An economic miracle in Israel

How Israel has rebounded from its worst recession, and what the rest of the Middle East can learn from it.The very hotels, malls, restaurants, theaters, travel agencies, car dealerships and construction sites that earlier this decade stood eerily empty while …

How Israel has rebounded from its worst recession, and what the rest of the Middle East can learn from it.The very hotels, malls, restaurants, theaters, travel agencies, car dealerships and construction sites that earlier this decade stood eerily empty while terrorism raged in the streets of Tel Aviv are now brimming with customers, turnovers and profits.

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

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 Israel arrive here a mere five years after the worst recession in its history, and what can the rest of the Middle East learn from it?

The boom’s causes are varied. Cyclically, as the global high tech sector recovered from the so-called Nasdaq Meltdown, the technology sector that had long dominated Israeli exports rode the wave and took with it much of the economy.

Structurally, Israel launched in 2003 market reforms that shook the economy loose: Taxes were cut, public-sector hiring was capped, and an elaborate social safety net was slashed; the jobless were enticed to seek work rather than social security; almost any sellable state asset was sold, from the El Al airliner and the ZIM shipping giant to the major banks, oil refineries and telecom monopoly Bezeq; the seaports were forced to compete with one another; the pension age was raised, and the pension industry itself was snatched from the unions that had dominated and mismanaged it.

Coupled with the reform of 1985, in which Israel defeated hyperinflation by slashing defense spending, abolishing food subsidies, imposing price controls and introducing monetary discipline, this decade’s reforms clearly have contributed to the economy’s rehabilitation. Yet beyond these measures there are two overriding historic circumstances that on the face of it should have placed Israel at a disadvantage, but in fact contributed to its prosperity: minerals and immigration.

When Israel was established, its leaders’ wildest economic dream was that some day, like their neighbors, they, too, would find oil. Yet Israel 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 thousands of immigrants, many unskilled and almost all destitute.

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

Israel’s current prosperity was also preceded by an immigration wave, in fact the largest in its history.

The arrival between 1989 and 2000 of 1 million immigrants was the equivalent of more than 50 million newcomers landing in the U.S. within a decade. Fortunately for Israel, by the time it faced this challenge it had the wisdom to allow the markets to create the jobs, housing and education this population deserved.

The bottom line of all this is that there are ways to thrive in the Middle East, even without oil. For now, Arab governments – whose collective economic performance is the world’s worst, after sub-Saharan Africa – treat immigrants as liabilities, social mobility as a strategic threat and minerals as eternal money spinners.

That is why a country such as Syria has pretty much no contingency plan for the moment its oil dries up, which is imminent. That is why the gulf region’s underpopulated states turn back immigrants from overpopulated Egypt, despite their being fellow Sunni Arabs.

That is also why they don’t even allow their own poor to rise socially, preferring instead to hire imported Asians as their hewers of wood and drawers of water.

To change any of this, it would help if objective parties, such as the European Union and United Nations, would tell Arab governments that their economic condition is self-inflicted, treatable, and in fact may hold promise; all they need to do is look at Israel a little less emotionally, and learn from its efforts and their results.

(Originally appeared in the Seattle Post-Intelligencer)