Middle Israel: An era of economic promise

Until today, the world in which the Israeli economy operated was driven by Europe and America; in 2014 Israeli sales to Asia, at just over a quarter of overall exports, will for the first time exceed exports to the US.

A view of the Ayalon Freeway in Tel Aviv. (photo credit: REUTERS)
A view of the Ayalon Freeway in Tel Aviv.
(photo credit: REUTERS)
They laughed hard in Turkey this week, as Syria announced it would set up an office dedicated to boycotting its northern neighbor’s economy.
Set aside the Syrian allegations, laughable in their own right, that Turkish firms were sabotaging the Syrian economy and also helped loot Aleppo; an economic basket-case like Syria threatening an economic giant like Turkey is a mouse roaring at a lion.
It wasn’t always this way. A similar threat leveled from Damascus at the newly founded Jewish state was actually quite potent, and cast a dark cloud on the already challenging childhood that awaited the embryonic Israeli economy.
The Israeli economy has since matured and learned to survive by joining the global economy and ignoring its region’s hostility. As it turns 66, however, the global economy itself is transforming, in ways that may hold promise for the Jewish state.
The Arab boycott’s threats were initially effective.
French automaker Renault, which was assembling cars in Israel, surrendered in the mid-’50s and left Israel; Ford canceled a plan to manufacture cars here; and all Japanese car makers except Subaru avoided Israel until the 1980s. The list of surrendering companies ran much longer.
Yet even more daunting than the boycott was the young economy’s burden of war. Lacking peace with any of its neighbors, the new state was predestined to spend much of its meager income on defense.
Israeli per capita defense spending was – and remains – more than three times higher than most other economies’. This meant that development budgets were smaller than other economies’, and worse, manpower that might otherwise have gone to industry and trade went instead to security, thus costing money instead of making it.
Moreover, because Israel’s immediate neighbors wouldn’t trade with it, whatever was made in Israel had to be sold in distant markets, thus spiking shipment costs. Worse, Israel was not only small but also painfully devoid of natural resources, from oil, gas, and coal through zinc, iron and timber, to gold, silver and platinum, not to mention water.
In addition, Israel was absorbing in its first years more immigrants than its entire veteran population, and the immigrants were often Holocaust survivors and expellees from Muslim lands who arrived here penniless, and in many cases undereducated.
And lastly, the Israeli economy was largely built by socialists, who often mistrusted private enterprise, and preferred to provide as much as they could through state-run bureaucracies – even telephone lines and apartments. Fervent believers in market intervention, they subsidized many basic products, imposed high tariffs and duties, and kept taxes high.
Historians will debate the achievements and failures of that era, and also the timing and reasons for its passage. They will all agree, however, that the turning point between the Israeli economy’s socialist beginnings and capitalist aftermath happened in 1985, with the stabilization plan that defeated inflation, cut defense spending, abolished subsidies, made the Bank of Israel independent and sidelined the unions. That was followed in 2003 with vigorous privatizations, tax cuts, pension and capital-market reforms and deep social-spending cuts.
This is how the Israeli economy matured. The shekel turned from one of the world’s weakest currencies to one of the strongest while GDP growth, foreign investments and per capita foreign-currency reserves became among the world’s highest and unemployment, debt-to-GDP and inflation rates became among the world’s lowest.
Now, as the global economy enters a new era, the Israeli economy, if only led with caution and wisdom, may proceed from its previous eras of socialist adolescence and capitalist maturation, to a new era, one of global inspiration.
IN PERFECT CONTRAST to the conditions into which it was born, a set of global trends, regional events, and local circumstances now play into the Israeli economy’s hands. The global trend is about the dawn of a post-Western era.
Until today, the world in which the Israeli economy operated was driven by Europe and America. Between them, Europe and the US comprised a Western axis that manufactured more than the rest of the world.
The existence during Israel’s first four decades of non-Western economies was almost irrelevant, as trade with the Eastern Bloc, China and India was negligible, and even after the fall of Communism, the newly freed economies were orbiting the West.
Now all this is changing. China’s economy is expected to end this year larger than the United States’, and India’s economy is expected to outsize Japan’s, according to the World Bank’s International Comparison Program.
While these measurements are not about absolute economic output, but about purchasing power parity, which configures local costs of living, the bottom line is clear: the West is no longer alone. An era is drawing to a close, 142 years in which America’s was the world’s largest economy.
