OPINION: Israel’s economy after 75 years is one of the most inspiring narratives of our time

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OPINION: Israel’s economy after 75 years is one of the most inspiring narratives of our time

Israel’s journey from undeveloped, desert economy to Silicon Valley of the Middle East is truly something to celebrate, writes Alex Brummer.

Alex Brummer is a Jewish News columnist and the City Editor, Daily Mail

Israeli innovation is at the heart of some of the most advanced technology in the world
Israeli innovation is at the heart of some of the most advanced technology in the world

Celebration of the economic miracle that is Israel over the last 75-years has been dampened by the weeks of demonstrations and protests in the country and across the diaspora against the Netanyahu coalition’s judicial and other reforms.

Former Bank of Israel governors Karnit Flug and Jacob Frenkel are among prominent global economists who have warned the proposed judicial changes could scare away investors and negatively impact the country’s credit rating. The current governor Professor Amir Yaron has been public in his concern.

He told the Knesset earlier this year that institutional independence is vital to preserving the strong rating of sovereign debt important to overseas investors in the country.

Alex Brummer

‘As an economist I will say that many studies have shown that strong and independent institutions are a vital component of a developed and thriving economy,’ Yaron declared.

The paradox is that it has been under the leadership of Benjamin Netanyahu, in his years as finance minister in Ariel Sharon’s government and as Prime Minister in 1996-1999 and 2009-2022, who is seen as the leader who changed Israel’s economy forever. He transformed the country from a struggling state dominated nation, with high inflation and a weak Shekel, into a free market economy on the Thatcherite model.

Under Netanyahu’s leadership a glittering array of central bankers were attracted to Israel including former World Bank chief economist Michael Bruno, former IMF chief economist Jacob Frenkel and renowned IMF fiscal chief Stanley Fischer. Netanyahu was also responsible for guiding Israel to membership of the OECD, the Paris-based club of advanced Western nations.

Israel’s journey from undeveloped, desert economy to the ‘Silicon Valley’ of the Middle-East is one of the most inspiring narratives of our time. The Israel of 1948 was about Jaffa oranges, Dead Sea chemical plants and low value textiles.

Today’s country is now a leader in advanced technology, cyber security, avionics, telecoms, life sciences and materials research.

Israel was once a butt of Borsht Belt jokes for its lack of native energy resources in a Middle-East region sitting on vast reserves of oil and gas. Prosperity is now supported by self-sufficiency in natural gas particularly important in an age of fuel insecurity following Russia’s barbaric war on Ukraine. As a result it has managed to avoid the 2022 double digit inflation which has been so damaging for many Western economies.

The headline rate of inflation hit 5.4% early in 2023. The Bank of Israel is acting aggressively to bring it down raising its key interest rate to 4.5%. Prices are projected by analysts at Goldman Sachs to moderate to 4% this year.

UK visitors to Israel could not but be aware how Israel has been winning the battle against inflation. At its post-millennium peak in 2007 one pound would buy eight New Israeli Shekels (NIS). Visitors in 2023 currently will receive just NIS 4.45.

It should be no surprise that despite the recent political uproar in Jerusalem and demonstrations outside Downing Street that Britain signed a far reaching new trade agreement in London in March 2023. The UK’s trade relationship with Israel has blossomed to £7 billion annually.

Netanyahu may be a political pariah today but was greeted as a hero of free market economics when he was invited to open trading on the floor of the London Stock Exchange (LSE) six years ago. He addressed the good and the great of British business such as Tim Steiner, a founder of online grocery shopping pioneer Ocado.

Some 25 Israeli-controlled companies have chosen to float their shares on the LSE and the UK government is anxious to learn lessons from Israel’s digitalised health sector as it seeks to drive efficiency in the NHS. British engineers, who designed London’s Elizabeth Line, are working on Tel Aviv’s fast transport system, turning parts of the city into a giant building site.

A decade ago the dialogue between the UK and Israel was dominated by settlements, the two-state solution and broader Middle East politics. The lives of UK diplomats now posted to Tel Aviv are now dominated by economic and commercial issues.

Israel has moved far from its arid, scratch poor beginnings in 1948. It had some early advantages. Not all the early pre-independence immigrants were left-leaning idealists seeking to green the desert and dancing the Hora on Kibbutzim as early newsreels might suggest. Among the arrivals were sophisticated German refugees who engineered a new Bauhaus Israeli architecture resulting among other things in Tel Aviv’s ‘White City.’

As Europe’s universities emptied themselves of Jews, a first wave of scientists and engineers put down the roots of Israel’s advanced science and technological citadels of excellence. The early development of institutions such as the Haifa Technion and the Weizmann Institute paved the way for great sea changes to come.

Israel’s technological revolution has been reinforced by an intense focus by successive governments on research and development with an astonishing 4.65% of national income devoted to the cause. As a consequence Israel is top among advanced OECD nations for the amount of national income devoted to innovation.

Its leadership in this area, making it only second to Silicon Valley, for its creativity and inventions, has been reinforced by the arrival of top Russian scientists, engineers and mathematicians when the barriers to emigration, from the old Soviet Union, came down in the 1980s.

