Maggie's Farm

Economic Miracle

Here in San Diego we’re all aware of the international success of Qualcomm, which has a key R&D facility in Haifa, and some are aware that one of Qualcomm’s co-founders now runs an investment firm that focuses on Israeli hi-tech start-ups. But, did you know that US successes Intel and Cisco owe it to their Israel R&D investments, and that the world’s PCs and Internet are built upon Israeli technology? Israel is the global leader in other technologies, like for agriculture or for desalinization or medicine, that literally offer salvation to critical needs throughout the world. Did you know that Israel has the highest density of start-ups in the world, that there are more Israeli companies listed on the NASDAQ exchange than all companies from Europe, that per capita venture capital investments in Israel are 2½ times larger than in the US, that on these scores Israel far surpasses burgeoning China and India, that Israel leads the world in the percentage of the economy spent on R&D, that Israel’s GDP growth beats the average of developed economies? Did you know that Israel has accomplished this even though its economy is weighed down by extraordinarily high defense and welfare expenditures, or that despite the burst of the global hi-tech bubble in 2000, intense terrorist attacks, and two wars, Israel’s share of the global venture capital market didn’t drop but doubled from 15% to 31%? Microsoft’s Bill Gates recognized, “innovation going on in Israel is critical to the future of the technology business.”

How Israel, itself a start-up nation, accomplished this fifty-fold economic growth in 60-years, these major contributions to the world, belying the pessimism or fears or hatreds of others, is carefully laid out in this book. The authors go well beyond the clichés about Jewish brains or survival imperative or such and go into the details.

The world is aware of the Israeli Defense Force’s (IDF) prowess at armed defense. It is the IDF’s intense culling of students to join its elite technology and combat units that develops the scientific and leadership skills that are carried into the economy. It is the IDF’s creation of life-long bonds and relationships among Israelis, almost all of whom must serve for many years, that is carried over into trusted networks to rely upon and come together to make breakthroughs. It is IDF experience, along with its reliance upon lower-level and individual initiative for adaptivity in battle, and the emphasis upon informality and results instead of rank, that is prized by private employers and by citizens choosing government leaders.

It is the chutzpah, sometimes defined as brazen nerve, of Israelis that is wedded to respect for trying-and-failing that propels Israelis to attempt what others see as too daunting or embarrassing. Israeli companies are structured in an “experimental model”, where everything is evaluated and debated in a culture of skepticism and proof, compared to more common US or Western or South Korean or Japanese or Chinese companies that are structured more on a “standardized model” governed by routines and systems and imitation.

It is the experience of assimilating refugees and immigrants from seventy different nationalities, many with little prior education but well-served by educational opportunities in Israel, and others already of world-class skills, that brings Israel a population chock full of risk-takers, of entrepreneurs. This “brain migration” to Israel is a key contributor to the critical mass. Israel contains four of the world’s top universities.

It is the removal of earlier socialist-statist restrictions upon finance, spurred by current Prime Minister Benjamin Netanyahu in his earlier positions as Prime Minister and Finance Minister, that unleashed internal resources and attracted foreign investments to fund start-ups. There are over 45 Israeli venture capital funds now, and billions of dollars have flowed in from abroad.

It is the cross-training and fertilization of talents, made necessary by a smaller population, compared to narrow specializations in the US or Europe, that provides added impetus to cross-field cooperation and innovations. These are sometimes called “mashups,” combining seemingly disparate technologies and end-uses to create entirely new and novel ones.

All this adds up to a “cluster,” the concept of development drawn from Harvard Business School's Michael Porter. “Clusters produce exponential growth for their communities because people living and working within the cluster are in some way connected to each other.” There are other examples that work, such as in the US’ Silicon Valley. But, there are attempts to create a cluster in more authoritarian states, like Dubai or Singapore, that despite huge investments fail to reach goals because they lack the freedoms found in the US or Israel. “Crucially, a cluster’s sense of shared commitment and destiny, which transcends day-to-day business rivalries, is not easy to manufacture.” The authors call Israel’s or the US’ approach “profitable patriotism.”

Reflections on the US

The value of this book doesn’t just stop there, however, although the authors do not go astray in their focus. As NBC’s Tom Brokaw comments: "There is a great deal for America to learn from the very impressive Israeli entrepreneurial model... Start-Up Nation is a playbook for every CEO who wants to develop the next generation of corporate leaders." More than that, even.

By pondering the book’s explanations of Israel’s economic success we in the US who care about ours will see some important reflections that some may find uncomfortable and others may find energizing.

