Mission not yet accomplished

Lyon Roth

Israel has emerged from recession in a way the US can only envy, but perils lurk.

"Mission Accomplished" thus read the giant banner behind President George W. Bush as he landed, as a passenger, in a Lockheed S-3 Viking airplane (dubbed "Navy One") aboard the USS Abraham Lincoln aircraft carrier on May 1, 2003. The president is also Commander in Chief, and the sign was meant to declare the end of the second Iraq War. Saddam Hussein was deposed (though not yet captured) and coalition troops (mostly American) had taken over the country. The sense was that the son had scored victory even more quickly than his father had twelve years earlier. Moreover, he got rid of the tyrant. In short, while the original movie was a hit, the sequel was a blockbuster.

Unfortunately, as we now know, life is not that simple. And for thousands of American troops, life was not destined to continue. In fact, 4,224 out of 4,363 American casualties in Iraq - a whopping 97% - (as of November 30, 2009) came after Bush's landing. Inevitably, that percentage will grow as casualties increase. I am not sharing these statistics to criticize the war in Iraq, but rather to highlight the perils of premature exhilaration.

Hard to cheer in pajamas

Several articles have appeared recently proclaiming Israel the first western economy to climb out of recession. Many have applauded the country's ability to emerge relatively unscathed from perhaps the greatest global financial debacle since the 1930s. According to strict macro-economic indicators, Israel did demonstrate modest growth in the second quarter, and may do so again in the third. The forecast for this year and next is higher than many anticipated. The shekel has been remarkably strong, motivating the Central Bank to purchase unprecedented amounts of foreign currency and boosting the nations reserves.

In America, the mood is more somber. There are over 15 million officially unemployed and about another 10 million under-employed. Thats more than double the amounts of a year ago and a very palpable change even in a country as large as the United States. There are more Americans sitting at home without a job who were working last year than there are residents in all of Israel, and twice as many without work who would like to have a job. Therefore, while the US stock market has also soared throughout most of the year, it is hard to cheer too loudly about the Dow Jones index exceeding 10,000 again while you're watching the financial news on television at home in your pajamas, waiting for the afternoon soap operas to start.

As a result, confidence in government is falling. Obamas approval rating has dipped below 50% for the first time since he became president. While he inherited an enormous challenge from the previous administration, its his economy now. As Congress grapples with health care reform and other initiatives, its approval rating is at around 22%. I believe the British enjoyed a higher approval rating within the colonies right before the revolution in 1776!

Speaking of the revolution, when it emerged as a nation in the late 18th century, America produced a healthy minyan of legendary leaders among a general population of barely 3 million people. Washington, Jefferson, Franklin, Adams, Madison, Hamilton, Hancock, Henry the list goes on. Today, with over 100 times as many citizens, America can barely produce one or two. Instead, the two major parties are obsessed with striking political blows against the other.

Political decorum? In Israel?

I am currently in Israel and, amazingly, politics here seem less partisan than in the United States. I attended Kennes Sderot last week, a two-day conference dedicated exclusively to the socio-economic challenges facing the country. The conference highlighted how every year more people are falling through the countrys historical social safety net. Israels financial success has been attended by amplified economic stratification. Silvan Shalom, the Minister for Development of the Negev and the Galilee, gave a stirring speech highlighting how critical it is to enhance these regions and ensure that they enjoy the same progress seen in much of the rest of the country. Tzipi Livni, leader of the opposition, admitted that her role is generally to critique exhortations by government representatives, but felt compelled to endorse every word of the ministers remarks.

Conference participants acknowledged that Israel still enjoys amazing innovation, world-class academic institutions, and a long-standing national commitment to research and development. However, the R&D tree has been planted selectively and too few are privileged to enjoy its fruit. Israel did not lose many jobs during the recession, but I submit that the labor force participation rate is a much more important indicator of a countrys work-producing potential. This index determines the percentage of individuals who are willing to work, are working, or are actively looking for work. Those who have no interest in working are not included. In the United States, the labor participation rate remains at around 65%. In Israel, its about 50%.

Able, not willing

There are nearly one and a half million Arabs living in Israel and over half a million haredim. Together they account for approximately 30% of the population. Hardly any haredi men or Arab women participate in the workforce. Haredi women and Arab males work, but at much lower rates that their counterparts in the other major demographic sectors in the country. This was true before the recession and, unless drastic changes are made, is likely to remain the case for a long time. Moreover, this perpetual labor-less class will continue to be a massive drain on the nation's economy as too few are working to support too many.

However, as none of this is recession-driven, many Israelis feel their country is humming along the way to a secure recovery. Those that are working are becoming increasingly international in their orientation, improving meaningfully their manufacturing and marketing skills and enabling Israeli companies to become global players. At nearly 5% of GDP, Israels R&D budget is about twice the average among other industrialized economies (which is closer to 2%). Per capita, Israel boasts more engineers than any other country in the world. The business, legal and regulatory infrastructure has motivated tens of billions of foreign investment dollars in the past 15 years.

I had breakfast in Tel Aviv last week with Adam Emmerich, a former colleague and partner at Wachtell, Lipton, Rosen and Katz, a New York law firm. He represented the Wertheimer family in their sale of 80% of Iscar to Berkshire Hathaway (Warren Buffett), and recently represented Shaul Shani in his sale of GVT to Vivendi. According to Adam, Israeli executives rank favorably alongside the most sophisticated business people in the world. International firms have been consistently impressed and rewarded by their partnerships in Israel. Moreover, the governance structure is familiar to anyone accustomed to working in any advanced industrialized country.

Billion dollar deals are still rare. However, they are no longer unprecedented. Israel is scheduled to become a full-fledged OECD member in May 2010. It has a stable currency and a robust financial services industry. Israeli banks did not get drunk on leverage, did not compromise their lending practices, and did not require government bailouts. By comparison, Floridas Commerce Bank recently became the 124th US bank to fail in the past year alone.

So Israelis should revel in their countrys many incredible accomplishments yet remain mindful of such perilous weaknesses as the workforce participation rate. As for Adam, he expects to continue hopping on a plane several times a year to advise his Israeli clients often for just 24 to 48 hours -- and not because he needs the miles.

Lyon (Lenny) Roth is a senior executive at an international wealth management firm and a member of Ben Gurion University's Board of Governors.

Published by Globes [online], Israel business news - www.globes-online.com - on December 2, 2009

Copyright of Globes Publisher Itonut (1983) Ltd. 2009

Lyon Roth

Lyon Roth
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