David's Harp / Is There a Doctorate in the House?

David Rosenberg
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David Rosenberg

If the Israeli economy underwent an annual physical, as it should have been doing since it turned 50, it would by the usual measures get a clean bill of health and advice from the doctor to wait another two years before coming back again.

Especially today, when most of the developed world's economies would look at home in a hospital waiting room, the reading for Israel's vital signs - growth in gross domestic product, GDP per capita, the unemployment rate, foreign trade and the current account and debt levels - are quite good.

Of course, there are plenty of second opinions. Our per capita growth rate relative to the world's developed economies over the last decades is not that impressive, and we're still in the lower leagues of the developed world on a GDP per capita basis. Income inequality and poverty are among the highest among countries belonging to the Organization for Economic Cooperation and Development.

These are worrying trends that get a lot of attention, if not exactly much in the way of treatment.

Here are three others that the physician-cum-economist might find just as compelling, both because they are mostly overlooked and because they cut to the core of the long-term problems facing the economy. What the three boil down to is a failure to fully exploit the country's brainpower to create jobs and wealth.

Start-up nation?

For all Israel's reputation as the "Start-up Nation," Israelis are in fact less likely to launch new businesses than people in most of the 60 developed and emerging market economies that were surveyed in the Global Entrepreneurship Monitor (GEM ). In 2010, only 5% of Israel's adult population was involved in a new business, putting it at 47th place.

The rate of entrepreneurship should grow as an activity makes the transition from an old-line industrial economy dominated by big business to an innovation-driven economy, where rapidly changing technology and consumer habits, and easier access to finance, create new incentives for people to start up their own businesses.

Yet that has not been the case in Israel: The rate of entrepreneurship has been in decline since it was at 7.1% in 2002.

Israel is a hospitable environment for high-tech start-ups, but for anyone trying to make a go of it by starting up an ordinary business, the kind that makes products or provides services for the local economy, barriers in the form of onerous regulation, high costs and state-sanctioned monopolies or near-monopolies are formidable. An important source of new jobs and greater productivity has been stymied.

Fleeing minds

The number of Israel's citizens living overseas relative to the population is not particularly high compared to other countries belonging to the Organization for Economic Cooperation and Development. But the number of educated Israelis who are abroad for extended periods is.

Israeli immigrants in the United States are on average younger and more educated than the rest of us Israelis back at home. Indeed, the educational level of Israelis living in the United States surpasses non-Hispanic Americans, and their earnings surpass their American-born peers a few years after they arrive.

Last week the Central Bureau of Statistics found that in 2011 more than 14% of all Israelis holding doctorates in science or engineering had been living abroad for three years or more for purposes of work or study. About 5% of all Israelis who received any degree from an institute of higher education during the years 1985 to 2005 - some 18,000 people - had been living overseas for three or more years.

Granted, a small economy like Israel’s that produces lots of graduates is going to end up exporting many of them, because the opportunities for the best and the brightest in an open and welcoming economy like America are just too compelling. But that pull is helped in no small measure by the push of an economy like ours, which should be offering more.

Starts-ups we have, but where are the opportunities for people with skill sets beyond engineering and writing software code? The answer is not many, and so their talents and education go to serving America and Europe.

Whose R&D is it? One widely cited bit of evidence of the extent to which Israeli intellectual capital is being put to good use is the proportion of GDP devoted to research and development by business.

In 2009, Israel devoted 3.42% of GDP to it, by far the biggest among OECD countries, including technology-focused ones like Finland (2.83%) and Sweden (2.55%). For once, we have a data point that leaves those Scandinavians in the dust. The OECD average was 1.62%, less than half the Israeli rate.
But who’s doing this research? In fact, according to the CBS, close to two-thirds of the spending is done by foreign companies. That is a high figure even for a small, technology-oriented economy.

Using 2008 for international comparison purposes, Israel had the second-largest proportion of business R&D being conducted by foreign entities (59.1%) after Ireland (72%). Foreign R&D centers employ lots of Israelis, but the benefits to Israel after a while pretty much stop there. The fruits of their work are enjoyed by others ? the people who work in marketing, production, logistics and the host of other functions involved in bringing an innovation to the market.

The new and improved widget developed in Israel is likely to be made in China, marketed by a team in Silicon Valley, and the dividends and capital gains distributed among investors all over America.

This is not to say that Israelis should be burning tires in front of Siemens’ or Microsoft’s local offices and demanding they go home; rather, it means Israel should be doing more to leverage the innovation it has.

But quite to the contrary, Israeli high tech is focused on tiny, short-lived start-ups, while the rest of its business sector is innovation-lite. Another stats bureau survey of 2,670 companies found that less than a third reported introducing a process or product innovation in the past year, a low rate compared to other OECD countries.

Saudi Arabia, Nigeria and a lot of other oil countries waste their precious assets by subsidizing fuel costs to consumers, encouraging over-consumption and unproductive activity. Quite correctly, these countries are routinely criticized for frittering away the bounties that geology and history gave them, rather than capitalizing on them.

By giving so many of the country’s best and brightest little choice but to work abroad because the opportunities at home are so crimped, Israel is doing much the same with its most valuable resource.

Brains: Israel can use all it has. Credit: Reuters
Bar-Ilan University students: Cap, gown and a one-way ticket.Credit: Yaron Kaminsky