Taking Stock / Where Did They Get 4.4%?

Where did that number come from?

Our readers were probably pondering that conundrum after our top headline Monday blared that the treasury now estimates Israel's economy grew by 4.4 percent in 2004, not 4.2 percent. In fact, it appears that 2004 was one of Israel's best years in a decade, economically speaking, if we are to count on the national books. Goodness.

So where did the figures come from? And why do so many people feel they're outside the party looking in?

l Exports: The main engine driving growth in 2004 was exports, which soared 14 percent to $33.7 billion. Exports have fully recovered from the 2001 crash following the technology bubble burst.

A lot of people and processes deserve credit for the jump in exports. One is that Israel's technology, pharmaceutical, plastics, chemical and other companies became more efficient, including in development and marketing activities. Another is that the global economy grew by almost 5 percent, a 30-year record. Third, exporters to the euro bloc saw their profits balloon as the euro soared against the dollar, while exporters to the dollar bloc didn't hurt too badly because their products are typically less vulnerable to exchange rates. Fourth, the prices of commodities jumped, helping exporters lift their prices.

l Government expenditure: When Benjamin Netanyahu took over as finance minister two years ago, he had several advisers, such as Victor Medina, who suggested that ending the recession would require more, not less, government spending. Netanyahu shouldn't lose sleep over the deficit, they argued: he should adopt an anti-cyclical, Keynesian policy, as George Bush had.

Happily, Netanyahu knows America and economic theory well enough to know that what suits the American giant may not be relevant to Israel. America can print as many dollars as it wishes and sell them to foreign investors to finance its deficits. Israel can't.

During his first two years, Netanyahu did something Israel had never done since its "stabilization" program of 1985: he cut government spending by the equivalent of 1.4 percent of GDP, and in 2004 he cut another 2.8 percent of GDP.

Netanyahu's biggest mistake was hastening to slash health care and welfare spending instead of tackling the true pork-barrel waste of the public sector, first and foremost the defense establishment.

But economic theory proved true. Lowering government expenditure freed resources for the private sector and for economic expansion. In the U.S., the opposite policy of printing money and inflating the deficit has worked well, though payment day will come even for that mightiest of economies, thunder the pundits.

l Loan guarantees, the conquest of Iraq, the interest rates cuts: It may be convenient to ignore all these, and some feel them unnecessary given the opening of the world's free markets to Israel. But make no mistake. That $10 billion credit line the U.S. gave Israel completely changed the risk profile of the Israeli borrower. With an open check that big in its hand, Israel could pretend to be a big, independent girl, though everybody knows Big Mama America is just an apron-string away.

The loan guarantees coupled with the conquest of Iraq lowered Israel's risk factor dramatically, supported financial stability, and allowed the central bank to lower interest rates at the fastest and most drastic pace in Israeli history. Mix in the global upswing and you get soaring stocks in Tel Aviv and the rebirth of the former banking financing system. In the last two years, Israeli companies have raised NIS 30 billion via the stock market, which relieved the pain of the credit crunch that developed during the recession. Capital gains increased and tax revenue did too, contributing not a little to the GDP increase.

Now the question is whether the finance minister and prime minister will rest on their laurels and relax their restraints holding back public expenditure, and pursue structural reforms and peace. Unless they remain on guard, growth in 2005 will rely entirely on the global economic situation, which is threatened by America's gargantuan deficits.

And if they pursue their policies for the first time in many a year, Israel's economy could outperform much of the world.