JERUSALEM (MarketWatch) -- The U.S. recession, already its longest since the Depression, has yet to die, but Israel's is already being eulogized, as the Jewish state unwittingly supplies America with sobering food for economic thought.
Last week, the Commerce Department reported a fourth consecutive quarter of negative growth, while in Jerusalem the Central Bureau of Statistics reported that the Israeli economy grew 1% in the second quarter after two quarters of shrinkage.
Not only did Israel's recession end earlier and begin later than most others, it was also milder, with its lone quarterly contractions measuring 3.2% and 1%. By contrast, the American economy shrank once by 5.4% and once by 6.4%.
It takes no economist to feel the renewed optimism. Customers crowd realty agencies, car dealerships, appliance stores and gourmet restaurants, while at Ben-Gurion Airport thousands flock every hour to vacations abroad. No wonder, then, that private consumption rose 2.7% in the second quarter after slumping 5.6% in the first quarter, while purchases of durable goods soared 19% after sinking 40% during the first three months. The burgeoning turnaround became so obvious that the July consumer-price index rose 1.1%.
Faced with all this, the Bank of Israel last week changed course after a year of monetary expansion, and pulled up interest rates 0.25 percentage point from their historic low of 0.5%. Gov. Stanley Fischer, the first among the world's central bankers to raise rates this year, and the first to cut them last year, now says the worst is behind us.
True, over the past two years unemployment has mushroomed to 8% from less than 6%, but the Israeli economy has clearly suffered less than others in this crisis, and whatever ailments it experienced were imported rather than self-produced. What, then, explains this defiance of the global trend, and what lesson, if any, does it hold for other economies?
Defying a global crisis
This is not the first time the Promised Land has defied a global economic crisis. It happened during the Great Depression and during the Bush recession in 1990-91, when waves of immigrants stimulated local consumption and construction, and it happened during World War II, when Britain used Palestine as a production center and shipping hub.
However, there was no such context this time around, as the previous decade's post-Soviet immigration had ended long before Lehman Brothers went under. Instead, Israel benefited from the kind of governmental prudence, corporate poise and middle-class caution that once, when they had yet to take root in Israel, were synonymous with American finance.
It's only been one generation since the Bank of Israel became independent, and less than that since it became illegal for the Treasury to breach a set budget deficit. Back when the two lacked such constraints, the former habitually printed billions and the latter spent them at will, thus feeding hyperinflation, which in turn obstructed investment and growth.
At the same time, the public gambled in a stock market where a banking cartel manipulated shares until the entire system - the stock exchange, the major banks and the public that abandoned its inflated money to their devices - collapsed.
That was Israel's equivalent of America's subprime crisis as well as the political and corporate dereliction that inspired it. That era and the painful recovery plan that ended it are recalled vividly by a whole generation of Israelis. No wonder, then, that this decade Israelis were much less likely to either manufacture or consume toxic financial assets.
Israelis had generally become suspicious borrowers moving in a marketplace governed by strict regulators.
This attitude began with the government itself, which halved the public debt, to 78% last year from 158% of GDP in 1986, while over the course of this decade shrinking the budget's share of GDP to 43% from more than 50% and reducing the budget deficit in 0% in 2007 from 5.3%.
With such leadership by example, Israeli regulators could proceed to establish financial prudence as a national value. While the American credit-card industry seduced retailers to borrow more and more for things they needed less and less, Israel's central bank tightened households' financial leeway by banning bank overdrafts. Since Israelis pay their credit-card deals not by writing checks but through automatic deductions from their bank accounts, this drastically reduced their ability to embark on shopping binges beyond their means.
This explains the Bank of Israel's confidence as it responded to the global crisis, which included not only its global leadership in expanding and tightening monetary policy but also its decision at the height of the crisis to buy $100 million daily to weaken the shekel and thus help Israeli exporters. Having helped to depreciate the shekel some 20% from a peak of nearly 3.2 to the dollar, the bank has now ceased the daily purchases, and the shekel began appreciating again.
