Can Israel supply a Grecian formula?

The Jerusalem Post reminds us:

The European Union’s unfolding Greek tragedy finds analysts outdoing each other in scripting hyperbolic doomsday scenarios. Time will tell whether they are right or exaggerating.

But it might serve us Israelis well to recall that, back in 1985, we were on the precipice of an even worse catastrophe, but managed to pull back and have since achieved unprecedented economic security and prosperity. As far as we can tell, which may not be all that far in this unstable and unpredictable financial environment, Israel is now sitting in a much better position than many Western economies.

The Greek economy – one of the EU’s smallest – is roughly the size of Israel’s. But that’s where the comparison ends.

While Israel has built impressive monetary reserves (despite military burdens that, proportionately at least, no EU country comes close to shouldering), it has also opted for conservative financial management. Much as this was criticized by local politicians, it has kept Israel relatively safe from the ravages that have afflicted the global economy especially since mid-2008. Our healthy GDP and focus on hi-tech research and development have also rightly elicited recognition worldwide.

Here are some of the particulars of the steps Israel took to reverse its economic disaster:

The JEDG played a pivotal role in the formulation of Israel’s ambitious stabilization plan of 1984, a plan that was welcomed in Washington. At the time, Israel was in serious economic distress. Years of shouldering the enormous defense burden imposed by Arab hostility, and the accumulated result of dependence on imported raw materials and fuel for Israel’s industry — to say nothing of the continuing cost of absorbing waves of destitute immigrants and providing them with the full range of social services — had led to extensive borrowing and a huge foreign debt. Foreign reserves had plummeted, and inflation was raging at 450 percent per year and rising. The government was running a budget deficit equivalent to 17 percent of the gross national product.

Then something unusual happened. Within Israel, the many parties and different schools of thought pulled together, set aside their differences, and worked in a united fashion for national economic recovery.

In 1985, Israel implemented a stabilization program that included several major features: a large cut in subsidies on basic products and services like milk, eggs and transportation. This helped to cut the budget deficit from 17 percent to 8 percent of GNP; a large currency devaluation followed by a stable exchange rate against the dollar; wage and price controls and the cessation of direct indexing of wages and savings to inflation; and a monetary policy that would control the growth of credit, thus driving interest rates upward.

The New York Times later described the sacrifices of the Israeli people, and the message of the stabilization program, as “Everybody takes a step backward — together.”

Indexing meant that certain prices would automatically rise to keep pace with inflation. While intended as a way of helping deal with high inflation, indexation actually fed inflation.

I also think that union influence in Israel was greatly reduced at that time.

But when reading this over, it occurred to me that if the cost of raw materials contributed to Israel’s economic problems, the technological innovation that Israel has been blessed over the past twenty years has been a perfect antidote. The technology has been more dependent on human beings than on expensive raw materials. George Gilder, the author of The Israel Test writes:

For all the achievements of Israelis working for Intel and other foreign firms, Israel’s native technology sector languished. Redemption came in unexpected forms. One was an infusion of genius: nearly a million immigrants, chiefly from the Soviet Union, whom Israel absorbed in the late 1980s and the 1990s. Impelled by constant harassment from the U.S. government—including Senator Henry “Scoop” Jackson’s emancipation amendment, which for a decade was attached to any American legislation of interest to the USSR—the Soviet government finally agreed to a frontal lobotomy of its economy. Under Gorbachev, it released the bulk of the Soviet Jews, who had continued, despite constant oppression, to supply many of the technical skills that kept the USSR afloat as a superpower.

The influx of Soviet Jews into Israel represented a 25 percent population increase in ten years, a tsunami of new arrivals that would be equivalent to the entire population of France being accepted into the United States. Largely barred in the USSR from owning land or businesses, many of these Jews had honed their minds into keen instruments of algorithmic science, engineering, and mathematics. Most had wanted to come to America but were diverted to Israel by an agreement between Israel and the United States. Few knew Hebrew or saw a need for it. At best, they were ambivalent Zionists. But many were ferociously smart, fervently anti-Communist, and disdainful of their new country’s bizarre commitment to a socialist ethos that punished achievement.

At the same time as the flood of Soviet immigrants, a smaller but seminal wave of Americans arrived in Israel from such companies as IBM and Bell Laboratories, with a knowledge of Silicon Valley and an interest in opportunities in Israel. Capping off and funding these catalytic outsiders was a generation of eminent American retirees who arrived in Israel with billions of dollars of available capital, petawatts of imperious brainpower, a practiced disdain for bureaucratic pettifogs, and Olympian confidence in their own judgment and capabilities.

Can Israel serve as an economic example to the rest of the world?

Crossposted on Soccer Dad.