Israel and Globalization

By Jonathan Lemco

Israel is one of the few, if not the only, democracy in the Middle East. It also has the most dynamic economy and most vibrant entrepreneurial culture. Its economic policy-makers are proactive and its workforce is one of the most technologically innovative in the world. This is best evidenced by its success in devising new materials and techniques applicable to the defense, electronic and other industries. Not surprisingly, Israel has benefited enormously from globalized trade and investment. This is despite Israel’s relatively small population base and its precarious strategic position. Of course, as the largest recipient of financial aid from the United States, Israel enjoys a particular advantage.

Since its inception in 1948, the Israeli economy has been fairly open to international markets. In the 1990s for example, the information technology and communications sector in Israel grew five-fold, reaching 14% of GDP. On the other hand, technologies are spread around the world through multinational companies, an area in which Israel is weak. The number of Israeli multinationals in the high-tech sector, as expressed in company size, is low. By definition, most Israeli high-tech companies are small firms. And they are vulnerable to a highly volatile global high technology sector.

Broad Macroeconomic Issues

To compete in a globalized world, Israeli policy-makers must seek price stability as a primary monetary policy goal, with a second goal of tempering business cycles. The main policy tool is short-term interest rates. In Israel there were two clear deviations from stable interest rate parameters; in 1998 and again in 2001. Both times, lowering the high interest rate created turmoil. Interest rate policy in a globalized world economy must be stable while adhering to medium- and long-term inflation targets.

With regard to budgetary policy, the Ministry of Finance must continue its policies of fiscal prudence. At present, Israel has a moderate external debt burden due to capable Central Bank management and strong capital inflows since the mid-1990s. Israel’s ample reserves of $24 billion cover its external financing gap. Direct international investment in Israel is up in 2003 as well. But Israel does have high government deficits of 5% of GDP and public debt burdens. Unemployment is too high at 10.8% as of April 2003. Many of Israel’s domestic costs are due to external shocks associated with its complex security situation. Future budgets should be rigid when it comes to government expenditures, and flexible regarding the impact on the business cycle through infrastructure investments. Otherwise, the risk of recession increases.

Israel is a trading nation, and this has contributed to lower prices and a higher standard of living. As a small nation, pursuing international trade agreements are the only way it can ensure its relatively high levels of prosperity can be sustained. Indeed, Israel’s export oriented economy has generated per capital income that is similar to some EU countries. It is a virtual par with Spain and higher than Greece and Portugal. The Israeli per capita income is much higher than the 10 countries that will join the EU in 2004. However, most of these countries are growing economically while Israel is in the third year of a recession.

That said, if there is progress attained by the internationally sponsored ‘Road Map” aimed at resolving the Israeli-Palestinian conflict, coupled with a global economic recovery, then the Israeli economy should emerge from recession in 2003. At 0.5% in real terms this year however, growth remains below potential.

Globalization’s Reach into Israel

As of August 2003, 2.2 million Israelis (32.8% of the total population), use the Internet. This is one of the most wired nations in the Middle East. Further, the telecommunications market in Israel is growing rapidly. Data communications is the growth engine, and the forecast for Israeli data communications growth is 31.2% through 2007. Wireless data communications revenue accounts for half of the data communications total and should expand by an average of 43% per year until 2007, according to the Israel High-Tech and Investment Report.

Also, according to the Israel High-Tech and Investment Report, the Israeli telecommunications market revenue amounted to $3.78 billion in 2002, of which $2.6 billion came from cellular communications and $1.17 billion from fixed line communications. Clearly, this is a burgeoning industry poised to benefit from greater international ties.

Israel’s biotech sector is also a growing force to be reckoned with. BioTechnology General, InterPharm Laboratories, and especially Teva Pharmaceuticals are the largest of the approximately 140 firms developing world class pharmaceutical and other products and technologies. The biotech industry in Israel employs about 40,00 people and its output, as of June 2003, was in excess of $800 million per year. Teva Pharmaceuticals alone was responsible in 2002 for more than $550 million in exports of its Multiple Sclerosis Copaxone drug.

The number of biotech startups is high and equals the number of companies in such countries as Switzerland, Sweden and France. Furthermore, Israel’s medical device industry, numbering more than 400 companies, is growing as well and is a world leader in the production of cardiac stents.

Finally, Israeli defense exports hit an all-time record in 2002. Signed contracts for defense industry deals with foreign armies reached $4.18 billion, a nearly 70 percent rise compared to 2001. The main customers for Israeli weapons systems are the U.S., followed by India and various Southeast Asian countries. Not surprisingly, the identity of many of the countries acquiring weapons systems are not revealed. As of July 2003, Israel is fifth as a military exporter behind the U.S., EU, Russia and Japan. But it is also among the leaders in exporting electronic equipment and high-tech military equipment.

Conclusion

Israel is a small country faced with a challenging strategic environment. But its population is educated and its industries have produced goods and services that are in demand worldwide. The Israeli economy has demonstrated an ability to compete with much larger competitors. In short, globalization has offered opportunities to Israel that have allowed it to transcend its small size and realize a standard of living for its citizens that are among the highest in the middle east.