Despite hostilities, Israel’s business is booming

BY SIMON GRIVER, IPS

The sale of Israel’s Iscar to Warren Buffett for $4 billion and Mercury Interactive to HP for $4.5 billion has made the headlines of the world’s financial press in recent months. All the more impressive is that these high profile transactions are only the tip of a high-tech led economy, which encompasses hundreds of successful advanced technology companies and enjoyed 5.3 percent growth in 2005 and over 6.6% in the first half of 2006.

“The past year was one of the best years Israel’s economy has ever known,” observes Reuven Kuvent, general manager of Dun & Bradstreet Israel, the global business information specialists. “Israel flourished by almost every economic parameter.”

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According to the Israeli government’s Central Bureau of Statistics, exports of goods and services rose by 10.5 percent in 2005 to $42.8 billion, and continued climbing in the first half of 2006 by an additional 6.5 percent to almost $23 billion. The trade deficit has virtually disappeared with imports reaching $23.2 billion in the first half of 2006. Unemployment has dropped to 8.8 percent from 11 percent three years ago.

The only cloud on the horizon was the outbreak of hostilities in Israel’s northern region during July. However, based on the assumption that the fighting would continue for weeks rather than months, most experts did not expect the Israeli economy to be badly hit, with analysts lowering the country’s already high growth expectations for 2006 (above 5 percent) by several tenths of a percent.

Standard & Poor’s Rating Services did not reduce Israel’s credit rating following the outbreak of fighting and said “strong demand for Israel’s high-tech goods and services and buoyant capital inflows have underpinned a further strengthening of the Israeli economy.”

Indeed it was during the first few weeks of the fighting in Lebanon that HP acquired Mercury Interactive, a global leader in business optimization technology software with annual revenues of $700 million. This $4.5 billion acquisition equaled the record purchase of an Israeli company — Chromatis Networks — by Lucent Technologies in 2000. The purchase of Mercury was swiftly followed by Sandisk’s $1.5 billion acquisition of another Israeli company, M-Systems, which has developed revolutionary mobile storage systems for computer data.

High-tech is unquestionably the motor that runs Israel’s economic engine, with over 50 percent of the country’s exports falling into this category. An additional 30 percent of overseas sales have advanced technology components. Israel is a global leader in such areas as mobile/cellular communications, Internet applications, software services and solutions, semiconductors, medical devices, electro-optics and electronic accessories for defense and homeland security equipment.

But the Israeli economy is also much more than high-tech. Iscar, which became Warren Buffett’s first Israeli investment, is a mid-tech company that manufactures industrial cutting tools for metal machining. What Iscar’s founder in 1952 — the veteran entrepreneur Stef Wertheimer — shares with today’s generation of young high-tech Israeli executives is a visionary grasp of innovation and flexibility to meet fast changing market needs.

Nor is Israel’s largest industrial manufacturer a classic high-tech firm. Teva Pharmaceuticals, which expects 2006 sales to reach $7 billion, is the world’s largest producer of generic drugs, although $1.3 billion in sales derives from an ethical drug — Copaxone ® — for the treatment of multiple sclerosis which is the fruit of Israel’s biotech industry.

If the early Zionists always worried that Israel’s economic development would be hampered by Israel’s lack of natural resources, then the arrival of the high-tech age of knowledge-based industries has solved that problem. With leading universities and more people with Ph.Ds per capita than any other country, there is no shortage of knowledge in Israel. Moreover, the country’s military needs and national service in the IDF mean that many academic Israelis are also endowed with an ability to make quick real-time decisions and meet short-term targets with flexible and innovative thinking.

Even the country’s few natural resources — phosphates in the Negev and minerals in the Dead Sea — now earn Israel Chemicals $3 billion in sales per year due to improved extraction processes. Israel has also used technology to overcome the region’s water shortages with much of the country’s needs now supplied by desalination and recycling of wastewater.

According to Professor Stanley Fischer, governor of the Bank of Israel, another reason for Israel’s improved economic performance in recent years has been correct government macro-economic policies and structural reforms.

“In 2005,” he says, “the government promoted several wide-ranging economic reforms of the capital markets, the seaports and the privatization of Israel Discount Bank and Bank Leumi. These were no less important for continued economic growth. These steps helped strengthen the overall framework in which investors, companies and consumers operate and they boost the credibility of the government in the eyes of investors. In 2005 foreign investment reached an unprecedented $9 billion.”

In fact, this figure has been surpassed in 2006 by the acquisition of Mercury, M-Systems and Iscar alone. Billions of dollars more have been channeled by overseas investors into Israeli industry through the Tel Aviv Stock Exchange, which rose by 30 percent in 2005, and the 120 or so Israeli companies traded on overseas stock exchanges, mainly in New York and London. Much of the $1.5 billion raised by venture capital funds each year is also from overseas investors.

But all this capital inflow has not helped Israel’s poorest. With Israel’s richest 10 percent earning an average of 13 times more than the bottom 10 percent, only the U.S. has a wider gap between rich and poor in the world’s developed economies. This was an issue that the new government, which had a strong mandate to deal with increasing poverty, began to address several months ago. But government funding of the war in the north is likely to delay implementation of these socio-economic policies. Nevertheless, this should not detract from the overall strength of Israel’s economy.