Israel’s economy to remain strong despite the Sharon crisis.

Israel’s economy is minimally vulnerable to political change. According to Ambassador Yoram Ettinger, the reasons are as follows:

“1. PROPER PERSPECTIVE. Upon Prime Minister Sharon’s hospitalization, the Tel Aviv Stock Exchange dropped by 3.9%, while the Israeli Shekel regained most of its (1.5%) decline by the end of the day. Putting it in perspective, the Tel Aviv Stock Exchange fell by 4.1% upon the assassination of Prime Minister Rabin (rising by 3.5% 22 days later and by 12.3% 63 days later) and took a plunge of 13.6% on the day of Iraq’s invasion of Kuwait (rising by 14% 22 days later and by 16% 63 days later). Moreover, Israel has not been a one-man economy! While Israeli Prime Ministers have supported their Finance Ministers, rarely (and certainly not recently) have they conceived or directed Israel’s macro-economy.

2. ECONOMIC FEATURES. Since 1985 Israel’s economy has become less government-controlled, increasingly private sector-dominated, know-how-intensive (rather than labor and land intensive), high tech-oriented and export-driven. Such features have rendered the economy substantially minimally-vulnerable to security predicaments and less vulnerable to political volatility.

3. ECONOMIC FUNDAMENTALS and INDICATORS. The vulnerability to political volatility has been eliminated by the fact that all viable challengers for the office of the Prime Minister (Labor’s Peretz is does not stand a chance due to his ultra leftist and ultra dovish positions) have been committed to the same macro-economic monetary and fiscal policies, which have triggered the impressive growth of Israel’s economy since 1985, and have facilitated the sustained recovery during 2003-2005:

*Smaller government (NO more tax & spend);
*Cardinal role played by the fiscally-hawkish Bank of Israel (headed by the globally-respected Stanley Fisher);
*Expanded structural reforms;
*Lower direct and indirect, personal and corporate taxes;
*Lower interest rates (around US rates);
*Lower budget deficit (2.1% of GDP in 2005);
*Lower inflation rates (2%-3%);
*Wider and accelerated privatization;
*Liberalization of foreign exchange regulations;
*Enticing overseas investments;

4. HIGH TECH OVERSEAS INVESTMENTS have been the chief catalyst for Israel’s economic growth. Such investments are drawn by the unique supply of breakthrough technologies, which are minimally (if at all) vulnerable to security and political volatility. Therefore, the launch of the current growth in Israel’s economy took place in 2003 upon the recovery of NASDAQ and the resulting recuperation of the confidence of private, corporate and institutional US investors. For astute investors (Intel, Motorola, J.P. Morgan, Sequoia, Benchmark, GE-Medical, Siemens, Phillips, etc.) WALL STREET HAS BEEN SIGNIFICANTLY MORE IMPORTANT THAN GAZA STRIP. Such investors value Israel’s commitment to growth-oriented economic fundamentals much more than they value the political affiliation of the particular Prime Minister.

5. SUSTAINED GROWTH WITH OCCASIONAL BUMPS. An examination of Israel’s economy since 1948 demonstrates that the series of wars and on-going terrorism, along with frequent political crises, have not been but bumps on the road to a most impressive economic growth, in defiance of security and political unpredictabilities. The economic significance of the current political predicament is, certainly, substantially less severe than most of the previous security and economic mishaps.”

Despite the political turmoil in the middle east, and the frequent attacks on Israeli civilians by Palestinian terrorists, the economy has been surprisingly stable and strong. Disciplined conservative fiscal policies along with tax reductions have contributed to Israel’s robust economy. Regardless of the political future of Israel, the economy should remain stable.

Ambassador Ettinger (ret.) is a former minister at Israel’s embassy in Washington, and a former consul general of Israel in Houston.