this is Israel a small Middle Eastern country on the Mediterranean Sea that is home to 9. 4 million people and a surprisingly robust economy we say surprisingly because the economy of Israel doesn't have a lot of things going for it and it has a lot going against it impossible to look at the economy of Israel without acknowledging the historically hostile relationship has had with its neighbors and while I'm not nearly knowledgeable or brave enough to talk about the geopolitical intricacies of this region economies tend to do a lot better when they work well with surrounding countries which is an advantage Israel does not have purely through the lens of Economics this is a real challenge because they don't have direct trading partners across their borders they have to spend a larger portion of their National Budget on defense and their only real access to global trade is over the ocean and although that's typically the best option anyway it's nice to have Alternatives especially for Commodities like oil that can be transported through pipelines speaking of which the country also doesn't have much in the way of Natural Resources arable farmland or a population big enough to use for low-cost Manufacturing in 2009 Israel was spending more than five percent of its GDP on energy Imports which not only made it vulnerable to the country's supplying this energy many of whom really didn't like them but it also meant that economic growth in competitive industry would be a challenge when so much Capital was flowing overseas just to keep the lights on literally despite all of these challenges though Israel is still one of the wealthiest and most advanced economies in the world with output figures more than 10 times out of their direct neighbors and higher even than places like Canada Germany France and the UK what's even more impressive is that less than four decades ago Israel's economy was in a very similar situations to ones that countries like turkey Pakistan Lebanon and Sri Lanka find themselves in today political unrest stalling economic growth High inflation and a general lack of confidence in the economy makes these problems extremely difficult to fix but Israel did fix them so they are a very useful case study for a lot of economists around the world today so how did Israel come back from complete economic failure what is leading their Economic Development to make them one of the richest countries in the world now is it possible to replicate the success in other countries facing similar challenges today and finally could this story of economic success be starting to come to an end once we've done all of that we can put Israel on the economics explained National leaderboard this episode of Economics explained was brought to you by Aura Aura is an easy to use app that includes everything you need to stay safe online Aura protects you from scammers and hackers by scanning the dark web where criminals still stole information and looking for your 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the channel to get a 14 day free trial and see if your personal information has been leaked online go to aura. com economics the economy of Israel as it exists today really got started in the mid-1980s during this time the country was struggling with an annual inflation rate of over 350 percent which meant that the Israeli shekel was basically useless for economic applications most people in the country resorted to using foreign currencies like US Dollars which came with its own problems on a macroeconomic level using the currency of a foreign country means that the government has less control over almost everything raising taxes in US Dollars would have been admitting that their own currency was worthless but if they raised taxes in shekels they would have been left with something with a quarter of the purchasing power that it had a year before and they'd be forced to make up a difference with more money creation which would lead to more inflation and the need for more money printing the role of a central bank is to stop this feedback loop by controlling the money supply and increasing interest rates to preserve the value of their currency unfortunately this only works when the central bank is allowed to act independently of the government in the last two years turkey formerly turkey has had problems with severe inflation well beyond even the elevated level that most countries around the world are experiencing the central bankers at least try to slow this down by raising interest rates but the Turkish government has repeatedly forced them to lower rates instead with the idea that if businesses need to pay less interest on their loans they can grow faster and provide more employment countering the problem of inflation this theory is not completely wrong if economic output can increase faster than the supply of money then there will be more new goods and services than dollars or liras or shackles so each unit of currency can buy more of these goods and services which is deflation a little bit of inflation is also a good thing because it encourages people to either spend their money or invest it so it maintains its value unfortunately what governments in these situations don't realize is that high inflation itself can stifle economic growth because it scares off Foreign investors and just makes the industry harder some business contracts are made over many years and when a business wants to hire an employee the first thing they'll want to know is how much they're going to get paid for their work if the value of a currency is falling so rapidly and unpredictably it makes formal long-term Arrangements like this impossible because a great deal now might be a terrible deal in the future if the country's currency