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Israel: The start-up nation and beyond

The fascinating story of Hatzerim kibbutz is a useful way to capture the profound transformation of the Israeli economy over the past several decades—from agriculture to high technology. 

In October 1946, 25 young Zionist pioneers set up camp on a sand dune in the arid Negev desert in the southern end of what was then Palestine. The declaration of an independent Jewish state in May 1948 was still not a guaranteed outcome. An old photo of the settlement—then called Kelta—in its early days shows a few wooden shacks amid a dry landscape. There is only one tree in the background.

The settlement had been built because Zionist leader David Ben Gurion had urged his followers to make the desert bloom—as well as plant the Zionist flag in new territories. The young pioneers had a task that must have seemed impossible back then. 

They succeeded. Hatzerim today is a green oasis in the Negev. It is hard to believe that it has been crafted out of a desert landscape. The community of around 250 families still tries to be true to its socialist origins. Salaries go into a common pool. Work is shared. Members eat in a communal dining hall. Decisions are taken by popular vote. Hatzerim seems like a prosperous community. However, the prosperity of the kibbutz cannot be explained by the 500 hectares of jojoba trees or the 350 cows in the local dairy. Hatzerim is the original home of a capitalist enterprise that has sustained the kibbutz in recent decades. 

Naty Barak is the chief sustainability officer of Netafim, the largest drip irrigation company in the world. He recalls how Simcha Blass, who developed the first drip irrigation systems, was looking for a kibbutz to house a new enterprise. Many turned him down. The 100 people who were then members of Hatzerim voted to back Blass. Barak was one of the people who voted in favour of the new enterprise. “The dream was to provide 14 jobs to kibbutz members,” he says, with a hint of irony. Netafim now has a global workforce of 4,300, sales of nearly $1 billion and a presence in 110 countries. 

India is the second largest market for its drip irrigation products. The company has three plants and over 1,000 people employed in India. Chief executive officer Ran Maidan confidently says that it is a matter of time before India overtakes the US as the biggest market for Netafim. A third of the profits of the company go back to the kibbutz. It also has a say in the composition of the board of directors. The profits from Netafim have ensured that Hatzerim is one of the most prosperous cooperative communities in Israel, even as many of the other kibbutzim strewn across the country are now in decline. 

There is a broader story here. The transformation of an agricultural community into one dependent on innovation is a microcosm of the larger transformation of the Israeli economy into one of the most innovative in the world. 

An hour away from Hatzerim is Tel Aviv, the hub of the innovation ecosystem that has helped Israel emerge as a start-up nation, as the title of a popular 2009 book by journalists Dan Senor and Saul Singer puts it. City officials say that the Tel Aviv metropolitan area is home to nearly a thousand start-ups and 50 multinational technology development centres.

Mayor Ron Huladai makes it a point to mention that the city itself is a start-up. It was built from scratch in the desert, outside the old Arab city of Jaffa, or Yafo as it is now called, over the last 100 years. He adds that innovative start-ups cannot flourish without an open political culture. 

Tel Aviv is now ranked as the fifth most robust start-up ecosystem in the world, according to a study by research firm Compass. Only Silicon Valley, New York, Los Angeles and Boston are above it in the ranking. The World Economic Forum says that Israel is the second most innovative economy in the world, after Switzerland. Israel was for long the country outside the US with the largest number of start-ups listed on the Nasdaq; it was only recently overtaken by South Korea. 

It is hard to come away from a meeting in the city without the conversation veering around to the explosion of entrepreneurship in a country that was once wedded to socialist principles. One big reason for the recent Israeli success in high technology is the fact that there is a compulsory stint in the armed forces at the age of 18, so young Israelis get an early opportunity to work on important national projects at an early age. The defence forces are also the crucible for future business networks.

Young Israelis then carry their experience and contacts into the private sector. It is thus no surprise that many of the areas where Israel is a strong player—telecom and cyber security, for example—are linked to its military research programme. 

