Money, Industry, Innovation: What Counts in the Israeli Economy

Pioneering agricultural workers in Petach Tikva circa 1930, source: pickiwiki.org.il

Lots of people have written about the "amazing Israeli economy". Just recently the two books Start-up Nation and The Israel Test (Guilder) are examples of how Israel amazes people around the world. The reality is a little different than just simple amazement. Some things are truly amazing, and people coming to Israel the first time really see us as unique. Some are not amazing at all, but are still different. Israel, like many small countries, does a few things very well. There are great engineering companies here and some of the best international engineering teams for companies like: Intel, IBM, Motorola and Microsoft. Some things like drip irrigation and solar water heating are simple and amazing and made a huge difference in how Israelis live. But the most unique factor here is how people have focused on the economy like very few other countries. The countries who have done similar things also succeeded: Japan, South Korea, Singapore, Brazil, Chile and recently China. They achieved just as much as Israel. The one big difference between Israel and other countries is our geographic location. Some it tied to natural resources: Israel has none! People do not expect Israel, amongst so many Arab countries, to be so successful. They also do not expect a new country, with very little to start with, not even a base population. Essentially the country started out with fresh immigrants all coming from a distressed environment. European Jews came from that horrible experience in the holocaust. Middle-Eastern Jews coming from discrimination in Arab countries.

It turns out that the economy in general is probably the single most important element in Israel's success. In the economy the most single element that has succeeded is keeping people employed. Keeping people employed means producing something. In the early days it was agriculture products with people who did not have agricultural background. Finally, the overall development of niche products, to be unique and strong in something small. This has meant doing all kind of things which sometimes go AGAINST social and government theories. In the 1970s and 1980s Israelis went into diamond polishing and established a large sector. Both private people and the state worked on building up the diamond polishing industry. Israel's strong position ended when countries like India started polishing diamonds, especially the low cost ones which were the high volume sellers. Losing this industry created a temporary depression in the Israeli economy, but Israelis weathered the storm and moved on to other niche markets. I will go into examples in more detail in future articles.

Currently Israel has invested heavily in innovation (technology, biotechnology and services) and in international trade. Israel has gone through the Dot-Com bubble and also through a downward real-estate cycle (2005-2008). In 2006 / 2007 there was a real fear that many small Israeli manufacturers would close down due to the total meltdown of bank credit here. The government offered loan guarantees but they were tied it to companies who needed money to market or manufacture products ready to sell. The problem was, small Israeli manufacturers did not know how to market internationally. Today there is a strong effort to send Israeli managers to train in international marketing and business. Learning and working in marketing at a local level is just not enough to compete on a global scale. In addition, Israel is also expanding it's reach globally by sending experts to new places not familiar with our fields of expertise (technology, building, finance, agriculture). In agriculture, specially in semi-arid climates, Israeli firms have developed varieties of fruits and vegetables able to grow well with less water. Today's Israeli seed companies enable farmers in countries around the world grow better produce and lower the risk associated with drought. One thing you notice in Israel is innovation in many areas. This reflects the curiosity and energy in the Israeli culture. You don't have to be an Intel chip designer or a Google programmer to invent something new. You can do it as an architect, a farmer, a pharmaceutical chemist and a financial analyst. The economic factor in Israel's success is a fascinating topic. I will write more and show some examples from today's life in future articles.