Did Sarah Lacy get it wrong on Israel’s economy?

Sarah Lacy is a talented journalist on the hightech scene. Look up her writings on TechCrunch et al.

One of Lacy’s pet themes is the Israeli economy, which for nearly three decades has made a name for itself as a “Silicon Valley of the Middle East”. Since the onset of start ups, internets and cleantechs, Israeli companies have been making noises louder and further than may be associated with a country the size of Wales.

The Israeli pavilion at the Barcelona World Mobile Congress this February was not short of impressive. Teva iPharmaceutical Industrie, located outside Tel Aviv, is “the tenth largest firm by market capitalization on the Nasdaq”. Leviathan in wind energy, WeCU in homeland security, BrightSource in delivering solar energy, Better Place powering non-diesel fuel cars, etc etc are leaders in their respective fields.

Lacy will be one of the first to recognise this. Equally, she is very au fait with the nuances of the Israeli society that encourages innovation; government subsidised business mentoring for small enterprises, matching funds for new technology via the Office of the Chief Scientist, a culture that challenges you to think out of the box, and more. 

Where she differs is when she argues that: –

Somehow, as Israel developed more of the ingredients that academics would consider crucial to high-growth company formation, returns from those (early) start-ups have plummeted….The problem is that Israel hasn’t had a lot of home runs……….Israel always outperforms elsewhere. Now, that seems to not be happening…………..

And it is that last phrase that is the key to my questioning of her judgement. “According to Bank of Israel estimates, GDP growth in 2011 will reach 4.5 percent…”, and more of the same is expected in 2012. So what ain’t happening, lady?

Lacy is concerned that few Israeli start ups go on to something mega. Two questions; (1) So what? And (2), Who is to blame?

Let’s be honest, 4% growth these days is pretty damn good. The UK and USA can only dream about such numbers. Unemployment is at a near record low. Exports have continued to zip ahead in 2011, although admittedly the trade gap has extended due to the strength of the shekel.

So based on an immediate statistical argument, Israel is still doing something well according to the textbooks; ensuring that the country’s wealth is being driven by SMEs, small and medium sized enterprises, that make up 95% of many economies.

As for start ups not going on to make a fortune, why blame Israeli macro managers? Simply put; A young firm becomes attractive to an investor or a VC, money pours in, the management board is “upgraded”, and sales are then set to take off. The new decision makers are often located overseas. But if they get it wrong, I suggest to Lacy that she should not look for other scapegoats.

Lacy could adjust her arguments in order to be on firmer ground. For example, Israel is about to benefit from newly discovered offshore gas reserves. Yes, Lacy, that will shift the emphasis of the economy away from hightech. Voters can only hope that the extra tax revenues will be invested wisely in infrastructure.

There is also doubt over some of the support being prepared for 2012 on behalf of small businesses. I have not been too thrilled of the rumours emerging from the Ministry of Industry, as the experts ponder what to do next. If you cannot find anything better, why change established procedures?

That said, Lacy should bear in mind a comment I heard from a London banker back in February 2009. We were sitting in Tel Aviv and he was commenting on the credit crunch. He noted that the same problems were turning in on people, be they in the UK or in the Holy Land. 

The difference is that in Britain, everyone was walking around pessimistic, head down. In Israel, people had the attitude of “OK, so things are tough, but how do we move on and make the next buck.”

That level of  innovation, the route to the next success story, is what Lacy does not see.

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