In the past decade, the term Startup Nation has become so entrenched as part of Israel’s identity that it’s almost a second name. Israel generates more startup companies per capita than any other country and its entrepreneurs are famed for their abruptness, chutzpah, and irreverence, all of which make them good at what they do. The sector has created well-paid jobs and has become a diplomatic asset, opening doors to countries that are hungry for Israeli technology.
Now, a new book called “Israel’s Technology Economy, Origins and Impact” written by veteran economic journalist David Rosenberg (full disclosure: he is a former colleague) takes a deep look at Israel’s startup phenomenon and its impact on the local economy. The book, published by Palgrave Macmillan and available on Amazon, goes behind the hype to take a deep look at the data, and in a very readable and easy to understand way comes up with a chilling though perhaps not surprising conclusion: the sector offers “few knock-on effects for the wider economy.”
“Israel is punching way above its weight in the world economy because of its high-tech sector,” Rosenberg said in an interview with The Times of Israel. “But you have an industry whose impact on the wider economy is limited. So, there is only a limit as to where this can go.”
Rosenberg, the business editor for the English-language edition of Israel’s Haaretz newspaper, believes that as important as understanding the rise of high-tech in Israel — as detailed in the book “Start-up Nation” by Dan Senor and Saul Singer, and the sector’s impact on the world, as set out in “Thou Shalt Innovate” by Avi Jorish — assessing its impact on the local economy and society is also a must.
David Rosenberg, author of Israel’s Technology Economy, Origins and Impact (Courtesy)
“The conventional view is that high-tech is the way to go for developed economies like Europe and the US” as manufacturing processes are shifting to Asian economies. “The belief is that the future lies in high-tech, in which people use their creativity, and where they have well-paying jobs, and processes are environmentally clean. This is all true, but especially in the case of Israel, the high-tech sector does not create a lot of jobs and it contributes to greater income inequality.”
Israel has an elite group of people who earn top salaries, but they, with their very specific set of skills, are only a small part of the population. Indeed, the high-tech workforce accounts for just some 8 percent of the total workforce in Israel, “and this number is not growing. The high-tech industry in Israel and the world has reached a ceiling,” Rosenberg said.
New economy giants like Apple and Google employ vast numbers of workers worldwide, yet those numbers pale into insignificance when compared to those once employed by the huge manufacturing industries, for example. In 2012 Apple employed 43,000 people in the US and 20,000 overseas. In the 1950s, General Motors, the Detroit-based car manufacturer, employed some 400,000 US workers, the book says.
“Knowledge-based sectors by their nature bestow higher incomes and employment opportunities chiefly on those with the relevant education skills,” Rosenberg wrote in the book. “Those without them have fewer alternatives. The combination of automation, robotics and artificial intelligence, and the emigration of less-skilled work to less-developed economies, threatens to narrow their possibilities even more.”
The high-tech industry, Rosenberg said in the interview, “is not a solution.” Nations need “a broader-based economy.”
And the situation in Israel is worse than in other countries, Rosenberg warns, because Israelis are good at innovation but not at building big businesses that could employ more people, such as accountants, lawyers and HR personnel. Israel doesn’t have a Google or a Facebook, but it also doesn’t even have companies a notch lower than these giants, like Salesforce, for example, he said. Salesforce.com, Inc is a US cloud-computing company.
“Our high-tech is only about innovation,” Rosenberg said.
Startups typically employ some 10-30 people, most of them engineers, and the companies’ trajectory is pretty clear. If they succeed, they get sold to a giant multinational and become their R&D center locally. Those entrepreneurs who opt to remain independent and expand “face a daunting challenge, because the same qualities that enable Israelis to so successfully start up companies and innovate are antithetical to the culture of big organizations.”
In the US and Europe, the transition from startup to big company often necessitates the founders handing over the reins to managers who have the skills to lead a large organization. But in Israel, there are relatively few managers who can do this. Because the industry has failed to develop bigger, sustainable enterprises, the sector offers opportunities only to those who have the narrow set of skills needed for a small company focused on R&D.
