People who have not visited Tel Aviv in a number of years would hardly recognize the place. The number of skyscrapers going up is astounding. Last week, a new 100-story tower was approved for construction. All of this tremendous expansion is being fueled by an economy that has been growing rapidly. Israel's economy grew at an annualized rate of 4.5% in the first three months of 2018, the same rate as the last quarter of 2017. The OECD average in 2017 was 2.5%. Last year, the growth rate of the economy in the United States was 2.3%.
Last week, Prime Minister Netanyahu proudly announced Israel's per capita GDP had risen to $42,115—ranking Israel 24th in the world, ahead of Japan and right behind the United Kingdom. In comparison, it should be noted that the U.S. per capita GDP stands at $62,15. In 1990, Israel's GDP stood at $11,264, while the U.S. GDP stood at $23,954.
Rapid growth of the high-tech industry has been the engine driving Israel's economy. 112 Israeli companies were purchased last year, for a total of $23 billion. At the same time $5.24 billion was invested into Israeli startups, up 9 percent from the year before. In addition to the success of the startup sector, there is growing presence of tech multinationals in Israel. IBM established its first R&D office in 1972, Intel in 1974. Today, those tech companies have been joined by Google, Apple, Facebook, and Amazon, who together with another 350 companies, all do R&D in Israel.
With both multinationals and startups competing for the same talent pool, Israel's high-tech industry faces a severe labor shortage. According to Alon Ben-Tzur, CEO of Binat Communications: "The shortage of labor is the single biggest obstacle to the continued growth of the country's economy."
The solution to the labor shortage has so far remained largely elusive. Most of the top talent for the high-tech industry either come out of the technical unit of the Israeli Army or from the handful of Israeli universities with high-level computer science departments. There are many programs underway to solve this problem, including efforts to boost computer training in the Arab-Israeli and Ultra-Orthodox sectors.
Efforts in the Arab-Israeli sector have already yielded some encouraging results. One example is the Takwin Fund, created to invest in promising startups in the Arab-Israeli sector. To date, the fund has invested in eight startups. According to the fund's CEO Itzik Frid, "We are mainly invested in Nano-technology and deep algorithm research."
As a result of the labor shortage, more and more Israeli companies are looking overseas to Ukraine, Poland, and other places to find competent tech workers.
The other challenge caused by Israel's tremendous economic growth has been the creation of two parallel economies. Salaries in the high-tech world are approximately twice that of average Israeli salaries. Israel once had one of the smallest income gaps in the world. Today, the income disparity in Israel is one of the highest worldwide.
Israel carries a sizable military burden, standing at $1,981 per person in the country. While Israel's overall economy has grown so that the military budget has dropped from 8.9% of the GDP to 4.7% today, the burden per person has not changed.
Finally, it is impossible to accurately portray Israel's economy without writing about the other great disparity—i.e. the West Bank and Palestinian territories, where the per capita income in 2016 was under $2,000.
Despite all of the aforementioned successes, standing in Tel Aviv watching the skyline transform almost daily, there is a certain air of uncertainty—a fear that it might not be real, that it could all disappear.
Could war break out with Gaza again? What about the very real fear of war with Iran that includes Hezbollah and their 100,000 missiles? Will Israel's vaunted missile defense system be able to shoot down enough of those missiles? If not, what would happen to all of the foreign investments that fuel the Israeli economy?
Israeli high-tech innovation emanated from Israel's defense industries. However, as long as the need to develop better technologies for defense remains front and center, and peace remains elusive, the Israeli economy will continue to confront an uncertain future.
Marc Schulman is a multimedia historian.
The views expressed in this article are the author's own.
Uncommon Knowledge
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