The Israeli Economy-Security Dialectic

A few years back, I put together this piece which looked at hard numbers regarding the growth of the Israeli economy and exports, both of which doubled during the BDS decade.  And while I don’t have the time to update that analysis for 2014, it is worth looking at an aspect of the Startup Nation story that demonstrates an interesting dialectic regarding Israel’s economy and its security situation.

One would think that a nation routinely subjected to heavy missile bombardment would be the very place investors would flee, given the instability such a military situation implies.  But in the case of Israel, the opposite seems to be the case as investment continues to pour into the country as if months of attacks from Gaza never took place.

The best example of this phenomenon is Intel’s decision to invest six billion dollars (that’s “billion” with a “B”) into updating its Israeli chip plant – the biggest investment ever made into the Jewish state – a decision which was announced in September, that is AFTER the country spent the summer on the receiving end of endless rocket fire.

Intel plays a key role in unlocking the reason behind such an unprecedented (and counter-intuitive) business dynamic.  For it was in 1991, well before Israel became the Startup Nation darling of the international M&A and investment communities, that keeping promises while under fire first demonstrated the mettle of Israel and the people who live and work there.

If you recall, that was the year Israel was first subjected to random missile fire, this time from Saddam Hussein’s Iraq which hoped to provoke Israel into joining (and thus “Zionizing”) a conflict begun when Iraq invaded, annexed and looted Kuwait.  As American and allied forces began shoving Iraqi troops back across their own border, Saddam decided to point his Scuds towards one of the few nations not arrayed against him, socking Israel with waves of rockets that many feared were armed with the same chemical weapons the ex (as in now ex-ecuted) Iraqi dictator used against his own people in the 1980s.

Israel never rose to that bait, but while coalition forces were demonstrating the paper nature of the Iraqi tiger, executives at the Intel Corporation who managed a plant in Israel that was turning out the company’s most valuable chips had different concerns: how to get their Israeli employees to stay home and safe, rather than show up for work.

Apparently, the Israelis who worked the chip factory had no intention of letting a tyrant living (and killing) miles away to disrupt their lives.  And if they had to defy their own government (which was urging people to stay indoors near shelters until the threat lifted), they certainly weren’t going to let some distant executives tell them what to do.

And so they showed up to work, keeping the factory firing on all cylinders, and delivering on every promise made to those Intel executives with regard to deliveries and deadlines.

It was this incident, more than any other, which demonstrated that the Jewish economy included something more than innovative inventors and programmers and a budding entrepreneurial culture that was shaking loose the vestiges of a planned economy.  For those Intel-employed Israelis were demonstrating tenacity, nerve, defiance and an unwillingness to not keep to their word even (or, should I say, especially) under fire.

So the minor impact of the Gaza campaign on the Israeli economy followed by a seemingly positive impact it had on that economy once the guns fell silent has an explanation: the continued demonstration of Israel’s ability to do remarkable work and get the job done, regardless of how harrowing the circumstances might be.

This should come as no surprise to those who understand that a citizenry brought up to defend itself, one which has lived on the precipice for  most of its existence, is not about to let a little thing like rocket fire from death-worshiping maniacs get in the way of carrying on a normal life.  And those who recognize this reality are ready to vote for Israel with their wallets, which is why Israel continues to receive the highest grade for investment – even as the rest of the region tumbles into self-imposed chaos.

This should provide another bit of perspective with regard to our old friends in the Boycott, Divestment and Sanctions “movement.”  For the BDS project is predicated on the notion that economic pressure deriving from their activities will so weaken the Jewish state that it will agree to capitulate to demands of those seeking its ultimate destruction.  But if weeks of direct military attack has only increased the nation’s defiant resolve, resolve rewarded by the very people the BDSers are asking to shun the Jewish state, then what is BDS left as other than a transmission belt for propaganda dedicated to ensuring that the millions of corpses being generated by #AlHamIsis across the Middle East never get noticed, much less mentioned.

Back to Business

It’s often useful to check in with a neutral observer to gauge the impact of BDS in the broad sense of the comings and goings of Israeli and anti-Israel politics. And the neutral party I tend to turn to for such information is the business press.After all, as much as we are all political animals we tend to base decisions with regard to what we do with our own money on factors other than partisanship. Even those who practice some sort of “ethical investing,” want to see a return on those investments, even if they choose to forgo buying certain types stocks for non-economic reasons. And the vast bulk of professional investors are more interested in anticipating political trends so they can get ahead of them and buy or sell accordingly.

