Home inFocus Israel’s Economy Has the Power to Astound

Israel’s Economy Has the Power to Astound

Yoram Ettinger Spring 2013

Tel Aviv is the economic center of Israel.

During 2012, the three leading global credit rating companies, and the International Monetary Fund (IMF) commended Israel’s economic performance and expressed confidence in its long-term viability.

Standard and Poor’s (S&P) reaffirmed Israel’s A+ credit rating in September at a time when it lowered the credit rating of an increasing number of Western countries. According to S&P, “The Israeli economy continues to generate solid economic growth… Major security risks will be contained… There is sufficient political will to prevent a sizable increase in the government’s debt burden… We forecast that by the middle of the decade domestic natural gas production should contribute to improved external and fiscal balances.”

That news came just weeks after Moody’s sustained Israel’s A1 credit rating: “Israel’s stable outlook is underpinned by the country’s high economic, institutional and government financial strength… supported by its relatively high GDP per capita [US$32,000] and its economic resilience… The country’s specialized-export sector is well positioned to rebound quickly should the global environment normalize… Moody’s judges Israel’s susceptibility to event risk as moderate based on the political risks facing the country, both domestic and external… Israel’s own gas production will increase substantially between 2013 and 2016.”

Fitch Ratings maintained Israel’s long term foreign exchange and local currency credit rating at A and A+ respectively, despite the ongoing war on Palestinian terrorism, the Iranian nuclear threat and the raging Arab Street. In April, Fitch cited “Israel’s strong institutions and solid recent macroeconomic performance, rich, diversified economy and strong external balance sheet against a high level of government debt and longstanding geopolitical concerns.”

The International Monetary Fund (IMF) published its annual report on Israel’s economy in April as well, noting, “Israel’s economy remains strong… led by robust private consumption and buoyant investment… Israel’s fundamentals are strong: inflation and inflation expectations are squarely within the 1-3 percent target range; unemployment is at historic lows; the net international investment position is a surplus; and public debt has fallen steadily to below 75 percent of GDP… The Israeli financial system currently appears to be generally robust… The current combination of external threats and the relative stability of the domestic system are propitious for strengthening the crisis management framework…” The IMF report added that the recent discoveries of natural gas fields may transform Israel to a net energy exporter in coming years.

Economic Indicators

While most of the world is afflicted by an economic meltdown, Israel demonstrates fiscal responsibility, sustained economic growth, and a conservative, well-regulated banking system with no banking or real estate bubble.

For example, from a 450% galloping inflation in 1984, Israel managed to hold inflation in check at 1.6% in 2012. Israel’s budget deficit and unemployment were 4.2% and 6.9% respectively in 2012, significantly lower than the OECD average of 7% and 8%.

During the 2009-2012 global economic crisis—without a stimulus package and in spite of the stoppage of the natural gas supply from Egypt, which increased energy costs—Israel experienced a 14.7% growth of gross domestic product (GDP), the highest among OECD countries. Israel led Australia (10.7%), Canada (4.8%), the United States (3.2%), Germany (2.7%), France (0.3%) and the Euro Bloc (which suffered a 1.5% decline in GDP). Israel’s 2012 GDP growth (3.3%) leads the OECD, which averaged 1.4%, is higher than the U.S. (2.2%) and Canada (2%), but lower than India (4.5%) and China (7.5%).

Israel’s GDP of $250 billion in 2012 catapulted 120 times since 1948. From $1,132 (1962) and $19,836 (2000) GDP per capita, Israel surged to $32,000 GDP per capita in 2012. While the debt/GDP ratio—a key indicator for the rating companies—is the Achilles’ heel of most countries, Israel has managed to reduce it rapidly. From about 100% in 2002, it was compressed to 75% in 2012, compared with the OECD average of 78%.

The Bank of Israel foreign exchange reserves—which are critical to sustain global confidence in Israel’s economy and Israel’s capabilities during emergencies—soared from $25 billion in 2004 to $75 billion in 2012, 26th in the world and one of the top per capita countries. The Swiss-based Institute for Management Development (IMD) ranks the Bank of Israel (Israel’s “Federal Reserve”) among the top five Central Banks in its 2012 World Competitiveness Yearbook for the third year in a row.

Recognizing Israel’s promising economic indicators, Kasper Villiger, Chairman of the United Bank of Switzerland (UBS) indicated that China, Hong Kong, Brazil, Russia, and Israel are the future growth engines for UBS. Deloitte & Touche, one of the top four global CPA firms opined that Israel is the fourth most attractive site for overseas investors, trailing the U.S., Brazil, and China, but ahead of India, Canada, Singapore, Taiwan, Australia, England, Germany, and Japan.

The High-tech Country

According to Warren Buffet, one of the most successful and conservative investors in the world, “If you’re going to the Middle East to look for oil, you can skip Israel. However, if you’re looking for brains, look no further. [Israel] has a disproportionate amount of brains and energy.” In 2006, Berkshire Hathaway, Buffett’s investment company, made its first acquisition outside the United States, in Israel, purchasing 80% of the Israeli company Iscar for $4 billion. The New York Sun reported that in his annual letter to Berkshire Hathaway’s stockholders, Buffett defined the Iscar investment as “the highlight of the year,” adding that “at Iscar, as throughout Israel, brains and energy are ubiquitous.”