There are other reasons as well. In a presentation made to Indian journalists in Jerusalem, Avi Simhon, the economic adviser to Israeli Prime Minister Binyamin Netanyahu, showed that Israel has the highest civilian spending on research and development (R&D) among the members of the Organisation for Economic Cooperation and Development (OECD). In fact, private sector R&D spending has gone up sharply from 2.2% of GDP in 1991 to 4.2% of GDP in 2015. Fourteen out of every 1,000 people employed in Israel are doing R&D work, compared to the OECD average of 8 people, says Simhon. 

Israelis like to point out that there are also several deeper explanations about why their country has emerged as a global start-up powerhouse. First, the very lack of natural resources has forced the country to innovate in order to survive in a hostile neighbourhood. Second, the lack of a large domestic market has meant that Israeli technology companies have been quite naturally pushed to become part of larger global value chains. Third, a robust public culture of debate, especially in the Israeli defence forces, has ensured that good ideas bubble to the surface. Fourth, Israel has invested in creating an education system committed to quality. Fifth, a nation of immigrants who built new lives under duress is a natural home for entrepreneurs. 

One aspect of the Israeli university education system is worth mentioning here—the ability to build interdisciplinary capabilities. At the Tel Aviv University, vice-president Raanan Rein argues that interdisciplinary education is important because “our current challenges are interdisciplinary”. He says that a majority of the graduates from his university are double majors, and that the university encourages students to mix courses from the hard sciences on the one hand and the social sciences, linguistics and fine arts on the other. Tel Aviv University has already begun to collaborate with Indian universities such as BITS Pilani, Thapar University and Mumbai University. 

At the robotics lab of the Ben Gurion University in the Negev, one Indian student tells how she benefited from the interdisciplinary approach. Sridatta Chatterjee is a psychologist by training but now finds herself busy working on a project to build robots to help senior citizens. She says that no Indian university gave her this chance because a psychologist is supposed to have nothing to contribute to robotics. She now works at Ben Gurion University in collaboration with experts from various disciplines. 

However, there are also complaints that Israel has a culture of impatience. This ensures that entrepreneurs sell out too soon so that they can move on to new ventures. One corporate executive explained on the condition of anonymity that the start-up nation has become an exit nation rather than a scale-up nation. One result of this culture of impatience is that Israeli companies find it difficult to do business with more slow-moving cultures such as India. 

Innovation is at the heart of Israeli public policy—and the way this arid nation has become a water exporter is an excellent example of ideas rather than resources drive change. In fact, innovation sits at the heart of a lot of Israeli public policy. Avi Hasson, chief scientist of Israel, says the centrality of innovation is one reason the Israel Innovation Authority that he heads is part of the economy ministry rather than a ministry dealing with technology issues. In other words, innovation policy is considered central to economic policy rather than an afterthought. The office of the chief scientist began 45 years ago, when Israel had not yet made a mark on the global start-up scene. 

The journey to becoming a start-up nation has not been a smooth one. Israel has had its fair share of economic turbulence along the way. Rafi Melnick, one of the most respected economists in Israel, a former member of the monetary policy committee of the Bank of Israel, and now a professor at the Interdisciplinary Centre at Herzliya, outside Tel Aviv, says that the transitions in the Israeli economy should be seen in the context of two important years. 

The first year was 1973. The Arab countries adjoining Israel jointly launched a surprise invasion on the holy Jewish day of Yom Kippur. The oil exporting countries later decided on a global oil embargo after the US rushed military equipment to help Israel fight a war it eventually won. The price of oil quadrupled in the global markets. The twin shocks from higher defence spending and higher energy import bills wrecked the Israel economy. An economy that was growing at close to double digits during the early decades of nation building saw growth collapse. 

Melnick describes the next 10 years as a lost decade. High fiscal deficits, a massive balance of payments gap and accelerating inflation brought the Israeli economy to the brink of a meltdown. Heavy government borrowing crowded out the private sector. The government had to practically nationalize the major Israeli banks in 1983 to prevent them from collapsing in a heap. Inflation was running at the Latin American level of 400%. People lost confidence in the currency. 

