Wednesday, August 09, 2006

The Israeli Economy

Until this last war, the economy of Israel was doing fine, not great, but fine. I read in a recent Barrons article, Israelis earn over twenty-one thousand a year, a figure comparable to many EU countries. Exports were over forty billion, much of it high-tech. Until recently, Israel, because of its trained workforce and aptitude for high technology, was capable of bringing in investment capital. Warren Buffet’s purchase for 4 billion of Iscar is a good example. More than a third of Israelis hold university degrees thanks largely to immigrations from the Soviet Union. The IDF remains a way for incubating new high technologies. Since the beginning of this century, the Tel-Aviv stock market has done much better than ours. We are essentially flat; they are up around 28%.

Despite these rosy figures, there are some negatives. The spread between the very rich and the very poor is greater in Israel than in America. I have read, though I don’t have the reference in front of me, that five percent of Israelis own 80 percent of the country. The income of the ten percent wealthiest strata is more than ten times the income earned by the bottom rank. Almost a third of the children live under the poverty line. Sefardim earn a third less than Ashkenazim. Israeli Arabs, a fifth of the population, are a large part of the bottom strata. People estimate that the real unemployment rate when you include both charedim who study Torah and discouraged workers is around eighteen percent. The educational system as a whole is not doing great. High school graduates score amongst the lowest when compared to other developed countries. A beleaguered country like Israel needs a citizenry that believes they are living in a just society. Patriotism and justice go together.

Right wing politicians want to say that peace isn’t really necessary for a growing economy. Left wing politicians and intellectuals claim that economic growth declines during periods of war and violence. I agree with the left. It seems to me that when there’s a war, tourism declines, investment capital is discouraged, the hotel industry goes kerflooey, and consumer confidence declines. Normally, the construction industry and real estate prices would also decline. In recent years, however, because of the anti-Semitism in Europe, especially in France, there’s been a steady stream of potential immigrants buying apartments in Israel.

In this war, serious economic losses have befallen over a million and a half Israelis. Many businesses were forced to close because of the conflict. There has been a partial mobilization of the army, 100+ deaths and hundreds of injuries, while 500,000 Israelis are forced to live in bomb shelters. Many inhabitants of the north have fled to the south.

A friend sent me this very dramatic short patriotic video showing photos of Israelis, both military and civilian, during these last few very difficult weeks. The ongoing stress and trauma is obviously visible, which must also be reckoned a cost of the war. Trauma experts believe that more than half a million children in the north could suffer from post-traumatic stress as a result of the war. It would be very sad if no money can be found to help these children to heal.

Olmert has said that the convergence plan of partial withdrawal on the West Bank is still on the agenda once the war ends. I don’t see how he expects to get the support of the Israeli public. But even if he can, where is the money going to come from? It is going to be expensive to rebuild the supplies of bombs and equipment, and improve the IDF for a possible future war. Nor does it seem likely that Labor will be able to make good on its campaign promise to increase social spending, and thereby rectify some of the excesses of Netanyahu’s policies as Finance Minister. There will be no excess money unless there is a tax hike.

I think the biggest danger over the long term for the Israeli economy is a brain drain. Three quarters of a million Israelis already live in the United States, many of them entrepreneurs, scientists and academics. Israel’s primary resource is its intellectual and business elite. About two-thirds of the Israeli doctoral candidates in the United States in the sciences and in engineering have no intention of returning to Israel. Most of these yordim (emigrants) did their army duty, risked their lives and then said ‘enough…no more.’ One has to understand that the endless war Israel is facing creates the feeling of despair amongst many young people. This feeling is augmented in secular Israelis by their resentment towards the Ultra Orthodox for avoiding the draft. Over time, the Zionist ideology of their elders begins to wear thin. People need hope the situation will improve. With Hezbollah to the north, Hamas to the west and south and a belligerent Iran, it becomes more difficult to be optimistic. A feeling that life in Israel will bring personal fulfillment, and that the prospects for a decent and safe life are favorable and are important considerations for a young person seeking to establish a family.

I am pleased to say that my long term anxiety of a brain drain is not at all evident in this current war. Israeli society has been unanimously supportive of the war in Lebanon in the face of enormous hardships. I hope this indicates the existence of an inner strength and determination in Israeli society that will enable Israel to provide its citizens with a safe and prosperous life.

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