We do it our way

May 13, 2016

As 2003 began, the Israeli economy was mired in the longest and deepest recession in its history. Indeed, the first quarter of 2003 proved to be the tenth in succession in which GDP contracted, with all the consequences thereof, notably rising unemployment. At that time, no other developed economy had endured such a prolonged slump since the 1930s — although that was to change in the Great Recession of 2007-09 and in the Eurozone crash that began in late 2009.


Furthermore, in early 2003 it was axiomatic that there could be no sustainable growth in the Israeli economy without an active peace process with the Palestinians. Given the backdrop in Israel, of a severe intifada in which a systematic campaign of suicide bombings directed against civilians in city centers had hammered the domestic economy, while a global recession and the collapse of the dot-com boom of the 90s had undermined exports and crushed the high-tech hype, that seemed a reasonable and plausible assessment.


However, like the parallel piece of wisdom current in the early years of the 21st century — that a regular army could never defeat its irregular (guerrilla/ terrorist) opponent in an ‘asymetric’ conflict — this was proven to be totally wrong by subsequent developments. Yet not even the most dyed-in-the-wool, starry-eyed optimist about Israel and its economy could have predicted, or even believed in his or her heart that, beginning in April 2003 and continuing uninterruptedly for the next 13 years, up to and including the present, the Israeli economy would grow and all the key economic metrics would display consistent, almost unbroken, improvement.


Unsung economic miracle


Thirteen-plus years of unbroken economic growth in a developed economy, is a very rare achievement in this century. What makes it entirely unique, to the best of my knowledge, is that it has not been based on accumulating vast quantities of debt to ‘grease the wheels’ of the economy — as so many others, from America to China, have done. On the contrary, this period has been characterized by a steady decline in the level of debt to GDP in the government and business sectors, although household debt has risen sharply in recent years.


This ‘economic miracle’ has gone largely unsung, for many reasons beyond the scope of this discussion. But whilst it was entirely unpredicted — and, I would argue in defence of economic analysts generally, myself included, entirely unpredictable — it is easily explicable in hindsight. Nevertheless, the facts that underpin the explanation are largely ignored, perhaps because their implications are so far-reaching as to be unpalatable.


The simple part of the explanation relates to how and why the Israeli economy — regarded in the 1980s as a basket case — became consistently successful. Conceptually, this process was identical to the one whereby an individual, or a household, or a business whether large or small, becomes successful and rich: You generate more income than you spend and you invest the surplus, thereby steadily accumulating productive assets. In the case of Israel, in the 55 years from 1948 through 2002, the country managed to run a surplus in its current account precisely once. The other 54 years ended in deficit and Israel had to borrow to finance its shortfalls. Since 2003, it has run a surplus every year and this keeps getting larger over time. Israel is a net lender to the world and its IIP (international investment position) keeps improving, in both absolute and relative terms.


That’s the simple part: become a leading player in rapidly-growing business sectors that offer premium profits and you will get rich. That much they know even in California and a few other places. But in most of the developed world, globalization and the technology revolution have been accompanied by (many believe they directly cause) loss of jobs, declining real wages and, worst of all, a steady fall in the participation rate — the proportion of working-age adults who have or even seek jobs.


Get jobs, have babies


Israel’s labor force has expanded steadily since 2003 — admittedly from an unacceptably low base, but nevertheless unemployment has fallen to record-low levels, employment has risen steadily, and the participation rate has reached respectable levels — crossing the declining US participation rate along the way — with plenty of potential left to rise further.


These developments have not just happened. They reflect deep changes in economic and social policy, as well as fundamental changes in the social structure, behavior and ideology of the two main demographic groupings in Israel that has previously been marginalised — Haredim and Israeli Arabs.


Beyond that, still beneath the surface and hence largely unrecognized, is the mega-demographic achievement that separates Israel from every other developed economy on earth — and most of the developing ones. In Israel, the birth-rate is not only comfortably above ‘replacement level’ (c-2.1 births per woman) but is actually rising. Furthermore, since c-2004, that rise is concentrated in the mainstream Jewish population, not in the two marginal groups characterized by  very high birth rates in the late 20th century.


There are, believe it or not, a long list of problems — some of them quite serious — still facing the Israeli economy. But they are fewer and less serious than the list of 2000 — let alone that of 1985, when the economy had been brought to the verge of collapse. Since 2003, as this column chronicled the self-destruction of the major global economies, Israel has charted its own course and avoided their fate. Long may that continue.

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