Israel’s Economic Future Hinges on Top Resource: People

What will Israel be like in five years’ time? “It will be like Europe, with fashion and style and luxurious goods,” says the factory manager of a kibbutz, one of Israel’s famed collective societies.

The answer is surprising because it defies Israel’s economic challenges: Unemployment 10% and rising plus an influx of immigrants mostly from the Soviet Union that ultimately will require creation of 600,000 jobs--adding one-third to the work force. Israel has 18% inflation and a $3-billion trade deficit.

Also, the country is in the fourth year of drought, and water for agriculture has been cut 60% in some places.

How will the country cope? “I’m not worried,” says one of Israel’s business leaders. “I’m sure we’ll improvise.”

He could be right. Israelis can be innovative and ingenious, from the kibbutz farm manager who is using recycled waste water on his cotton crop to government planners trying to recycle the waste water of Tel Aviv for agriculture.

Israel has responded before to chronic water scarcity--by developing drip irrigation and pioneering genetic agriculture. It is also strong in microelectronics, computers, software and laser technology--all the advanced industrial categories.

That’s the “First World” Israel, the country that is such a sharp contrast to the Third World Arab nations around it. But there is also a Third World Israel, with a state bureaucracy resembling the governments of neighbors Egypt and Syria. The state owns whole industries, much of Israel’s land and all the banks. Like its neighbors, Israel has a high-tax system that encourages evasion and fiddling.

But now Israel needs investment to create jobs for its immigrants. So it is trying, if slowly, to sell state holdings, reform its Third World weaknesses and emphasize its First World strengths.

And that makes it a good time for other countries and U.S. states--trying also to attract investment--to look at Israel. There are lessons here for all.

On the bright side, Israel could be on the verge of an entrepreneurial boom. Industry Minister Moshe Nissim beams happily over a desk piled high with applications for government loan guarantees and other incentives to set up or expand businesses.

“We used to average 30 to 40 applications a month; now it is over 100 a month,” he says. “The figures kept rising all through the Gulf War.”

Israel holds promise for investors because it understood and capitalized on technological trends that have transformed the world economy the last 20 years. Those trends center on microelectronics, which has put as much power on printed circuit boards--the heart of machinery today--as once existed in bulky motors and generators.

Light, wafer-like circuit boards, unlike bulky generators, can be transported economically by air, which means that distance is less of a factor and suppliers no longer have to be close to customers. That proved a great advantage for Israel, a small state far from world markets and unable to trade with hostile neighbors. Israeli firms such as Scitex, Elbit Computers, Oprotech and Orbot could develop innovative products at home and fly them to the United States, Europe and Asia.

Another trend, the mobility of capital, also favored Israel. World business today is happy to have research done wherever it can find the brainpower. So Israel, with a record of problem solving in agriculture, electronics and now the environment, has won more than its share of brainpower investments.

And that brings up Israel’s most interesting lesson for economic development. Bright people don’t develop knowledge and skills without training; they must be cultivated like any other resource. Israel understood that educating its people was the most important investment it could make for its economy.

The government funds the nation’s seven universities and technological centers. Israel spends proportionately more on research and development than any nation, including Japan and the United States. It doesn’t try to pick winners among technologies or industries, but spends to cultivate brainpower, the raw material of modern industry.

That doesn’t mean that Israel is a business paradise. To the contrary, “This is a hard place to do business,” says an Israeli entrepreneur. “If in the United States you need to see three government agencies to be in business, here you deal with 10.”

There are opportunities for corruption--bribes, payoffs, influence--wherever governments control licenses to do business. Within the vast government, there’s an ample share of that kind of thing, business people say.

Now such old world, Third World practices have to change. Israel’s economy must treble its growth rate to 10% a year and increase exports 12% a year if it is to absorb the immigrants and make a productive return on the $20 billion it plans to borrow on world markets in the next five years.

As much as a time of promise, this is a time of reckoning for an Israeli economy that wants to double in size in this decade and attain, as the kibbutz manager says, that “European” standard of living.

If it falters, Israel will see its new hopes fade as bright Soviet immigrants depart for other places--Los Angeles and Brooklyn, if they can swing it.

More likely, however, is that Israel will “improvise” and adapt to the new challenges as it did to technological changes in the last 20 years--since the oil price rise of the early 1970s.

Ironically, in the early 1970s, experts predicted that oil riches would make the Arab countries powerful; countries with few natural resources, such as Japan and Israel, would be vulnerable.

It hasn’t worked out that way. Instead, Japan and Israel have proven that brainpower is much more important than oil for a nation’s economic success. There’s a lesson there for more than the Arab countries.