High-tech propeling economy as Israel shifts to capitalist mode

TEL AVIV — Israeli start-up companies showed off their wares from behind sleek, futuristic booths adorned with state-of-the-art multimedia presentations.

Magicians and scantily clad young women promoted the latest high-tech products.

Representatives of some of the world's leading technology giants talked business behind closed doors. Indeed, 3Com, a manufacturer of computer networking systems, unveiled plans to invest $250 million in Israeli companies during the next few years.

The scene at Internet World '98, an information technology exhibition and conference held earlier this spring on Tel Aviv's exhibition grounds, was one that Israel's socialist founders probably couldn't have imagined in their wildest nightmares.

And the conference reflects a wider truth. Despite an economic slowdown this year, Israel has become a much wealthier country during the past decade — and analysts, economists and business people agree that the high-tech sector has helped generate the boom.

No company illustrates the changes more clearly than Check Point, a Tel Aviv-based network security software company. Founded in 1993 by three young programmers, the company is now listed on Wall Street — along with about 100 other Israeli companies — at a market value of about $1.5 billion. Industry analysts estimate Check Point has captured more than one-third of the world market for "firewalls," which are used for protecting computer networks from intruders.

Gil Shwed, the twentysomething founder and chief executive officer of Check Point, says it would have been difficult for the company to succeed in the 1970s.

"It is easier to succeed in high-tech today because the market is more liberal and open," and companies are able to raise money abroad, he said. "The possibility of linking up to companies across the world has helped us greatly."

Three main factors have driven Israel's entry into the global village, said Eli Nahum, head trader at Zannex Securities, which was established in 1994 as the first Israeli brokerage to provide comprehensive services for foreign investors:

*The worldwide technology revolution.

*The peace process, which — as the Arab boycott disintegrated beginning in 1993 — has opened Asian markets to Israel.

*The immigration, since 1989, of more than 800,000 residents from the former Soviet Union, which has boosted the number of consumers of high-tech products and has contributed brainpower to the workforce.

"These three factors allowed Israel to come very close to the developed world and shift away from the developing world," said Nahum.

Indeed, during the early 1990s, Israel's gross domestic product, the value of its goods and services produced by its residents, grew at about 6 percent a year. Incomes climbed to Western European levels, with GDP per capita reaching $17,000 last year.

As any visitor to Israel during the past few years knows, there are more and more products to buy and more shops in which to spend money. Shopping malls have popped up across the country, housing outlets of foreign chains — from Burger King to Blockbuster Video — that were previously unknown in Israel.

Meanwhile, during the past two years, the government's austere spending policy, along with high interest rates set by Israel's central bank, the Bank of Israel, brought inflation down to 7 percent last year, its lowest level in 28 years.

"The decline in inflation was the most dramatic change in recent years," said Nahum, "because without bringing down inflation you can't be a normal country."

But lowering inflation has created new problems. Unemployment rose from 6.7 percent in 1996 to 7.7 percent in 1997. Gross domestic product growth slowed to 4.5 percent two years ago, declined to 1.9 percent last year and is expected to remain sluggish in 1998.

The slowdown has prompted many business leaders to publicly lambast Prime Minister Benjamin Netanyahu's economic policies, even though international organizations such as the International Monetary Fund have given him fairly good marks.

Some business people admit the criticism is in part politically motivated — the lion's share of the business community backed the Labor Party's Shimon Peres in the last elections because of the increased foreign investment and improved economy brought about by the peace process.

Even Netanyahu's critics, however, openly welcome the government's privatization and deregulation program, which had stalled under the previous Labor-led government.

Last year, the government raised more than $2 billion from privatization. This included the largest-ever sale of a state-owned company in Israel — the sale of a 43 percent controlling stake in the country's largest bank, Bank Hapoalim, for $1.37 billion to an investor consortium headed by Ted Arison, a billionaire who owns Carnival Cruise Lines.

At the same time, Israelis were treated to some of the fruits of deregulation when the government broke the monopoly held by Bezek, the state-owned telecommunications company, over international calls. Rates fell as much as 80 percent after two competitors were granted licenses to compete.

All of these factors, said Ron Lubash, managing director of the Israel office of Lehman Brothers, the investment bank, have transformed Israel's economy.

"All of the basic parameters the economy was based on are now going through changes," said Lubash. "Dependency on the government has been reduced substantially."

Lubash, 40, was born in Israel but earned a master's degree in business from Yale and worked at investment banks in the United States. Since returning to Israel in 1993, he has been involved in about $7 billion of financing deals for Israeli companies.

Lubash believes that the economy will eventually settle somewhere between pure capitalism and a social welfare state.

The changes to Israel's economy, said one businessman, are captured in a joke told in Tel Aviv.

"Businessmen used to say that if you came to the country to do business 20 years ago, you needed to meet three people: the finance minister, Rafael Recanati and Shoul Eisenberg," he said, referring to the two tycoons who dominated the private sector.

"Today, if you want to do business, you need to meet 10 times as many people," he said, "and if the minister of finance is one of them, it's simply a courtesy call."