by Matt Krieger and editorial staff
A fortuitous confluence of events propels the Israeli economy to unprecedented heights.
Trying to decipher the conundrum of Israel’s most recent boom. Who comes out on top and who is left behind?
Despite the fact that 2006 witnessed a month of warfare with Hezbollah, the takeover of Gaza by Hamas, and massive public discontent with the country’s elected officials, by the end of 2007 the flagship of the Tel Aviv Stock Exchange, the TA-25, increased by forty percent. As often as we hear stories in the news about the latest threat to the country’s security, there are dozens more detailing the success stories of Israeli businessmen striking deals, raising money or going public with their IPOs.
Against the backdrop of the events that typically cause Israel to be in the news -- the conflict with the Palestinians, war with Hezbollah, genocidal threats from Iran, and their ilk -- people often forget that there are normal things happening in Israel. And in many cases, extraordinary things, like the amazing performance of the Israeli economy over the last few years.
As far as the economy is concerned, the war of 2006 is a distant memory. After a brief slump in its wake, the economy bounced back and grew at an annual rate of 7.3 percent in the last quarter of that year, according to the Israeli Central Bureau of Statistics. A year after the war, the Tel Aviv Stock Exchange’s benchmark TA-25 index had risen by 38 percent. An economist at one of Israel’s largest banks asserts, “Israelis are not willing to allow tragedy to interfere with life -- they are always looking for the next deal.”
What accounts for this growth?
Immigrants as Assets
Adding to Israel’s already large number of professionals, engineers and scientists -- graduates of the country’s prestigious universities -- the 1990’s saw an influx of almost one million immigrants from the Former Soviet Union. Although much mitigated, the stream of immigrants remains steady. These immigrants carry with them a treasure of professional knowledge and expertise. Soon after arriving, many immigrants found themselves behind desks, in front of computers and tapping the keyboards which catapulted Israel’s hi-tech into a position of global prominence. Historically recognizing immigrants as an asset, Israel has a sophisticated apparatus for absorbing them. Their integration is also particularly evident in construction, commerce, civil service and the arts. ‘Invest now, reap later’ is proved by the economic dividends of Israel’s changing demographic.
The Head and the Arms
Combining a well-developed system of higher education and the wave of educated immigrants, by 2008 Israel could boast the highest ratio worldwide of skilled engineers in the workforce according to the IMD World Competitiveness Yearbook. Additionally, Israel also leads the world in the quality of its workforce as for every 100,000 workers, 135 are scientists, the highest proportion in the world, as compared with 70 in the US. Nine out of every 1,000 people employed in the country work in research and development, nearly double the R&D rate in the US or Germany.
Weapons of Success
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The Puzzle
An apocryphal Israeli anecdote tells of a meeting between Ben Gurion and President Truman in the early days of the State. Ben Gurion asks Truman how much the average American earns. Truman replies (for the sake of argument), “$1000 per month.” “And how much are average living expenses?” asks a curious Ben Gurion. Truman replies “$750 per month.” “So what do they do with the rest of the money,” inquires Ben Gurion. Truman replies indignantly, “This is a free country. We don’t ask.”
Truman then asks Ben Gurion, “And how much does the average Israeli earn in a month?” “Oh, about $400,” replies Ben Gurion. “And living expenses?” “About $600,“ answers Ben Gurion. “So what do they do about the rest of the money?” asks a concerned Truman. “Israel is a free country,” retorts Ben Gurion. “We don’t ask.” |
Whereas Israel has an accomplished defense industry with vigorous exports, many of the industry’s technologies and manufactured goods are sold to commercial clients. In addition, many security and safety systems born out of defense imperatives are now civilian industries. Nehemiah Strassler, editor of Haaretz newspaper and economic pundit, claims that if Israel were free of the security threat and the accompanying baggage, the conditions would be ripe for the Israeli economy to double its extremely impressive growth rate.