Moreover, this is the end of the Christian world’s status as the world’s economic locomotive, a status it enjoyed ever since the industrial revolution.
America’s loss of economic prominence is very relative and will take long to mature, much the way Britain’s did between 1872 and 1945.
Moreover, Uncle Sam’s special place in Israel’s markets, psyche and heart will continue to be dominant. Similarly, Europe will continue to be Israel’s major trading partner. Yet Israel’s trade map is already transforming dramatically.
For one thing, following the end of the Cold War, Russia and Azerbaijan became Israel’s major oil suppliers.
But much more significantly, in 2014 Israeli sales to Asia, at just over a quarter of overall exports, will for the first time exceed exports to the US.
Europe’s share, at roughly 40 percent, is also steadily shrinking, while Asia’s is growing every year.
While this trade is dominated by Intel’s and Israel Chemicals’ exports to China, and by defense deals with India, the Jewish state is increasingly seen in Asia as offering something that transcends ordinary merchandise: inspiration.
From 2003 to 2013, Israeli entrepreneurs built and sold 772 start-up companies for a total of $42 billion. Then, in the 12 months that ended in January, 45 Israeli start-ups were sold for an aggregate $6.4b, besides $1.2b. raised in public offerings last year, and $673 million in this year’s first quarter.
Such start-ups, from navigation software Waze and cyber-protector Trusteer to cellphone-service accelerator Intucell and game-console developer PrimeSense, which were bought by industry powerhouses like Google, IBM, Cisco and Apple, embody the self-empowerment that China will need as its economy approaches its next phase. The Chinese realize this and are therefore attracted to Israel’s entrepreneurial culture.
In India, meanwhile, Israel is helping inspire a pioneering spirit in the Subcontinent’s huge farming sector, where Israeli experts scattered in 30 centers of agricultural development in 10 Indian States are introducing new irrigation and fertilizing technologies.
Meanwhile, Israelis are helping farmers from Central Asia to Latin America plant new crops, double a cow’s milk and multiply an acre’s output.
Such entrepreneurship exported to the emerging powers of a post-American global economy will increasingly dominate the Israeli economy. Considering these countries’ refusal to mix business and politics, their geographic proximity, their special needs and Israel’s special abilities – the new era holds great promise Israel.
In Israel’s own region, alas, no such transition is expected anytime soon.
THE MIDDLE EAST’S multiple civil wars, which have raged over the past quarter-century from Lebanon, Iraq and Syria to Yemen, Sudan, Libya and Algeria, not counting additional strife in Egypt and Bahrain, add up to a regional catastrophe.
Hopefully, when this violence finally spends itself it will be followed by a spirit of tolerance, the way Europe emerged from the Thirty Years’ War. If and when such an era someday dawns, Israel will obviously welcome it. For now, alas, Israel must assume it will generally continue taking its business elsewhere, as it did in its first 66 years.
At the same time, while demanding more investment in anti-terrorism and anti-guerrilla resources, the regional mayhem allows Israel to cut its investments in conventional-war tools. This is a challenge Israel’s current leaders have so far failed to meet, neglecting to emulate Yitzhak Rabin’s courageous 20% cut in defense spending in 1985, without which that year’s economic revolution would not have happened.
Lastly, there is the local circumstance of newly found gas.
Energetic bounty has ironically arrived in Israel when it was needed least, four decades after the oil embargo and well after Israel had anyhow begun to prosper. Moreover, such sudden cash inflows have previously wrecked economies, making local currencies expensive, raising the price of labor, and exposing national budgets to volatility in commodity markets.
Theoretically, this danger was already addressed when the government adopted then-Bank of Israel governor Stanley Fischer’s recommendation to establish a sovereign fund that would dam much of the expected gas revenues and then drip them into the economy in small, steady, long-term doses, much of which will go to education and social spending.
This brave vision, like the trimming of defense spending, remains to be executed, as Israel begins to sell the gas that is believed to equal its energy needs for two generations at least.
Similarly, as it braces for the global economy’s post-American era, Israel will also have to narrow the gaps between its rich and poor, a category in which it is embarrassingly worse than most developed economies.
Then again, daunting as its new challenges may prove, the Israeli economy should be able to meet them – judging by its first 66 years.