The Israeli Economy: What's Ahead After Israel-50?
By Elmer L. Winter
Chairman
Committee for Economic Growth of Israel
Jews, worldwide, have much to celebrate on Israel's 50th anniversary. During the nation's brief half century, the Israelis have created a homeland for Jews; built a society based on democratic principles; absorbed many cultures and have developed diplomatic relations with 150 nations. These accomplishments merit a "Well done, Israelis!"
But the people of Israel deserve our additional congratulations for having created an economic miracle that is highly respected and envied throughout the world. They have produced a remarkably high Gross Domestic Product (GDP) of $98.4 billion in 1997, with a GDP growth during the past five years averaging 6 percent.
A major contributing factor to this formidable achievement has been the rapid expansion of the electronics industry. The revenue from this sector alone reached $7.2 billion in 1997 � a stunning increase of 11 percent over the previous year. And 80 percent of the country's electronics production was sold outside of Israel.
Israel, in fact, has become a second Silicon Valley, attracting hundreds of American companies. Many of the world's largest computer concerns, including Microsoft, IBM, Digital, Hewlett Packard, National Semiconductor and Motorola have located facilities in the country and become part of "Israel � the In�Place for Innovation." There is every reason to predict that the nation will continue increasing its high-tech exports to Europe and the United States.
Currently, there are 2,000 start-up companies operating facilities in Israel. They are active in a variety of innovative high-tech areas, including voice and handwriting recognition, Internet video and voice transfer, smart cards, data security, push technology, bandwidth expansion, medical diagnostic equipment and design gear for the semiconductor industry, to mention only a few.
Here are a few of my predictions for the Israeli economy in the "post-50" era:
Start-up companies will continue to raise capital on Wall Street and British and European stock exchanges because of the startling level of innovation and energy that has marked Israel's ascension in the world of high-tech.
There probably will be a lessening of activity in Israel's low-tech industries because of high-labor costs. To compensate for this loss, many companies operating factories in Israel will subcontract part of their production to Jordan, Egypt and, eventually, the West Bank and Gaza assuming peace will come to the area.
More American high-tech companies will complete their downsizing programs by opening factories in Israel, to take advantage of Israel's unique incentives, including the country's high-quality engineers and scientists. Israel's electronics industry today employs a work force of 43,000, 60 percent of whom are engineers and technicians. Compared to other countries, Israel's ratio of scientists and engineers to the overall population makes it Number One in the world, by a wide margin. Israel has 145 of these technical workers for every 10,000 employees. The United States has only 78 per 10,000 while Japan has 75, German has 58, Sweden has 50 and Canada has 40. As a result, Israel's productivity in the electronics industry stands at $167,000 per employee.
Many American corporations will expand their "contracting out" programs to Israel. One reason is the shortage of high-tech personnel in the U.S. For a growing number of companies, Israel is the Ideal place to conduct research and development and create software be cause of the availability and inventiveness of Israeli scientists, engineers and technicians. Furthermore, the Israeli government provides between 50 and 60 percent of the cost of R&D.
Stock markets dealing in Israeli stocks will continue to expand in Israel and the United States. At this time, stocks of 75 Israeli companies, carrying a value of $17.9 billion, are listed on Wall Street exchanges and 659 companies are traded on the Tel Aviv Stock Exchange. There has been a rapid expansion of venture capital companies opening in Israel. In 1997, 50 such firms in vested $1 billion in Israeli companies, a sure sign of confidence in the future of Israeli enterprises.
Despite the roller coaster course of the Israeli-Palestinian peace process, American companies will continue to see Israel as the hub of operations throughout the Middle East. They rely on Israel because of its strong infrastructure, trained managerial corps, satellite facilities, and free trade agreements with the U.S., Canada and members of the European Community. They view it as the commercial port of entry to a potential market of 200 million Arabs, once a peace agreement is signed.
American companies will look to Israel as a market to help offset the loss of sales to Asian customers beset by the Far East financial crisis. Israel in turn, will welcome orders from American companies to balance the losses Israeli companies have incurred in lost Asian business.
The bottom line is that the Israeli economy is well poised to move into the next century provided, that a peace agreement is signed and adhered to by Israel and the Palestinians. High tech is the engine that will continue to drive Israel's economic machine. Hanan Ashsaf, president of Motorola (Israel), noted recently that if Israel's industrial growth, per employee productivity and export volume continue to increase at the current rate, revenues of Israel's high-tech industry alone will soar from $7.2 billion to $20-25 billion by the year 2005. This would constitute a gi ant leap into Israel's "post-50" era, one that Israel's founders could not have imagined in their wildest dreams.
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