March 4, 2002

Depend on technology to lead Israel, world out of slump.”Worst Year Since 1953″ screamed the headlines. In 2001, Israel’s gross domestic product (GDP) declined by 0.5 percent – the first time GDP has fallen since 1953. As unemployment climbed above nine percent, the business-sector GDP declined by 2.1 percent, industrial production fell by five percent and exports slumped by 13.1 percent, one might well ask whether there is light at the tunnel’s end, or simply more darkness?

Here are four reasons for optimism, based on our work at the Technion Institute of Management with leading Israeli high-tech firms and startups.

1. The lessons have been well and truly learned. The bubble years of 1998-March 2000 saw enormous sums of money pour into Israel (including a $4.7 billion acquisition of an Israeli optical-networking startup), to fund both great companies and terrible ones. When the bubble burst and the Nasdaq stock market plummeted 60 percent from its peak, both good and bad Israeli companies were seriously hurt. Entrepreneurs now know they must husband money cautiously, even when it is plentiful, and they realize that business cycles occur, usually unexpectedly. Startups that survive will be wiser and stronger, well-positioned to capitalize on the recovery expected for later this year or early in 2003.

2. Israel is a global powerhouse in life sciences research. For example, the Technion is one of 10 research institutions worldwide that has embryonic stem cell lines. Bio-Enterprise, a Cleveland biotech investment company recently announced it plans to invest hundreds of millions of dollars in Israeli biotech firms. Many experts believe biotechnology will lead the next technology boom and Israel is well positioned to take advantage.

3. In 2001 the global economy “hit the wall,” as world GDP growth slumped from a nearly unprecedented 4.7 percent in 2000 to only 1.4 percent in 2001, and perhaps 1.2 percent in 2002. The recovery, when it begins, will be led by technology sectors. The same reasons that made Israel’s recession very deep – the global recession hit networking, software, telecoms and computing particularly hard – will spur Israel’s recovery, as the hard-hit industries will tend to recover fastest globally.

4. The future lies with the innovators. Israel’s creativity, inventiveness and entrepreneurial energy remain boundless. Global companies such as Applied Materials, IBM, and Intel continue to see Israel as a wellspring of R&D excellence.

When global R&D spending rebounds strongly, as it will, Israel’s hard-earned title as Silicon Wadi will be truer than ever.

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Jason Harris

Jason Harris

Executive Director

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