The transformation of Israel from an undeveloped desert economy to the Silicon Valley of the Middle East in just 75 years is one of the most inspiring narratives of our time.
The Israel of 1948 was about Jaffa oranges, Dead Sea chemical plants and low-value textiles. Today’s country is a leader in advanced technology, cyber security, avionics, telecoms, life sciences and materials research.
Israel was once a butt of Borscht Belt jokes for its lack of native energy resources in a Middle East sitting on vast reserves of oil and gas.
Prosperity is now supported by self-sufficiency in natural gas, particularly important in an age of fuel insecurity following Russia’s barbaric war on Ukraine. As a result, Israel has managed to avoid the 2022 double-digit inflation that has been so damaging for many Western economies.
The headline rate of inflation hit 5.4 per cent early in 2023. The Bank of Israel is acting aggressively to bring it down, raising its key interest rate to 4.5 per cent. Prices are projected by analysts at Goldman Sachs to moderate to 4 per cent this year.
UK visitors to Israel could not but be aware how Israel has been winning the battle against inflation.
At its post-millennium peak in 2007, one pound would buy eight New Israeli Shekels (NIS). Visitors today will receive just NIS 4.40.
It should be no surprise that despite the recent political uproar in Jerusalem and protests outside Downing Street that Britain signed a far-reaching new trade agreement in London in March.
The UK’s trade relationship with Israel has blossomed to £7 billion annually. Some 25 Israeli-controlled companies have chosen to float their shares on the London Stock Exchange and the UK government is anxious to learn lessons from Israel’s digitalised health sector as it seeks to drive efficiency in the NHS.
British engineers who designed London’s Elizabeth Line are working on Tel Aviv’s fast transport system, which has turned parts of the city into a giant building site.
A decade ago the dialogue between the UK and Israel was dominated by settlements, the two-state solution and broader Middle East politics. The lives of UK diplomats in Tel Aviv now are dominated by economic and commercial issues.
Israel has moved far from its arid, poor beginnings in 1948. But it had some early advantages.
Not all the early pre-independence immigrants were left-leaning idealists seeking to green the desert and dance the Hora on kibbutzim.
Among the arrivals were sophisticated German refugees who engineered a new Bauhaus Israeli architecture, for instance in Tel Aviv’s “White City”.
As Europe’s universities emptied themselves of Jews, a first wave of scientists and engineers put down the roots of Israel’s advanced science and technological citadels. The early roots of institutions such as the Haifa Technion and the Weizmann Institute paved the way for great sea-changes to come.
Israel’s technological revolution has been reinforced by an intense focus by successive governments on research and development with an astonishing 4.65 per cent of national income devoted to the cause. As a consequence, Israel is top among advanced OECD nations for the amount of national income devoted to innovation.
Its leadership in this area, making it only second to Silicon Valley for its creativity and inventions, was reinforced by the arrival of top Russian scientists, engineers and mathematicians when the barriers to emigration from the old Soviet Union came down in the 1980s.
A huge contribution is also made by Israel’s advanced military with the air force playing an enormous role in taking defence applications and software into civilian territory.
Most important is the way the high-tech culture has become native to Israel’s further-education system and is seen by many young people as the path to prosperity. In my own family almost all my first cousins and their offspring (the descendants of Shoah survivors) are engaged in digital transformation.
Early recognition of the values of higher education, innovation and research helped to create a tech powerhouse. It is a story first told to the world in by Dan Senor and Saul Singer in their 2009 book Start-Up Nation, which became a global bestseller.
Israel’s high-tech industries are the key to the country’s modern prosperity, contributing 15 per cent to national output (GDP) and providing 43 per cent of the country’s exports and 25 per cent of its tax income.
Israel’s status as an advanced economy was sealed in 2010 when it joined the Paris-based club of sophisticated economies, the OECD. Perhaps the best measure of its economic strides is the speedy rise in the country’s per capita income: national output divided by population.
On this measure Israel’s per capita income stood at US $54,847 at the end of last year. At this level per capita prosperity is higher than in Britain at $47,317 and greater than bigger countries in Europe such as Spain and Portugal.
