Middle Israel: Lessons from Israel's economic boom

An economic miracle lurks behind TA's skyline while the rest of the Middle East is stagnating.

amotz asa el 88 (photo credit: )
amotz asa el 88
(photo credit: )
The Israeli economy is ablaze. The very hotels, malls, restaurants, theaters, travel agencies, car dealerships and construction sites that earlier this decade stood eerily empty while terror raged in the streets are now brimming with customers, turnovers and profits. Data released last week by the Central Bureau of Statistics indicates that GDP soared 6.6 percent during the first half of the year; since 2002, unemployment has dropped from 10.9% to 7.5%; household spending on durable goods skyrocketed 36%; inflation stood at 1.1%; interest rates sank below the US Federal Reserve's level; and the shekel's dollar value swelled 20% this decade. There is an economic miracle lurking behind Tel Aviv's increasingly Manhattanesque skyline, one that has turned the Promised Land into the Land of Milk and Money and the Jewish state into the developed world's fastest-growing economy. How could all this happen a mere five years after the worst recession in the country's history? Even more curiously, how could this happen when the rest of the Middle East is stagnating? THE BOOM'S causes are varied. Cyclically, as the global hi-tech sector recovered from the so-called "Nasdaq Meltdown," the local technology sector which had long dominated Israeli exports rode the wave, and took much of the economy with it. Structurally, the Netanyahu reforms shook the economy loose: Taxes were cut, public-sector hiring was capped, an elaborate social safety net was slashed, the jobless were enticed to seek work, almost any sellable state asset was sold, the seaports were forced to compete with each other, the retirement age was raised and the pension industry itself was disabused of the unions' domination. Clearly, these reforms are major factors in Israel's economic performance, coupled with the reform of 1985, when hyperinflation was crushed after defense spending was slashed, food subsidies were abolished, price controls were imposed and monetary discipline was introduced. Yet beyond these measures there are two overriding historic circumstances which, paradoxically, fed the Israeli boom and at the same time produced the Arab bust: minerals and immigration. In its first years, Israel's wildest economic dream was that some day, like its neighbors, it too would find oil. Yet it never found commercial quantities of oil, or for that matter of any commodity, from gold and silver to lead and zinc. Heck, it didn't even have timber or water, and that's besides having been largely besieged and hopelessly minuscule. Meanwhile, the fledgling state was compelled to absorb tens of thousands of immigrants, many of them unskilled and almost all of them destitute. As it turned out, Israel's lack of natural resources, like Japan's, was a blessing, as it forced the nation to seek wealth in human brains rather than natural resources. Eventually, reality proved the former more economically reliable than the latter. A by-product of this attitude was the realization that immigrants can be assets rather than liabilities. Israel's current prosperity was also fueled by an immigration wave, the largest in its history. The arrival between 1989 and 2000 of some 1 million immigrants was the equivalent of more than 50 million newcomers landing in the US within a decade. Fortunately for Israel, by the time it faced this challenge, it had the wisdom to allow the markets to create the jobs, housing and education this population demanded, and thus see it dramatically accelerate the retail demand that many of us have grown accustomed to seeing while visiting any of our rapidly proliferating and perennially bustling shopping malls. In sum, Israel proved, unwittingly, that there are ways to thrive in the Middle East even without oil. Its neighbors, at the same time, demonstrated that there are ways to decline even despite, and perhaps because of their mineral wealth and social stability. IN A STUDY titled "The Challenge of Economic Reform in the Arab World" published recently for the Carnegie Endowment's Middle East Center, economist Sufyan Alissa indicated that the Arab world accounts for a mere 4% of international trade, has the world's least-employed workforce, and some of the world's most spectacularly deteriorating growth rates, most notably Saudi Arabia's, which plunged from $22,634 per capita GDP in 1980 to $12,556 by the start of this decade. Clearly, this is a result of overreliance on one source of income, one whose prices fluctuate historically, and whose exploitation has been done in a way that kept most Arabs at arm's length. Arab economies, writes Alissa, are dominated either by oil industries, which account for 90% of all Arab exports, or by public sectors, whose share of the overall economy's workforce is nearly three times its level in Latin America. Add to that the non-oil-producing Arab countries' dependence on foreign aid, foreign debt and remittances from workers they send temporarily abroad, and you get underproductive societies that are inherently exposed to economic volatilities they can neither predict nor affect. Meanwhile, writes Alissa, any attempt to ease capital inflows through deregulation is being hampered by a lack of "capacity to design, implement and manage reform programs." Worse yet, "established elites often have resisted reforms that would harm their economic or political interests," while "they and their privileges remain entrenched." In short, the Arab economies are where Israel was until 1985, when it too stagnated while nurturing an easy-money addiction - though not to minerals, but to foreign aid - and failing to face up to vested interest groups that fought reform. To these one should add the immigration factor. While Israel idealized social mobility and welcomed a penniless but highly motivated and culturally absorbable immigration, Arab governments treated immigrants as liabilities and social mobility in general as a strategic threat. That is why the Gulf's underpopulated states refuse to admit immigrants from overpopulated Egypt and Syria. That is also why they don't even allow their own poor to climb socially, preferring instead to hire imported Asians as their hewers of wood and drawers of water. That is also why the grand Arab world, despite its famous and relatively recent history of economic excellence, is now antithetical to India's, China's, Russia's and Brazil's new mercantilist mentality, economic productivity and social mobility. This is the manner of the political elites that Ehud Olmert and George Bush now eye as the strategic backbone of the peace conclave they are planning for the fall. It follows that whatever pro-Western Arab elites will be prepared to deliver there will have to be - as long as it's up to them - in line with their agenda of aristocratic preservation and their record of social neglect. Whether their enlistment can be done in a way that will also suit long-term Western interests in general, and Israel's in particular, is of course another question. www.MiddleIsrael.com