As world leaders are pondering international efforts to promote the sound recovery and sustained development of the world economy in the post-crisis era in Davos, Switzerland, Israeli economists are eyeing the present macro- economic policies of Israeli government and the prospect of Israeli economy.

The economy enjoys a picture upbeat in the short term and is viewed as a developed economy which has pretty well defended itself from the international financial crisis and headed to a road of rebound.

However, economists warn that Israel must chart a careful course when global economy still remains highly uncertain.

DOWNTURN AND AFTER

When the depth of the international financial crisis became clear, in Israeli halls of power, there was considerable satisfaction that the recession that hit so many countries would not overly impact Israel.

Israel's economic growth did slow over the last 12 months but the word "recession" has been far from the lips of the lawmakers, the financial sector and the usually highly-critical media.

But to say the Israeli economy was totally unaffected by the international downturn would be an oversimplification and somewhat exaggerated. Ask anyone who works in Israel's powerhouse high-tech industry, they will tell you they know of people who lost their jobs during 2009.

There is warm praise in virtually all quarters for the governor of the Bank of Israel, Stanley Fischer who was among the first to scent the danger and immediately cut the central bank's key lending rate as the global economy appeared to teeter.

While when good signs appeared in key Israeli economic statistics and signs of an easing in the global recession started, the Bank of Israel became the first central bank among developed economies to raise its key lending rate to fight inflation.

The bank announced on Monday to leave its key short-term lending rate unchanged at 1.25 percent after raising it by a quarter-point in each of the past two months and from 0.5 percent last August, which the bank said was part of a "gradual process" of returning the interest rate to a "normal level."

Meanwhile, governmental institutions are continuing efforts to stimulate and assistant export, which suffered a significant slide in the past year due to dwindling of world demands.

Israeli Finance Ministry launched a new assistance program aimed at exporters earlier this month, which committed the government to funding up to 1 billion Israeli shekels (about 268 million U.S. dollars) in bank guarantee risk to exporters. The program will remain in effect until the end of 2010.

OPTIMISM AND RISKS FOR 2010

Till now, most forecasts about the growth of Israeli economy in 2010 are optimistic, or more optimistic than 2009.

The central bank expects the economy to grow 3.5 percent this year, adding some one percentage to its previous forecast in September.

While a staff report of International Monetary Fund (IMF) released this week said growth of Israeli economy in 2010 was projected at 2.5 percent, and forecasts for the next year is 4 percent.

While citing Israeli exports, consumption and domestic credit recovering from the global financial crisis as reasons for its forecast, the IMF report suggested that Israel's economy was not yet out of the woods and highly-uncertain global outlook may affect Israeli economy.

Eyeing risks in the near future, the IMF report said that public debt in Israel was high and expected to rise in the near- term before declining, while upward pressure on Israel's shekel currency could pose new risks.

"High Israeli public debt represents an enduring vulnerability, " the IMF report said.

Israeli economists mentioned inflation and interest rates as among major concerns.

"There are opposing forces that need to be delicately balanced, on the one hand to keep down inflation but on the other hand to encourage the right projects for investment," said Dan Peled, head of the Department of Economics at the University of Haifa, adding that "this is something the Bank of Israel has done pretty well in recent years."

Likewise the bank has to take into account interest rates with regard to the flow of currency entering and exiting Israel and the effect that has on Israeli exports.

In addition to need for the central bank to continue its sterling work, Peled thought that the government must make certain the budget deficit remains relatively low in relation to the gross domestic product (GDP), "at around the 60 percent mark."

"The government must also ensure openness and competitiveness in the Israeli economy both in the financial markets and in the real economy. Right now this is what they are doing," Peled said.

PATH BEFORE AND AHEAD

Avraham Ben-Bassat, a professor of economics at the Hebrew University in Jerusalem and a former director general of Israel's Finance Ministry, is of the opinion that the process putting Israel on the right track which began some 20 years ago, and the economic reforms in the 1980s made Israel far less vulnerable.

As a result of that type of thinking and various additional reforms in the interim, Israel has converted a poor economy with rampant inflation into a flourishing member of the Organization for Economic Co-operation and Development (OECD), according to Ben- Bassat.

However, mistakes are also made in the past in eyes of economists and Dan Peled pointed to the lack of competition in the banking sector, for example.

While the country's booming high-tech industry is a source of national pride, Peled noted that it employs a relatively small number of people, even though it accounts for 40 percent of Israeli exports.

What Peled saw as the real area for correct planning is in the long term rather than day-to-day macroeconomic decisions that affect exchange rates, inflation and so on. "We're talking about support for research and development, higher education, freeing the economy from institutional problems, openness and competition," he said.

In order to guarantee correct planning and appropriate funding for an expansion of education and other areas that guarantee long- term stability for the country, Ben-Bassat said it is vital the government not cut taxes.

"Everyone would like lower taxes but everything comes at a price," he said.

Whether the year 2010 will prove a bumper year for Israeli economy is still unclear, but both Ben-Bassat and Peled believed that so far Israel has got things right and if it keeps strictly to budget and continues opening up the economy, there is no reason that it cannot stay on the road to economic stability. (1 U.S. dollar = 3.74 shekels)