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Has Israel's regional isolation helped protect its economy?

Israel economy 2012 2 17
A view of Tel Aviv from the ancient port city of Jaffa on Feb. 19, 2010. (Jack Guez/AFP/Getty Images)
Israel and Palestine

Has Israel's regional isolation helped protect its economy?

While Israel's isolation threatens its security, it has done wonders for its economy.

JERUSALEM — With Spain, Italy and Greece's financial systems tottering, Israel's buoyant and growing economy, alone among those of the Mediterranean basin, remains something of a startling apparition.

It is “a mystery or an enigma,” in the words of Omer Moav, a professor of economics at the Hebrew University of Jerusalem.

The paradox of Israel's economy is all the more mystifying given the country's small size — Israel is smaller than Rhode Island, with a population of only 7.5 million — the nation's diplomatic and economic isolation from its neighbors, its lack of natural resources, and the unstable regional context burbling around it.

The facts: Israel’s gross domestic product has seen steady growth in all but two quarters of the last five years. The third quarter of 2011— the last for which statistics are available — shows a market expansion of 0.8 percent over the previous quarter.

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In some ways, Israel has been just plain lucky. Spain, for example, now facing a possible default, comprises only 2 percent of its export market. Also, several of its industries are relatively immune to market fluctuations, including armaments and defense technologies, of which Israel is among the three leading nations on earth. Medical equipment and diamond manufacturing are also strong factors.

But it is not simply a tale of good fortune. A pattern can be discerned when trying to unravel the knot. Overwhelmingly, Israel's conservative and cautious banking system is highlighted as a principal reason for the economy's apparent immunity. A second basis always mentioned is the country's robust and vibrant entrepreneurial spirit, especially visible in the high-tech sector.

“The central explanation I have is that Israel has a very developed private sector, including sophisticated high tech,” said Gil Feiler, an economist at the BESA Center at Bar Ilan University. “If you look at it, a week doesn’t go by without some leading international company buying an Israeli start-up. But even more importantly, the banking sector has shown tremendous responsibility compared to its counterparts in the United States and Europe. In Israel, you never saw the kind of negligence you saw in their real-estate sectors.”

Almost every economist falls back on the banking sector as a principal support of the stable economy.

Israelis have long been famed for their endless carping about the near-impossibility, in relation to other nations, of securing a mortgage. Yet this very inconvenience, it turns out, is a key reason for the apparent immunity that has protected Israel from the global crises.

“We’ve always complained and we still complain that our banking system is very cartelistic in nature, that there is insufficient competitiveness in the financial sector, which allows it to obtain high profits without taking unnecessary risks, like mortgages of 100 percent or more of the home’s value that you saw in the US and Europe,” Moav said.

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“In Israel this simply doesn’t exist, so we never had that mortgage crisis or the financial crisis. For once, the fact that there is ‘over-profit’ and a lack of competition, went well. We were lucky. In a way, regulation of the financial sector simply paid off.”

In Israel, getting a mortgage involves an exhaustive series of trials, disclosures and financial commitments undertaken by the principal and by a long list of co-signatories who are often pursued by legal authorities if even a single payment is not presented on time.

In addition, in Moav’s words, “Here the debt is personal. You cannot just walk out on your mortgage and leave the house behind. The debt will follow you.”

Another economic policy that has helped is an expanding but controlled free-market approach. Over the past 30 years, Israel has transformed itself from an economy with massive government involvement, a relic of its socialist, post-war beginnings, to an economy “more free-market than the nations of southern Europe that are now in crisis,” Feiler said.

The economic crises that hit both the US and Europe in recent years had “both internal and external sources,” said Michel Strawczynsky, deputy director of the research department at the Bank of Israel.

“The internal sources were related to the housing sectors, which collapsed in many countries, including Spain, Ireland the UK and even, to