A terrific contribution also is made by Israel’s advanced military with the air force playing an enormous role in taking defence applications and software into civilian territory. Most important is the way the high tech culture has become native to Israel’s further education system and seen by many young people as the path to prosperity. In my own family almost all my first cousins and their offspring (the descendants of Shoah survivors) are engaged in digital transformation.

Early recognition of the values of higher education, innovation and research helped to create a tech powerhouse. It is a story first told to the world in by Dan Senor and Saul Singer in their 2009 book ‘Start-up Nation’ which became a global bestseller.

Israel’s high-tech industries are the key to the country’s modern prosperity contributing 15 per cent to national output (GDP), providing 43pc of the country’s exports and 25pc of the nation’s tax income.

Israel’s status as an advanced economy was sealed in 2010 when it joined the Paris-based club of sophisticated economies known as the OECD. Perhaps, the best measure of its economic strides is the speedy rise in the country’s per capita income: national output divided by population.

On this measure, Israel’s per capita income stood at US $54,847 at the end of last year. At this level per capita prosperity is higher than that in Britain at $47,317 and greater than bigger European countries such as Spain and Portugal. The most recent projections for Israel’s economy show per capita income continuing to rise reaching $65,625 by 2027, an increase of 18.55% from 2022.

Output soared by 6.3% in 2022 as Israel bounced back from Covid-19 restrictions. The OECD project that growth will moderate to 2.8% this year (2023) before picking up to 3.4% in 2024. Higher inflation and a squeeze on disposable incomes will slow private consumption in 2023.

Israel’s historic growth record is remarkable given the polyglot nature of its society. It reflects a triumph of immigration with Holocaust survivors, their children and grandchildren, expelled populations from Arab lands, waves of Russian and Eastern European immigrants demonstrating the entrepreneurial spirit, enterprise and endeavour to drive them up the economic ladder.

Investment in Israel through its most difficult decades in the 1950s, 60s and 70s was supported by large subventions from overseas. Tourists to the country might well believe that Israel, as we know it, would not exist but for American philanthropy given the names which frame so many landmark buildings, parks and monuments.

The reality is the unseen cash flows. German reparations at their peak amounted to more than a billion dollars a year. Most significantly since independence in 1948 Israel has been the recipient of $158 billion of military and other assistance from the US, according to the Congressional Research Service.

It is scheduled to receive a further $3.8 billion of funding this year including $500 million for the ‘Iron Dome’ designed to protect the nation’s vital infrastructure and cities from Hezbollah, Hamas and Iranian sponsored rocket attacks. The continued American support, particularly in the military sphere, illustrates why the current beleaguered government of Benjamin Netanyahu cannot afford to alienate US public and political opinion.

Both the OECD and the International Monetary Fund – which conducts an annual inspection of the economy – also recognise flaws in the society and economy. Among the most disturbing is that the OECD found that Israel has among the biggest income disparities of anywhere in the Western world. At the top end of   Israel’s income scale are the tech entrepreneurs, Russian oligarchs. Established Israeli industrial and banking families dominate corporate ownership on the Tel Aviv Stock Exchange.

At the other end of the spectrum are Israel’s less well-off minorities who find it hard to access the workforce. These consist of the fast growing Charedi groups which often lack the secular education and awareness needed to contribute to wealth creation.

Other struggling segments are part of Israel’s burgeoning Israeli-Palestinian population of two million. Many have advanced the economic ladder and Israel’s healthcare system has proved a great test bed for social and economic equality. Around half of Israeli pharmacists are Arabs and up to one one-third of doctors and other medics.

Left behind in abject poverty are the Bedouin Arabs of the Negev, involved in long running and bitter land disputes with the Israeli authorities. Their communities wrestle with problems of drugs and inter-family violence. In the North several once prospering Arab villages suffer from disturbed relations with Jewish-Israeli neighbours, border restrictions with their West Bank kith and kin and Israel’s largely separate education for Jews and Arabs.

In its most recent, largely upbeat assessment of Israel’s prospects, the IMF noted that Israel’s skills shortages is ‘rooted in the very fragmented education system.’  It points to large socio-economic gaps which means ‘lower performance for Arab and Charedim students compared to their peers.’

The Washington-based Fund warns that skills gaps could hinder development of the hi-tech sector which is largely bereft of Israeli-Palestinian and Charedi workers. Similarly, the proportion of Israeli women employed in the hi-tech is poor and there are great digital disparities between low and higher skilled workers.

In spite of such structural weaknesses in the labour market there can be no dispute about the degree of economic change that has taken place in Israel. A barren land, with limited natural resources, has been transformed into a Middle-Eastern economic power house. Barriers to high performance, such as state ownership of major sectors, largely have disappeared.

In any economy the best opportunities for trading advantage are with your nearest neighbours. That has been denied to Israel for most of its existence because of the extant security threats.

Nevertheless, the openings to the Gulf States and Morocco through the Abraham Accords should be an enormous plus, with many of the modernising and wealthy oil states seeking to invigorate their economies with the best tech and communications.

There are vast opportunities on the horizon and Israel already has demonstrated its ability to reach out to India and China. But the full potential of its economy will never be reached until it better integrates its domestic minorities into the labour force and finds better ways of co-existing with its closest neighbours in the West Bank and Gaza.

  • Alex Brummer is City Editor of the Daily Mail
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