The Magazine

The Med's Best-Kept Secret

Had a Thai herbal massage in Israel lately?

Jul 27, 2009, Vol. 14, No. 42 • By WILLY STERN
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It's not only culture. Israel enjoys top universities, upscale restaurants, million-dollar homes, hoity-toity architecture, and the like. Take the economy. In the fourth quarter last year, when the global economy went all to hell, Israel's annual, quarter-over-quarter rate of GDP was only off 0.5 percent, the best figure in the industrialized world. (The United States was off 6.3 percent and Japan 12.1 percent.) "Think about the resistance of our economy in recent times," suggests Zvi Eckstein, deputy governor of the Bank of Israel. "Our prime minister [has a stroke]. The war in Gaza. The war in Lebanon. The government gets replaced. But we've maintained a stable macroeconomic structure and a strong high-tech sector."

What's the secret? Ayelet Nir, chief economist at IBI, an Israeli investment firm, lists six major reasons Israel's economy has done well of late:

n A very conservative banking system--without most of the complex and problematic financial instruments found in the United States.

n No mortgage crisis in a country where putting 50 percent down isn't unusual, and banks often ask for guarantors.

n A current account surplus since 2003.

n Negligible inflation.

n Prudent governmental fiscal policy.

n Healthy integration into the world economy.

Last year, 483 Israeli high-tech companies raised a whopping $2.08 billion from local and foreign venture capital investors. (Only U.S. companies raised more.) All the major tech players--Google, Microsoft, IBM--have large research centers in Israel. They go where the talent is.

Take the case of Isaac Berzin, an Israeli inventor and chemical engineer named by Time magazine last year as one of the world's 100 most influential people. He's an MIT-affiliated scientist who discovered a process to extract renewable energy from seaweed and could live anywhere in the world. He and his wife, along with their three daughters, chose Jerusalem. Berzin still has to do his annual stint in the army reserves--where, he complains, he knows the "smell of every dirty sock" in his unit. But Berzin thinks the mandatory military service is very positive for Israel. Virtually every high school senior in Israel takes a battery of tests before being assigned to a military unit. Israel's best and brightest are tapped at this early stage and sent to elite units. Alumni from these elite units form a natural pipeline into Israeli high-tech firms. Think of it as a mixture of Harvard Business School and the Marine Corps.

"Everybody knows everybody else's business," explains Elisha Yanay, the cigar-chomping president of Motorola in Israel. "That leaves no room for B.S. Résumés mean very little in our country. In a few phone calls, you can strip anybody bare--how they did in kindergarten, their military service, whatever. Pretending in our country is just not possible." Israel is today "the third-hottest spot [after Silicon Valley and Boston] for high-tech venture capital in the world," adds Yanay. "We have only 7 million people but make enough noise for 70 million."

Not all of Israel is noisy. The Tel Aviv stock market, in particular, seems one of the world's best-kept secrets. In the last 12 months, amidst the global meltdown, the Tel Aviv-100 has slumped only 15 percent. (By contrast, the U.K.'s FTSE 100 Index is down 24 percent, Japan's Nikkei 225 is off 28 percent, and the S&P 500 Index is down 31 percent.) Some of the Israeli market's resiliency is certainly driven by the continued success of Teva Pharmaceuticals, the massive Israeli generic drug firm, market cap near $42 billion. (Teva's former CFO Dan Suesskind jokingly refers to what he calls the "regret curve"--that is, people who look at the chart of Teva's share price over time and regret not buying the stock.) "Most countries I know would be happy to trade positions with us, at least on the economic front," reports Ben-Zion Zilberfarb, professor of economics at Bar-Ilan University. "Our recession ought to be milder."

And it's not just Israelis who are taking advantage of the boom. A year ago, Carlos Arroyo was whipping passes to Dwight Howard and leading the Orlando Magic into the NBA playoffs. Now it's approaching midnight on a Monday night; Arroyo is just off a nifty 17-point, 4-rebound, 4-assist outing. He's chatting in the bowels of the Nokia Arena about his new life. He's glad to be out of Orlando. "What I really like about this place is the chic, cosmopolitan lifestyle. You go the supermarket, you find amazing food." What city is he talking about? Los Angeles? Toronto? Try Tel Aviv.