How Israel Prospers as Islam Remains in Dark

How Free Israel Prospers as Islam Remains in the Dark
By Chuck Devore, Investor's Business Daily, April 13, 2011

Israel, a New Jersey-sized nation of 7.5 million people (1.7 million of whom are Arab) filed 7,082 international patents in the five years ending in 2007. By contrast, 28 majority-Muslim nations with almost 1.2 billion people — 155 times the population of Israel — were granted 2,071 patents in the same period.

Narrowing the comparison to the 17 Muslim nations of the Middle East from Morocco to Iran and down the Arabian Peninsula, the 409 million people in that region generated 680 patents in five years.

This means that the Arab and Iranian world produced about one patent per year for every 3 million people, compared with Israel's output of one annual patent for every 5,295 people, an Israeli rate some 568 times that of Israel's neighbors and sometime enemies.

The awarding of Nobel Prizes in the quantitative areas of chemistry, economics and physics shows a similar disparity, with five Israeli winners compared with one French Algerian (a Jew who earned the prize for work done in France) and an Egyptian-American (for work done at Caltech in California).

This phenomenon is manifested in other nations as well, where bad government begets poverty. Free South Korea, with 48.8 million people, filed 24,200 international patents from 2003 to 2007. The 24.5 million people in the North Korean slave state managed to produce 14 patents in the same period.

But wealth isn't the sole explanation for this disparity in intellectual innovation. Saudi Arabia enjoyed a per capita income of $24,200 in 2010. Yet the Kingdom averages an anemic 37 patents per year compared with Israel's 1,416 per year — and there are 3 1/2 times more Saudis than Israelis, meaning that Israel's per capita output of intellectual property is 132 times greater than Saudi Arabia's.

My on-the-ground education in the Middle East began in 1984, when I attended school at American University in Cairo, Egypt. At the time, Israel was a socialist state, still very much mired in a planned economy focused on heavy industry and agriculture, replete with government subsidies and heavy regulation.

Israel's per capita output stood at $6,749 (in current U.S. dollars), 41% of America's — slightly less than the Soviet Union's per capita output at the time.

Egypt also featured a planned economy in the 1980s, with smoke-belching heavy industries making Cairo among the world's most polluted cities. Egypt's per capita production was $881, about 5% of U.S. per capita output. Israel produced about 7.7 times more goods and services per person than did Egypt.

In 2010, before unrest disrupted its economy, Egypt produced $2,759 per capita, a little less than 6% of U.S. per capita production. Israel, meanwhile, had improved its per capita wealth generation to $26,843, or 56% of America's per capita GDP.

Remarkably, the populations of Egypt and Israel grew at almost the same rate, Egypt's being driven by internal growth, Israel's largely by more than a million immigrants from the former Soviet Union. By 2010, Israel had improved its ratio of productivity over Egypt, producing about 9.7 times more goods and services per person than its neighbor to the south.

Why this growing disparity in wealth creation between Israel and Egypt?

The Egyptian Revolution of 1952 saw the overthrow of monarchy with the military running the nation's economy. This invariably led to stagnation and a growing external debt.

Egypt has launched two waves of economic liberalization since 1984, one under the auspices of an International Monetary Fund standby agreement in 1991 and another in 2004, when former President Mubarak appointed an economic-reform-minded Cabinet. The 1991 effort focused on the privatization of state-owned enterprises.

The 2004 program reduced import tariffs, cut taxes and allowed the Egyptian pound to float. The reforms of the 1990s took some time to take hold, with the Egyptian economy seeing year-over-year growth in per capita income (purchasing power parity) rising an impressive 5.7% per year from 1997 to 2000. Mubarak's 2004 free-market reforms bore even more fruit, with per capita growth averaging 6.9% from 2005 to 2008.

However, the demonstrators of Tahrir Square claim, with some justification, that the most recent round of reforms mostly benefited the nation's elite. This crony capitalism is said to have generated a massive amount of wealth for the two sons of the former Egyptian president. And, with that wealth concentrated at the top, resentment mounted in the masses who saw their cooking fuel subsidies cut while the cost of basic necessities soared.

