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In the peripheral belts of the two main cities of Israel, just a drive around is enough to notice the landscape of the industries that lead the country’s growth. Besides the multinational companies – which are strategic in the production of computers, software and micro components –the Israeli companies dedicated to the fields of information technology, pharmaceuticals and aerospace, among others, stand out.
Those are silent factories, with little movement of workers on the streets, that seem purged of traditional industries and their sounds and smells. The truth is that, in a period of less than fifteen years, the high-tech sector took command of the economy. The manufacturing industry accounts for almost 35% of the GDP (Gross Domestic Product) located at 250 billion dollars, and around 75% of the exports. The high tech slice is responsible for 15% of this performance and paves the way for the high productivity of other activities.
Mikhail Frunze/Opera Mundi
Several nations have higher coefficients, such as Mexico, with 17% of its exports classified as high added value. But the flagships, in this example, are the maquiladoras – the country just puts together and exports foreign technology. The Israeli case is very different: excluding the military, the country applies 4.5% of its economy annual income to research and development, by far the best world performance.
There are other impacting numbers. With only 7.7 million inhabitants, the country has stocked nearly 75 billion dollars in direct investments, an average of $ 9,490 per capita, nearly three times more than Brazil, in relative terms. It is the 49th destination of global capital, but it is among the top ten when the population size is taken into account.
The weight of the so-called Silicon Wadi (as the Israelis like to call their most advanced supply chain; it´s the Hebrew translation for of Silicon Valley), made a solid contribution to raising the GDP per capita to $ 32,200 in 2012, reaching the 27th place in the ranking. Over the past decade, according to the IMF (International Monetary Fund), the actual value of the Israeli economy, per citizen, grew 48.64% – against 27.83% of the European Union, 30.26% of the United States and 32.67% of the 35 other countries with higher income per capita in the world.
“Our turn began in the '80s,” says Eldad Shidlovsky, head of the research department of the Ministry of Finance. “The reforms designed to tackle hyperinflation and the uncontrolled public deficit through privatizations and cuts in state spending created the conditions for modernizing the production facilities.”
Until the stabilization program, implemented from 1985, Israel had a substantial growth rate, but it was centered on government action, the resources arising from war reparations, the U.S. support for security expenditure and the solidarity capital that came from the Jewish diaspora.
Only one third of the industrial and agricultural enterprises was in the hands of entrepreneurs. Another third was controlled by the state or cooperative organizations. And the rest was owned by the powerful trade union federation, the Histadrut, which was also the largest employer.
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Military funding reached more than 15% of GDP and the government was spending over 55% of the national income in a rapidly rising curve after the 1967 war, when it occupied new territories. The model was blown apart and had severe adverse affects on Israel, with annual inflation reaching the extremely high rate of 445% (1984). Banks collapsed, the economy collapsed.
Liberal playbook
Aided by a generous credit line made available by the United States, a joint administration made between The Labour Party and Likud implemented the liberal playbook to work the country’s way out of the crisis. The main formulator of the package, Stanley Fisher, would end up being hired, twenty years later, as the president of the Central Bank.
In addition to making deep cuts in expenses and state grants, which spared only the military, the government took away the pension funds and the health insurance from the hands of the unions, forcing the Histadrut to sell almost all of its assets. State companies were auctioned. Israel had abandoned the dream of being a fairly egalitarian society and based on welfare politics, but opened the way to become one of the largest business squares in the world.
Mikhail Frunze/Opera Mundi
Israelis have lunch at a market in Tel Aviv, the country's most cosmopolitan city
“The capital flow, after the stabilization program, was essential for the remodeling of the economy,” explains Shidlovsky. “This ingredient catalyzed other elements that were already present, as the technological sophistication of the armed forces, the high educational level of the population and the Russian immigration after the collapse of the Soviet Union. The synergy of these four vectors is the birthplace of our high tech industry. “
Aluf Benn, editor of the Haaretz newspaper, an inveterate critic of the Zionist right, likes to say that “Stalin, Khrushchev and Brezhnev paid for the Israeli development.” In the 90s, after all, thousands of engineers, chemists, physicists and mathematicians have joined the Israeli companies, allowing a cheap and immediate qualitative leap. Socialism had given his last contribution to Israel.”
