January 3, 2023, Updated January 18, 2023

The Economist, a laymen’s magazine, rated Israel as the fourth best-performing economy among the OECD countries for 2022.

This has raised the question about the source of Israel’s economic resilience over the past 20-plus years.

Except for 2020 (Covid), Israel has had positive economic growth every year since 2003 — including during the Great Recession, which racked the United States and Europe.

Where does this resiliency come from? Can we count on it, and invest in it, in the years to come?

6 surprising secrets of Israel’s economic resiliency
Prof. Micheal Humphries. Photo courtesy of JCT

Reason 1: Arab boycott

In answering these questions, I start with the Arab boycott of Israel, still in force with some of our neighbors.

Economic growth is fueled by exports. The positive consequence of the boycott was to force Israel to trade with distant partners, particularly Europe and the Americas.

Trading with these partners entailed tremendous transportation costs, which had to be covered by the added value of our exports.

Trade with these distant markets forced us to adopt what might be called the Japanese economic model: import raw materials and process them into high value-added products to then export to distant markets.

This pushed us into knowledge-intensive industries where human capital contributed most of the value added, rather than low-margin industries producing what the poor of Egypt and Jordan could afford.

Reason 2: Russian immigration

The second element is the “Great Aliyah,” which brought to Israel approximately 1 million Russian immigrants in the 1990s. 

An educated population, they not only increased Israel’s population but also its average level of education. They also brought an emphasis on scientific/mathematical education, which they passed on to their kids.

This immigration wave boosted Israel’s high-tech industry. (My son’s first job as a technician, and later as an engineer, was with a firm founded by two Russian PhD physicists.)

The sudden increase in population also offered domestic producers opportunities to benefit from economies of scale or greater mass production, reducing the per-unit costs of what they produce. 

This helped reduce inflation in Israel as well as reduce our unit costs of export items.

Reason 3: Incoming funds

We must also acknowledge a unique situation, in that Israel has the equivalent of an expat population that transfers funds to Israel. 

The Philippines, Jordan and Mexico have expats working abroad who transfer funds to family members back in the “old” country. Israel has the Jewish diaspora community, which transfers funds to Israel either in the form of philanthropy or as investments (whether in vacation homes or industry). 

These funds contribute to Israel’s foreign currency reserves, which bolster the currency exchange rate, keeping imports affordable and easing Israel’s foreign trade and balance of payments.  

6 surprising secrets of Israel’s economic resiliency
The Israeli Ministry of Finance, Jerusalem. Photo by Teo K via Shutterstock.com

Reason 4: Strict regs

No less important is Israel’s regulatory framework. The Bank of Israel keeps a tight rein on Israel’s banks and financial markets. 

Buying a home in Israel requires a down payment of at least 25 percent for a first purchase, or 30% for a second purchase. There aren’t any zero down payment mortgages in Israel. 

We also don’t have a secondary mortgage market such as in the US, where one firm originates the mortgage and then sells it to another firm/investor. In this situation, the originating firm doesn’t really care if the borrower can afford the mortgage, as the buyer of the mortgages is the one that will have to deal with a default (moral hazard). 

It was precisely this moral hazard that led to the Great Recession in the US, when mortgage originators granted mortgages to people who clearly couldn’t support the payments. Defaults flooded the market and pushed housing prices down, below the mortgage values, giving birth to the term “underwater mortgage.”

Reason 5: Banking norms

Consumer loans in Israel are generally given by the same bank where the consumers deposit their salaries.

Furthermore, “credit” cards in Israel are actually charge cards. Most Israeli credit card issuers require full payment of the outstanding balance each month.

Reinforcing this is the norm that most Israeli consumers get their credit cards via the same bank where they deposit their salaries, creating a situation where a single bank is aware of a consumer’s total financial obligations.

This reality reduces the threat of consumer debt crises. During the Great Recession, the Israeli economy grew 6% in 2007 and 3.19% in 2008.

Reason 6: The security situation

Israel’s security situation, much like the Arab boycott, has had a positive influence on the economy in that we are always on alert against sudden attacks. 

Service in the army has trained those who go on to become top managers and entrepreneurs to anticipate rapid change and to roll with the punches.

The constant flareups have also given our military industry the opportunity to field-test new ideas and technology in shorter periods than our American and European competitors, giving us a competitive advantage in this arena.

In short, the Israeli economy’s greatest source of resilience is the combination of the Jewish people’s historic ability to adapt to a hostile environment and find a way to maintain a decent standard of living, and the communal sense of responsibility for one another. The rest is commentary.

To answer our opening question: Yes, you can invest in the Israeli economy assuming it will adapt to a changing environment.

Prof. Micheal Humphries is an industrial marketing and management lecturer at the Jerusalem College of Technology – Lev Academic Center and vice-chair of the Business Administration Department at Touro College Israel.

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