Alternative Paths of Development
The question of how to develop a nation or jurisdiction from poverty to first-world prosperity has been a point of rancorous debate in economics and political science for decades. The traditional method of development has, historically, been through a lengthy and organic process of incremental political and legal reforms combined with cultural shifts which, step by step, have led Western economies from relative poverty to unimaginable prosperity over the last 200 years.
However, there are people suffering from poverty today that need multi-decade and not multi-century solutions. This traditional growth path is simply too slow to alleviate poverty and suffering in the near term. Recognizing this, some nations and jurisdictions have implemented seemingly radical solutions to produce radical results. I have recently been reading about a nation that has done just this, with shocking results: Israel.
The nation of Israel was created out of “thin air” in 1948 after the resolution of World War II as a “safe haven” for the world’s persecuted and suffering Jewish people. After an initial spike in economic growth that one would expect to occur after the influx of millions of high-skilled laborers into a brand new jurisdiction, the economy began to stagnate. By 1984, Israel was facing Zimbabwe-levels of inflation (over 450% in some cases) and a sputtering economy. Fast forward to today, and Israel is a booming first-world, developed nation with the highest rate of start-ups per capita in the entire world. Israel is on the cutting edge of a variety of technological industries a mere 30 years after having an economy comparable to that of Zimbabwe.
It seems that Israel had done the impossible: 200 years of economic growth and development was squeezed into a 30-year time period. This begs the question: how did the Israeli’s do it, and are there lessons to be learned for those wishing to emulate this exponential level of economic development?
Unfortunately, many of the factors which drove Israel’s economic miracle are not replicable but are rather unique historical and cultural circumstances. Israel received a massive influx of highly-skilled laborers after the collapse of the Soviet Union and has received over $129 billion in aid from the US and $89 billion in reparations from Germany since 1950. Israel also has uniquely entrepreneurial and innovative Jewish culture, with chutzpah driving economic growth in the small nation.
However, Israel’s exponential growth story does contain some lessons for the aspiring start-up jurisdiction.
One of the first and most straightforward lessons is simply that fiscal austerity combined with a streamlining of regulation on innovative industries can drive economic growth. Government spending as a percentage of GDP has been steadily declining in Israel since 1995, as this graphic shows:
Israel also streamlined and optimized the regulatory framework for both technology and research firms as well as the venture capital firms required to fund them. This allowed for the flourishing of the most innovative tech industry on the planet (alongside Silicon Valley), as well as a catapulting of the generalized prosperity of Israel:
The other important lesson to be gleaned from Israel’s story is the importance of bold leadership unafraid to take risks. In the late 1980’s, Israeli leaders did just that: they utilized state funds to jump-start a venture capital industry from scratch. The government both directly invested in start-ups through the BIRD program and started the venture capital industry from nothing by starting the Yozma fund-matching program. Essentially, if Israeli venture capitalists could raise a baseline amount of funds, the state would match them up to $8 million. This bold move proved wildly successful, as Israel has a massive venture capital industry and more start-ups per capita than any other nation on the globe.