At the same time, the rest of Israel’s economy, though it has an excellent record of growth, is based on a protected, noncompetitive environment with relatively low-cost, under-trained labor. The result of this is that despite the high levels of growth, Israeli per capita gross domestic product (GDP) is “at the lower end of the developed world, labor productivity is poor,” and the nation struggles “to reduce its high rate of poverty.” Israel had the second highest income poverty rate among OECD countries in 2013, and the nation is one of the most unequal societies in the OECD, with only Mexico and the US showing larger gaps.
Added to that is the fact that Israeli students score poorly in the OECD’s Program for International Student Assessment (PISA) exam, and that there is a troubling decline in the number of students pursuing scientific studies from high school through university. Arab Israelis get an inferior education to that of the general population as their schools get less funding, and the fact that they teach in Arabic puts their students at a disadvantage when they venture into university or the workforce, the book says.
“These are serious problems, which are compounded by discrimination and other factors,” Rosenberg wrote. “But they pale in comparison with the challenges posed by the ultra-Orthodox.”
While the ultra-Orthodox community emphasizes study and education, the focus is “geared almost exclusively to traditional religious studies,” and they “get no significant exposure” to the core curriculum studies of math and English that would help them get well-paying jobs.
These two populations participate in the labor force at much lower levels than other Israelis and suffer higher rates of poverty. But they also have the fastest growth rates, posing a huge threat to the rest of the economy. The ultra-Orthodox population is forecast to increase its share of the total population to 26 percent from 10% in the period between 2009 and 2059. And the Arab Israelib share of the population will grow to 23.1% from 20.4%, according to data provided in the book.
“Israel enjoyed a favorable confluence of economic and political factors that came together after 1985, but those achievements have come hand to hand with failures,” wrote Rosenberg. “Some of them, such as high rates of poverty, poor schools and the low rates of productivity, are already evident; others, like the challenging demographic outlook that will leave it with an older and less-educated population if the current trends remain, will only manifest themselves in the years ahead.”
“These failures, both the ones Israel faces now, and the ones looming ahead, jeopardize the country’s achievements of the last three decades. Analyzing them is as important, if not more important, than examining the factors that contributed to its success.”
Reaching out to the populations that have been left on the sidelines and expanding the base of its knowledge economy is the “single biggest challenge facing Israel in the years ahead,” Rosenberg wrote.
To do this, Israel must increase funding of its universities and improve its school system.
The country must also integrate Arab Israelis and the ultra-Orthodox into the workforce. To some degree their inclusion is already happening but progress is too slow, given the demographic changes happening in Israel “that could see the two groups combined increase their share of the population to close to half.”
But because these populations live today in “virtually separate societies,” better education isn’t enough, and Israel must strive to more “fully integrate them into mainstream Israeli society.” This would mean getting the ultra-Orthodox to give up the values that lie at the heart of their tradition of insularity and full-time Torah study — which will happen if economic pressures become too great to resist — and for Jewish Israelis to abandon “the racist attitudes too many of them now hold” vis a vis Israeli Arabs, he said. A peaceful conclusion of Israel’s conflict with the Palestinians would certainly “aid this process, but the economic imperative is too important for it to wait.”
The government must also cut back on regulation but enforce rules where they count, and work on providing services effectively, something that is lacking today.
Shrill voices in society
A fourth challenge relates to the nation’s religious and political culture. “The startup ethos requires people to think, speak and act freely,” Rosenberg wrote. These qualities cannot flourish isolated in the workplace, but need to also exist in society, where they should be cultivated.
And even if Israel is showing signs of greater freedom and inclusiveness than ever before, there are deep tears in society between various groups, resulting in a “culture war”: between the older, left-wing and liberal Ashkenazi establishment and “a right wing of socially mobile Mizrahim,” plus Israel’s settler movement and its Orthodox Jews, each holding on to their beliefs and truths. Disputes are often held in shrill voices, as each side seeks to constrain the freedom of the other, Rosenberg wrote.
