From the January 25, 2010 Wall Street Journal Europe
January 25, 2010
by Irwin Stelzer
Now is the time to take a close look at models.
No, not those who strut the catwalks of London, Paris and other rallying points of international fashionistas. Instead, those economic models that might contain clues for post-recession policy. The European Union wants to jack its growth rate up from a meager 1% to 2%, and the United States would like to see its economy grow at an annual rate of at least 3%. Faster growth means more jobs, and an increased flow of tax revenues with which to bring down the huge deficits many countries are running.
On offer are the Anglo-Saxon, more-or-less free-market model, modified to account for what we have learned in the past two years; the EU-French model of increasing regulation and government involvement in the economy; the Chávez-Castro-Kim Jong-il state ownership model; and China's managed-economy model. And, attracting less attention, Israel's model of entrepreneurialism.
Israel's prime minister, Benjamin Netanyahu, a.k.a. Bibi, is known more for his foreign policy positions than for his earlier role as the finance minister and economic reformer who rolled back regulation and impediments to the operation of market forces. He did not let the crisis created by the 2003 recession go to waste: he cut benefits, liberalized the banking sector, and removed currency and capital controls.
Mr. Netanyahu received considerable help from Daniel Doron's determinedly market-oriented think tank, the Israel Center for Social & Economic Progress. Arthur Seldon, co-founder of Britain's Institute of Economic Affairs, which played an important role in shaping Margaret Thatcher's policies, said that Mr. Doron's think tank in a short time "had more influence … than we had in Britain in our first ten years."
Finally, Israel benefited from an intelligently crafted macro-economic policy, thanks to Professor Stanley Fischer, governor of its central bank, who was the first major central bank chief to raise interest rates after a successful recession-fighting loosening.
A reforming politician, backed by a think-tank director who helped change the intellectual climate, and a central banker who remembers what he taught when head of M.I.T.'s economics department weren't enough to produce some amazing results and an economy so advanced that it is on the verge of accession to the club of advanced countries, the Organization for Economic Cooperation and Development.
Dan Senor and Saul Singer's new book "Start-Up Nation: The Story of Israel's Economic Miracle," rattles off some interesting statistics that deserve consideration by policy makers in other countries. Per-capita venture-capital investment in Israel runs 2.5 times that in the U.S. and 30 times that in Europe. Tiny Israel—population 7.1 million— attracts as much venture capital as Britain (population 61 million), and France and Germany combined (combined population 145 million). Israel has more companies listed on Nasdaq than any other country save the U.S. and has grown faster than the average for developed economies in most years since 1995. Between 1980 and 2000 7,652 patents were registered in the U.S. from Israel. That compares with 77 from Egypt.
Messrs. Netanyahu, Doron and Fischer were operating within a culture that is "skeptical of conventional explanations about what is possible" and characterized by "insatiable questioning of authority" according to Messrs Senor and Singer. And a willingness to accept failure is a necessary part of any economy heavily reliant on start-ups for its economic growth, a feature also characteristic of the U.S., where entrepreneurs say that if an entrepreneur has not gone bankrupt by the age of 35, he has not taken enough risks. A Harvard University study puts it more scientifically: entrepreneurs who fail in their first venture have a higher success rate in their next venture than first-time entrepreneurs. Credit Peter (now Lord) Mandelson for long ago recognizing that and leading an effort to reform U.K. bankruptcy laws to make second chances more possible for the country's risk-takers.
Throw in a superb university system and the obligation of all Israelis to serve in the military, the elite units of which have spawned many of the most successful high-tech entrepreneurs, and you have a recipe for world-class start-ups. These are firms that either end up selling shares in IPOs, or selling to Intel, e-Bay, Microsoft, or Google, among others. One unnamed e-Bay executive told Senor and Singer, "The best-kept secret is that we all live and die by the work of our Israeli teams…. What we do in Israel is unlike what we do anywhere else in the world."
Obviously, no other country has Israel's combination of advantages and problems. But other countries can see what happens when a well-educated country allows failure and thereby encourages risk-taking, replaces pervasive government intervention with light-handed regulation, and benefits from intelligent management of its monetary policy. Job-creating start-ups flourish. The growth rate accelerates. Exports increase. Even in a country under continued threat from its enemies. Or perhaps because of that.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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