Elisabeth Meinecke

Israel’s economic prowess currently stands in stark contrast to its neighbors. How did the country now labeled an ‘economic miracle’ manage to beat the odds? Seth Mandel explores this for Townhall Magazine.

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In July 2012, Mitt Romney, the presumptive Republican nominee for president, landed himself in hot water for uncharacteristically politically incorrect remarks. At a fundraiser in Jerusalem, Romney pointed out the economic disparity between Israel and the Palestinians. Geography could not explain it, but something else could; paraphrasing the economist David Landes, author of the influential “The Wealth and Poverty of Nations,” Romney said, “Culture makes all the difference.”

What happened next was about as inevitable as death and taxes. Romney was called a racist by the Palestinians and their supporters. Bizarre stories in The New York Times and Washington Post designed to make Romney look foolish had the reverse effect: the articles were so riddled with bias and ignorance about the Middle East it was hard to believe the reporters were willing to put their names on them. And Romney’s comments were without question correct: he simply repeated not only what economists and historians have concluded but what Arab intellectuals and educators have themselves said for decades.

The debate that raged on in the wake of his comments focused, perhaps understandably, on only the Palestinian side of the equation. That’s too bad, because just as the Jewish people believe they have a responsibility to be a “light among the nations” by keeping to exemplary moral and ethical behavior, so too does Israel have something to say on economic policy, having weathered the recent global financial crisis better than her Western colleagues and counterparts.

The debate that raged on in the wake of his comments focused, perhaps understandably, on only the Palestinian side of the equation. That’s too bad, because just as the Jewish people believe they have a responsibility to be a “light among the nations” by keeping to exemplary moral and ethical behavior, so too does Israel have something to say on economic policy, having weathered the recent global financial crisis better than her Western colleagues and counterparts.

This was illustrated perfectly in a February Washington Post profile of Stanley Fischer, who announced he will step down this year as the governor of Israel’s central bank. Fischer has attained heroic status in Israel, and the piece’s author, Dylan Matthews, was no less subtle, headlining his profile: “Stan Fischer saved Israel’s economy. Can he save America’s?” Fischer’s record withstands the scrutiny such claims draw: he by and large has earned his plaudits. And, in the end, it has been this mix of economic policy and culture that allowed Israel to flourish in a way somewhat foreign to its neighbors.

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The stabilization program revolved around a successful plan to immediately and dramatically reduce the government deficit, rein in union wages and cut inflation. It worked and completely restructured the Israeli government’s approach to the economy by easing the regulatory state and giving the private sector much of the economic space previously clogged by the government. Because it decreased government expenditure, it also reduced the state’s dependence on foreign aid and other external sources of income. In the following years, other steps were taken to put the private sector on more equal footing with the government in regard to tax and investment rules.

The timing of the stabilization program was crucial—not only because the Israeli economy was spiraling fast but also because the fall of the Soviet Union would bring an influx of an enormous number of immigrants who could only be absorbed effectively by a healthy job market. As Ben-Bassat notes, between 1989— just before the mass immigration began—and 1996, Israel’s unemployment rate actually dropped 2.6 percentage points, an almost unbelievable statistic. (Ben-Bassat adds that the absorption of the immigrants was so successful it actually lowered unemployment among non-immigrants as well.)

The other element integral to the success of Israel’s economy is the high-tech sector. This is the core of the start-up nation, as evidenced by the book that coined the term, written by Dan Senor and Saul Singer in 2009. And this can be boiled down to the intersection of two factors: first, the risk-taking culture appropriately praised by Senor and Singer; and second, a pitch-perfect example of how necessity can be the mother of invention. It is Israel’s geopolitical predicament, for example, that convinced tech maven Shai Agassi of the need to develop electric cars as a feasible alternative that could make Israel energy independent and which led to the founding of the electric transport company Better Place in 2007. And learning how to recognize the web fingerprints of a potential terrorist while serving in the Israel Defense Forces enabled Shvat Shaked, founder of Fraud Sciences, to create pathbreaking e-commerce security software for PayPal. According to Rivlin, between 1995 and 2008 Israel’s high technology output increased 183.5 percent.

In 2010, Israel’s status as an elite, free market economy was confirmed with an invitation to join the Organization for Economic Co-operation and Development (OECD). While this puts the Jewish state in the top tier of world economies, the contrast with Israel’s immediate neighbors is especially striking. The World Economic Forum ranks Israel 26th in global competitiveness; Egypt comes in at 107, Jordan at 64, Lebanon at 91, and Syria—now disintegrating into violent collapse—isn’t included in the ranking at all. Israel’s bureaucracy may still be daunting, but Transparency International puts Israel in 39th place in its global corruption perceptions index; Egypt lands at number 118, Jordan at 58, Lebanon at 128, and Syria at 144. The International Monetary Fund puts Israel’s gross domestic product (GDP) per capita at around $33,000 for 2012, Egypt’s around $3,000, Lebanon’s at a little over $11,000, and Jordan’s at slightly under $5,000.

Even among Israel’s OECD peers, her economic strength is apparent. Among Israeli adults aged 25-64, 80 percent have the equivalent of a high school degree—higher than the OECD average of 74 percent. Average personal financial wealth in Israel is at $47,750, well above the OECD average of $36,238. Life expectancy at birth in Israel is approximately 82, which is two years more than the OECD average. Given these numbers, it shouldn’t be too surprising that Israelis work more and longer hours than the OECD average. The willingness to work those long hours may have something to do with the fact that Israel—a country with a population of under 8 million—has more companies listed on the NASDAQ stock exchange than every country except the U.S. and China.

There is one more piece to the story of Israel’s “economic miracle,” as Senor and Singer term it. In between the grand 1985 economic stabilization plan and Fischer’s deft monetary policy that shielded Israel from the worst of the global downturn in 2008, there was a major economic achievement led by Benjamin Netanyahu in 2003....

Excerpted from Townhall Magazine's May feature, "Israel: Beating the Economic Odds," by Seth Mandel. To read more of Mandel's analysis, subscribe to Townhall Magazine today.

 

 

 

 


Elisabeth Meinecke

Elisabeth Meinecke is TOWNHALL MAGAZINE Managing Editor. Follow her on Twitter @lismeinecke.