Shmuel Ben-Tovim Minister for Economic Affairs at the Embassy of Israel and Chairman of the Association of Economic Representatives in London (AERL), charts his country’s remarkable economic performance

During their gloomy early years in power, the leaders of the young and struggling State of Israel tried to cheer up the nation by portraying a future vision of a majority of world Jews returning to their homeland and enjoying full economic independence. Fulfilling the first part of their goal required unprecedented (and totally unexpected) waves of mass immigration. Meanwhile for the second part to become a reality, Israel’s developing economy, unable to count on any significant natural resources, had to earn all by itself sufficient foreign currency to satisfy a burgeoning demand for imported goods and services. Both counts, therefore, seemed to be nothing more than a sweet, distant, politically-driven utopia.

How times have changed. On the 62nd anniversary of Israel’s establishment, David Ben-Gurion, the late founding father and first prime minister, would have probably repeated his famous saying: ‘I told you, to be considered a realist in Israel you should believe in miracles!’

During the early 1990s the gates of the former Soviet Union opened up, allowing one million Jews to migrate to Israel, where they increased the population by 20 per cent. And in June 2010 the formal classification of Israel in world financial markets will be promoted from ‘emerging’ to ‘developed’ – rubbing shoulders with global leaders such as the US, Japan, the UK, France and Germany.

During its first 62 years, Israel’s economy grew more than 60-fold, and the population 11-fold; therefore GDP per capita, the most commonly used indicator of a country’s standard of living, has increased about six-fold. Putting it another way, over 62 years Israeli GDP has grown by an average of seven per cent annually – a statistic unrivalled in modern history.

Even more remarkable is the fact that the huge and sudden waves of immigration in Israel during the early 1990s were not just the realisation of an ancient Zionist dream, but also a unique lever for economic and social growth. They coincided with the globalisation of the Israeli economy, and in particular the emergence of its technology sector – many highly skilled recent immigrants have played pivotal roles in what is widely recognised as the main engine of Israeli economic growth today.

In 2001 and 2002 the second Palestinian Intifada and the bursting of the global high-tech ‘bubble’ derailed this growth pattern. But daring structural reforms and more disciplined public spending policies, implemented both by the government and the Bank of Israel, produced five subsequent and consecutive years, from 2004 to 2008, of growth above five per cent. At the same time, inflation rates were kept low, securing stable conditions for both the business sector and consumers. Exports and foreign investment were up; tax rates, unemployment, the budget deficit and public debt were down.

In particular, two indicators of Israel’s external economic position, each impressive in itself, allow the country to now be depicted as economically ‘independent’:

• Since 2002, Israel has been a net lender/creditor to the world, with negative net external debt levels;

• Since 2003, Israel’s current account balance has been in surplus, making it a net exporter to the world.

THE CREDIT CRUNCH The global financial crisis of the last two-to-three years has threatened to interrupt Israel’s economic momentum once again. The fact that exports make up almost 50 per cent of Israel’s GDP explains the country’s high sensitivity to developments overseas, especially in the EU and North America.

Fortunately, the otherwise robust condition of Israel’s economy has helped it to weather the worst consequences of the crisis. Both the financial and property markets, widely viewed as the ‘eye of the storm’ in the US and Western Europe, suffered no meaningful setbacks in Israel. Effective regulations and prudent management have spared Israeli taxpayers from the need to bail out any private institutions.

As of late 2009 the economy has returned to solid growth, and the forecast for 2010 is presently at 3.6 per cent. Indeed, 2009 was one of the best years on record for the Tel-Aviv Stock Exchange, with investors enjoying average returns of 104 per cent.

Meanwhile the government continues to maintain budgetary discipline, restraining expenditure and the size of its deficit by law. It has also identified several sectors as future growth generators, including water and environmental industries (‘cleantech’), biotechnology and IT services for the global financial market.

SOCIAL CHALLENGES The government still faces significant challenges in its social policies. While there is no doubt that economic growth has benefited most Israelis, not all of them have benefited in the same way. Inequality in Israeli society is still high, undermining the social cohesion that is so significant to a country facing grave external challenges. Special attention is given to the ultra-orthodox Jewish and Muslim communities, both of which are characterised by larger families and low participation rates in the labour force, and hence over-represented below the poverty line.

Another major challenge is the education system, which in the past has enabled Israel to create a competitive edge in the areas of science, technology, agriculture and defence, to name just a few. These days, however, there is much evidence that the system has fallen below these high standards and is in urgent need of upgrading.

Over its first 62 years the Israeli economy has demonstrated outstanding ingenuity, resilience and vision. The same virtues should help it overcome present and future challenges and continue to carry the State of Israel from strength to strength.