is only buying a fifth of what it was when the deal was made realistically inflation Beyond about five percent does more harm than good so Israel's 370 rate of inflation in 1984 was a real problem that most of its citizens avoided by just not using their own currency stability and confidence is one of the most important things in economics and nobody within or outside of Israel had any confidence in the currency stability and by extension the economy as a whole changing this was the first and most difficult step the government had to take to start turning the country around in 1985 Israel introduced a new currency to replace the shekel that had effectively become worthless with the unimaginably named new Israeli shekel just introducing a new currency doesn't fix the problem of sustained inflation by itself the government had to get people to actually use it instead of doing business in the much more widely recognized and stable US dollar to get people to use their new currency they had to give them confidence that it wouldn't have the same problems as the old currency it's worth noting that the old shekel was only technically around for five years between 1980 and 1985 after it replaced new Israeli shekel although that replacement was done a rate of one to one it wasn't so much a new currency as it was a rebranding to a Hebrew name by the way the new shekel was supposed to be a new start and it was rolled out in parallel with the Israeli government's economic stabilization plan to turn its economy around Israel rolled out a five-point plan that was simple in theory the government first cut its excessive expenditure government spending is a major inflationary pressure if the government is putting money into the economy through welfare payments government jobs or big infrastructure projects that is going to increase consumer demand because more people will have more money by cutting the spending people that used to receive income from these sources won't anymore and the businesses that used to receive income from them will also find it harder to make money if a currency becomes a scarce of resource it will all other things be equal also become more valuable as countries around the world today struggle with their own inflation problems a lot of attention has been paid to monetary policy from central banks and many people don't realize that government spending and Taxation is just as important because it adds and subtracts from the money supply which is a major component of inflation they also made the Bank of Israel the Central Bank in the country completely independent of the government like it is in most advanced economies around the world central banks and governments normally have aligned roles of General economic Prosperity but letting the banks act independently means that they can step in and raise interest rates and stop money creation even if the country's leader is trying to get them to do the opposite like the example from Turkey we explored earlier after cutting expenses and giving Independence to the central bank Israel's government also let the sheckle fall in value in International Exchange markets and then temporarily fix the rate at the new low price a devaluation in domestic currency was an interesting move because it actually heightens inflation if a country is dependent on Imports which Israel definitely is having to spend more local currency for the same amount of stuff is the definition of inflation but the government's first challenge at this time was not to control inflation it was to get people to use their currency If people could trade in the US dollars they were using for a reasonable amount of new currency they would be more likely to adopt it which was a worthwhile trade-off even if it did come at the expense of heightened inflation for the first five years by the end of the 1980s inflation had returned to a reasonable level and most of the trade within the country was once again been done in their own currency the stabilization plan had worked and even today a lot of countries could take the same steps to pull their way out of similar problems but for Israel this now meant that it could fully realize its potential in 1987 after inflation had stabilized Israel had a GDP per capita of nine thousand dollars which was just less than half of the USA at the same time this wasn't bad by any means but in the following three and a half decades the country would close the gap significantly their first breakthrough was the discovery of offshore natural gas up until that point the country had been very dependent on energy Imports and this made them self-sufficient but it wasn't enough for them to become a fossil fuel state that just becomes economically dependent on exporting its natural resources Israel also benefits from tourism the country is home to a lot of religiously significant destinations for a lot of different faiths the country normally welcomes over 4 million tourists each year with the exception of recent years due to covert that's almost one tourist arriving for every two residents which introduces a lot of foreign income into the country and creates a lot of jobs for a country with less than 10 million inhabitants that tourism industry alone would normally be a significant portion of total economic output but in Israel it only amounts to two percent of their total GDP Israel's real resource is its very clever population today Israel spends twice as much on research and development than even very technical Nations like the United States this has allowed the country to build out world-leading industries that add a lot of economic value within its borders Israel is one of the world's largest producers of advanced semiconductors its need for a strong military has also