It's Not (Just) the Culture, Stupid: 4 Reasons Why Israel's Economy Is So Strong

The government has learned from economic disaster, embraced high-skilled immigrants, played venture capitalist, and imported one heck of a good central banker.

Jordan Weissmann, 08/02/12

In case it wasn't clear the first time he said it, Mitt Romney is certain that "culture" is the reason Israelis are relatively rich today, while Palestinians are quite poor. Much of the world -- including the authors Romney cited -- responded to his analysis with a collective "oy."

But Romney's stand does raise a few good questions. Among them: How on earth has Israel become so successful? Sure, its economy has no shortage of problems -- in particular, a startling degree of income inequality. But in the span of just a few decades, the Jewish state has "transformed itself from a semisocialist backwater into a high-tech superpower," as The Economist put it in 2010. Per capita, it gives birth to more technology startups and is the destination for more venture capital than any other country is the world. Its economy barely flinched during the financial crisis.

Here are four big reasons (though by no means the only ones) Israel is in the strong shape it is today.

IT LEARNED FROM DISASTER

It may now be known as the Silicon Valley of the Middle East, but back in 1984, Israel's story had much more in common with modern-day Zimbabwe. That year, the inflation rate averaged 450 percent, and for a few months reached vertigo-inducing highs of around 950 percent. The economy, in short, was eating itself alive. But the crisis had an upside, in that it sparked reforms that would lay the groundwork for Israel's present-day prosperity.

Like any nasty bout of hyperinflation, this one had a few culprits. But here's the streamlined version of what happened: Starting with the massive military buildup that followed the 1973 Yom Kippur war, Israel began ratcheting up its public sector spending. By the end of the decade, the government was consuming three quarters of the economy and leaving behind huge budget deficits, which it tried to finance by having the Bank of Israel print money. The fact that Israeli workers' wages rose with the cost of living only made the situation worse.

Fighting severe inflation usually means suffering through some unemployment, and so Israeli policy makers, who were obsessively focused on providing the country with jobs, did little to fix their metastasizing problem. But as the economy's health deteriorated -- on top of the inflation problem, there was a banking crisis -- investors began evacuating their money from the country, and it became unclear if Israel would be able to pay its foreign debts. In 1985, government leaders met for a marathon, one-day summit where they crafted a grand bargain that slashed government spending, massively devalued the currency, and severed the tie between wages and prices. It also set new rules for a more independent central bank.

This was, in many ways, the beginning of the modern Israeli economy, a step away from the early workers' state, and towards something more akin to mainline modern capitalism. Although public spending in Israel is still high, the government has gradually eased up its role in the economy, while focusing on keeping inflation low and its deficits manageable.

IT WELCOMED BRILLIANT IMMIGRANTS

Israel's economy started getting healthy when the government started practicing mainstream economics. But it also benefited from a once-in-a-century stroke of luck. When the Soviet Union began to collapse, American immigration policy prevented a large number of Russian Jews from coming to the United States. Instead, they chose Israel. Between 1990 and 1997, more than 710,000 Soviet immigrants landed in the country, boosting the working age population by 15 percent. Around 60 percent of the new arrivals had a college education, versus 30 to 40 percent of the native population. Immigration, in general, is good for growth. There are more people to work, buy houses, shop at malls, and pay taxes. When those immigrants are engineers, managers, and college professors, it's even better for growth. The Russian influx gave Israel a booster shot of both bodies and brains.

THE GOVERNMENT PLAYED VENTURE CAPITALIST (BRIEFLY)

These days, you'll often hear Israel referred to as "the start-up nation." The nickname comes from the title of a book co-authored by Romney adviser Dan Senor, which argues that the country's brash, ambitious culture, and its citizens' ability to overcome adversity, is the secret to its success as a high-tech incubator. The Washington Post's Zach Goldfarb has dubbed this theory the "chutzpah thesis."

And chutzpah is probably part of it. But early on, so was the helping hand of government. Thanks partly to investments in military research and its well-educated population, Israel had some of the key ingredients for a high-tech boom by the early 1990s. But it lacked an important catalyst: investors. As Glenn Yago, senior director at the Milken Institute's Israel Center, told me, there was virtually no venture capital scene in Israel to speak of. Rather, the economy was still dominated by state-backed behemoths. "Basically, it was a kind of crony capitalism," he said.

