Wake up, nation

Israel’s economic miracle is threatened by structural and social deformities, according to a diagnosis and plan that the Start-Up Nation’s cheerleaders had better read, and its planners execute.

By AMOTZ ASA-EL
David Rosenberg (photo credit: Courtesy)
David Rosenberg
(photo credit: Courtesy)
It took a generation, but in the decade that followed the 2008 financial meltdown, Israel’s economic revolution became the envy of a financially perplexed world.
The great turning point was the 1985 stabilization plan that saved Israel from economic ruin, underscored by 415% inflation, and led it from its socialist past to its capitalistic future.
Replacing its founders’ Keynesianism with the Reagan-Thatcher era’s monetarism, Israel cut its defense spending overnight by 20%; abolished an elaborate system of food subsidies; froze salaries and hiring throughout the public sector – which at the time spanned 70% of the economy; imposed on the unions an end to salaries’ indexation to inflation; discontinued import duties that artificially protected low-tech industries; banned by law printing money as a means of covering deficits; and shifted responsibility for monetary policy from the Treasury’s politicians to the Bank of Israel’s economists.
The plan, besides rationalizing prices and restoring investor confidence, uncorked a great entrepreneurial energy that was soon accelerated by a million post-Soviet immigrants, and then redoubled by last decade’s privatizations, tax cuts and financial reforms. The combined result of all these has been an astonishing macro-economic turnaround.
Yesteryear’s financial basket case became the developed world’s fastest growing economy so far this century; unemployment and inflation are now among the lowest in the world; the shekel is among the world’s strongest currencies; national debt has plummeted from more than twice the size of the economy in 1985 to less than 60%, far lower than the rates of France, Britain and the US; foreign currency reserves, which in 1985 approached full evaporation, are now the fifth highest per capita in the world; and per capita product, at more than $38,000, is $1,500 higher than the European Union’s, and expected to surpass next decade Britain, France and Japan, which are currently just under $44,000.
Understandably, then, Israel has been the toast of the global financial markets, particularly after emerging pretty much unscathed from the 2008 financial crisis, thanks to its government’s fiscal discipline, its central bank’s monetary wisdom, and its commercial banks’ conservatism.
This, in a nutshell, is what allowed the emergence of the universally saluted “Start-Up Nation,” as writers Saul Singer and Dan Senor called Israel’s newly shining economy in the 2009 book by that name.
Now David Rosenberg, in “Israel’s Technology Economy,” is putting that song of praise in timely perspective with a thoroughly researched, lucidly written, and well-structured analysis of the Israeli economy’s merits and drawbacks, punctuated by a road map for Israel’s next economic revolution. 
CURRENTLY the business editor of the English daily Haaretz, Rosenberg deploys knowledge and instincts earned over three decades of covering the Israeli economy for Bloomberg, The Economist, Reuters, The Jerusalem Post and The Jerusalem Report.
In analyzing Israel’s economic uniqueness Rosenberg rightly defines it as a knowledge economy, namely one fueled by the exportation of inventions, a phenomenon he convincingly attributes to Israelis’ distaste for organization and willingness to take risks, as well as their propensity for problem-solving and their culture of teamwork and group loyalty.
This is how Israelis ended up inventing fighter jet avionics, driving navigation systems, video pills, and breakthrough treatments for Parkinson’s and MS, and this is how they ended up selling abroad inventing companies like Mobileye, Chromatis, Mercury, Galileo or Waze in multimillion- dollar exit deals that in 2017 alone totaled $23 billion, about 15% more than Israel’s entire defense budget.
However, Rosenberg cautions that this phenomenal success is misleading, when viewed through a broad, national and social prism. If Israel does not treat its flaws soon, he warns, its economic success might soon spend itself.
THE ISRAELI economy is driven disproportionately by a hi-tech sector that is itself overly dominated by start-ups that export Israeli ideas and companies, rather than turn them into long-term generators of Israeli jobs.
The invention industry, notes Rosenberg, is built to employ a select few, and is therefore unfit to produce enough jobs for the workforce’s critical mass. Israel’s manufacturing industries, meanwhile, are generally uncompetitive.
PepsiCo’s recent $3.2 billion purchase of SodaStream, which makes kitchen-based water carbonators, is the exception. The rule is that Israel’s overall industrial productivity languishes at 55% of the US industry’s rate.
Besides this strictly economic insight, Rosenberg also probes Israel’s social imbalances, underpinned by an 18% poverty rate, 64% higher than the OECD average, and a 23.5% child-poverty rate (as of 2013), which is 74% higher than the OECD’s.
After decrying the Israeli worker’s low productivity, Israeli high-school students’ low achievements, the Arab and ultra-Orthodox populations’ low labor-participation levels, and the gaps between Israel’s rich and poor – he prescribes four treatments, which, if applied, can lead the Israeli economy to its next phase. 
First, Israel must expand social access to its knowledge-based economy, by helping the academic system graduate more students generally, and from marginalized populations, in particular. At the same time, Israel must cultivate less glamorous but more stable and labor-intensive industries.
Secondly, Israel must draw the non-working parts of its Arab and ultra-Orthodox populations into the workforce. Ultra-
Orthodoxy will have to change from within, by compromising – in response to pressing material needs – its quest for a Society of Learners. Israeli Arabs’ situation will have to change from outside, with Jewish employers abandoning the prejudice and racism that currently obstruct many Israeli Arabs’ access to the best Israeli jobs. 
Thirdly, the government’s quality of service must be brought closer to Western standards. Lastly, and most interestingly, Rosenberg says Israel’s religious and political culture must open to the hi-tech industry’s mentality of free speech, thought, and initiative.
Added up, David Rosenberg’s “Israel’s Technology Economy” is a critique that the Israeli economy’s cheerleaders had better read, and a blueprint that Israel’s economic planners had better execute