Taking Stock / Three Rooms in Tel Aviv for $6,300

The 'in' conversation among Israel's rich is how high real estate prices have climbed here and how rent is rising. But the economic reality is something else.

One moldy joke that's been making the rounds among Israeli economists for decades tells of Levi Eshkol's assistant, who rushed up and blurted, "Levi, something terrible has happened - a drought!"

"Where?" asked the then finance minister with concern. "In Texas?"

"No," said the aide. "Over here."

"Then there's nothing to worry about," Eshkol replied.

More than 50 years since Eshkol's day at the Finance Ministry, the world doesn't rely on agriculture to drive its economy any more. Droughts are not as much a reason to worry for finance ministers either. But the connection between Israel's economy and America's remains as strong as ever.

With each passing day, a growing number of economists believe America is heading for recession in 2008. Some say it's already here. An American recession could hit Israel in three ways. One is by slowing Europe's economic growth, another is by souring sentiment in Tel Aviv's capital market and the third is by creating a credit crunch, which would give a hard knock to Israeli exports to the United States. Though not the main export market that Europe is, the U.S. remains a key export market for Israel.

But the influence of the American economy in the global one, and the role that it plays, are completely different. America is gradually losing its absolute hegemony as the world's only economic growth driver. It is coming to share that role with Europe and the emerging markets, mainly India and China. True, America's Gross Domestic Product (GDP) is $14.5 trillion, still three times Japan's ($5 trillion) and almost four times China's ($3.9 trillion) or Germany's ($3.4 trillion). It's almost 10 times India's ($1.4 trillion). But the Far Eastern economies are growing by more than 10 percent a year and will be the engines driving the world economy in 2008, together with the emerging markets of South America and Eastern Europe.

Finance Minister Roni Bar-On and Prime Minister Ehud Olmert have a lot more ground to cover than Levi Eshkol did.

Bar-On and Olmert would like to claim credit for Israel's economic boom, conveniently neglecting to mention the role played by the upbeat global environment. But if the global economy does slow and Israel's does too, 10 to one they'll blame it on a drought in Shanghai, Bangalore or Sao Paolo.

As it does every year, The Economist published its World in 2008 special supplement, offering global economic and political forecasts, both macro and micro. Its predictions do not diverge much from sentiment on Wall Street: the U.S. will apparently slide into recession, the emerging markets will continue to grow, Hillary Clinton will win the U.S. elections and online social networks will conquer ever-widening circles of the global population. Nor does the British weekly spring any surprises about Israel. It foresees 4.5 percent economic growth, inflation of 2.3 percent (within the Bank of Israel's target range) and it predicts the peace process will remain stuck fast.

More interesting than economic forecasting, a dubious business at best, is comparison of historic figures and comparing Israel to the rest of the world.

Let's start with the bad news. Many countries considered Third World until a decade ago are rapidly closing in on Israel, first and foremost Latvia, Slovakia and Slovenia. The latter has already passed us in terms of GDP per capita, meaning, the total products and services that the country produces divided by the population.

And (not for the first time) comparison with Ireland is alarming: There, GDP per capita has reached more than $60,000, almost three times Israel's, where it's $23,000. Ten years ago, GDP per capita in the two countries was the same.

The good news is that the standard of living can also be compared between countries using another measure, namely purchasing power parity - PPP. That's based not on the exchange rate of each country's currency in the open markets, but on the exchange rate of a fixed basket of consumer goods as calculated by economists, in this case the International Monetary Fund. Based on that, the exchange rate of the shekel against the dollar should be NIS 2.80 per dollar, while in the marketplace the rate is NIS 3.85 per dollar. That boosts Israel's GDP per capita, in terms of PPP, to $31,000.

When PPP is applied to Europe's rich nations, their GDP per capita sinks like a stone because of the cost of living. Then, Israel finds itself nearer countries like Italy ($32,000) and even Germany ($34,000) or France ($35,000).

The "in" conversation among Israel's rich is how high real estate prices have climbed here and how rent is rising. But the economic reality is something else. Possibly one reason that GDP per capita in terms of purchasing power parity, is significantly higher than in terms of the exchange rate, is because property prices have not changed materially in the last decade. Meanwhile, throughout most of the West and in parts of the emerging markets, property prices soared.

Renting a really nice three-room apartment in Tel Aviv will cost between $1,500 to $2,000. According to Mercer, renting a similar flat in Hong Kong would cost $6,300, in Tokyo it would cost $4,100, and in Moscow or New York it could set you back $4,000 a month. In London make that $3,900 and in Beijing, $2,800. In Paris say adieu to $2,600 a month and in Rome, $2,000. Leaving Tokyo aside, housing indexes in most of the world capitals have doubled in the last few years. Over here, in shekel terms, prices generally haven't reached the high point last seen in 2000.