Israeli Economic Engine Now Seen Humming Along

Tel Aviv — A year ago if you were a star lawyer looking for a position with an Israeli firm, chances are it would have been a waste of time. As the U.S. economy swayed in financial crisis, companies stopped hiring.

But over the last few months that’s changed.

“After the holidays, it’s been wild,” said Minna Felig, the chief executive of a legal recruiting firm that serves high-tech companies and the real estate and banking industries. “Since the summer, in-house demand has quadrupled. I’ve seen a huge rise in people expanding their legal departments.”

Even as the U.S. economy continues to limp along while hemorrhaging jobs, Israel has emerged from worldwide financial crisis virtually unscathed. Economic growth has surpassed estimates and now stands at around 5 percent. (Bank of Israel Governor Stanley Fisher told delegates to the Herzliya Conference this week that, with peace between the Israelis and the Palestinians, the growth rate could reach 7 percent.) And unemployment is declining.

The standout economic story was translated into robust gains on the Tel Aviv Stock Exchange, which surged 75 percent in 2009 compared to the Dow Jones Index’s gain of 19 percent.

The main difference, experts said, is that Israel’s property market was not overheated like the one in the U.S. with sky-high prices and an excess of supply. The other critical difference is that Israeli banks were under tighter government regulations and stayed away from the toxic sub-prime mortgage assets that U.S. financial institutions snapped up.

“We didn’t have the real estate bubbles that the U.S. and the U.K. had, and the banks were more conservative,” said Richard Gussow an analyst at Deutsche Bank in Israel. “We were more of a defensive market than other markets.”

With foreigners hailing Israel’s sound footing, and a best-selling book, “Start-Up Nation,” that extols Israel’s culture of creativity and entrepreneurship, the economy seems to have arrived. Israel’s candidacy for membership in the exclusive Organization for Economic Cooperation and Development (OECD) was further proof that the Jewish state has moved up to the big leagues.

To be sure, Israel’s export-driven economy has taken a hit. Thousands of technology employees here lost jobs because of slack worldwide demand. One local branch of a U.S.-based telecommunications giant shed 20 percent of its staff last year and cut remaining salaries by 7 percent. Investment in startups sank about 50 percent in 2009 to $1.1 billion, according to Israel Venture Capital Research Center.

Many of those laid off last year have yet to find new jobs. But high-tech employment firm MIT reported this month that demand for employees began to recover at the end of last year (though is still down compared to 2008).

“I am sure that the Israeli high-tech industry will emerge from the recent crisis stronger,” said MIT CEO Erez Benovitch, in a statement.

That’s good news for laid-off Israeli high-tech executives who are still struggling find work.

But just below the sheen of Israel’s technology sector and the economy’s resilience lurk some pressing question marks about the future. The report on Israel’s economy prepared by the OECD stressed several rough spots.

With one in five households living below the poverty line, Israel is one of the poorest countries in the 32-member group, according to the report. The country’s employment rate of about 66 percent is below the OECD average.

The economic review identified the fervently Orthodox and Israeli Arab communities as “untapped” economic resources for Israel because of the low workforce participation in these communities. The report called on the government to “level the playing field” for Arab Israelis in areas such as education. The government needs to ensure that haredi school systems provide students with enough vocational skills so they can get jobs. With the combined communities accounting for nearly half of all children starting primary school, “work on solutions cannot wait.”

Vered Dar, the chief economist at Psagot Ofek investment house, said the disparity between Israel’s feted technology sector and its poor communities outside of the mainstream reflect a tale of two economies.

“If you take a picture of people working on Wall Street and then you take a picture of people in Louisiana who have yet to buy a new house after Katrina, you get a picture of two different countries and it’s not that different from Israel,” she said. Regarding the fervently Orthodox, she said, “we have a huge chunk of people — maybe 10 percent — who say studying is more important than working. These are people that are poor by choice.”

But by far the most burning economic issue is a new offensive by Prime Minister Benjamin Netanyahu to reduce the number of migrant workers in Israel. According to the Finance Ministry, there are about 250,000 guest laborers employed in Israel — about half of whom are working illegally. Working mainly in construction, agriculture, caregiving and as restaurant cooks, they account for more than 10 percent of the Israeli labor force.

“The massive influx of foreign workers to Israel in recent years has created problems of security and drugs, but mainly it has [flooded] the labor market and weakened wages,” Netanyahu said at a press conference last week unveiling a policy to crack down on employers and deport illegal aliens.

The prime minister said last week that Israel’s economic success has made it necessary to build a barrier on the border with Egypt in order to block migrant workers.

“Israel is actually the only country in which one can enter on foot from one of the more battered Third World countries,” he said. “We are going to set up a barrier. Otherwise, a flood will come and we can’t allow ourselves to be swept away. We established a Jewish and democratic state and we can’t allow to be turned into a state of foreign workers.”

Critics of Netanyahu’s new push against foreign workers criticized his rhetoric as a “fear campaign” against the migrants, according to a Haaretz editorial.

Spokespersons for the Association for Civil Rights in Israel and the Hotline for Migrant Workers said that the government is right to step up enforcement against employers. But the reform does not solve the “revolving door” phenomenon by which Israeli brokers charge exorbitant fees to tens of thousands of guest workers annually to obtain work visas that lapse after a few years.

They also claimed that Netanyahu-led governments have contributed to the problem by granting a record number of visas annually.

Israel’s Finance Ministry has been grappling with the problem since the mid-‘90s, and has embarked on two waves of crackdowns against foreign workers in the last decade, said economist Dar, a former treasury employee.

“You get addicted to foreign cheap labor — it’s a phenomenon all over the world, and in Israel as well,” she said. “I’m going to wait until I see the results.”

While the issue of immigrant workers poses a problem for Israel’s economy, the overall picture is that the country is in much better condition than the U.S. and most European economies.

This week, $1.5 billion worth of government bonds due in 2019 were listed for public trading on the New York Stock Exchange, another boost to the country’s international profile.

Finance Minister Yuval Steinitz, who was in New York on Tuesday to inaugurate trading, said the milestone would “widen the participation of the State of Israel in international markets and the ability of its business sector to raise money in these markets.”

And then there’s the buzz from “Start-Up Nation.” In the book, Jerusalem Post editorial editor Saul Singer and Council on Foreign Relations fellow Dan Senor try to explain the story of Israel’s overachievement in technology. They claim that the country’s adverse geopolitical realities combined with the lack of natural resources — and a healthy dose of chutzpah — placed a premium on innovation.

“Early on, Israel realized it needed to innovate in order to survive,” Singer said in an interview with Fox News last month. “As a result, it does well in downturns. Innovation is what is real in economic growth. It’s not real estate, it’s not a credit bubble. It’s what productivity and growth is based on.”