Taking Stock / The Auld Sod of Israel

"I'm a citizen of Nasdaq," we were told by an Israeli businessman who deals in financial and other investments. "The American economy and Wall Street accept me and the companies in which I invest. In fact, much of Israel's business sector is a respectable citizen of Nasdaq. We talk the same language in business, accounting, law, and gradually, in management, too. The fact that we live in Tel Aviv or Jerusalem doesn't matter any more. More and more companies, sector and businessmen are becoming citizens of Nasdaq again. So I am more optimistic than ever before."

He may feel Nasdaqian, but Jerusalem circles aren't looking at Wall Street. What's stoking their fires these days is Ireland.

Some 45 years after the Investment Encouragement law was enacted, this week a panel headed by treasury director-general Yossi Bachar put the final touches to recommendations for amendments to the law. A key amendment is the addition of a track to stimulate investment in "National Priority A" areas, including a 10-year tax benefit. Corporate tax would be reduced to 10 percent and dividend tax to 15 percent.

That new track is based on principles laid down in Ireland, a country that has managed to attract incredible amounts of foreign investment through grants and tax breaks.

The return of Nasdaq optimism and the adoption of the Irish model in Israel pose an opportunity to dwell on the changes sweeping through our economy, and through economic policy, after three dark years of recession.

Despite the assassination of Hamas leader Sheikh Ahmed Yassin, the fears of retaliatory attacks and the resultant apprehension of a tourism bust, the business sector is retaining its sunny outlook.

The high-tech comeback, the expectations that exports will soar as global trade expands, the drop in interest rates and the surge on the stock market are fostering ever-rising expectations among Israel's business leaders.

The sharpest change is at the big companies, whose shares have been climbing, creating possibilities of offerings on the stock market. Also, some have started to reap the fruits of efficiency drives they were forced to institute during the protracted slump.

The sharpest turnaround is in high-tech, of course, which is tied tightly not only to the global economy, but also, mainly, to the financial markets. After two years of skulking in the wings, again we're hearing high-tech leaders boasting of being the economy's engine.

This is also an opportunity to peer seven years back and compare Israel's economic development with that of rival countries, particularly Ireland, with which we have quite a bit in common.

Even if Israel's economy does grow by 3 percent this year, it will still lag behind most serious countries. That translates into 1 percent growth per capita, compared with 3 percent growth per capita in the U.S.

Ten years ago Israel's average standard of living beat Ireland's. Today Ireland's is almost twice as high as Israel's, per capita.

Whodunnit, and who didn't

You might be tempted to blame Israel's poor showing over the last seven years on the resumption of the intifada. But that won't wash.

Israel's performance is especially feeble in view of the strong back wind it received from the high-tech and the financial markets boom in the last decade, which brought billions to Israel each year.

No, the main reason for Israel's economic weakness is terrible macroeconomic policy. The most egregious example of that is the incredible size of the public sector.

When discussing the Irish model, people here talk about Irish incentives for foreign investors versus Israel's bureaucracy, which stifles any desire to initiate, to invest, to take risk.

But the biggest difference between the ould sod there and the land of milk and red tape here lies is the public sector. Namely, its share of the economy. In Israel, almost 55 percent of GDP is public expenditure, while in Ireland the parallel figure is 35 percent. That 20 percent difference results in an entirely different economy.

It is natural that the resurgence of high-tech, the recovery of exports and the stock market boom restore optimism to business. People are glimpsing a ray of light after three years in the tunnel.

But therein lies the danger: that we may repeat mistakes made in 2000 and in the last 10 years, that we will again expect recovery in a few sectors tied tightly to the world to drag the whole economy upward in their wake.

We might succumb to the tempting thought that high growth can be sustained over time without dealing with our fundamental problems. We might bask in the stock market gains and the Israeli issues on Wall Street, welcome investment bankers at Tel Aviv's trendy restaurants again, explain that we live in Tel Aviv but are citizens of Nasdaq to our heart's content - but forget to cure our true economic ills. Namely, the hugely bloated public sector, the expensive but rotten education system, the widening social gaps, and the government's eroding ability to hide them through massive infusions of welfare.