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25 2011

The Start Up Nation

Syndicated from: Steve Paikin

While the rest of the world has been suffering under the Great Recession of the past few years, Israel’s economy has been strong. The country is known as the “Start Up Nation,” because it has the largest concentration of high tech companies per capita in the world. “And not high tech like India’s run of the mill high tech,” says Dr. Nadine Baudot-Trajtenberg, associate dean of the Herziliya Business School, one of Israel’s elite post-secondary institutions. “India has call centres and routine software writing. That’s not what we’ve got here.” (Dr. Baudot-Trajtenberg herself is an interesting story. A French-Canadian gentile, she met her Argentine Jewish future husband at Harvard, agreed to convert, and moved to Israel, where the couple had three daughters). Israel has had no real estate bubble, no sub-prime mortgage crisis, and a growing economy despite the fact that it trades not at all with any of its neighbours. Its biggest trading partners are the European Union (40%), North America (30%), and Asia (20%).  Agriculture makes up only 3% of Israel’s economy. Health, education, and financial services represents 70%.  Israel, of course, was born in 1948 with the idea of being a socialist paradise. The kibbutz movement was pure communism. The community owned everything. There was no private property.  Unions were very strong. The government had its hand in everything, protecting local industry, and regulating most activities. The beautiful kibbutz Gonen in Galilee, northern Israel.   The result was inflation rates of 600% per year, a currency (the shekel) worth next to nothing, and national debt at 200% of GDP. Add to all of that huge defense expenditures (35% of GDP in 1975), and you had an economy that simply didn’t work. But in the 1980s, there was a paradigm switch. A “national unity government” made up of both the Labour and Likud parties, decided to lessen government’s role in the economy, and let the market increase its. Now, Dr. Baudot-Trajtenberg says a cluster of other factors has led Israel to become such a high tech world leader, its companies are now the second biggest grouping on the NASDAQ. Top flight post-secondary institutions provide excellent opportunities for research and training. They benefited significantly from the influx of Jews from the former Soviet Union, increasing the country’s population by 10-15% in just a few years. These Jews were highly educated, particularly in the sciences, and motivated to find work.  After their integration, Israel suddenly found itself with a winter Olympic team, a gymnastics team, more violinists per capita than anywhere in the world, and rows upon rows of vodka in stores, which didn’t exist 20 years previously. Israel has established a thriving venture capital market and a culture to match it. Unlike in Canada where failure is seen as a bad thing, Israelis don’t mind failing. “In fact,” says Dr. Baudot-Trajtenberg, “it’s okay to fail. There’s no shame in failure. There’s pride in having tried.”  The silver lining of Israel’s geo-political situation. The military is deeply involved in research and development. And it’s common for individual soldiers to be working on their own “start ups” on the side. Of course, one of the most difficult burdens on the economy is that every Israeli, age 18 to 45, leaves the workforce for one month a year to serve in the army. We’ll pick up the story there next time.

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