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« Back to The Israeli Economy main page    Transcript for: The Israeli Economyisrael.html ANNOUNCER: Think Tank is made possible by AMGEN, recipient ofthe Presidential National Medal of Technology. AMGEN, helping cancerpatients through cellular and molecular biology. Improving livestoday and bringing hope for tomorrow. Additional funding is provided by the John M. Olin Foundation,the Lilly Endowment, the Lynde and Harry Bradley Foundation, theUnited States-Japan Foundation, and the Donner Canadian Foundation. (Musical break.) MR. WATTENBERG: Shalom, I'm Ben Wattenberg in Tel Aviv. Behindall the headlines of the Arab-Israeli conflict, behind the intensearguments between the religious and secular Jews, there is anothermore global story going on here. The Israeli economic revival can beseen as somewhat of a model in the worldwide move from state-run tomarket economies. The topic before the house, away from socialism,the Israeli economy, this week on Think Tank. (Musical break.) MR. WATTENBERG: The front page news from Israel usuallyinvolves the peace process and violence. But there is a quietrevolution going on there, a startling transformation from asemi-socialist state into a modern free market economy. Back whenIsrae l was founded the situation was very different. MR. SHARANSKY: the founding fathers were great pioneers, greatZionists, but also great Socialists. And it's arguable whether theyhad different way to build the state underground or not, but it wasbuilt as a very centralized, very ideological, very Socialist-oriented economy, with a lot of state monopolies actedeverywhere, beginning from trade unions and distribution, finishingwith all the main spheres of industry and production. MR. WATTENBERG: Israel grew, then the economy went off therails. By 1984, inflation had hit 445 percent. Israel began a longprocess of economic recovery. Inflation was brought into check, andby the 1990s, not much above the range of normal Western levels. Unemployment has generally stayed low, and is now down well belowEurope's average unemployment level, despite a troubling recent uptick. Although Israel's growth has slowed in the last year, it'sgross domestic product has grown at almost 6 percent annually since1990. That's a rate more than double that of the United States inthe midst of its own economic boom, and vastly faster than theEuropean countries. Israel's per capita GDP has already passed some Europeancountries. It's approaching that of England. It vastly outperformsits Arab neighbors. How did this happen? Israel has few natural resources, but in the information age,that may not matter much. MR. SHARANSKY: It is a very creative labor force. In hightech start ups, in absolute figures we are number two in the world. We have more high tech start ups than all of Western Europe together,in absolute figures, and we are 20-25 percent less, in absolutefigures, than the United States of America. So it means -- of coursein relative figures, we are by far number one. It means that thisflow of high tech inventions, which comes from Israel -- Israel islike one big Silicon Valley. MR. WATTENBERG: The key to the burgeoning Israeli economy isits high tech sector. Some familiar American names have moved in. But it's Israel's homegrown start ups that are catching the world'seye. High tech products now account for almost 25 percent ofIsrael's exports. Of the thousands of start ups, one of the biggestsuccesses is Check Point Software Technologies, Limited, located in asuburb of Tel Aviv. We talked to its cofounder, Gil Shwed. MR. SHWED: Our principle product is called Firewall One. It'sinvolves very much what I would call an electronic door to companynetworks. When you have a company with a network, all the computersare connected. Once you connect this network to a public network,like the Internet, immediately every computer becomes part of a hugenetwork, and becomes accessible to the rest of the world. Andimmediately all your databases, all your servers become accessible tothe rest of the world, which has some security risks in it. WhatFirewall One does, it sits between the internal network and thepublic network and simply enforces the company policy which says whocan go out, which people from the company can access the Internet,and what they can do, which applications or which sites they canaccess, and which people can go in, like sending an email connectingto the company mail server, or getting to the company Worldwide Website. MR. WATTENBERG: We asked Shwed what it was about Israel thatmakes it such a fertile ground for high tech start ups like his. MR. SHWED: Trying to analyze why Israel became important, orwhy there are so many start ups, or so many