“The country's budget, however, reveals a fifth component in the making of what the most enthusiastic call an ‘economic miracle.’ Through the Law for the Encouragement of Capital Investment and other measures, the government provides an appetizing menu of subsidies, credits and exemptions for the installation of new companies or the expansion of those already installed. Taxes for large corporations are among the lowest in the world.
“The public deficit, beginning in the 80s, just changed beneficiaries,” says Professor Arie Arnon, from Ben-Gurion University. “Military spending remained relatively stable in absolute numbers, but the government takes resources from the public services and the social programs to finance the settlements in the occupied territories and the high-tech entrepreneurs.”
Mikhail Frunze/Opera Mundi
Arie Arnon, Professor at Ben-Gurion University: “The public deficit, beginning in the 80s, just changed beneficiaries”
The fact is that, with the rapid growth of the economy, the relative share of certain expenses fell significantly, although its monetary value was maintained, or even increased. The general government payments now account for just over 40% of GDP, a cut reduction of almost 25% compared to the year 1985, used here as a parameter. In the same period, the military budget declined from 14.5% to 7.5%, continuing to be one of the ten largest military expenditures in the planet.
“The Oslo Accords, followed by a state of relative calm in the past ten years, offered greater security to investors,” says Shidlovsky. “On the other hand, military spending still accounts for about 30% of the budget, but have been much higher before. Our tax margin of maneuver is greater than before. “
Commercial deficit
The attraction of capital is decisive for Israel, at the risk of not making ends meet. The country has an almost permanent trade deficit, largely due to the importation of arms and ammunition. Part of this deficit is covered with large grants from the U.S.- the official figure is 3.5 billion dollars a year – about 20% of the 18 billion used to finance the military, or just over 27% of the negative balance of 12, 85 billion in purchases and sales abroad, judging by the 2012 data.
Another reason for the disequilibrium is the currency. The investments flow, which finances the industrial boom and fixes the internal deficit, also raises the shekel value, the local currency, making exports of goods and services with lower value harder, which are not benefiting from the increased productivity derived from the technology boom.
Mikhail Frunze/Opera Mundi
Eldad Shidlovsky, of the Ministry of Finance: “the capital flow was essential for the remodeling of the economy”
The strong shekel, however, contributes to the struggle against inflation, as it lowers the price of imports. It also facilitates the internationalization of the Israeli capital, rapidly expanding to other countries. The amount of international assets reaches $75 billion, similar to what the world capitalists possess inside the country.
The optimistic view, however, is far from unanimous. “The fragility of the Israeli economy is bigger than it looks,” says Professor Arnon. “Capital flight can occur at any time, due to the conflict with the Palestinians or with other nations in the region, blowing up the basis of the entire Israeli economy. We depend largely on other countries. The costs of the military and the colonial policy are also a burden, because they bring almost no dynamism to the economy and force cuts in the spending of key sectors, worsening the lives of people and narrowing the internal market. “
In the first week of May, the Minister of Finance, Yair Lapid, presented the proposed budget for the 2012-2013 biennium. The main objective is to reduce the annual deficit in the public accounts, from 3.8% (2012) to 3% next year, indicating that the country is able to control its public debt, currently at 74.4% of the GDP.
The budget leaves intact the defense bills and the funding for the colonies, increases consumer taxes, and cuts funding for education and health. On the other hand, it preserves, with little change, the tax policy favorable to large corporations.
Many people say that the ordinary workers and small businesses pay the bill for the high-tech companies, and that the country's growth is based on a formula that concentrates income and impoverishes the base of the pyramid. This discontent, however, doesn´t seem to be shaking the government and its allies.
“Social inequality is a real problem that we have to face, but it’s part of the system,” says Shidlovsky. “When you walk into a market economy, the labor share in the national income decreases. What can you do? “
Translation: Kelly Cristina Spinelli