Besides these huge domestic challenges, the book also refers to the significant external threats facing the country. These are, for now, “relatively muted” by Israeli standards, but could grow, “indeed arise quite suddenly — in the years ahead.”
These include the threat of Syria and Iran and the Lebanese terror group Hezbollah at Israel’s borders and the challenge of global public opinion that could deter companies from doing business with Israel or lead governments to impose sanctions.
Assuming Israel successfully handles or forestalls all of these challenges, Rosenberg suggests five strategies the nation could employ going forward, “to create business opportunities and employment in sectors where Israel has potential that has been only partially exploited or not exploited at all. In doing so, it would address the problems of poverty and inequality Israel now struggles with.”
Five strategies forward
The first strategy is to create small or medium-sized companies modeled on the style of Germany’s Mittelstand companies — family or privately held businesses with annual revenues of up to 50 million euros and employing up to 500 people. Their formation would offer Israel both microeconomic and macroeconomic benefits, Rosenberg said. They would play to the country’s strength in innovation and technology by developing high value-added products in niche markets.
The second strategy is to set up advanced manufacturing plants in Israel — a new emerging manufacturing environment in which machine-driven mass production is replaced with a microprocessor-based factory floor, and including a variety of emerging technologies, including cloud computing, 3D printers, low-cost electronic sensors and new materials, that enable small and nimble manufacturing processes. The advantages of this are many, Rosenberg said. Israel has the technology infrastructure in place to develop products and processes; there are low costs in acquiring software and hardware necessary for production; the labor force required is small though workers need to be well educated.
The third strategy is to create a local industry based on natural gas. Israel, traditionally lacking in natural resources, has found a bonanza of natural gas off its shores. The country is seeking to use this gas locally and export it to neighbors, enhancing its geopolitical standing in the process. “But Israel should also be using gas as a catalyst to expand and create new industries,” Rosenberg said. Industries based on natural gas would provide well-paid employment for those who are less educated, he said.
The fourth strategy is to leverage Israel’s reputation of having top-ranked universities to become a teaching center, with higher education becoming a source of employment and income as by attracting foreign students to come and study in Israel. This would enable many Israeli academics working abroad to return home to teach this increased number of students, and these returning teachers would also help boost Israel’s research capabilities.
The fifth strategy is to leverage Israel’s creativity — which has served it so well in the high-tech sector — for media and creative arts. This creative energy could be “put to use in creating employment and generating income,” for example, by providing TV content for shows, as Israelis have already successfully done over the last decade, with hit series like “Homeland” and “Fauda.”
“The creative industry may even under the most optimistic scenarios create only a small number of jobs, but they would be rewarding and well paid and offer opportunities to Israelis without the skills and training required by the tech sector,” he wrote. “In particular, Israeli Arabs could be a critical bridge to creating content for the Arab speaking world.”
It is evident by the flow of the book that Rosenberg, a former Israel bureau chief for Bloomberg News in Jerusalem and a former economic correspondent for Dow Jones Newswires and Reuters, knows his stuff. His writing is clean and concise, and the book will likely earn a place on the bookshelves of those who are interested in the phenomenon of Israel and its economy. Rosenberg has also previously written the book “Cloning Silicon Valley: Inside the World’s High Tech Hot Spots.”
“Despite Israel’s evident successes, the overall tone of this book [Israel’s Technology Economy] has been critical of Israel’s economic performance,” Rosenberg wrote in the conclusion of the book. “That is because in a dynamic and globally interconnected economy, there is no time to rest on one’s laurels.”
If nothing is done, or not enough is done, to fix what needs to be fixed, Rosenberg said in the interview, then “we are in trouble. If things don’t change then we are going to be treading water. We have to go further.”
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