As the US government has intruded further and further into and restricted the freedom of our economics and businesses, imposing regulations in smothering layers of complexity, we have seen a decline in our rate of innovations and growth compared to our global competitors. As tried-and-true experience and reliance built in military service are relegated to a small portion of the population, while others selfishly pursue their own personal interests, our trust and bonds to each other, our sense of community, are weakened. As uneducated immigrants flood our shores seeking shrinking opportunities for jobs, our allowance of this and lack of emphasis on raising their skills and education reduces our future pool of constructive contributors.

Threats to the Economic Miracle

Israel has already shown that it can survive and prosper even under its heavy economic burdens of defense and integrating millions of refugees, despite repeated wars and ongoing terrorism. During the current worldwide financial meltdown, Israel has sidestepped its severe impacts because its banks were only leveraged 5 to 1, compared to 26 to 1 in the US or 61 to 1 in Europe. There are no subprime mortgages in Israel, compared to the reckless push for them by our Congress. The threat from Iran’s subversion and funding of threats from Gaza and Lebanon, from Iran’s imminent nuclear weapons that target not only Israel but Europe as well, is well known but others wait for Israel to save their hides. Nonetheless, there is confidence within Israel that it can deter and deal with Iran, on its own if ultimately necessary.

The authors raise what they see as the most serious challenge to Israel’s continued economic success, the disproportionate percentage of its population – the Orthodox Haredim and the Israeli Arabs -- who set themselves or are set outside the institutions, experiences and relationships that lay at the core of Israel’s financial and security strengths. In the US 65% of the potential workforce contributes to the economy. In Israel it is a little over half. The Haredi and Israeli Arab portion of the population is projected to increase from 29% in 2007 to 39% by 2028. With a limited population and a limited pool of Jews from elsewhere to immigrate, Israel must further bring the Haredim and Israeli Arabs into its productive economy.

The Haredim self isolate themselves, do not serve in the IDF, do not pursue modern education, and draw heavily upon welfare from the state. The Talmud says that even the most observant Jews should learn a skill and work at it. Most of Israel’s Haredim refuse to. They exert often alienating control over much of Israel’s social life, such as marriages and conversions, which reduces the attractiveness of immigrating to or remaining in Israel by more secular Jews or by Gentiles. The Haredim, via Israel’s proportional representation system for election to its Knesset parliament, act as parliamentary blocks to reforms and demanders of disproportionate welfare funds from the state.

The Israeli Arabs, though enjoying freedoms and opportunities far beyond their brethren elsewhere in the Arab world, restrict the potential involvement of their females and receive second-rate services from the state. This lack of services breeds resentment, and makes them more likely to react with increased affinity for radical Palestinians in the West Bank or Gaza, which in turn increases distrust of them by Jewish Israelis.

The book doesn’t stray from its primary focus by offering “solutions” to these major hot-buttons within Israel. The authors just say, "it is probably easier to change policies than it is to change a culture.”

Co-author Saul Singer wrote to me: "We just didn't think it fit within the scope of the book to go into the solutions that different studies have advocated on this point.” Singer refers the reader to the study “Israel 2028,” which recommends “a wide-ranging, visionary national strategy, as well as perseverance and forbearance.”  Reviewing its 310 pages of details, and the many other studies with which Israel deeply contemplates these problems and their solutions, would certainly be outside the purview of this review and of the book. Singer tells me, “[T]here is no simple solution, just hammering away with job training programs and raising awareness among employers. Also, the trend is in the right direction, so it's a question of trying to accelerate the trend.”

By raising the issue the book has sent me, at least, deeper into these pressing issues, which also lay at the core of many of the seemingly intractable dilemmas in finding a stronger financial and security and, hopefully, peace for Israel.

Regarding the Haredim, proportional representation in the Knesset should be reduced, to reduce the ability of small political parties to stymie reforms. Service in the IDF should be required (at least initially in segregated units for those who want/demand that), to increase Haredim participation in Israel's modern economy.

Regarding the Israeli Arabs, whose frustration at second rate services lends sympathy toward radicalization of their self-identity as "Palestinians", reforms are needed to include much more "justice" (Jewish morality) in portioning out social services.  (It worked in building Hamas!)

These measures are contributory to the nascent efforts in the West Bank to focus on developing its economy rather than its terrorism, efforts that are supported by Israeli Prime Minister Netanyahu. But, the prospects are likely outweighed, in Gaza certainly under the violently extremist Hamas, and likely in the West Bank under the corrupt PLO, and both’s utterly hostile intents and actions against Israel, their ignoring of advancing the welfare of Palestinians, topped by the self-serving lack of constructive assistance from the rich Arab states and their incitement of Palestinians in order to distract their populations from their oppressed conditions.

Israel has successfully dealt with and countered these enemies of peace and progress for the past 60-years. Israel can, also, successfully deal with and overcome its own threats to its economic miracle.

The website for the book is www.startupnationbook.com