We saw this in the case of money associated with Iran-related investments which fled retirement and other fund portfolios in advance of divestment and sanctions bills being passed by US states and the federal government over the last 5-6 years. Which makes this story about Barclay Capital’s recommendation to buy into Israeli tech stocks all the more interesting.

While Barclay identifies risks associated with putting money into the Israeli economy, these are mostly related to the ever-present potential of prolonged military conflict in the region. But with regard to boycott, the smart money sees this as highly unlikely to the point of being “almost unfeasible.”

And if BDS is not on any serious investor’s radar as a risk they need to take into account, even military instability is a two-edged sword with regard to the Israeli economy. For it was the ability of Israeli workers at Intel’s most advanced chip factory to continue delivering the company’s most valuable products, even during wars when missiles were falling on the country, that added the dedication of Israeli workers to meet their commitments (not just Israeli innovation) to the list of reasons to invest in the Jewish state.

Indeed, despite lots of anti-Israeli hectoring coming from Europe and the occasional Scandinavian retirement fund selling of a couple of thousand shares of this or that Israeli stock in order to appease the mob, Europe is voting with its Euros by pouring millions into hot Israeli start-ups (indeed, European venture funding in Israel recently outstripped similar investment in any European state). And with Israel seeming to be the only country left in the world able to keep its budget relatively balanced, we can expect to see the money people continue to fall all over each other to invest vs. divest in the targets of BDS.

A similar story can be gleaned even at the small end of the BDS spectrum of product boycotts. For those following the latest boycott trends, the villainous product of the month is SodaStream, the manufacturer of devices which allow you to carbonate your own beverages. Now given the clownish nature of BDS practitioners, one would think they would avoid associating their project with seltzer bottles. But apparently the fast growth of SodaStream in the US market (coupled with some success making the brand controversial in – once again – Scandinavia) makes this a target of opportunity.

But it is only because of the expanding success of this Israeli company (which recently signed deals to have their products carried by Bed Bath and Beyond, William Sonoma and Best Buy) that the BDSers have something to protest. If this were twenty or even ten years ago, the boycotters would have to work for weeks to find a retailer carrying an Israeli product to protest (which would probably be some kind of produce, such as oranges). But today, the availability of more and more Israeli goods sold through more and more channels means an expanded BDS target list only exists because of a far more expanded list of Israeli product successes.

The bottom line on the business side of the BDS story is that the Israeli economy somehow managed to double in size during the period when boycott and divestment advocates were attempting to drive that economy to its knees. And while I am not a believer in the BDS formula of investment/divestment translating to political support, if we are to judge the boycotters success or failure by their own standards then the conclusion we must reach is that investors and consumers are not just voting for Israel with their wallets but are also using those dollars to condemn BDS for the squalid little propaganda program that it is.

Startup Nation

I’m a little embarrassed to admit that I’ve only recently read Startup Nation, Dan Senor and Saul Singer’s bestseller speculating on the origins of Israel’s startling economic success over the last decade. I’ve written about this phenomenon in the context of pointing out that Israel’s economy doubled in size during the very decade BDS was allegedly on its unstoppable march. But how and why this miraculous growth is occurring now is worth consideration, even beyond the context of how much it exposes the embarrassing lack of success of the boycott, divestment and sanctions “movement.”

An earlier treatment of this subject, George Gilder’s The Israel Test, was a bit of a disappointment. Not that the author’s heart wasn’t in the right place, but his portrayal of Israel’s success representing the victory of civilization, creativity and life over the forces of barbarism, envy and death just seemed too Manichean to explain trends that I suspected were grounded in the more down-to-earth, pragmatic factors usually driving economics.

Articles on Israel’s decade of success tend to focus on individual aspects of the country’s character: the national solidarity and character-building deriving from universal military service, the influx of huge numbers of skilled immigrants in the 1990s, the liberalization of the economy by then Finance Minister, now Prime Minister Benjamin Netanyahu. These all seemed to tell part of the story, but not the whole.

After all, other nations couple national conscription to meet existential threats with a commitment to export-driven economic success (think South Korea), yet they have not managed to create the eco-system required to support high-risk startups that are driving Israel’s growth. Immigration has proven to be as much of a burden as a boon to most nations, and even the notion that Netanyahu unchained the nation from the anchor of its socialist past ignores the spectacular nation-building that took place during Israel’s earliest years when the economy was its most statist.

