April 7, 2016
The recent nuclear deal with Iran. The ongoing threat of terrorism in the Middle East. The still-unresolved Israeli-Palestinian conflict. Issues involving Israel appear in the news almost daily. And the country’s political actions continue to spark strong opinions inside and outside its borders.
But often lost in public perceptions of Israel is what this tiny country of a mere 8 million people — founded only 67 years ago, possessing few natural resources, and facing constant security threats from its neighbors — has achieved from an economic and business standpoint. Ron Dermer, Israel’s ambassador to the United States, recently spoke at Wharton on this subject and promised to reveal “the secret of Israel’s success.”
The second-youngest ever Israeli ambassador to the U.S., Dermer was born and raised in Miami Beach, Fla. He earned degrees from both Wharton and Oxford. He graduated from Wharton in 1993 where, he noted, he arrived “a supporter of capitalism,” and left “a champion of it.” In 2004, Dermer co-authored, with Israeli human rights activist Natan Sharansky, the bestseller The Case for Democracy: The Power of Freedom to Overcome Tyranny and Terror, which has been translated into 10 languages.
Dermer said he has long been interested in the moral argument behind capitalism, something that he thinks is rarely voiced by political leaders. “The failure of people to defend capitalism in moral terms I think is a great, great failure Twitter . … I don’t know another system that has done more good for more people.”
Dermer noted that one of the main keys to Israel’s success today was getting rid of the socialist system on which the nation was founded and embracing capitalism. In 1948, when Israel became a nation, “socialism was the prevailing ethos.” The vision of the country’s founder, David Ben-Gurion, was to “create a new Jew” who would leave the shops of Europe behind and live by farming the ancestral homeland. Dermer said that when he first came to Israel 20 years ago, he was startled to discover that capitalism was considered a dirty word. To call a political opponent a capitalist was an attack.
“I don’t want to get into an argument with the founder of the state of Israel, one of our greatest prime ministers,” said Dermer. “But one thing I know for sure … socialism stifles genius.” He held up the example of the former Soviet Union. “You had great genius [there] … great thinkers in mathematics and science. But look at their economy. Look at their inability to produce welfare, well-being, for their society.” Many of these extraordinary individuals took their talents elsewhere, such as to Silicon Valley where they became successful entrepreneurs.
For a long time Jews were succeeding all over the world except in Israel, noted Dermer. In its early days, the country was poor, with the same GDP per capita as Egypt and Jordan. “The old line used to be that the way to make a small fortune in Israel is to come with a big fortune.”
For Israel’s shift toward capitalism over the past 20 years, Dermer primarily credits Benjamin Netanyahu, the current prime minister, who has held office for nearly half of that time. Netanyahu also served as finance minister for two and half years. (Dermer held the position of senior advisor to Netanyahu from 2009 to 2013.)
Dermer said that one important step Netanyahu took as prime minister was to end the country’s long-standing capital controls. Although warned by experts that this would cause capital flight (“all the money’s going to rush out of Israel”), he went forward, and according to Dermer, “All the money rushed into Israel.”
Another significant step by Netanyahu was to end the long-distance telephone monopoly in 1996, Dermer said. The cost for a call from Israel to the United States at that time was a dollar a minute. Once two other phone carriers were introduced into the market, the per-minute cost plummeted to 18 cents. “That decision to introduce competition changed the lives of so many people. … It allowed families to connect that otherwise couldn’t.” Competition not only breeds excellence, said Dermer, but enables people to get access to goods and services that would otherwise be unavailable to them.
“The failure of people to defend capitalism in moral terms I think is a great, great failure…. I don’t know another system that has done more good for more people.”
According to Dermer, the biggest reforms in Israel came about in response to a crisis, as is often the case, elsewhere. Once again, Netanyahu was the facilitator, this time as finance minister in 2003. Israel was grappling with two years of negative growth, nearly 12% unemployment, and a debt-to-GDP ratio of 102%. There was concern that the economy might go into a tailspin and banks would fail. One major cause of these troubles was the NASDAQ collapse of 2000, a situation beyond Israel’s control. “Those were the cards he was dealt,” remarked Dermer.
Dermer also recounted how Netanyahu came up with a progressive economic plan to boost the private sector and reduce government control. Furthermore, the finance minister “sold” it very effectively to the Israeli public. In a televised national press conference, he evoked an image that “unfortunately a lot of Israelis know … the image of serving in the military.” He asked people to recall a training exercise in which soldiers have to try to run with someone else on their shoulders.
Netanyahu said, ‘All economies are pairs of a public sector on the back of a private sector, and if the public sector gets too fat, and the person underneath — the private sector — is too thin, you’re going to see it collapse.’” He told the television audience that he would cut spending to put the “fat” public sector on a diet, and cut taxes to make the “thin” private sector stronger. The image became well known in Israel as the ‘Fat Man Thin Man’ paradigm and helped generate support. Netanyahu proceeded to make major privatization reforms to the country’s industries including refineries, airlines, and telecommunications.
In the decade since, noted Dermer, Israel has had sustained growth of about 4% a year. It even rode out the 2007-2008 financial crisis better than most industrialized nations, suffering only flat growth rather than negative growth. The country’s unemployment rate today is only about 5%, and its debt-to-GDP ratio has come down to 67%.
The Secret Ingredient: Chutzpah
Referring to the popular book Start-up Nation: The Story of Israel’s Economic Miracle, Dermer said he would go further and call it the “Innovation Nation.” He said that freed from its socialist past, Israel is “literally catapulting ahead in so many different areas.”
“If Israel’s going to do battle with God, we’re going to do battle with Apple and Microsoft [too].”
Dermer recapped some of Israel’s recent achievements in medicine, including two that received FDA approval just last year. The PillCam is a mechanical “pill” containing a miniature camera that lets doctors view a patient’s digestive system without invasive procedures. And ReWalk is a robotic exoskeleton that allows people paralyzed in their lower body to stand and walk.
Dermer also discussed Israel’s leadership in water conservation and farming technologies. “We recycle close to 90% of our water,” pointing out that the United States recycles only about 1%. He explained that Israel’s recycled water goes into an agricultural process called drip irrigation, an Israeli invention that now also helps farmers in water-deprived areas of Asia and Africa.
Internet technology is another large and growing industry. Dermer noted that 80% of the leading technology companies in the world have R&D facilities in Israel, including Apple, Cisco, Intel and Microsoft. If you are a serious technology company, he said, chances are you have an R&D facility in Israel, and it is probably your only R&D facility outside the United States. “And I’ve got news for everybody. Those companies are not in Israel because they’re Zionists … they’re there because they want access to this very dynamic society, very innovative society, that is second to none.”
Dermer asserted that in addition to Israel’s embracing of capitalism and having a genius for innovation, the natural chutzpah (a Yiddish word meaning insolence, boldness, audacity) of the Jewish people was another secret of Israel’s success. Chutzpah was reflected in the country’s very name, he said. In the Old Testament, Israel was the name given to Jacob after he wrestled with an angel. “‘Israel means to struggle with God,” said Dermer. “Why is that the secret of our success? Because if Israel’s going to do battle with God, we’re going to do battle with Apple and Microsoft [too].” We’ve been a questioning, skeptical people for a long time, Dermer said, and “it takes gall and daring to challenge conventional wisdom.”