Eric Schmidt, Google’s Executive Chairman, has been a frequent investor in Israel’s high-tech sector via his own private venture capital fund, Innovation Endeavors. He considers Israel “the most important high-tech center in the world after the U.S.,” which will have an oversized impact on the evolution of the next stage of technology. In fact, Google established a large engineering and sales operation in Israel, whose achievements are definitely world-class.

Intel has led the pack of some 400 global high-tech giants that operate in Israel. Intel features four research and development centers, two manufacturing plants and investments in 64 Israeli start-ups. Intel’s President and CEO, Paul Otellini, revealed that “we are the largest private employer in Israel (8,200 employees), and most of those employees have technological know-how. Some of our most sophisticated engineering efforts are carried out in Israel…. We have been in Israel for 40 years and we have done many things. We’re here for the long term…”

A Wall Street Journal book review of Dan Senor and Saul Singer’s book, Start-up Nation: The Story of Israel’s Economic Miracle, reported, “Steve Ballmer [Microsoft’s CEO] calls Microsoft as much an Israeli company as an American company, because of the importance of its Israeli technologies. Google, Cisco, Intel, Microsoft, eBay… live and die by the work of [their] Israeli teams… Israel, a tiny nation of immigrants torn by war, has managed to become the first technology nation…”

Highlighting Israel’s emergence as a high-tech superpower and a unique ally of the U.S., George Gilder, author of The Israel Test and a high-tech guru, wrote in the Wall Street Journal:

Israel cruised through the recent global slump with no deficit or stimulus package… It is the global master of microchip design, network algorithms and medical instruments… water recycling and desalinization… missile defense, robotic warfare, and UAVs… [supplying] Intel with many of its microprocessors (Pentium, Sandbridge, Atom, Centrino)… Cisco with new core router designs and real-time programmable network processors… [supplying] Apple with miniaturized memory systems for its iPhones, iPods and iPads, and Microsoft with user interface designs for the OS7 product line and the Kinect gaming motion-sensor interface… U.S. defense and prosperity increasingly depend on the ever-growing economic and technological power of Israel. If we stand together we can deter or defeat any foe… We need Israel as much as it needs us.

The high-tech giants don’t just talk the Israel talk; they walk the Israel walk. Cisco just made its 11th Israeli acquisition, acquiring IntuCell for $475 million; IBM acquired WorkLight for $60 million, its 11th Israeli acquisition; Sequoia Capital, one of the world leading venture capital funds, introduced its 5th Israeli-dedicated $200 million fund; Hong Kong’s Sir Li Ka-Shing, considered the 9th wealthiest person in the world (net worth $22.5 billion), made his 7th Israeli investment; ChemChina acquired 60% of Agan for $1.44 billion; Siemens acquired solar energy Solel ($418 million) and 40% of Arava Power ($15 million); Apple made its first Israeli acquisition—its first research and development center outside the United States—acquiring Anobit for $400 million; the Dallas-based DG acquired MediaMind $517 million; and there is more.

Israel’s Competitive edge

Israel attracts the elite of global high-tech due to its competitive edge, offering a unique high-tech environment. For instance, the Shanghai Jiaotong University’s Academic Ranking of World Universities—one of three most influential rankings—includes four Israeli universities among the top thirty computer science universities in the world. Twenty universities are from the United States, four from Israel, two each from Canada and the UK, and one each from Switzerland and Hong Kong.

Israel leads the world in its research and development manpower per capita: 140 Israelis (per 10,000) and 85 Americans (per 10,000) are ahead of the rest of the world. Israel’s qualitative workforce benefits from the annual Aliya (immigration of Jews) of skilled persons from the former USSR, Europe, the U.S., Latin America and Australia, who join Israeli graduates from Israeli institutions of higher learning. In addition, Israel’s high-tech sector absorbs veterans of the elite high-tech units of Israel Defense Forces. Israel’s unique security and economic challenges have produced unique, innovative and cutting edge solutions, technologies and production lines. Israel’s informal society has also nurtured ongoing interaction between the academic, research, military, and industrial sectors. Moreover, Israel’s robust demography—which leads the Free World with three births per Jewish woman—provides a tailwind for Israel’s economy.

In order to sustain its competitive high-tech edge, Israel dedicates 4.5% of its GDP to research and development, the highest proportion in the world, ahead of the OECD (2.3%), Sweden (3.8%), Finland (3.5%), South Korea (3.4%), Japan (3.3%), the U.S. (2.8%), Germany (2.7%) and Canada (1.7%).

In advance of Israel’s 64th anniversary, Nicky Blackburn wrote at Israel 21c, “With the most startups per capita worldwide, and the third highest number of patents per head, Israel has become one of the leading players in the world of high-tech innovation, attracting international giants to its shores. From health breakthroughs to technology, agriculture, the environment and the arts, the country’s innovations are transforming and enriching lives everywhere. Israel today is playing a significant role in some of the most important challenges facing our planet.”

In hindsight, the ongoing wars and terrorism, since Israel’s establishment in 1948, have been just bumps on the way to unprecedented economic and technological growth.

Ambassador (ret.) Yoram Ettinger is a consultant to Israel’s Cabinet members, legislators, and the Knesset Foreign Affairs and Defense Committee on U.S.-Israel bilateral projects, U.S. policy, and Middle East politics.