Extract of article in Issue 21, February 4, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. Ireland, Hong Kong and Singapore have all succeeded as financial service centers. Can Israel? "Take Singapore as one example." Dan Galai, professor of business administration at Hebrew University and CEO of Sigma PCM, a Ramat-Gan based portfolio management firm, is convinced that the example of Singapore three decades ago is relevant to Israel today. "In 1970, Singapore was a backwater country geographically and economically far from everything besides Malaysia and Indonesia. The per capita GDP was between a third to a quarter of Israel's. But today they have surpassed us." According to the U.S. Central Intelligence Agency's World Factbook, he notes, Singapore's per capita GDP in 2006 was $31,400 to Israel's $26,800. There is no doubt, he says, that the financial sector in Singapore played a large role in the country's astounding progress, with over 500 financial services companies and banks now located in Singapore, offering a wide range of financial products and services. These products and services, which account for a whopping 12 percent of Singapore's GDP, include trade financing, derivatives products, loan syndication, underwriting, foreign exchange, mergers and acquisitions, asset management, financial advisory services, securities trading, and insurance services. Envious of countries such as Ireland, Hong Kong and Singapore, which overtook Israel economically over the past two decades, some economists are convinced that Israel could significantly upgrade its GDP, if only a serious effort were made to turn the country into a major international center of financial activity. And at least some decision-makers agree. Bank of Israel Governor Stanley Fischer and Finance Minister Ronnie Bar-On, in late November, jointly announced the establishment of a committee, headed by Treasury Director General Yarom Ariav, to study ways in which Israel can be made more attractive to foreign capital and become "a significant global player" in world financial markets. On the one hand, the Israeli economy has been doing rather well of late. GDP growth for the past four years has surpassed 5 percent per annum. In international tables of ranking in terms of GDP per capita, Israel sits comfortably among the top 40, alongside several European Union nations, such as Spain and Greece. But economic observers agree that the country has the potential to climb much higher. True, in international financial terms, Israel has come a long way since the shekel exchange rate was tightly controlled and since 1977, when then-prime minister Yitzhak Rabin resigned after the media revealed that his wife illegally maintained a bank account in the United States. Israel today is plugged into international markets and investment firms, independent of the major banks, which have in the past decade begun proliferating - there are now an estimated 20 homegrown Israeli hedge funds. At the same time, the world of international finance has undergone upheavals. What were once semi-derisively called "rocket scientists" on Wall Street - the mathematical wizards who can study markets using differential equations developed for physics - have moved into central positions and every day, more complex financial packages for moving money around and increasing returns are invented. But Israel, for all its vaunted brainpower, is not yet really on the map when one thinks of world financial centers. In contrast, Ireland, whose image was never one of financial wizardry, has seen the number of financial institutions located there grow to more than 450 over the past 15 years, and it is now the second-largest banking and financial center in the European Union, after Luxembourg. There are nearly 10,000 people employed in the asset management industry in and around Dublin, and Ireland has in the same period skyrocketed in the GDP tables - its 2006 per capita GDP of $44,500 places it ahead of the United States's $43,800. Only a generation ago, this situation would have been considered a mere fantasy. But the development of the Irish finance industry did not happen by chance. It was the result of deliberate government decisions. In Israel, Bar-On, in particular, has been saying that the goal of Israel moving into the forefront of world financial activity is a top priority. "Because we are a small player in the global world," Bar-On said at the annual seminar of the Finance Ministry's capital market division in mid-December, "we need to ask ourselves whether in the long-term Israel could become a regional financial center, that is, a center attracting investors in developing economies east of Germany and west of China." Proponents of upgrading Israel's financial services sector point to several factors in Israel's favor: a well-educated and sophisticated population that has proven itself to be capable of creating a world-class high-tech sector; significant sub-populations fluent in several languages; and a geographical location that can fit into a time-zone niche that is currently unfilled (later than the Far East markets but earlier than Europe and North America). Even the fact that Israel's working week includes Sunday has been touted as an advantage: a full day of work can be accomplished in Israel on a Sunday, when much of the rest of the world is still on weekend. Others point to the fact that many talented Israelis end up working in New York or London because the local financial sector is insufficiently developed to keep them in Israel - and wonder if they can be brought back to lead the development of the industry at home, similar to the way many Israelis who had learned the ropes of the high-tech trade in Silicon Valley provided opportunities for local talent in the 1990s. "The same forces that led to the miracle of the high-tech boom can lead to an Israeli finance miracle. The power center of Israel lies in human capital," says Bar-On. "I refer to the young and talented Israelis you can find today spread across global financial markets and investment houses, occupying key positions as advisers or partners. We need to find a way to get them to come back home." The vision is grand and tempting, but not everyone is convinced. Skeptics point to the grandiose claims made over 30 years ago by one of Bar-On's predecessors, Simcha Ehrlich, who served as Finance Minister in Menachem Begin's first administration in 1977 and famously proclaimed that he would implement reforms that would turn Israel into "the Switzerland of the Middle East." Ehrlich's dreams ran into some hard realities, including socialist-labor traditions that were still strong at the time and Israel's large defense spending needs. The Begin government ended up administering an economic tailspin that brought Israel to an unprecedented economic crisis, with triple-digit inflation, in the early 1980s. "Don't expect Israel to become Switzerland any time soon," a source in one of Israel's economic regulatory bodies tells The Report while requesting anonymity. "Geopolitically we can't be. The Middle East conflict will prevent people from feeling they can park their money away safely here." In response, supporters of the vision of Israel as a financial center say that in today's world money need not be parked in a specific location. When money is blips on a computer screen, investment packaging and shifting for maximal returns matter more than where the computer is situated. Extract of article in Issue 21, February 4, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.