technologies companies inIsrael, I think there are several reasons. The first one is that wehave a lot of talented people. Education is important, we have veryeducated people. Many countries have a lot of educated people, butwhat we also have or what we don't have is a local market. So, if Iwant to start a company that's going to be successful and a largecompany, I have to look at the global markets, and I have no localones. I can't start just with Tel Aviv and then grow from Tel Avivto surrounding countries. So, I have to look globally. I have tolook to the U.S. market, or to the European market, and when I dothat, I create a glo bal high tech company which has a chance of success. MR. WATTENBERG: When Benjamin Netanyahu was elected PrimeMinister of Israel in 1996, he promised to further deregulate theIsraeli economy and further increase the influence of the freemarket. He said this about the new Israeli economy: We shallestablish in Israel, listen well to my words, we shall establish inIsrael a truly free economy that is not governed by politicaloperatives or by bureaucrats, an economy that does not hinderenterprise. As part of the global economy, Israel has lowered tradebarriers and moved towards making its currency, the shekel, fullyconvertible and tradable. As in many nations going throughpro-market changes, critics claim that the poor and middle class arebeing short-changed. Sharansky is an elected politician, he squaresthe circle this way: MR. SHARANSKY: I wouldn't say it's inaccurate. No doubt thatwe are under strong pressure, strong pressure relative when there arecoming a lot of people who have some immediate elementary needs,because people when they're coming, they were taking very goodpositions, successful careers and so on, they are coming withoutknowing the language, without any property, without any connectionsin the society, without any income of their parents, which could helpthem to start. So and especially old people are coming without theirpensions, which they were receiving. So the most elementary thinglike getting an apartment has to be met. MR. WATTENBERG: To find out how the move away from Socialismis going in Israel, we talked in Jerusalem to two pro-market expertscoming from somewhat different perspectives, Daniel Doron, presidentof the Israel Center for Social and Economic Progress, and AmotzAsa-El, Associate Editor of the Jerusalem Post, where he cracksIsrael's economic fortunes. When I have been in Israel in the past, going back from 1990and earlier, one would hear from Israelis, they would say, well, youknow, this is a poor country. It's not like America, it's not likeEurope, it's a poor country. Now you come here and you hear peoplesaying, you know, we're a rich country now. It's like Europe. Andsome of the statistics say the standard of living is as high as inthe United Kingdom or as Italy. And there are what, 90 Israelicompanies on the NASDAQ stock exchange. And you come out of Tel Avivdriving here toward Jerusalem and you see crane after crane aftercrane, building going on. So what's happened? Why don't you start, and then let's talk. MR. ASA-EL: I would say that the big first change, Israel isnot its cause but its result. I think that world economies that inthe past used to prosper due to their possession of raw materials, ofostensibly scarce raw materials, seem to prosper, and you can havesuch instances all over the world, from Zambia with its copper toNigeria with its oil. And there came a point somewhere in the courseof the '80s, when the world discovered that the possession of rawmaterials is not necessarily a recipe for -- a panacea. In fact, itcan even be detrimental in the long-term. So, when it comes toprosperity, the inversion of this principle was that the lack of rawmaterials can ultimately be a blessing because it compels the societyto seek other sources of income, namely knowledge intensive ones likethe ones that we here apparently efficiently utilize. MR. WATTENBERG: Do you buy that? MR. DORON: Yes, definitely. I think that our major source ofwealth is our human capital. Israel has more scientists in absoluteand relative number than Switzerland. We are the second in the worldin the proportion of people that are graduates of MIT after theUnited States. And we are first in the world in the application ofscientific papers per capita. However, we have had institutional arrangements until now. They are slowly changing, but too slowly, too painfully that haveinhibited this tremendous wealth that we had and didn't allow it toprosper -- MR. WATTENBERG: For example, what were the restraints that youhad and still have? MR. DORON: Well, Socialism and stateism were the majorreasons. I mean, Israel has perhaps now, arguably, the mostconcentrated