Silicon Israel: how it happened

Venture capitalist George Gilder wrote this essay for City Journal. I’ve had first-hand experience with Israeli innovation. Gilder is spot on. Excerpt:

(…) My interest in Israeli innovation began in 1998, when I invited an Israeli physicist named David Medved to speak at the Gilder/Forbes Telecosm conference. Medved described the promise of â€œfree-space opticsâ€â€”what most of us call â€œlightâ€â€”for high-end communications among corporate buildings and campuses. He also spoke of air force experiments in Israel that used the still-higher frequencies and shorter waves of ultraviolet light for battlefield communications. Some of the most important explorations of electromagnetic technology, I realized, were happening in Israel.

Nearly a decade later, Medved introduced me to his son Jonathan, a pioneering Israeli venture capitalist. In his offices high over Jerusalem, the younger Medved told me the startling tale of Israelâ€™s rapid rise to worldwide preeminence in high technology. I had long known that Israel held laboratories and design centers for American microchip companies. I knew that, in a real sense, much American technology could reasonably bear the label ISRAEL INSIDE. I was familiar with a few prominent Israeli start-ups, such as the electric-car company launched by Wired cover boy Shai Agassi, which boldly bypassed the entire auto industry in redesigning the automobile from scratch, and Gavriel Iddanâ€™s company Given Imaging, with its digestible camera in a capsule for endoscopies and colonoscopies.



But what changed in Israel that made this possible? Certainly Israel was not reckoned a force for innovation as late as the mid 1980s. Gilder argues that the new Israel gave up its welfare-state mentality:

How to explain this lassitude? For much of Israelâ€™s short history, the country has been a reactionary force, upholding a philosophy of victimization and socialist redistribution that could only impede its progress. In 1957, a team of American economic consultants found that Israelâ€™s â€œhigh labor costs . . . reflected the high degree of job security . . . [and] the absence of adequate incentive to or rewards for superior efficiency or performance.â€ This was partly a result, they added, of â€œvirtually complete protection from foreign competition.â€ Two years later, A. J. Meyer of the Harvard Center for Middle Eastern Studies noted â€œuncertainty in the minds of many [Israeli] industrial producers that theirs is the â€˜goodâ€™ occupation or that society really gives them creditâ€”financially and in statusâ€”for their efforts.â€ He also cited â€œwelfare state concepts [that] often dictate that incompetent workers stay on payrolls.â€

Many of Israelâ€™s Jews, as the writer Midge Decter described them, â€œwere coming into the country armed with their socialism and their ideologies of labor and a Jewish return to the soil.â€ Imagine it: urban socialists trying to reclaim their past glory and save themselves in a hostile world by returning to the soil in a desert! They created communal experimentsâ€”kibbutzimâ€”and put intellectuals to work with hoes and shovels, for all the world like a voluntary version of Chairman Maoâ€™s Cultural Revolution. In a truly menacing dÃ©marche of ideological madness, they attempted to abolish the family and private property.

Panicked, moreover, by the Jewish caricatures and stereotypes wielded by their enemies, they resolved to become mendicant nebbishesâ€”touring the centers of Western money and industry with tin cups in handâ€”rather than bankers and financiers. They assigned close to a third of the economy to the ownership of Histadrut, a socialist workersâ€™ organization prone to threatening nationwide strikes. Under Histadrut pressure, they instituted minimum wages that stifled employment and propelled inflation. Then they imposed more controls on wages, prices, and rents, making everything scarce.

In a general enthusiasm for public ownership of the means of production and finance, the government through the 1990s owned four major banks, 200 corporations, and much of the land. Israelâ€™s taxes rose to a confiscatory 56 percent of total earnings, close to the highest in the world, stifling even those private initiatives that managed to pass through the countryâ€™s sieves of socialism. Erecting barriers of bureaucracy, sentiment, and culture, Israeli leaders balked the entrepreneurs and inventors who gathered there, creating a country inhospitable to Jewish genius.

Gilder says the game changer was the influx of Russians:


But finance was still mired in the socialist past

(…)As the millennium dawned, Israel had failed to create a financial-services industry or to wrest control of much of Israelâ€™s capital from the hands of Histadrut.




In under 25 yearsâ€”starting from those first modest tax reforms of the mid-1980sâ€”Israel has accomplished the most overwhelming transformation in the history of economics, from a nondescript laggard in the industrial world to a luminous first. Today, on a per-capita basis, Israel far leads the world in research and technological creativity. Between 1991 and 2000, even before the big reform of 2005, Israelâ€™s annual venture-capital outlays, nearly all private, rose nearly 60-fold, from $58 million to $3.3 billion; companies launched by Israeli venture funds rose from 100 to 800; and Israelâ€™s information-technology revenues rose from $1.6 billion to $12.5 billion. By 1999, Israel ranked second only to the United States in invested private-equity capital as a share of GDP. And it led the world in the share of its growth attributable to high-tech ventures: 70 percent.



Please continue reading Silicon Israel…

One thought on “Silicon Israel: how it happened

  1. Maybe SOME people profitted, and great, Israel’s GDP is doing fine.
    What you forgot to mention is that Netanyahu is causing severe damage to elderly Jewish people, the Jewish children, and to handicapped people.
    The pensions which people have been saving, is “gone”. Their money has gone straight into the hands of capitalists. wow…. I am a Jewish lady living in Tel Aviv, and it does not make me proud.
    Before Netanyahu’s reforms, maybe Israel was not so high in the GDP, BUT PEOPLE HAD DIGNITY AND BREAD ON THE TABLE.
    Netanyahu made the rich richer, and the mainstream poor, very poor.
    Minimum wage is very low; there are old men working here for less than minimum wage because they have no more pension (thanks to Mr. Netanyahu).

    As for the Histadrut – by infiltration and by deception, he killed the labor movement.

    Shame on you and shame on your article. We have NOTHING to be proud about!

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