Israel at 75: How a desert economy became the ‘Silicon Valley’ of the Middle East 

The celebration of Israel’s economic miracle over the past 75 years has been tempered by weeks of demonstrations and protests.

Dissenters in the country and in the diaspora have opposed Benjamin Netanyahu’s judicial and other reforms.

Former Bank of Israel governors Karnit Flug and Jacob Frenkel are among global economists who have warned that the proposed legal changes could deter investors and negatively impact the country’s creditworthiness.

The paradox is that Netanyahu, as finance minister in Ariel Sharon’s government and as prime minister, changed Israel’s economy forever.

He transformed the country from a struggling state-dominated nation, with high inflation and a weak shekel, into a free market economy modeled on the Thatcherian model.

Netanyahu was also responsible for guiding Israel to membership in the OECD, the Paris-based club of developed Western countries.

Israel’s journey from an undeveloped desert economy to the ‘Silicon Valley’ of the Middle East is an inspiring story.

The Israel of 1948 was about Jaffa oranges, chemical plants in the Dead Sea and low-value textiles.

Today’s Israel is a leader in advanced technology, cybersecurity, avionics, telecoms, life sciences and materials research.

Prosperity is supported by self-sufficiency in natural gas, especially important in an era of fuel insecurity following the Russian invasion of Ukraine.

It should come as no surprise that, despite the recent political turmoil in Jerusalem and demonstrations outside Downing Street, Britain signed a far-reaching trade deal in London in March 2023. The UK’s trade relationship with Israel has grown to £7 billion a year.

When it started in 1948, Israel had some advantages.

As Europe’s pre-war universities emptied of Jews, a first wave of scientists and engineers planted the roots of Israel’s advanced scientific and technological fortresses of excellence.

Israel’s technological revolution has been bolstered by an intense focus by successive governments on research and development, with an astonishing 4.65 percent of national income being devoted to the cause.

His leadership in this field was strengthened by the arrival of Russian scientists, engineers and mathematicians as barriers to emigration from the old Soviet Union fell in the 1980s.

High-tech culture is seen by many young people as the path to prosperity. Israel’s high-tech industries contribute 15 percent of the national output (GDP), accounting for 43 percent of the country’s exports and 25 percent of tax revenue.

Perhaps the best measure of the country’s economic progress is the rapid increase in per capita income – national output divided by population.

By this measure, Israel’s per capita income was US$54,847 (£44,000) at the end of last year. Wealth is higher than Britain at $47,317 (£38,000).

Bygone days: 1948 Israel was about Jaffa oranges, Dead Sea chemical plants, and low-value agricultural textile exports have collapsed as the tech sector continues to thrive

Israel’s historic growth record reflects a triumph of immigration. Holocaust survivors, their children and grandchildren, displaced populations from Arab countries, and waves of Russian and Eastern European immigrants have all demonstrated the entrepreneurial spirit.

Investment in Israel during the most difficult decades in the 1950s, 1960s and 1970s was supported by large subsidies from abroad.

German reparations at their peak exceeded $1bn (£800m) a year.

Israel has received US$158 billion (£127 billion) in military and other aid from the US since independence, according to the Congressional Research Service.

But the OECD and the International Monetary Fund also recognize flaws in society and the economy.

One of the most troubling is that the OECD has found that Israel has one of the largest income disparities in the Western world.

At the top of the income scale are the tech entrepreneurs, Russian oligarchs and established Israeli industrial and banking families, who dominate corporate ownership on the Tel Aviv Stock Exchange.

On the other side are Israel’s less affluent minorities, who have difficulty accessing the labor force. They include the fast-growing ultra-religious Charedi groups who often lack the secular education and awareness necessary to contribute to wealth creation.

Other struggling segments include the Israeli-Palestinian population of 2 million.

Many have risen up the economic ladder and Israel’s healthcare system has proved to be a great testbed for social and economic equality. About half of Israel’s pharmacists are Arabs and up to a third are doctors and other medical practitioners.

Left in abject poverty are the Arab Bedouins of the Negev, who are embroiled in long and bitter land disputes with the Israeli authorities. Their communities struggle with drug problems and family violence.

In its most recent, mostly upbeat assessment of Israel’s prospects, the IMF pointed to major socio-economic disparities that mean “lower performance of Arab and Charedim students compared to their peers.”

But there can be no doubt about the degree of economic change that has taken place in Israel. A barren land has been transformed into a Middle Eastern economic powerhouse.

In any economy, the best opportunities for trading advantage are with your closest neighbors. That has been denied Israel most of its existence because of existing security threats.

However, openings to the Gulf States and Morocco through the Abraham Accords should be a huge plus as many of the modernizing and wealthy oil states look to boost their economies with the best technology.

But the full potential of Israel’s economy will not be reached until it better integrates its domestic minorities into the workforce and finds better ways to live with its closest neighbors in the West Bank and Gaza.