequent
complaints about a “brain drain”. About one in four Israeli academic scholars is currently employed at an American university – a far higher share than those from European countries. The proportion of departed academics rises even further in some fields that are important for Israel's future economic development, such as economics, engineering and computer sciences. The problem with the Isrsaeli University system is that it is devoid of incentives for exellence among its academic staff, and that the state has starved Israel's higher education system of funding, There are too few staff positions available and pay is almost always much lower than in the US.
The main reason for the success of the US- based research university Model lies in their superior
organization. The first principle is that the government plays a limited part in the allocation of funds, which
means the tuition and philanthropy are an important part of the funding, especially the teaching aspect of a
University. The second principle is better incentives in the internal allocation of the budget among the different academic units, and differential salaries producing more adequate incentives . But the hurdles for a change in Israel are paramount. Political parties typically compete for the student votes, swing voters in national elections. This political setup does not allow top- up tuition. Self government, by the academic faculty, coupled with a strong faculty union, are a barrier to the introduction of more efficient incentive system, which could have
attracted young scientists with good academic alternatives abroad, by offering them better working conditions to compete with the working conditions offered by US universities. It seems to me that the decades- old era of the great Berglas School of economics at Tel Aviv University will have become a one- shot episode in history; unless the reformers on the national and university levels, could get its act together. I really hope I will have been proven wrong on this.
It is not likely that in the current higher education system Israeli universities will be able to recreate centers of excellence. Because to do this they will need greater freedom: for example to increase tuition fees and differentiate salaries in a new internal governance structure. Their governing structure will need to become more effective and less beholden to the union. On the difficulty of doing a substantive reform we can cite a quote from Machiavelli’ s book “ The Prince” : “It must be considered that there is nothing more difficult to carry out,nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those
who would profit by the new order, this lukewarmness arriving partly from fear of their adversaries, who have the laws in their favor; and partly from the incredulity of mankind, who do not truly believe in anything new until they have had an actual experience of it. Thus it arises that on every opportunity for attacking the eformer, the opponents do so with the zeal of partisans, the others only defend him halfheartedly, so that between them he runs great danger.”
The phenomenon that I am passionate about my research subjects and related policy issues, such as the collapse of the Kibbutz system, could be illustrated by the following story (told by the archeologist Magen Broshi). Herod, born in the 72 B. C. (one of the greatest builders in human history) was mentally ill. This has long been recognized by historians. A king who murders three of his sons, his beloved Hasmonean wife, Mariamne (whose death sent him into a deep depression), and countless other members of his close circle, is obviously not in his right mind. Now fast forward 2000 years. Walking down the street, the archaeologist Pesach Bar- Adon (whom I remember from the days I was recovering from a bullet wound shot, after my release from the army,
preparing to take the matriculation exam to enter the Hebrew University) bumped into a colleague, the historian Abraham Schalit. Schalit told him he had just come from Prof. Lipman Heilprin, a famous psychiatrist, who said something about a clear case of paranoia. Bar- Adon, assumed that Schalit was talking about a family member, tried to console him. There are all kinds of therapies and medications today, he said. But Schalit
was talking about Herod.
In this context I look at the way my son Ronny has been developing a splendid academic career (now
tenured in LSE), as something that I would have liked to be doing in my time, had not the shape of Tel
Aviv economics not been then so excellent in terms of its academic environment, with great colleagues,
great students. Indeed, in the last two decades the Tel Aviv School of Economics was ranked at the top of
non- US economics departments, along with LSE. But, currently, our school is dramatically deteriorating. A
whole generation of top economists is stepping out, with no new academic staff with the same academic
caliber in sight. No leader who can turn things around has emerged. Recently, my colleague, Elhanan
Helpman, commented on the quick response of Hezbollah, immediately after the recent Lebanon war
ended, where they started to give money to refugees to rebuild their homes, which were severely destroyed
in the month- long war. Hezbollah has been the fastest and, without a doubt, most effective organization doling out aid to the shattered towns and villages of southern Lebanon. In contrast, the Lebanese government which already secured grants from rich Arab countries and from Europe and the USA was not even in the planning stage of the reconstruction effort. This shows how a small and dedicated number of people with great motivation can always outperform governments manned by officials without the right motivation. This is in analogy to what we have had in the Department of Economics in Tel Aviv University. At the initial stage of its development (I was the chairman in 1974 to 1976) we had a group of well motivated members (Elhanan Helpman and Efraim Sadka among them, together with a good leadership from Eitan Berglas, who was older then us) that cared about recruitment of new members, promotion, research facilities and research centers, etc. Today,
with all these facilities already in place, governed a bit mechanically by members of the new generation
that lack similar motivation, the crisis in the system gets no constructive response from its officer holders.