economy in the Western world. MR. WATTENBERG: What does that mean, concentrated? MR. DORON: It means that most assets are owned by a very smallgroup of people. Until recently, it was mostly owned by governmentand public bodies like the Labor Federation, and recently through theprocess of privatization, a lot of those assets were sold, some ofthem through sweetheart deals, to about 20 families that, at themoment, control most assets. And we cannot keep acting likelumbering monopolistic elephants. We must become racehorses. Iwould like -- MR. WATTENBERG: That's how you would describe the oldSocialists? MR. ASA-EL: Absolutely. Absolutely. MR. WATTENBERG: Lumbering elephants? MR. ASA-EL: That's right. MR. WATTENBERG: They say, we built the state, it was alldesert, and we built the state. MR. DORON: Right, and no question asked about efficiency,about the cost, about the price, those were things that were notmentioned in Israel. I mean, the end product mattered, and it didn'tmatter what you had to pay for it, how much it cost you. Regarding the wealth -- MR. ASA-EL: Layoffs were anathema, layoffs unthinkable,certainly not massive ones. Such kind of rationalization was -- itwas a given that you wouldn't go through such a thing. MR. WATTENBERG: Now, do you have major layoffs now? MR. ASA-EL: We've certainly gone through a period of majorlayoffs back in the late '80s. Now, I wouldn't say that the macroeconomy demands that kind of thing, but you do see that in therapidly vanishing low tech industries. It's not massive on a scaleof thousands of employees, but every now and then you hear of a planton the order of a few hundreds of employees that shuts down becausethe production lines are migrating beyond the border to much cheaperlabor markets. MR. DORON: I want to add a few words about the question ofwealth. You know, Israel potentially could be one of the wealthiestcountries in the world, if not the wealthiest, according to thequality of its human capital, and the proven achievements of itshuman capital. Where have you got a country that is the size of NewJersey with the population of greater Philadelphia that can product afirst line fighter aircraft, a first line battle tank, imagingequipment that is first in the world, the most advanced software,irrigation systems, you name it, the Israelis are at the cuttingedge. And yet, the Israeli worker is still earning an average $1,500a month. MR. ASA-EL: One must also bear in mind that Israel'sleadership back and including David Ben-Gurion himself were veryeconomically poorly educated people, not to say completelyuneducated, and he, at least, had a law degree. Some of his peershave no formal higher education whatsoever. So they did the bestthey could and their accomplishments are nothing to scoff at. MR. WATTENBERG: But they followed -- I mean, they may not havebeen economists, but they were following the basic drift of developedworld economics, the British Fabian Socialists. MR. DORON: Not really, no. Their intellectual homeland wasRussia, not Fabian Socialism. Russian Bolshevism was their home. And let's say in their favor, if you were a poor Jew around the turnof the century, you know, Jews were then destitute. They lived inabysmal poverty because of terrible political and racist attitudes ofthe Russian government. Now, if you saw this as a free enterprisesystem that oppresses you, that grinds you to the bone, naturallyyou'd fall for the siren song of Socialism. Socialism then looked toBertrand Russell, to George Bernard Shaw, to a lot of very smartpeople as the promise of the future. The question is not anymore theideology, but the actual formation of the Israeli elites. And thisis the real story of this country. I was a graduate of the first school class of economics at theHebrew University after the war of liberation. We had ProfessorPotemkin, an American economist that was a disciple of PaulSamuelson. MR. WATTENBERG: This was what, 1948? MR. DORON: 1949, 1949-50. And we were taught then that youcan find an economy, but we -- my comrades that were the best and thebrightest are the ones that ground the Israeli economy to the groundsimply because of this foolish belief that you can have a commandeconomy that government can really control economic processes, youknow, that you can find unity here, adjust interest rates here. MR. WATTENBERG: Right. MR. DORON: You can decide better than the entrepreneur whetherto invest in something. Now, this has become the problem of Israel,it's bureaucracy. We have now powerful vested interests in thebureaucracy, in the Bank of Israel, in the Treasury, whose colleaguesare now the head -- MR. WATTENBERG: But the Bank of Israel, I mean, you have gonefrom 445 percent inflation to, what, 5 percent inflation, about 