made it a world-leading weapon system manufacturer and one of its biggest Imports is uncut diamonds that are then shaped into jewelry that is sold at a significant markup last week we looked at the economy of South Korea and found that their global companies were the driving force of their success and they added value to the economy even beyond the nation's borders the story is very similar in Israel it's just that their companies are less household names because they operate in less consumer-focused Industries not too many people are buying missile defense systems the companies are also smaller but more plentiful which is actually a good thing just Samsung's Revenue accounted for 20 of South Korea's GDP which does lead to some economic instabilities when so much of an economy is dependent on the performance of one company Israel also attracts a lot of international companies from Europe and North America that have set up high-tech manufacturing facilities and research centers in the country to gain access to its small but very well-educated Workforce the amount of innovation that takes place in Israel has earned the region around Tel Aviv the nickname silicon Wadi which is the Arabic term for Valley and a reference to its Innovation which is on par with Silicon Valley the tech Innovation capital of the world unfortunately for other countries looking to replicate Israel's success it's not as easy as just becoming a global Center for Innovation and Technology Israel was only able to grow these industries through a program that rolled out once this economy was back on track that encouraged Innovation by having the government directly invest in promising Industries this was not a new idea by itself the reason Taiwan is the global Center of Chip manufacturing is because their government directly invested and supported companies like tsmc but Israel arguably did the same thing better government investment into for-profit institutions is always difficult because there is so much room for corruption to just end up with government funds been given to people that pay the right bribes Israel is not immune from corruption and during the period of economic recovery the government was trying to get the people to just trust their own currency so trusting them to responsibly invest in Private Industry was a bit of a stretch the solution I ended up with was a hybrid approach where private investors were encouraged to fund businesses in Israel with their own money and in return they would get generous tax concessions and zero interest rate loans from the government to make their money go further this meant that investors were still risking their own money so they wouldn't use it irresponsibly but it also made Israel a very attractive place to invest and start a business the best part was that since these loans got paid back the Israeli government effectively built out its Advanced Industries for no cost to them whatsoever in the 1990s the government expanded this strategy to leverage the technical expertise they got from almost a million former Soviet scientists engineers and doctors who moved to Israel after the collapse of the union we have already spoken about the benefits of skill migration just last month so I don't want to repeat too much here but just looking at the population charts of Israel you can actually see this inflow of some of the most skilled workers in the world the state of Israel did not have a lot of advantages and it has overcome a lot of challenges in its Short 75e history as a country and again this is ignoring all of the geopolitical issues that I couldn't even hope to scratch the surface of in a single video the fact that despite these challenges it has been able to become one of the most prosperous economies in the world is a fantastic sign that even countries facing severe challenges today have a hope of making a better future for their people with some good economic management okay now it's time to put Israel on the economics explained National leaderboard starting with size Israel has a GDP of 488 billion dollars which makes it the 29th largest economy in the world falling just behind Ireland and Norway it gets a 7 out of 10.
while being far from a trillion dollar economy its output is only spread out over 9. 5 million people so GDP per capita is an impressive 52 000 which puts it ahead of countries like Canada Germany Japan and even Hong Kong it is the 15th most productive country in the world but it's still a fair way behind countries like the USA and extreme outliers like Luxembourg so it gets an 8 out of 10. stability and confidence is a difficult one to place because of the aforementioned geopolitical issues that will inevitably be on anybody's Minds when they are doing business with Israel in the past three decades especially the country has been able to reshape that image and people have a lot more confidence investing into it but for now it gets a 6 out of 10 which to be clear is not bad at all growth has been very strong thanks to everything we've explored in this video it has an average annualized growth rate of just under seven percent which is in line with some of the fastest growing economies in the world in just the past decade the country has almost doubled its output giving it a score of 9 out of ten finally industry this is where Israel really shines it is fully leveraged its population to create a diverse selection of Highly value-adding world-leading and globally important industries doing everything from cutting and trading diamonds to producing state-of-the-art computer chips its economy is however still relatively small compared to the true industrial superpowers so it gets an 8 out of 10.
altogether that gives Israel a very respectable average score of 7.