That is why 1985 is the second important year in the transition of the Israeli economy, according to Melnick. The Israeli coalition government went in for a tough structural adjustment programme to bring the economy back on an even keel. The landmark peace treaty signed with Egypt in 1979, at Camp David in the US, created space for a reduction in defence spending.

Nearly a third of the consumer price index was then under price control. The government cut these subsidies with the cooperation of the trade unions, with the regime agreeing to give money to the workers to maintain real wages once the economy stabilized. Monetary policy was tightening through large increases in interest rates. The currency was devalued against a basket of major international currencies to make exports competitive. A law was passed to prevent the monetization of fiscal deficits. And the government stepped aside to allow the private sector to drive economic growth. 

The subsequent success of Israel as a start-up nation would not have been possible without the 1985 reforms, and the economic stability they brought. However, the indisputable Israeli achievements in technology have created their own unique problems. The glittering success in high technology has blinded some people from the problems in other parts of the economy. 

Guy Rolnik, the founder of financial newspaper The Marker and an associate professor at the University of Chicago’s Booth School of Business, says that Israel is actually a “dual economy”. It has a globally competitive technology sector but also a traditional economy that is controlled by a tight nexus of banking and business oligopolies. He describes this as crony capitalism. His newspaper has campaigned to create more competition in industries such as telecom or to reduce the power of the large banks. 

One indication that the more traditional parts of the Israeli economy is lagging behind the technology sector is the fact that Israel has only a middling rank (53) in the ease of doing business lists brought out by the World Bank. This is a far cry from its leadership in areas such as innovation. That also helps frame two important policy challenges. Melnick points out that the total factor productivity growth in Israel is still sluggish despite the economic turnaround after 1985. And Simhon in the office of the prime minister says that Israel has the highest level of inequality among OECD countries. 

Many of these issues came to a head in 2011. The combination of rising home prices as well as growing inequality led to what are now known as the social justice protests of that year. Hundreds of thousands of citizens took to the streets in major cities. Official government reports often argue that inequality is growing because of the inability of two disparate groups—the Israeli Arabs and the Orthodox Jews—to join the modern economy. The social justice protests threw light on problems that were a world away from the many successes of the start-up nation. 

It is hard to leave Israel without being impressed with its achievements. It has built a successful nation state despite being surrounded by hostile neighbours. It has managed to remain a stable democracy in a region dominated by autocrats. It has converted the lack of natural resources to an advantage by relentlessly innovating. It has survived economic storms to create prosperity. And it has proved its mettle in the global technology game. 

However, existential issues of the Jewish state always seem to lurk just below the surface of what is otherwise a successful society. Many of the core themes in Zionism are very similar to the core issues in Indian nationalism. There is the idea of Jews as a people united through a common history; the strong belief that the Holy Land is the natural home of this nation; the profound distinction between the Jewish religion and Zionist politics; the clarity that the democratic Jewish state should be secular rather than religious in practice, and should guarantee equal political rights for all citizens,Jewish or Arab; the tortured path to the integration of two people in a common state through the idea of citizenship; the search for two-state solutions to persistent conflict with the Palestinians. It is hard to miss the parallels with India. 

Shimon Peres—whose extraordinary life went through three phases of Zionist fighter, hawkish political leader and international statesman for peace—captured the creative tension between the need to respect yesterday while being focused on tomorrow in this statement: “Israeli children should be taught to look to the future, not live in the past. I would rather teach them to imagine than to remember.” That came from a man whose own grandfather was burned alive in his synagogue in Poland by anti-Semitic thugs. 

Political history is not the only stage where the core concerns of India and Israel converge. There are more contemporary meeting points as well—the common threat from Islamic terrorism, the common challenge of water, the common enthusiasm for innovative solutions and the common commitment to democracy. As an Israeli diplomat notes: “You will not come across a single democracy if you fly in a straight line from Mumbai to Tel Aviv”. 

Disclosure: Niranjan Rajadhyaksha was in Israel as a guest of the Israeli government.

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