That began to change with the Yozma program, a $100 million state-owned venture capital fund that opened for business in 1993. Some of the money was invested directly in startups. But more importantly, the program convinced foreign venture capitalists to create funds in Israel by lowering their taxes and promising to match part of the money they raised from investors. In doing so, it set in motion a virtuous cycle that created a thriving, independent venture capital market that was backing hundreds of startups a year by 2000, as shown in the graph below, adapted from a paper by Israeli researcher Gil Avnimelech. With the market up and running, the government privatized Yozma in 1998.

As George Gilder wrote in City Journal, it took a final, massive round of deregulation under Prime Minister Benjamin Netanyahu in 2005 before Israel would have a full-fledged financial services industry. But Israel pulled off a remarkable feat by cleverly growing a financial ecosystem for its tech entrepreneurs from scratch.

THEY MAY HAVE THE WORLD'S SMARTEST CENTRAL BANKER

There are a host of reasons Israel managed to escape the worst of the global financial crisis and its awful aftermath. For one, it managed to properly implement something close to a classic Keynesian spending policy, cutting its deficit during the good times before the meltdown, then letting it grow when the economy went south.

But the country also has a not-so-secret weapon: Stanley Fischer, the Zambian-born, U.S. educated head of the Bank of Israel. A former MIT professor, chief economist at the World Bank, deputy managing director at the International Monetary Fund, and vice chairman at Citigroup, Fischer was not an Israeli citizen when he was recruited to manage the country's monetary policy. He was an import. But since taking the helm in 2005, he's managed to keep the country's currency relatively stable against a fluctuating dollar -- key for their exports -- while steering the economy towards consistent growth.

In a much discussed blog post, Evan Soltas pointed out that this growth may have been the product of a controversial strategy known as "nominal GDP targeting," where a central bank picks an annual growth figure, and tries to hit it whether through inflation, or by expanding the real economy. The idea is to prevent private debts from crashing the economy by making sure incomes steadily rise, even if real growth slows down a bit.

As Soltas' graphs below show, Israel's real GDP and inflation have moved in opposite directions, while its nominal GDP has hovered right around 6.5 percent per year.

This is a strategy that many, including The Atlantic's Matt O'Brien, have hoped the Fed would pursue to rev up our own economy. But as of now, that seems like a remote possibility.

MORE THAN CULTURE

So in a sense, Romney had a point. Culture has been a big factor in Israel's success. Its openness to immigrants and the ingenuity of its entrepreneurs have played a role in its economic renaissance. But unless you lump your feelings about government spending as a percentage of GDP, public-private partnerships, and NGDP targeting under the header of culture - and who knows, you might - then that's only part of the explanation. Rather, Israel's government has gotten better over time at learning when it needs to get out of the way, and knowing when it needs to step in and lend the private economy a hand, when it needs to tackle a problem like inflation, and when a little bit could be good for growth. It's figured out how to be flexible. That's a lesson some of our own policy makers could probably use, too.

http://www.theatlantic.com/business/archive/2012/08/its-not-just-the-culture-stupid-4-reasons-why-israels-economy-is-so-strong/260610/

-- 請至原網頁參考所附圖表 -- 卜凱

Mitt Romney is living every social scientist's nightmare

Daniel W. Drezner, 08/02/12

Late at night, when your humble blogger is troubled in his sleep because of some crap argument he was making in his day job, some version of this Annie Hall scene plays out in his head:

(請至原網頁參閱影片)

This is, far and away, my worst nightmare.

I bring this up because yesterday in the National Review, Mitt Romney doubled down on his "culture comments" he made in Israel:

During my recent trip to Israel, I had suggested that the choices a society makes about its culture play a role in creating prosperity, and that the significant disparity between Israeli and Palestinian living standards was powerfully influenced by it. In some quarters, that comment became the subject of controversy.

But what exactly accounts for prosperity if not culture? In the case of the United States, it is a particular kind of culture that has made us the greatest economic power in the history of the earth. Many significant features come to mind: our work ethic, our appreciation for education, our willingness to take risks, our commitment to honor and oath, our family orientation, our devotion to a purpose greater than ourselves, our patriotism. But one feature of our culture that propels the American economy stands out above all others: freedom. The American economy is fueled by freedom. Free people and their free enterprises are what drive our economic vitality.

