Part 1 covered the irreplicable factors of economic growth that were critical in the development of the start-up nation of Israel. Part 2 will instead cover factors driving Israeli growth that can be duplicated by other nations aspiring to emulate the Israeli Economic Miracle.
In 1985, after struggling with hyperinflation and realizing that it would lead to ruin, Israeli leaders came together to slash government spending and sever the legal linkage between wages and the cost of living. This reform completely turned around the Israeli economy and GDP, with results that speak for themselves. See below:
The high levels of human capital found in the highly educated Israeli population paired with some of the world’s highest levels of research and development funding resulted in massive technological development occurring soon after 1985. This burgeoning tech industry, however, was stifled by regulation and lack of investment capital. To facilitate the growth of the Israeli tech industry, the Israeli government essentially deregulated venture capital and start-up financing to induce economic growth previously impossible. This deregulation encourage entrepreneurs to do more and innovate more. After this initial deregulation of venture capital, Israel continued to deregulate industries which the government recognized as high-growth potentials. This was a successful lesson in showing how deregulation of industries in which a jurisdiction has a natural comparative advantage can showcase the possibilities of human innovation.
State-Backed Venture Capital: BIRD and Yozma
Seeing a dearth of funding for many start-ups in the 1980’s, Israel’s government began providing state-backed investment funds for businesses and start-ups. The first of these programs was called the Binational Industrial Research and Development Foundation, or BIRD, and was a joint endowment between Israel and the US, which matched Israeli technological developments with American firms for marketing and distribution.
BIRD was soon supplemented by another, larger program called Yozma. Although BIRD was helpful in funding entrepreneurs, it could not provide the business acumen needed make a start-up successful. Yozma filled this gap by providing not only venture capital financing and equity investments, but active management participation and guidance from experienced American venture capital firms. This program is in large part responsible for making Israel the nation with the highest number of start-ups per capita in the world.
Israel has been able to ascend among the most rapidly developing economies due to a combination of many unique and dynamic conditions as well as a number of easily replicable and intelligent government decisions. This model has reinforced the significance of fiscal austerity, the benefit of light regulatory burdens, and the importance of state-backed venture funds for small, poor jurisdictions to achieve rapid economic growth. Additionally, it has drawn light to the benefit of high-skilled, highly-educated immigrants, and the importance of catalyzing a culture that can support and inspire innovation and entrepreneurship.
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