IASPS Op-Eds
March 6, 2001
High-Tech Exports: What do They Signify for Israel?
By Alvin Rabushka, Director, IASPS Division for Economic Policy Research
Bank Hapoalim, Israel’s largest bank, publishes a periodic “Economic Report” that reviews recent economic developments and presents an updated forecast for the coming year. The most recent report, Issue 136, was published January 23, 2001.
Foreign trade is a major topic in every “Bank Hapoalim Economic Report.” The year 2000 can be divided into two distinct periods. During the first three quarters of the year, relatively strong economic growth was driven by a very large rise in exports, notably high-tech exports. During the last quarter of the year, in the wake of the violent crisis with the Palestinians, growth slowed appreciably.
The focus of this Institute Op-Ed is the subject of high-tech exports, and what they signify for Israel. The finding of this focus, somewhat at odds with the prevailing view, is that Israel is missing an opportunity to become a high-tech global powerhouse. But first it is important to put exports, including high-tech exports, into the overall context of foreign trade.
Israel routinely runs a current account deficit. The current account encompasses trade in goods and services, and some financial remittances. In recent years, Israel’s current account deficit has ranged from a low of about $1 billion in 1998 to a high of $5.4 billion in 1996. Israel does not earn its keep in the global marketplace. The gap between imports and exports is closed by unilateral grants and transfers, which consist of official foreign aid, German reparations, and institutional and individual remittances. The annual sum comes to $7-8 billion, which has been, and remains, more than sufficient to compensate for the current account deficit.
It is possible to run current account deficits year after year without foreign aid or other unilateral transfers. That is the situation in the United States, which attracts large amounts of foreign capital for direct and portfolio investment. In recent years, Israel has also received substantial foreign direct and portfolio investment. Between 1996 and 1999, annual foreign investment in Israel averaged about $3 billion, split almost evenly between direct and portfolio investment. During the first 11 months of 2000, foreign investment exceeded $6.5 billion; about $4 billion was direct investment, the balance purchase of Israeli financial assets. During 1996-2000, between a third to two-fifths of the foreign investment in Israel in any given year was offset by Israeli investment abroad.
Against this backdrop, let’s examine technology exports in particular. Israel’s Central Bureau of Statistics has refined its classification of exports. Previously, technology-related exports were lumped together in a general category. The CBS currently classifies exports on the basis of technology intensity as high-tech exports, medium-high-tech exports, medium-low-tech exports, and low-tech exports. High-tech includes such items as computers, electronic components, aviation equipment, electronic communications equipment, and pharmaceuticals. Medium-high-tech includes more traditional manufactured exports, such as machinery, electrical motors, and transportation equipment. Medium-low-tech includes oil products, rubber and plastics, metals, and the like. Low-tech consists of traditional items such as food, beverages, paper and wood products, clothing, and leather.
In 1996, medium-high-tech exports earned about $4.5 billion. This was followed by high-tech at just under $4 billion, medium-low-tech just under $3 billion, and traditional industrial products at about $1.8 billion.
Between 1997 and 1999, high-tech and medium-high-tech each generated roughly similar amounts in foreign currency earnings, rising from about $5 billion in 1997 to about $5.7 billion in 1999.
In 2000, high-tech exports of $9.1 billion substantially surpassed medium-high-tech industrial exports of $6.5 billion. On these figures, Israel seems to deserve the much-hyped second Silicon Valley moniker it receives in the media.
The increase in high-tech exports is disproportionately responsible for the particularly high rate of 22.7% growth in exports of goods and services in 2000. (Imports in 2000 grew by a much smaller 12.2%, which suggests that Israel perhaps was getting its foreign economic accounts into better balance, and perhaps finally beginning to earn its keep in the global marketplace.)
But the increase in high-tech exports is misleading in the traditional sense of the meaning of exports. A key sentence appears on page 1 of the report, which reads as follows: “The high-tech sectors, including in this respect the sale abroad of fast-growing start-up companies, accounted for most of the rise in GDP.” Under the Central Bureau of Statistics’ method of measurement, the sale of start-up companies is recorded as the export of services. In other words, when Israeli entrepreneurs sell their companies to foreigners, this is counted in the official statistics as an export. These sales are recorded as an “other services” export item in the balance of payments. This category grew 35% in 2000. (Prior to a sale, the product of a company is recorded as a growth in inventory).
The sale of successful Israeli start-ups to U.S. firms shows up in Israel’s accounts as a healthy increase of exports. But these sales are one-time events. An Israeli company can only be sold once to a foreign firm. Selling out and cashing in is not a sign of Israel’s economic health. Rather, it signifies that Israel is not conducive to building global multinational high-tech firms. It means that Israeli entrepreneurs are not building their businesses inside Israel. They are not creating Israeli multinational giants.
There are many reasons why Israeli high-tech start-ups sell out to American firms or, in other instances, relocate to the U.S. and become U.S. firms. We have written extensively on this subject on this site. Israel is not a desirable place to build major high-tech, multinational companies. Any such company would, as it grew, increasingly have to cope with a predatory government, a dreadful tax system, and endless unpredictable strikes, just to name a few problems. Far better to realize one’s dream as a U.S. subsidiary or simply retire young to the beach with millions in the bank.