Yet, the military certainly plays a role in the ascension of Israeli industry, both low- and high- tech. Professor Bernard Avishai introduces the concepts of know-how and know-about: Most of Israel’s young men and women serve in the military, yet the majority of soldiers do not discharge their duties in fighting units. They work as support personnel in branches ranging from radar detection to battle simulation software. They gain the know-how to be professional and they know-about state of- the-art technologies as well as organizational teamwork. Their service years constitute a valuable reservoir of work experience to draw from when later entering university or the civilian labor force.
Silicon Wadi
| A few recent Israeli corporate highlights:
•Israel ranked the 23rd most attractive country in the world in which to do business (Economist)
•Six of the NASDAQ companies with market capitalizations of over $1 billion are Israeli. In descending order, they are Teva Pharmaceuticals, Checkpoint, Partner Communications, Nice Systems, Elbit Systems, and Elbit Medical. The total market capitalization of Israeli companies on NASDAQ is $50 billion. (www. israel21c.org)
•“Israel is now the most important international market on the exchange.” Charlotte Crosswell, the Head of NASDAQ International (www. israel21c.org)
•Microsoft announced the establishment of a new R&D Center in Herzliya shortly after it increased its activities at the high tech industrial park in Haifa. Plans to employ 550 engineers by the end of 2008.
•Kodak launched a new R&D center In Israel which will employ 1,000 people. In 2005 Kodak acquired the Israeli company Creo which specializes in digital workflow systems.
•Nice concluded a 7-year contract with the American Federal Aviation Administration to enhance air traffic recording capabilities.
•Aladdin Knowledge Systems will supply their ‘eToken’ to some 3.8 million Indian students for securing the network of e-Learning resources at 2800 campuses.
•Pfizer Pharmaceuticals entered final stage of negotiations to establish a R&D center in the Galilee.
• During 2007, 56 new Israeli companies raised more than $2.5 billion. During the first quarter, Israelis invested 4.7$ billion abroad.
•Israeli biotech ranks 6th in Europe for absolute number of companies. (Ernst and Young’s Global Biotechnology Report 2007).
•Renault Nissan Alliance announces plans to invest in the Israeli-initiated Electric Car project. The auto giant will set up the electric car development center in Israel.
•‘Just call my email.’ Yoomba, an Israeli company jointly headquartered in Tel Aviv and Silicon Valley in the USA has developed the world’s first peer-to-peer open communications apparatus. Yoomba has developed proprietary technology which turns any email address into a phone or instant messenger.
•Prigat, an Israeli juice company, stands out as a top exporter to European countries, providing close to 40% of all non-carbonated beverages in Romania. In fact, on Romanian restaurant menus, fruit juice is simply referred to as “Prigat.”
•“The Financial Times” Stock Exchange Group will promote Israel from Emerging Market status to its Developed Market group as of June 2008. The reclassification of Israeli stock indexes, which will put Israel in a class of 24 developed nations, makes it the first Middle Eastern country to make the grade.
•“Silicon Wadi was a magnet for Wall Street investment banks, topped only by Silicon Valley and the Route 128 corridor outside Boston.” (Forbes)
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For many years, Israeli industry was anchored in the export of cut diamonds, metal-cutting machinery, metals, chemicals, plastics and agriculture. Yet well on their way to overtake those contenders in the export marathon are the hi-tech and bio-tech industries in what is now known as Silicon Wadi.
Israel’s place is already established by the likes of CheckPoint, Amdocs and Mercury, and behind the throng of new startups are the angels of Venture Capital. Israel is ranked by the World Economic Forum as the 2nd largest venture capital market in the world. In addition to the homegrown firms which regularly raise hundreds of millions of dollars, a host of foreign venture capital firms are also squeezing into the local real estate. Sequoia Capital, one of the first Silicon Valley venture capital firms, has only one office outside the United States -- in Israel. Benchmark Capital’s two foreign bases are London and Tel Aviv; the giant Siemens has one of its six centers in Israel.