The most recent projections for Israel’s economy show per capita income continuing to rise, reaching $65,625 by 2027, an increase of 18.55 per cent from 2022.
Output soared by 6.3 per cent in 2022 as Israel bounced back from Covid-19 restrictions. The OECD projects that growth will moderate to 2.8 per cent this year before picking up to 3.4 per cent in 2024. Higher inflation and a squeeze on disposable incomes will slow private consumption this year.
Israel’s historic growth record is remarkable given the polyglot nature of its society. It reflects a triumph of immigration, with Holocaust survivors, their children and grandchildren, expelled populations from Arab lands, and waves of Russian and eastern European immigrants demonstrating the entrepreneurial spirit, enterprise and endeavour to drive them up the economic ladder.
Investment in Israel through its most difficult decades in the 1950s, 1960s and 1970s was supported by large subventions from overseas. Tourists to the country might well believe that Israel as we know it would not exist but for American philanthropy, given the names that frame so many landmark buildings, parks and monuments.
The reality is unseen cash flows. Germany’s reparations at their peak amounted to more than a billion dollars a year. Most significantly, since independence in 1948, Israel has been the recipient of $158 billion of military and other assistance from the US.
It is scheduled to receive a further $3.8 billion of funding this year, including $500 million for the Iron Dome defence system designed to protect the nation’s vital infrastructure and cities from Hezbollah, Hamas and Iranian-sponsored rocket attacks.
The continued American support, particularly in the military sphere, illustrates why the current beleaguered government of Benjamin Netanyahu cannot afford to alienate US public and political opinion.
Both the OECD and the International Monetary Fund (IMF) — which conducts an annual inspection of the economy — also recognise flaws in the society and economy. Among the most disturbing is that the OECD found that Israel has one of the biggest income disparities of any country in the western world.
At the top end of the income scale are the tech entrepreneurs, Russian oligarchs and established Israeli industrial and banking families that dominate corporate ownership on the Tel Aviv Stock Exchange.
At the other end of the spectrum are Israel’s less well-off minorities who find it hard to access the workforce, especially the fast-growing Charedi groups who often lack the necessary secular education and awareness.
Another struggling segment is part of Israel’s burgeoning Israeli-Palestinian population of two million. Many have advanced up the economic ladder and Israel’s healthcare system has proved a great testbed for social and economic equality. Around half of Israeli pharmacists are Arabs and up to one one-third of doctors and other medics.
Left behind in abject poverty are the Bedouin Arabs of the Negev involved in long-running and bitter land disputes with the Israeli authorities. Their communities wrestle with problems of drugs and inter-family violence.
In the North several once-prospering Arab villages suffer from disturbed relations with Jewish-Israeli neighbours, border restrictions with their West Bank kith and kin, and Israel’s largely separate education for Jews and Arabs.
In its most recent, largely upbeat assessment of Israel’s prospects, the IMF noted that Israel’s skills shortages is “rooted in the very fragmented education system”. It points to large socio-economic gaps, which means “lower performance for Arab and Charedim students compared to their peers”.
The IMF warns that skills gaps could hinder development of the high-tech sector, which is largely bereft of Israeli-Palestinian and Charedi workers. The proportion of Israeli women employed in high-tech is poor and there are great digital disparities between low and higher-skilled workers.
In spite of such structural weaknesses in the labour market, there can be no dispute about the degree of economic transformation that has taken place in Israel. A barren land, with limited natural resources has been transformed into a Middle Eastern economic powerhouse.
Barriers to high performance, such as state ownership of major sectors, have largely disappeared.
In any economy the best opportunities for trading advantage are with your nearest neighbours. That has been denied to Israel for most of its existence because of the extant security threats.
The recent openings to the Gulf States, Morocco and Sudan through the Abraham Accords should be an enormous plus, with many of the modernising and wealthy oil states seeking to invigorate their economies with the best tech and communications.
There are vast opportunities on the horizon and Israel has demonstrated its ability to reach out to India and China. But the full potential of its economy will never be reached until it integrates its domestic minorities more fully into the labour force and finds better ways of coexisting with its closest neighbours in the West Bank and Gaza.
Alex Brummer is City Editor of the Daily Mail