Cheer up, 'Economist'

Despite wars and intifadas, Israel has built an economy able to lead the nation to greater prosperity.

fifty shekels 88 (photo credit: )
fifty shekels 88
(photo credit: )
If Israeli political morale has waned since the botched war against Hizbullah in south Lebanon in 2006, the country's economic self-confidence would seem healthier than ever. But according to a special report in this week's edition of The Economist, Israelis ought to reappraise even that sunny patch of optimism. Citing the country's aggressive unions, over-dependence on the high-tech sector, widening wealth gaps, a faltering education system, low workforce participation and a public sector paralyzed by bureaucratic red tape, the esteemed British magazine claims that "the engines of growth are punier than they look." The report argues that "beneath its gleaming high-tech skin, the body of Israel's economy is slightly worn…. much of the country's traditional industry (e.g., machinery, chemicals, clothing and food), which accounts for more than half of its jobs, is lackluster…. Moreover, Israel's ability to capitalize on the internet boom was a lucky one-off." The conclusion: "The country's greatest vulnerability is not military but economic." THERE ARE, to be sure, economic indicators which ought to cause worry and spur much-needed reforms. Over-centralization, a legacy of Israel's socialist past, stunts growth. The country's wealth is indeed too highly concentrated in the hands of the few. Israel's income inequality rate is one of the highest in the developed world. The percentage of Israeli children living below the poverty line has grown, reaching 36 percent last year. And the country's knowledge-based economy renders it especially vulnerable to ever poorer educational performance. Yet The Economist's bleak tone, unwarranted in itself, becomes disturbing when it steps from economics to politics, and generalizes this gloom into a discussion of the fraying of Zionism. Israel's future, the magazine pronounces, is "as uncertain as at any time in its 60 years of history." This wouldn't be the first time The Economist offered a tendentious reading of Israel's political landscape. In an editorial last year marking the 40th anniversary of the Six Day War, the magazine called that confrontation a "Pyrrhic victory" and "a calamity for the Jewish state no less than for its neighbors." Israel, wrote The Economist, "embarked on its hubristic folly of annexing the Arab half of Jerusalem and - in defiance of law, demography and common sense - planting Jewish settlements in all the occupied territories to secure a Greater Israel." IN THE present case, the facts, some cited by The Economist itself, lend themselves to a rather different interpretation. Israel enjoys one of the fastest growing emerging markets in the world. Israel's gross domestic product (GDP) per capita growth is robust, having remained above 3 percent for the past four years. (GDP is projected to rise 3.8 percent this year, according to the International Monetary Fund.) Israel leads the world in research and development spending as a proportion of GDP. The country hosts the greatest number of NASDAQ-listed companies after the US and Canada. It is home to Teva, the world's largest maker of generic drugs, to telecommunications software firms like Amdocs, to world-class biotech research at the Technion and to Intel's advanced chip production facilities. Silicon Wadi, in fact, is the world's second most important technology cluster. In 2007, venture-capital firms invested $1.76 billion here. Export earnings are up. Tourism is up. So are property prices. Just this month, Forbes magazine rated Israel as the world's most "up-and-coming" real-estate market. Last year Israel was invited to join the Organization for Economic Cooperation and Development (OECD). Nor is this impressive growth showing signs of abating. Privatization, deregulation and capital-markets reform continue to gain momentum, as does the high-tech boom itself. Fiscal management is improving, and with it the credibility of the Bank of Israel, now guided by Stanley Fischer's steady hand. The result is a good forecast: Israel will continue to export start-ups and attract foreign investment. Deficits and inflation will remain under control. Without slipping into complacency, Israel can take pride in its economic accomplishments. Despite wars and intifadas, and in a relatively short time, it has managed to build an economy that is both well-cushioned against political instability, and well-positioned to lead the nation into greater prosperity.