"Double down" is appropriate here, because he went from a speech in which he said there were "other factors" that mattered as well to zeroing in on culture. Again, to be fair, a close read of what Romney describes as "culture" in his essay clearly includes political and economic institutions. To get academic-y about it, Romney is being "conceptually fuzzy" with his terms.

So sure, Romney has been pilloried by political reporters and left-wing columnists and foreign policy writers and former U.S. diplomats and snooty British publications for a bad trip... but they've mostly been focusing on the "gaffes."

This morning, however, Romney is having his Marshall McLuhan moment. In the New York Times, Jared Diamond grades Romney's citation of his book Guns, Germs and Steel:

Mitt Romney's latest controversial remark, about the role of culture in explaining why some countries are rich and powerful while others are poor and weak, has attracted much comment. I was especially interested in his remark because he misrepresented my views and, in contrasting them with another scholar’s arguments, oversimplified the issue.

It is not true that my book “Guns, Germs and Steel,” as Mr. Romney described it in a speech in Jerusalem, “basically says the physical characteristics of the land account for the differences in the success of the people that live there. There is iron ore on the land and so forth.”

That is so different from what my book actually says that I have to doubt whether Mr. Romney read it.

Then there's Daron Acemoglu and James Robinson here in FP, attacking Romney on the conceptual fuzziness thing:

Unfortunately, Romney's views are seriously out of sync with those of the great mass of social scientists. For one, as his more extended argument in the National Review illustrates, he confuses "culture" with institutions. By culture, social scientists mean people's values and beliefs. Romney refers to Americans' "work ethic," which is cultural, but he also claims that political and economic freedoms are the real keys to economic success. But political and economic freedom are not guaranteed by (or even related to) culture but by institutions, such as the U.S. Constitution or its system of property rights. Romney did cite Harvard University historian David Landes, who did indeed argue that values and beliefs are crucial for economic development, as providing the intellectual origins of his views -- but his focus on institutions is much more in line with our book Why Nations Fail than with Landes. Indeed, the facts on the ground in the Middle East illustrate the power not of culture, but of institutions.

Fareed Zakaria weighs in the Washington Post [Wait, he counts? -- ed. He earned his Ph.D. in political science at Harvard under Samuel Huntington. So yeah, on this, he definitely counts]:

Had Romney spent more time reading Milton Friedman, he would have realized that historically the key driver for economic growth has been the adoption of capitalism and its related institutions and policies across diverse cultures.

The link between economic policies and performance can be seen even in the country on which Romney was lavishing praise. Israel had many admirable traits in its early decades, but no one would have called it an economic miracle. Its economy was highly statist. Things changed in the 1990s with market-oriented reforms -- initiated by Benyamin Netanyahu -- and sound monetary policies. As a result, Israel’s economy grew much faster than it had in the 1980s. The miracle Romney was praising had to do with new policies rather than deep culture.

Ironically, the argument that culture is central to a country’s success has been used most frequently by Asian strongmen to argue that their countries need not adopt Western-style democracy. Singapore’s Lee Kuan Yew has made this case passionately for decades. It is an odd claim, because Singapore’s own success would seem to contradict it. It is not so different from neighboring Malaysia. The crucial difference is that Singapore had extremely good leadership that pursued good economic policies with relentless discipline.

Finally, there's the Center for Global Development's Charles Kenny, who is far and away the most supportive of Romney's argument:

Mitt Romney created a stir this week when he pointed to the immense difference in wealth between Israel and the Palestinian territories and explained it with his interpretation of Harvard economic historian David Landes’s work that “culture makes all the difference.”

By now there is wide agreement that Romney used a pretty terrible example to illustrate Landes’s point. And yet the proposition that “culture” is a factor in long-term economic performance is increasingly accepted among development economists. What Romney seems to have missed is that culture is a declining barrier to development worldwide.