The corporate side
Corporate Israel also traversed the crisis impressively.
Yes, there have been failures, like the announcement Sunday by real estate tycoon Lev Leviev that his holding company, Africa-Israel, is seeking to restructure its 21-billion-shekel ($5.52 billion) debt, or the Zim container-shipping company, which is now grappling with a 15% decline in its far-flung fleet's activity.
However, while affecting average Israelis who bought their securities, these companies' travails do not reflect, for better or worse, the Israeli economy's performance: Neither is a major local manufacturer or employer, and both got into trouble abroad, where Leviev bought American and Russian real estate on the eve of the meltdown and Zim saw international commerce plunge with the global economy.
The hard core of Israeli industry performed entirely differently, benefitting from its dominance by the technology, biomedicine and defense sectors, whose products remain highly in demand even in times as hard as these. Israel Aerospace Industries, the largest defense manufacturer, saw a 25% drop in first-half sales to $1.44 billion but remained firmly in the black with $50 million of net income, while software giant Check Point's /quotes/comstock/15*!chkp/quotes/nls/chkp (CHKP 27.83, +0.22, +0.80%) second-quarter sales rose 12% to $223 million, netting $75 million, and pharmaceutical trendsetter Teva's /quotes/comstock/15*!teva/quotes/nls/teva (TEVA 52.68, +0.27, +0.52%) sales in the quarter jumped 20% to $3.4 billion while net climbed 25% to $742 million.
Yes, not everyone fared as impressively, but this recession saw no Israeli equivalent of General Motors, a labor-intensive Godzilla whose insolvency affects the entire economy. It's been two decades since such a species last roamed the Israeli economic landscape, when holding company Koor, /quotes/comstock/11i!koorf (KOORF 25.00, +9.75, +63.93%) then Israel's largest employer and carrying a heavy debt burden, was sold to private investors who turned it around while presiding over the biggest layoffs the country had ever seen.
Does all this mean that Israelis have become more economically responsible than the meltdown's many protagonists, from the management of Bear Stearns to the government of Iceland? Of course not. Israeli real estate's 10.8% appreciation during the first half, the steepest rise in the world, serves as a reminder that a critical mass of gamblers is still out there, ready to dive into the unknown with millions strapped around their waists. The question is where their leaders are while they climb the diving board.
In the past, Israeli leaders not only failed to block such divers, they joined them. Now they stand in their way, in this case by raising interest rates, and therefore also mortgage prices, and in another case, after a large bank made particularly ill-conceived deals abroad, by forcing its chief executive to resign.
So, after some two decades of prudent economic leadership, most Israeli managers, regulators and households behave as if inspired by Benjamin Franklin's advice to work hard, save patiently, borrow responsibly and repay punctually, dictums that sociologist Max Weber later depicted as epitomizing the Protestant ethic that, as he saw it, gave rise to capitalism in general and American economic values in particular.
It remains to be seen to what extent America's current leaders will uphold the financial ethic that until recently was seen as their mighty economy's hallmark.
U.S. public debt is expected this year to reach 55% of GDP, roughly double its level a generation ago, and the U.S. budget deficit is expected to total $1.6 trillion this year and a cumulative $9 trillion over the next decade. Both threaten the dollar's future as the world's dominant currency. In addition, President Barack Obama is nationalizing ailing companies while demanding astronomic social spending without showing how it will be financed.
In sum, America seems headed in the opposite direction of the path Israel took from the economic delinquency of its youth, to the frugality that has now helped it emerge from a global recession almost unscathed.
Amotz Asa-El is former executive editor of the Jerusalem Post.
this (wall street journal digital network) outlet "marketwatch" has also featured some very anti 2nd Amendment articles, and I'm assuming they're quite liberal...Cass Sunstein liberals.
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