Using quarterly macroeconomic data over the period 1992-2012, and the expectations in industry surveys conducted quarterly by the Manufacturers Association of Israel, we examine if the rapid expansion of the high-tech sector caused depression and sharp reduction of the competitiveness of the non-booming traditional sectors through currency appreciation and rising real wage mechanisms. This survey covers 140-200 firms per quarter representing various industry sectors and size of firms in terms of production and employment.
Utilizing advanced time series techniques (cointegration and causality tests) we find that the growth of the Israeli high-tech sector indeed results in (i) a long-run appreciation of the Israeli currency (NIS), (ii) a rise in real wages and (iii) crowding out of the traditional sectors.
Unlike in the case of natural-resources based Dutch disease where a Sovereign Wealth Fund (SWF) is created to invest the public funds, in Israel’s case most of the funds are private. Thus, to alleviate the effects of the growing high-tech sector we propose establishing a governmental Special Purpose Vehicle (SPV) that offers hedging mechanisms that encourage pension funds to invest in foreign assets. As a result of doing so, at least some of the foreign exchange originating from the high-tech sector is kept abroad and the pressure for appreciation of the local currency is reduced.