5percent inflation. So they must have been doing something rightthese terrible bureaucrats that Daniel is talking about? MR. DORON: On the inflation side, they have been wonderful. That was the one fettle that our very bright Jacob Frankel gave allhis heart to because that's -- his reference groups are severalbankers, and inflation is -- control of inflation is the na me of the game. So that's where he spends all his energy and allhis might, and he has done nobly. I mean, he resisted tremendouspolitical pressure. However, the cost was that he neglected almosttotally the deregulation of financial markets in Israel. MR. WATTENBERG: Let's move on from this point in history thatwe are discussing, where Socialism hits a wall, where both parties orone-and-a-half parties, everybody sort of gets the idea that itdoesn't work anymore, and then we come to one simple two-syllableword, which is Bebe. Now, my recollection of Prime Minister BenjaminNetanyahu, who I've known over the years, is the thing that he gotmost passionate about, about Israel, was economics. It was not theland. He was really saying, we've got to break up -- all of thethings that you've been saying, by the way. This goes back to 1990and the mid-1980s, and the terrorism conference in -- MR. DORON: You can have the choice, either fools never deferor great minds think alike. MR. WATTENBERG: Right. Now, what kind of a job has he done? MR. ASA-EL: He spent the first at least few months andprobably entire first year of his office surviving and only once thesecond year began he began thinking about how, more systematically,on how to get along and continue with his own agenda. Meanwhile, thevery economic -- MR. WATTENBERG: Which is a Thatcherite agenda, basically. MR. ASA-EL: Absolutely. A very positive thing that happens,strictly economically speaking, is that Prime Minister David Levyleft the government. He was the holdover from the old populousLikud. He embodied that attitude, and coming from his back ground wedon't want to discuss him now. The point is that with him gone,there is hardly anyone within this cabinet who, when an asset is onthe counter for sale, will be as contrarian as he could have been insuch pivotal moments. The big bones of contentions have yet to be attacked, like theelectric corporation, which is probably bound to end up being, eithersooner or later, under Bebe or under his successor, Israel'sequivalent of what the coal miners were for Thatcher. MR. DORON: Bebe, of course, came unprepared because nobody canbe prepared to govern the Israeli government. First of all -- MR. WATTENBERG: There was no Keith Joseph to play to hisThatcher. MR. DORON: The Israeli government is really a misnomer. Ibelieve governments everywhere are misnomered. You think ofgovernment as an entity that has some kind of cohesiveness and a setof coherent goals that it wants to execute, like any other body,there ain't such a thing as government. Government is simply anunstable coalition of vested interests that are pulling this way andthat in every country, and especially in Israel where everything isarbitrated through government. The source of wealth in Israel isgovernment. Government contacts, government contracts, you name it,you get it through your government, and through your politicalconnections. So, everything here is politicized, from the size ofthe doughnuts that we buy is determined by the government that tellsus how much jam can be in it, to the interest rates and the foreignexchange rates. MR. WATTENBERG: Right. MR. DORON: Now, since the Israeli government has to havearbitrate between so many vested interests, it's always torn apart. It has torn apart the two large parties, both of them. And Ipredicted that both of them in the next elections would just decline,as had happened, indeed, because they fight each other constantly,and they are incapable of producing anything. They're incapable ofcarrying out any policy. I've seen it from inside now. The same forprivatization. I mean, there is no reason why a government in Israelshould succeed in privatizing more than it succeeds in itseducational system, which in a Jewish state to create such aneducation system is a real shunda (sp) as they say. MR. WATTENBERG: Scandal. MR. DORON: Scandal. Or the health system, we have the highestrate of doctors per capita in the world, and some of the finestJewish doctors, and yet we have one of the worst health deliverysystems, because it's -- MR. WATTENBERG: Do you agree with that, Amotz? MR. ASA-EL: Well -- MR. DORON: Because it's a bureaucracy. MR. WATTENBERG: Now, hold on. You're saying this as a greattheoretical economist. You talk to Israelis and they say, we havethis wonderful national health system. MR. DORON: They don't know the