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Our economic success story

While world struggles, Israel’s economy reaches another milestone

Published: 04.05.10, 13:08 / Israel Opinion

Without you realizing it, Israel is approaching yet another milestone en route to turning into a highly developed economy – our per capita GDP will reach the $30,000 mark this year, likely at the beginning of the summer. The overall gross domestic product, which is the economic value of all the goods and services produced in Israel, will reach roughly $230 billion.

 

Israel fully reached the $20,000 per capita GDP mark only in the first half of this decade. We did it slowly and hesitatingly; the deep recession during the second Intifada curbed economic growth and pushed the economy backwards.

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Reaching the $30,000 per capita GDP mark reflects to a small extent the increase in real national income in shekels, and to a large extent the shekel’s strengthening against the dollar. Yet this does not detract from the accomplishment. For many years, the shekel has been traded in foreign currency markets below its real purchasing power.

 

We can address the $30,000 GDP mark as yet another statistical figure; just another fleeting figure. Yet we can also look at it as a starting point for a leap in the coming decade. The Israeli economy’s state at this time is exceptionally good: Other economies whose per capita GDP is similar to ours – Spain, Greece, Portugal, and Britain just to name a few – sustained harsh blows during the financial crisis. They will dedicate the coming years to licking the wounds and attempting to extract themselves from the abyss of deficit and debt. Their recovery will be slow.

 

Window of opportunity

This is our window of opportunity. While in most developed and industrialized states are weakened and bleeding, while their government budgets skyrocketed, Israel is strong and in good health. In six of the seven leading industrial powers, the ratio between government debt and GDP is expected to grow by dozens of percents in the coming years. The debt will reach 90% of the GDP in Germany, 96% in France, 100% in Britain, 110% in the US, 130% in Italy, and 250% in Japan. In Spain, Greece, Portugal, and Ireland, the ratio is expected to stabilize somewhere between the 100% to 150% mark.

 

Yet in Israel, the opposite is expected to happen: Government debt is expected to go down to only 70% of GDP, with the decline starting as early as this year. The budgetary plan presented to the government by Foreign Minister Yuval Steinitz is a pipe dream for most finance ministers in developed countries.

 

Israel’s new comparative advantage is prominent in many areas. The Irish government, for example, announced last week a national rescue package for local banks, at a total cost of 80 million Euros. The British, French, and American governments are close to imposing special taxes on financial institutions, in order to fund at least some of the assistance handed over to them during the crisis. Yet in Israel there’s no need for it. Israel’s banking system overcame the past two years without taking a penny from the government.

 

Ambitious target

Late into his tenure as finance minister, Benjamin Netanyahu presented an ambitious target for Israel: Joining the list of top 10 or 12 richest economies in the world. Is this target realistic? Based on today’s perspective, the answer appears to be “yes.” In order to join the group of truly wealthy states, Israel needs to reach the $40,000 per capita GDP mark. To that end, our economy must grow at an annual rate of 6.5% in the next six or seven years, assuming that the shekel exchange rate won’t shift much from its current level of about NIS 3.6 per dollar, and that our population will grow by 1.8% annually.

 

This isn’t impossible; the target can be reached. In the years 2003-2008, Israel’s economy grew at an average annual rate of 5.5%, with a less convenient starting point and with two wars in the middle.

 

So what can the accelerated growth in the coming years be premised on? What are its possible engines? Here they are: Tens of thousands of ultra-Orthodox men joining the workforce, boosting the production of Israeli Arabs, improving the quality of education and employment in outlaying areas, massive investments in physical and educational infrastructure, expanding the export base and directing it to new markets, slowing down the defense budget growth, and removing bureaucratic obstacles. These are the main required steps. All of them, without exception, will minimize economic gaps within Israel.

 

We are already enjoying strong backwind. Here are four examples: The kibbutzim reinvented themselves and have again turned into an economic asset and a significant growth accelerator; the discovery of natural gas by businessman Yitzhak Tshuva frees Israel of the depdendancy on coal and dramatically brings down the cost of producing electricity; the Arab sector is seeing an unprecedented entrepreneurial business revolution; Israeli software companies are taking over Africa – and there are many more examples.

 

Diplomatic component

At this time, Israel is equipped with the needed means for a great leap. These means are integrated and also include a diplomatic/political component. In the past, Netanyahu claimed that Israel can grow and become wealthier even without a peace deal (but not under intifada conditions). Yet now he knows: A diplomatic agreement with the Palestinians is a vital condition for the great economic leap. First and foremost, because without such deal, the world will have trouble countering Iran and forcing it to abandon its nuclear program.

 

The grave economic implications that Iranian nuclear capabilities will have for Israel’s economy are horrifying. A nuclear arms race will add tens of billions of dollars to the defense budget, at the expense of developing the economy. One government body has already prepared a scenario for the day after Iran acquires a nuclear bomb: Foreign investors fleeing, Israeli investors taking their money and assets out of the homeland, and the grim and frightened national mood paralyzing production.

 

On the other hand, an Israel-Palestinian agreement would serve as a lever for orchestrated global activity – and possibly military action as a last resort – against the Iranian nuclear program. This will enable us to save tens of billions of dollars. Such deal will also open up the giant markets of rich Gulf states, which are desperate for the kinds of products and services Israel specializes in, ranging from right-to-left software systems to salt water purifiers for desert springs.

 

Incredible gift

Communism’s collapse in the late 1980s granted Israel an incredible gift in the form of the massive immigration from the former Soviet Union and the opening of export markets that were off limits for dozens of years. Israeli governments and the business sector managed to take advantage of the opportunity and completely change the face of our economy. Within about 12 years, we went up from a $10,000 per capita GDP to $20,000 per capita GDP.

 

Later we turned from a state that owes money to foreigners and contends with a foreign currency shortage to a country that foreigners owe money to, and that has foreign currency surpluses. Our economic, rather than military, independence is full by now.

 

The 2007-2008 crisis again grants Israel an incredible opportunity, this time in respect to competing against the developed world; the crisis undermined its pillars and posed deep trouble for it. Will we be foolish enough to miss out on this opportunity?

 

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