How to grow Israeli hi-tech

Enhance competitiveness and reduce costs rather than promote government 'direction.'

August 14, 2007 20:51
4 minute read.
How to grow Israeli hi-tech

computer 298.88. (photo credit: Ariel Jerozolimski)

A recent Merage Foundation conference gathered some major industry and academic players with the goal of helping Israel's hi-tech sector grow and enhancing "its contribution to increased economic opportunity for all Israelis." The participants offered many important insights, but they mostly proposed improving government policies to help better hi-tech performance and the MBA programs that underpin it. But an examination of the government's record raises serious doubts about its ability to help. Of the government's approximately NIS 300-billion budget, about a third is committed to paying off debt, another third to salaries and pensions and what remains to defense, education, health care and transfer payments. This leaves government few free resources, especially since its existing programs and handouts are vigorously defended by powerful vested interests. But even if government had the means, and knew how to help, its track record does not augur well. Since the conference also wanted to enable "Israel to compete successfully in an increasingly global market place," perhaps a better approach would have been to focus on policy reforms that enhance competitiveness. INFLATED COSTS make Israeli firms less able to compete internationally. The conference could have studied which costly government regulations could be dispensed with and also targeted the breakup of cost-inflating practices - especially in financial markets, where accessibility to credit is still a major problem for small and medium businesses, the engines of growth. The participants could have used their business and organizational savvy to delineate a smaller, more efficient government that encourages economic growth rather than hinders it. They could have proposed tax reforms that would free resources for productive private investment. The conference could have contributed to the effort to break up land, building material and construction monopolies that double the cost of construction in Israel. It could have pushed for deregulation which would enable small businesses to thrive rather than choke. It could have recommended the removal of trade barriers that make consumer goods and the cost of doing business so high. Competitiveness could profit from lowering the inflated costs of water, electricity, credit, education and health. Lower costs would also help the poor more than income redistribution. Education could be bettered by the breakup of the degenerating government's educational monopoly, and by the introduction of economic considerations and competition. Instead, two decades after the notion of industrial policy had been discredited, calls were heard for more government "direction," as if government could "assist" hi-tech by reducing risk. YET RISK and its management are a vital component of healthy growth. Risk-adverse government bureaucrats do not deal best with risk. Only diffused private investment that enhances competition, accountability and better decision-making can help spread risk. Open financial markets also provide better access to capital for smaller firms. Moreover, all government directions and subsidies result in state employees picking favorites and discriminating against those with less political pull. Sixty years of massive government intervention and "development efforts" have led mostly to massive failures and waste. Yet, mysteriously, policy makers still insist on increased government spending and budget deficits, and on shifting resources to the less efficient public sector. In hi-tech specifically it is hard to find credible studies showing that government "encouragement" ever played a consistent positive role. THE CONFERENCE'S concern with policies that could correct putative imbalances in growth was also problematic. Can anyone really define what balanced growth is? Even if we seem to discern imbalances during certain periods, does this mean that we understand them accurately or know how to correct them? The conference's Overall Mission goal demanding that hi-tech "contribute to increased economic opportunity for all Israelis," namely, "reduce current income disparities" was also questionable. It is almost impossible to define what equality really is, unless one thinks of the long-discredited goal of strict equality in wages. Nor is it clear why hi-tech is particularly suited to attaining such a goal. Why would hi-tech people be more qualified to address the complex problems of poverty? Is not running a complex business profitably hard enough, and does it not contribute sufficiently to the general welfare? Despite all the fashionable talk about the putative "social responsibility" of business, it is not clear at all how narrowing income disparities, rather than enhancing productivity, helps the poor; by reducing envy, perhaps? TO HELP hi-tech, rather than promote the lost cause of better government "direction" we need to launch reforms that enhance competitiveness and reduce costs. We must also refrain from trying to solve the thorny problem of poverty by trendy but questionable means. In the past, socialist policies that mutated into statist control of the economy made our industries non-competitive and unproductive, so that despite over $300 billion in foreign aid, our economy cannot provide most of our talented workforce more than a measly NIS 7,000 a month, making so many families unable to make ends meet. Our distributive system is also the reason our political system is so torn by constant strife over the division of government handouts, as well as explaining why growth has been stymied. So let us give markets a chance to deliver the prosperity they have delivered everywhere, and let us promote more freedom from government rather than more or better government direction and aid.

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