As a business book, Startup Nation avoids the analytic pitfalls that often derive from reading economic trends through potentially distorting lens of global or domestic politics. Not that business books don’t suffer from their own problems, especially their tendency to “predict the present” when looking at current “hot” success stories. Think back to the 1980s and early 90s when bookstore shelves groaned under the weight of tomes hailing Steve Jobs as the penultimate genius, only to be reshelved with books featuring titles such as Accidental Millionaire exposing Jobs as a fraud, followed by today’s titles again celebrating the Apple pioneer’s brilliance. (Along the same line, one wonders how many biographies hailing the wonderfulness of business leaders responsible for the recent economic meltdown are in the process of being pulped.)

Startup Nation dodges these various bullets by taking an integrated historical approach to the subject matter. Yes, the conservative Netanyahu is a hero of the tale due to his dismantling of state enterprises that were standing in the way of growth in the 1990s. But the book also celebrates the left-leaning Shimon Peres for creating the very industries (aircraft, arms, etc.) that got Israel to a point where they had valuable national enterprises worth privatizing. In addition to exploring factors related to universal military conscription (high levels of responsibility and high-tech training at a young age, etc.), the book also explores the unique nature of Israel’s military where initiative and cross-service cooperation is celebrated, rather than stifled, up and down the ranks.

Humility is probably the greatest asset Startup Nation brings to the table, specifically with regard to pointing out that Israel’s current success owes as much to global changes in technology and economics as it does to the nature of Israeli society itself. Simply put, the world has transformed over the last 2-3 decades in a way that the unique strengths of the Jewish state (limited patience, flat institutional hierarchies, forgiveness of failure, acceptance of inter-disciplinary approaches to problems) happen to be just the factors that support the driving force of the new economy: entrepreneurial startups.

Other factors, such as support from the Jewish Diaspora and a culture which celebrates learning (represented by so many high-quality Israeli universities) play a part in the tale of Israel’s success, but those things have been in place since before Israel’s founding. If we were in an era when national wealth and power was derived from heavy industry requiring massive resources and the ability to mobilize large pools of unskilled labor, Israel would simply not be a player. But in an era when the ability to create and sustain high-risk startups is the world’s most valuable commodity, Israel is in the fortunate position of having the very qualities needed for today’s definition of success.

As my friend Sol often says, read the whole thing

Invest

Whenever divestment hits a college or other institution, a frequent response of divestment opponents is to propose positive investment in companies and organizations that support both Arabs and Jews in Israel as a counter to the wholly negative program of divestment.

While investment is a logical response to BDS, one that reflects the commendable desire to build and grow vs. punish and destroy, I’ve rarely seen much come out of these suggestions. Partly this is because divestment really has nothing to do with business or economics. As has been pointed out here again and again, BDS is a political propaganda project, one designed to drag high-profile organizations (by any means necessary) under the banner of “Israel=Apartheid.” As such, the idea of investing to benefit the people of the region means nothing to advocates of boycott, divestment and sanction.

But even when investment in the region is proposed (regardless of whether or not such suggestions were triggered by a divestment program), such projects are difficult to sustain (assuming they can get off the ground in the first place). This is no great surprise since most activism (particularly campus activism) involves short bursts of activity: holding a rally, protesting an event, sponsoring panel discussions or educational events, etc., etc.. These are all extremely important and valuable activities, but not ones that fit the “buy and hold” timeframes required for involvement in a real investment program.

Can this circle be squared? Can these noble sentiments for positive change via investment be channeled in a direction where they can do long-term good?

Enter the Israeli economy.

Two books, The Israel Test and Startup Nation have come out recently highlighting the incredible dynamism of Israel’s entrepreneurial society, one which continues to grow and thrive despite 60 years of being in the cross-hairs of every dysfunctional government in the Middle East, despite endless war and terror, despite even the recent economic downturn.

Such an economy provides open doors for those offering to combine good ideas, hard work and a willingness to take risks. And a group of students at the University of Michigan has walked through one of those doors, creating the Tamid Israel Investment Group, a remarkable student-run organization that connects members with entrepreneurs in Israel, providing opportunities to invest, intern and generally take part in the project that is Israel in ways that jibe with these student’s emerging identities as international businessmen and women.

Now this is not to say that taking part in the wide variety of social, religious and political organizations designed to support Israel should be supplanted by a drive towards economics and business. As we’ve seen in the two decades since Oslo, economic development will not create the incentive for those who prefer war to opt for peace. The battle against BDS, like the battle to defend Israel from its enemies and defamers can and must go on at all levels.

But one of those levels can and should be the practical activities of business. Tamid (an organization I can only hope will spread to campuses across the nation) provides students who may not have felt they had a stake in the Jewish state a way to connect deeply and professionally with Israel, creating bonds that will last a lifetime. And if they can accelerate their careers and grow the Israeli economy in the process, so much the better.