Israeli economy booms louder than intifada

Amotz Asa-Al:

The Israeli economy is ablaze. The very hotels, malls, restaurants, theaters, travel agencies, car dealerships and construction sites that earlier this decade stood eerily empty while terror raged in the streets are now brimming with customers, turnovers and profits.

Data released last week by the Central Bureau of Statistics indicates that GDP soared 6.6 percent during the first half of the year; since 2002, unemployment has dropped from 10.9% to 7.5%; household spending on durable goods skyrocketed 36%; inflation stood at 1.1%; interest rates sank below the US Federal Reserve's level; and the shekel's dollar value swelled 20% this decade.

There is an economic miracle lurking behind Tel Aviv's increasingly Manhattanesque skyline, one that has turned the Promised Land into the Land of Milk and Money and the Jewish state into the developed world's fastest-growing economy. How could all this happen a mere five years after the worst recession in the country's history? Even more curiously, how could this happen when the rest of the Middle East is stagnating?

THE BOOM'S causes are varied.

Cyclically, as the global hi-tech sector recovered from the so-called "Nasdaq Meltdown," the local technology sector which had long dominated Israeli exports rode the wave, and took much of the economy with it.

Structurally, the Netanyahu reforms shook the economy loose: Taxes were cut, public-sector hiring was capped, an elaborate social safety net was slashed, the jobless were enticed to seek work, almost any sellable state asset was sold, the seaports were forced to compete with each other, the retirement age was raised and the pension industry itself was disabused of the unions' domination.

Clearly, these reforms are major factors in Israel's economic performance, coupled with the reform of 1985, when hyperinflation was crushed after defense spending was slashed, food subsidies were abolished, price controls were imposed and monetary discipline was introduced.

Yet beyond these measures there are two overriding historic circumstances which, paradoxically, fed the Israeli boom and at the same time produced the Arab bust: minerals and immigration.

In its first years, Israel's wildest economic dream was that some day, like its neighbors, it too would find oil. Yet it never found commercial quantities of oil, or for that matter of any commodity, from gold and silver to lead and zinc. Heck, it didn't even have timber or water, and that's besides having been largely besieged and hopelessly minuscule. Meanwhile, the fledgling state was compelled to absorb tens of thousands of immigrants, many of them unskilled and almost all of them destitute.

As it turned out, Israel's lack of natural resources, like Japan's, was a blessing, as it forced the nation to seek wealth in human brains rather than natural resources. Eventually, reality proved the former more economically reliable than the latter. A by-product of this attitude was the realization that immigrants can be assets rather than liabilities.

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There is more. Tax cuts and cutting the growth of government seems to work in other countries too. It is too bad more do not try it. Contrast the growth in Israel with the existence in Gaza or Cuba where control freaks reign.