How Israel’s R&D thrust became an economy booster

Avi Simhon attributes the structural shift in the Israeli economy in the mid-1990s to sheer serendipity, which propelled the nation on to a rapid growth curve on the back of its hi-tech industry. “The world had changed then and things that we were good at suddenly became important,” says the head of the National Economic Council in the PMO.

Making a presentation on the Israeli economy to visiting Indian media at the Foreign Ministry office in Jerusalem, Simhon said a combination of events helped the Israeli economy, which was in the doldrums in the 1980s. In the 1990s, the Israeli government began to spend disproportionately on R&D — at 4.3 per cent of GDP, Israel’s spend on R&D is the highest among OECD nations, far ahead of the US which spends 2.4 per cent.

This is only civilian R&D spend, Simhon points out, and does not include R&D spend on defence, which is huge, and a figure under wraps. South Korea, the second largest in R&D funding, spends 4 per cent of GDP on R&D, but that includes defence R&D as well.

The huge R&D spend boosted Israeli capability and laid the base for its expertise in computer systems, cyber security, robotics and artificial intelligence. A gradual lifting of protectionism then gave a big thrust to Israeli exports in hi-tech software systems. Simhon also points out to another shift in the Israeli spend on R&D — in most countries, the bulk of R&D spend is by the State; but in Israel, the spend is now mostly by the private sector.

“With the private sector taking over, government spending on R&D has been cut back. This has been an important feature of Israel’s growth. Our prosperity is led by many companies,” Simhon points out.

The start-up eco system in Israel fuelled the growth of many global companies. For example, Check Point Software, headquartered in Tel Aviv, with $2 billion in revenues, is among the world’s largest in security systems for the internet, and protects customers from cyber attacks and malware.

Simhon, who was earlier a professor of environmental economics and management in the University of Jerusalem, reels out another factoid: the key to Israel’s success is its human capital. In 2012, Israeli researchers in the R&D sector per 1,000 employees were 14, against eight in OECD nations.

The emphasis on R&D has had other spin-offs as well. It has attracted over 300 MNCs to set up their R&D centres in Israel. From Google and Cisco to IBM and Siemens, all are well ensconced in the country.

Israel’s economy, where exports were dominated by diamonds and agriculture, began to see a dramatic shift in the 1990s, continuing into the 2000s. A country of just 8.1 million people, Israel’s exports of technology, excluding diamonds and agriculture, spurted from $40 billion in 2005 to $80 billion in 2015. From negative territory, the current account balance as a percentage of GDP has been surplus for the past 16 years.

The spurt in start-ups, research labs et al, has created many jobs; unemployment is at an all-time low of a shade over 4 per cent. This has now created a peculiar problem for the country: a shortage of engineers! Says Simhon: “Israeli companies want more engineers and I have made it my mission to train more of them.”

The economic advisor convinced the treasury to allocate more money for university education. “We worked with universities to create a system where universities would get additional money to enhance their electrical and computer sciences departments. I believe hi-tech industries will accelerate; that’s the way the world is moving and this is what our government believes,” he said.

Incentives to study maths were announced for students from high school and this became a buzz among Israeli parents. Simhon expects engineers graduating will grow by 40 per cent in five years. “I believe this is achievable without lowering standards all round (in other disciplines).”

This writer was in Tel Aviv and Jerusalem at the invitation of the Israeli government.