Israel's Economy Continues To Roar

What’s Israel’s secret to success?  Being at the right place at the right time.

The Jewish state’s success is all the more remarkable considering its lack of natural resources such as oil and the constant threat of armed conflict with its neighbors.  Moreover, Israel receives about $3 billion in US foreign aid, the largest of any foreign country.   It also spends a huge amount of money on defense  — 7.3% of GDP — because of the small country’s many enemies.

Economically speaking, though, things are going great for Israel.  The country’s burgeoning high-tech and biotech sectors have fueled an explosive growth.   According to the CIA World Factbook, Israeli GDP expanded by 3.4% in 2010, up from 0.2% in 2009.  Per capita income is $30,000.

Israel also was not scarred as badly as other countries by the meltdown in the worldwide banking system. The country’s stock market has been on a tear as well,  gaining 88% and 15% in 2009 and 2010 respectively.  The benchmark TA-25 Index is down 2.3% this year, underperforming U.S. indexes – a performance that is not surprising considering the turmoil in the Middle East.

“In the beginning of 2009, we were in a big crisis,” says Yuval Steinitz, Israel’s Minister of Finance, in an interview with Newsweek. “Government revenues were going down, unemployment was climbing sharply, our exports were collapsing. We suffered different effects, mainly on our exports—but exports are about 50 percent of our economy. When our government was formed, right away we announced a two-year budget and a tax reduction in the long-term [preceded by a tax hike]. And you see the recovery.”

Israel has transformed itself into one of the world’s most modern economies over the past two decades when its best-known industries were orange growing and diamond polishing.  More than 60 Israeli companies are listed on the NASDAQ, the second most of any foreign country behind Canada, with a market value of $500 billion.  The largest of these firms is Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA),  the world’s largest maker of generic drugs.  Israel’s economy grew a staggering 7.8% in the fourth quarter.

Many large U.S. companies including IBM Corp.  (NYSE: IBM), Microsoft Corp.  (NASDAQ: MASFT) and Intel Corp.  (NASDAQ: INTC) have established R&D centers in Israel.   Israeli start-ups also are active in developing mobile apps for cell phones.   Corning Inc.  (NYSE: GLW) recently acquired Israeli tech firm MobileAccess for as much as $200 million.

As if that wasn’t enough, Israel is not bereft of natural resources either, or at least that is what their promoters claim.  Last year, there were media reports of a 1.5 billion barrel discovery, a claim that some experts say was exaggerated.   What isn’t hyped, however, is massive natural gas field found off Israel’s Northern coast, one of the largest discoveries of its kind in the past decade.

Israel has loads of problems to be sure.  Palestinians are largely living in poverty and an independent Palestinian state is bound to happen sooner rather than later.  Israel’s economic success, however, is undeniable.

“What we did was basically follow three things,” said Prime Minister Benjamin Netanyahu in an interview with Fox Business Network. “We controlled spending. We cut tax rates and projected them in a very deliberate path into the future. And we removed obstacles to competition.”

Maybe the U.S. can learn from Israel’s example.

–Jonathan Berr