Israel’s high-tech transformation

A country in a semi-permanent state of war hardly sounds promising for investors. But Israel is worth a look. It has “transformed itself from a semi-socialist backwater into a high-tech superpower”, as The Economist puts it.

An overdose of public spending and money printing in the early 1980s sent inflation rocketing to 950%. Politicians finally bit the bullet, slashing government spending, deregulating the economy and bolstering the central bank’s independence. Sound management continued, with an emphasis on reining in spending, keeping inflation low and debts manageable. The state’s share of the economy has dwindled from 56% in 1988 to 43% now.

An influx of Russian Jews in the early 1990s boosted the working-age population by 15%, says Jordan Weissman on, while a state-owned venture capital fund helped trigger a technology boom by encouraging foreign investors to create venture capital funds in Israel and promising to match part of their input.

The focus on survival has also spurred the development of advanced technologies, says Martin Spring in his On Target newsletter. Israeli “military technology is superb”, notably in cyber warfare. Israel produces more high-tech start-ups relative to its population than any other country.

Meanwhile, thanks to a major discovery in 2009, Israel will soon be self-sufficient in natural gas. The economy “has become a formidable force”.

Investors can gain access through some US-listed stocks. Among those worthy of further research, says Spring, are Teva Pharamaceuticals (TEVA); its rival Perrigo (PRGO); ClickSoftware Technologies (CKSW); Check Point Software (CHKP) and EZchip Semiconductor (EZCH).