With the help of these venture capitalists, start-ups are transformed quickly into profitable and competitive companies, evident by Israel’s position as the country with the largest number of NASDAQ-listed companies after the United States, and an increasing number of companies listed on the London Stock Exchange. Apart from Silicon Valley, the highest concentration of high-tech companies in the world is found in Israel, with 4,000 businesses.
Thriving Partnerships
This spirit extends not only to running independent businesses, but also to patent registration. In 2006, the Organization for Economic Cooperation and Development ranked Israel 6th globally for patents per GDP. It is ranked second after Japan for patents in Europe, and leads the world in patents for medical equipment. Israel also produces more scientific papers per capita than any other nation – 109 per 10,000 people.
This is, in part, due to Israel’s government policy which encourages the transfer of knowledge from academia to industry - known as technology transfer. The World Economic Forum ranked Israel 6th in the world for its collaboration between university and industry. This pooling of resources has successfully converted research into lucrative enterprises.
Loose and Loosening up
A vital factor in Israel’s economic success, of course, is Israeli culture, which embraces entrepreneurship, risk-taking, and ingenuity. According to Thomas Friedman of The New York Times, the secret of Israel’s hardy economy lies in the Israeli genius. The imagination, innovation and flexibility of the country’s citizens, bolstered by excellent higher education and government support for entrepreneurship, help Israel adjust and respond to an ever-changing world. Israel’s prosperity, according to Friedman, comes from the head.
However, no economy, no matter how entrepreneurial its people, can flourish while strangled by an overbearing bureaucracy, punitive levels of taxation, and suffocating regulatory policies. From 2003 a series of market-friendly, and desperately needed reforms resulted in substantial growth.
Sound finance is bearing fruit. The International Monetary Fund’s annual report (2/2008) praised “the Israeli economy’s exceptional performance, which reflects both sound policy implementation and strong global growth.” The government reins in spending, and the consequent emergence of budget surpluses helps free scarce resources for productive private use. In parallel, free trade and capital decontrols attracted more global investors, while allowing Israeli capitalists to link up with the rest of the world. Israeli businesspeople, architects and engineers can be found criss-crossing the globe, buying real estate, building shopping centers, tourist sites and hotel complexes, all the while funnelling at least some of their profits into Israel.
Unfortunately, Israel’s economic upsurge has not reached all its citizens equally. Despite the reformers trickle down theories, many civil servants, unskilled laborers and professionals lag far behind in salary increases, unable to take advantage of the fruits of prosperity. More often than not, they resort to the ultimate trump card to achieve their aims - the omnipresent strikes: teachers, ports of authority staff, civil servants. There are those that claim that reforms inevitably harm Israel’s well-established social welfare safety net, and will rebound.
Statistics reporting high poverty levels sweep the country into a turmoil; yet they are most misleading. They do not note the concommitant rise of living standards of even the poorest, as they examine the gap and not the total. In addition, the working poor are relatively few. However, the persistent rift between the periphery (primarily struggling towns and villages in the Negev and the Galilee) and the center (the coastal plain) continues to exasperate the nation.
A large percentage of the poverty statistics refer to the Arab sector where unemployment is relatively high, and to the growing number of ultra-orthodox, the majority of whom do not work and have a large number of children. Israel’s work productivity is significantly lessened by the ultra-orthodox remaining out of the workforce, while sophisticated political pressures maintain the status quo of State stipends, which put a strain on the working public.
The generous social security payments made for each additional child hark back to the first years of the State, where Jewish demography needs reigned supreme. Today, the ultra-orthodox and some in the Arab sector, particularly the Bedouin, rank amongst the highest in the world in childbirth rates, often leaving the State to contend with the support of those children. Cognizant of the problem, the government is working to create training and employment programs to ease these populations into the tax-paying workforce.
As Friedman pointed out, “countries and companies that empower their individuals to imagine and act quickly on their imagination are going to thrive.” Israel is living and breathing proof of this dictum.