Still, three out of four social scientists have flunked Romney's comparative political economy comp. Will this make a whit of difference in the campaign? That depends entirely on whether you believe that voters still respond to cues from elites... so for me the answer is "probably not." This entire episode is nevertheless an instructive parable for graduate students studying for comps everywhere:

1) Define your terms clearly;

2) Make sure you've done your reading and not staffed it out relied on book reviews or summaries of the Big Arguments -- cause those summaries can be way off base;

3) Don't double down when you make a bad argument.

http://drezner.foreignpolicy.com/

Capitalism, not culture, drives economies

Fareed Zakaria, The Washington Post, 08/02/12

Mitt Romney has explained that his comments abroad were simply truth-telling. “I tend to tell people what I actually believe,” he said. With regard to one much-debated comment -- on the cultural differences between Israelis and Palestinians -- many agree with him. The Wall Street Journal editorial page and columnists including Marc A. Thiessen and John Podhoretz all applauded. Podhoretz wrote: “Anyone who publicizes his remark is helping Romney win the election.”

“Culture makes all the difference,” Romney said at a fundraiser in Israel, comparing the country’s economic vitality to Palestinian poverty. Certainly there is a pedigree for this idea. Romney cited David Landes, an economics historian. He could have cited Max Weber, the great German scholar who first made this claim 100 years ago in his book “The Protestant Ethic and the Spirit of Capitalism,” which argued that Protestant values were the most important fuel for economic progress.

The problem is that Weber singled out two cultures as being particularly prone to poverty and stagnation, those of China and Japan. But these have been the world’s fastest-growing large economies over the past five decades. Over the past two decades, the other powerhouse has been India, which was also described for years as having a culture incompatible with economic success -- hence the phrase “the Hindu rate of growth,” to describe the country’s once-moribund state.

China was stagnant for centuries and then suddenly and seemingly miraculously, in the 1980s, began to industrialize three times faster than the West. What changed was not China’s culture, which presumably was the same in the 1970s as it was in the 1980s. What changed, starting in 1979, were China’s economic policies.

The same is true for Japan and India. Had Romney spent more time reading Milton Friedman, he would have realized that historically the key driver for economic growth has been the adoption of capitalism and its related institutions and policies across diverse cultures.

The link between economic policies and performance can be seen even in the country on which Romney was lavishing praise. Israel had many admirable traits in its early decades, but no one would have called it an economic miracle. Its economy was highly statist. Things changed in the 1990s with market-oriented reforms -- initiated by Benyamin Netanyahu -- and sound monetary policies. As a result, Israel’s economy grew much faster than it had in the 1980s. The miracle Romney was praising had to do with new policies rather than deep culture.

Ironically, the argument that culture is central to a country’s success has been used most frequently by Asian strongmen to argue that their countries need not adopt Western-style democracy. Singapore’s Lee Kuan Yew has made this case passionately for decades. It is an odd claim, because Singapore’s own success would seem to contradict it. It is not so different from neighboring Malaysia. The crucial difference is that Singapore had extremely good leadership that pursued good economic policies with relentless discipline.

Despite all this evidence, most people still believe that two cultures in particular, African and Islamic, inhibit economic development. But the two countries that will next achieve a gross domestic product of $1 trillion are both Muslim democracies -- Turkey and Indonesia. Of the 10 fastest-growing economies in the world today, seven are African. The world is changing, and holding on to fixed views of culture means you will miss its changing dynamics.

When societies or people succeed, we search in their cultures for seeds of success. Culture being a large grab bag, you can usually find what you want. We observe the success of Jewish, Lebanese, Chinese and Indian people in various societies and attribute it to culture. But it may really stem from the traits of diaspora populations -- small groups of entrepreneurial immigrants forced to live by their wits in alien cultures. Interestingly, Palestinians have a reputation around the Middle East for being savvy merchants and traders and have been successful in the United Arab Emirates, Jordan and Saudi Arabia.

Culture is important. It is the shared historical experience of people that is reflected in institutions and practices. But culture changes. German culture in 1935 was different from 1955. Europe was once a hotbed of violent nationalism; today it is postmodern and almost pacifist. The United States was once an isolationist, agrarian republic with a deep suspicion of a standing army. Today it has half of the world’s military power.

Daniel Patrick Moynihan once observed: “The central conservative truth is that it is culture, not politics, that determines the success of a society. The central liberal truth is that politics can change culture and save it from itself.” That remains the wisest statement made about this complicated problem, probably too wise to ever be uttered in an American political campaign.

comments@fareedzakaria.com

http://www.washingtonpost.com/opinions/fareed-zakaria-capitalism-not-culture-drives-economies/2012/08/01/gJQAKtH9PX_story.html