Now the Egyptian economy has been hammered by unrest. Crime has tripled since Mubarak's ouster. A wave of child kidnapping has struck fear in wealthy and upper-class parents. Militant Islamists now operate in the open, brazenly attacking Egypt's large Christian minority and moderate Muslims alike. Tourism, accounting for 11.3% of the economy, has dried up. Unemployment is surging.

Adding to Egypt's travails, the Muslim Brotherhood is calling for "modesty police" — mirroring the actions taken by Hamas, the Muslim Brotherhood branch in Gaza, after its 2006 electoral win and subsequent bloody purge of its more secular rival, Fatah.

These would-be mullahs of misery are also calling for the criminal prosecution of those who made money during the Mubarak era, coupling that call with a return to Egyptian socialism. This sure recipe for economic failure will inevitably cause Egypt's new leaders to blame Israel, the Jews and America for Egypt's problems. As the availability of bread declines, the index of hate will rise. This volatile equation is good for neither Egypt nor Israel.

After its founding in 1948, Israel was also burdened with a socialist economy. Israel's main right-wing party, Likud, won the 1977 elections, but that win was mainly a reaction to Israel's near-run victory in the 1973 Arab-Israeli War. Likud did little to change Israel's socialist policies.

Israel's commitment to socialism wasn't challenged until former Prime Minister Ariel Sharon appointed Benjamin Netanyahu as finance minister in 2003. Many thought Sharon made this move to bury rival Netanyahu's career. Netanyahu sought to remake Israel's economy, instituting reforms such as liberalization of the banking system.

Critics scoffed at these reforms as "Thatcherite," worrying that Israel's social safety net was being dismantled. But Netanyahu's free-market reforms worked, causing Israel to see its longest sustained period of high economic growth, with per capita income (purchasing power parity) rising an average of 6% per year from 2004 to 2008. Israel is now considered a high-tech market economy.

The telltale signs of Israel's economic rise can be seen in the Tel Aviv skyline and the new office complexes around Jerusalem. International giant Teva Pharmaceutical Industries Ltd. was founded in 1901 by three pharmacists in Jerusalem. Today it employs 40,000 around the world.

Teva has a market cap of $44.2 billion — the most highly valued company based in Israel and the ninth-largest firm traded on the Nasdaq. Seventy percent of its revenue comes from generics, a niche it pioneered, while 30% comes from newly developed drugs. Teva's history and forward-looking strategy is for revenue to double every four years, with 65% of that coming from internal growth.

Teva's success in the generic market is predicated on rapidly developing high-quality formulations and quickly getting approval for them within 180 days after filing — a quick turnaround that competitors find difficult to match.

A few miles from Teva's gleaming office campus west of the Old City sits the former national mint building for the British Mandate. Built in 1937, this renovated building, along with the old Ottoman Empire railway warehouses next to it, houses the JVP Media Quarter and 300 entrepreneurs.

The complex hosts Israel's leading venture capital firm, Jerusalem Venture Partners, as well as 35 startups and a performing arts center for good measure. JVP, which has helped launch 70 companies since 1993, has more than $820 million under management with seven active venture capital funds.

The Media Quarter concept was created in 2002 when JVP founder Erel Margalit wanted to create a media-focused incubator that combined technology, culture, art and business. JVP has shepherded 18 initial public offerings, mergers and acquisitions, including some of the largest Israel-based companies: Qlik Technologies, Netro Corp., Chromatis Networks, Precise Software, Cogent Communications.

The government of Israel created 28 incubators between 1990 and 1993 under the auspices of the Office of the Chief Scientist in the Ministry of Industry and Trade. Reminiscent of Japan's state-guided capitalism through the Ministry of International Trade and Industry, Israel's incubators were designed to engage the scientific and engineering skills of the large influx of immigrants from the former Soviet Union.

The government eventually viewed the effort as a burden, so it privatized its incubators. Today there are 24 incubators that can receive a government grant of $500,000 per company and up to $1.5 million in state seed capital.

Less than 300 miles separate the purposeful creative buzz in the JVP Media Quarter from the restive streets of Cairo, where the Muslim Brotherhood tells Egypt's unemployed that their plight is the fault of corrupt capitalists and Jews. It doesn't take a Nobel Prize-winning economist to figure out where these two economies are going.