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'21st Century's All About Brainpower'

November 2, 2006 By:
Ryan Teitman, JE Staff
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Ron Dermer

After a war with Hezbollah in Lebanon, unrest in Gaza and a political transition following former Prime Minister Ariel Sharon's grave health issues, how is the Israeli economy doing? For Ron Dermer, economic minister for North America at the Israeli Embassy in Washington, the answer is quite clear: It's frankly better than ever.

"How can Israel defy the laws of economic gravity?" Dermer asked, rhetorically, of the audience attending his briefing at the Center City law firm of Pepper Hamilton.

He first examined economic conditions as they stood when the war began: The country's unemployment rate dipped to 8.8 percent (down from 11 percent two years ago), despite an influx in the labor force. The stock market was on the rise. The debt-to-GDP ratio dropped from a "very high" 106 percent in 2003 to 93 percent in 2006. And the country was actually experiencing a budget surplus.

"Israel's economic situation was almost perfect," said Dermer, who was also the co-author with former Israeli cabinet minister Natan Sharansky of The Case for Democracy: The Power of Freedom to Overcome Tyranny and Terror, which was cited by President George W. Bush as influencing his views on spreading democracy.

Israel soldiered ahead, despite a host of negative external factors. While the war was a major concern, the conflict only lasted a relatively short period: 35 days. Dermer noted that if the conflict had continued for a longer duration, the impact would have certainly been more significant.

And while manufacturing facilities in northern Israel were only operating at a fraction of capacity once the fighting erupted, they were back up to 150 percent by war's end.

The tourist industry did take a hit, but Dermer reminded the audience that tourism only accounts for 1.7 percent of Israel's total economy.

He also added that finding a vacation spot is difficult in the north right now, but not because of damage caused by the war. Patriotic Israelis who would normally vacation in places like Cyprus are heading north to support the nation with their patronage.

"This was not as big a blow as we thought it was," he said.

Dermer went on to identify three main reasons for the robust environment. The first was a strong fiscal policy. Dermer, who previously worked under Finance Minister Benjamin Netanyahu while many of these changes took place, described Netanyahu's move from a socialist-style economy to a more free-market model as "not just putting [the economy] on the rails, but building the rails."

Both spending and taxes were cut: The personal income tax; the value added tax; and corporate taxes were lessened. And in two years, accelerated privatization occurred with El Al, Israel's national airline; Bezeq, Israel's communications provider; and Zim, Israel's shipping company.

While "difficult and deep" cuts were made to welfare, the country poured money into investment in the infrastructure, as well as instituting incremental social-security changes, establishing port reform to end strikes at the docks, and putting an end to the banking "duopoly" that reigned via Bank Hapoalim and Bank Leumi.

"You had a dramatic reversal of economic policy in 21/2 years," said Dermer, adding that during the fighting with Hezbollah, the government was still enacting the same economic policies.

Dermer also credited Israel's monetary policy under the helm of Stanley Fisher, whom he called "the finest central banker in the world."

Fisher made the controversial decision to raise interest rates while a war raged -- something near blasphemous in the American economic mindset.

Finally, Dermer touted the true "engine of Israeli growth" as the people themselves.

"You have an enormous reservoir of talent," he said. "The 21st century is all about brainpower. It's the minds that are driving Israel's economy."

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