alternatives. Look, everyIsrael feels that he's very rich because he drives a Subaru that costhim $30,000. So, he feels he drives Cadillac. It cost $30,000. Hehas an apartment in Jerusalem that cost him $250,000. He thinks he's a very wealthy man. They don't -- look, the Talmudsays the worm that lives inside the horseradish thinks that it's thesweetest fruit. MR. ASA-EL: Israelis don't know how exorbitantly taxed theyare. They may know that theoretically, but we are perhaps the mostheavily taxed society in the developed world, when you take intoaccount it's not just income taxes, but a host of indirect taxesranging from value-added tax to a car sales taxes, or to a host ofproperty related taxes, which you pay whether as an owner, or as abuyer, or as a seller. There's no end to this. It's a plethora oftaxes. MR. WATTENBERG: As, by the luck of the draw here, we havethree people who think that the adjective Thatcherite is a complimentnow. But there's a lot of people in Israel who are not Thatcherites,like probably about 90 percent if I had to guess. Now, if I hadassembled this panel differently with non-Thatcherites, play a gamefor me, what is the argument against what is going on in Israel now? MR. ASA-EL: Well, I can just quote it, but don't anyone eventhink that I think so myself. MR. WATTENBERG: Okay, but what do you hear, what do you hearfrom the other side? MR. ASA-EL: What opponents of Thatcherism would clearly sayis, they would make this mechanical linkage between Israel'scurrently rising unemployment and this government's Thatcherist talk,and whatever action of it there is. I would quickly say, of course,that this is economically unfounded. The reason unemployment iscurrently rising, the rise isn't that dramatic, the reason it'srising is that the economy is basically undergoing an historic shiftfrom a low tech dominated structure to a high tech dominated one. And surely, in the course of that, there are those who fall by thewayside. And meanwhile, also due to fortunate politicaldevelopments, also labor intensive production lines can go -- MR. WATTENBERG: Now, you play a Socialist here for me, or awelfare state economist -- MR. DORON: Well, I think -- MR. WATTENBERG: But tell me what the other side would say? MR. DORON: Well, I think Israelis are really very botheredabout inequality of income, and they don't realize that theinequality -- the great gaps of income that we have in Israel arecreated precisely by the stateist of the Socialist system in order toconcentrate wealth in the hands of the few. They are also, you mustrealize, Israelis have been trained to look at the world through avery different prism. I mean, they were educated on Upton Sinclair'sThe Jungle, on the Grapes of Wrath -- MR. WATTENBERG: The Grapes of Wrath. MR. DORON: On Dallas, and on American magazines that talkabout what a failure America is because your cities are full with thehomeless, you know, and drunks. So, Israelis say, well, look, thisis a model of capitalism and it's failed, and Socialism hassucceeded, look at Sweden for example, the nicest society, it'sSocialist. And Socialism is coming back now in Europe. It hasgained the government in Britain. It has gained -- they don't, ofcourse, realize that Socialism was somewhat transformed in Britain orin other places. So, you have this simplistic view, and you havestill mostly the concern of the Israelis about the quality. This isa community that needs cohesion, and therefore equality is veryimportant. MR. WATTENBERG: Thank you very much, Daniel Doron, and AmotzAsa-El. You're wonderful guests. You're not such great Socialists,I mean in terms of making a case for Socialism. MR. DORON: We might still grow up. MR. WATTENBERG: We might still grow up. But, thank you verymuch. And thank you. For Think Tank, I'm Ben Wattenberg. ANNOUNCER: We at Think Tank depend on your views to make ourshow better. Please send your questions and comments to New RiverMedia, 1150 Seventeenth Street, Northwest, Washington, D.C. 20036,or email us at thinktank@pbs.org. To learn more about Think Tank,visit PBS Online at www.pbs.org. And please let us know where youwatch Think Tank. This has been a production of BJW, Incorporated, in associationwith New River Media, which are solely responsible for its content. Think Tank is made possible by AMGEN, recipient of thePresidential National Medal of Technology. AMGEN, helping cancerpatients through cellular and molecular biology. Improving livestoday and bringing hope for tomorrow. Additional funding is provided by the John M. Olin Foundation,the Lilly Endowment, the Lynde and Harry Bradley Foundation, theUnited States-Japan Foundation, and the Donner Canadian Foundation. (End of program.) 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