The recent war in the Middle East has become a global focus. To be honest, I'm really curious about what's happening right now, but I can't bear to watch the footage. I don't want to talk about war, so I'm going to make two videos to talk about the economies of Israel and Palestine separately.
Actually, Palestine doesn't even qualify as an economy because it lacks many basic economic frameworks. Over the past few decades, it's really been suppressed by Israel. We'll talk about how that happened in the next episode.
On the other hand, from a purely economic perspective, Israel is a unique existence. So in today's video, I hope you can put aside your subjective views about Israel or the Jewish people and take a look at Israel's economy.
The Israeli-Palestinian region is arguably the most turbulent region in the world. You might think Israel is like this (shows a picture of war-torn area), but Israel is actually like this (shows a picture of modern city).
An Economic Powerhouse in the Desert
Its GDP per capita is as high as $55,000. Look at its neighbors, Turkey, Iraq, Jordan, they are not even in the same league. Even the wealthy Saudi Arabia is crushed by it. It even surpasses the UK, Germany, and Japan, approaching the United States. It's a very special product of a very special historical context.
So how did the Israeli economy go through all this? First, let's quickly review the historical background of Israel.
The entire area of present-day Israel and Palestine is called the Palestinian region. This place was ruled by Jews more than 2,000 years ago. In the two thousand years since then, it has undergone various dynasties. After World War I, the area was taken over by the British. At that time, it was mainly inhabited by Arabs, accounting for three-quarters of the total population, while Jews accounted for about 13%.
At that time, the Jews started a wave of Zionist movement, wanting to establish their own country on this land. Coupled with the Holocaust in Europe and various other political reasons, Jews from all over the world flocked to the Palestinian region. In 20 years, the number increased eightfold. By the end of World War II, the Jewish population had reached 600,000, accounting for one-third of the local population.
With so many Jews pouring in so quickly, the Arabs who originally lived there were definitely unhappy, leading to escalating violence between the two sides. After World War II, the British couldn't control it anymore. They simply left this mess to the newly established United Nations.
The United Nations thought it would be a good idea to divide them into two countries since the Jews and Arabs were always fighting, each in charge of one piece of land. So the UN passed Resolution 181.
As for how to divide it, we'll divide it like this (shows a picture of the partition plan). You see, this division looks like a puzzle, doesn't it?
The Jews were certainly very happy with this partition plan because, first of all, the international community recognized that they could establish a state and gave them such a large piece of land. So they readily accepted the plan and declared independence in 1948, establishing the State of Israel on the spot.
But the Arabs were firmly opposed. You have to know that all around Israel are Arab countries, like Egypt, Iraq, Jordan, Syria, Lebanon, etc. The day after Israel was founded, these Arab countries began to attack Israel, starting the First Middle East War.
Unexpectedly, the Israelis were really good at fighting. Coupled with the secret support of Jews internationally, including the United States, the two sides finally ceased fire in 1949. Israel actually controlled more land than the original UN puzzle-like plan.
During the war, about 700,000 Arabs were displaced. The Arabs also call this exile "the Catastrophe". And this war also opened the prelude to the conflict between Israel and the surrounding Arab countries, which continues to this day.
Let's take a look at Israel's economy at this time. It had just experienced the Holocaust and World War II, and then the First Middle East War. It can be said that it lacked nothing but enemies.
So what economic cards did it have to play at this time? In terms of natural resources, although Israel is also in the Middle East, not far from those oil-rich countries like Saudi Arabia and Iraq, its natural resources are very scarce. It has always been an importer of fossil fuels. It was not until around 2010 that the discovery of some natural gas improved the situation. Water resources are also very scarce.
In short, the Israeli economy at that time was basically on the verge of collapse, a very, very difficult post-war reconstruction. So everyone's goal was to survive.
Two Trump Cards
But in fact, Israel still had two cards in its hand, which I deliberately didn't mention just now. It can be said that these are the two economic cards that changed its national destiny, two golden cards.
It was not US aid. At that time, the US gave Israel the most basic material supplies, unlike the vigorous support the US gave to South Korea at that time.
What are these two golden cards? The first is war reparations from the Germans. In 1952, West Germany and Israel signed a compensation agreement, which stipulated that West Germany would pay a total of 3 billion marks to Israel over the next 14 years.
What is the concept? This is equivalent to more than four-fifths of Israel's GDP in those years. Note that this is not four-fifths of government revenue, but more than four-fifths of the national GDP. Although Israel's GDP was indeed relatively low at that time, it highlights the importance of this compensation. Israel can use the money to buy supplies and basic production materials in the international market.
Its second golden card is new immigrants. Every year, Israel has 30,000 to 70,000 Jews coming in. They didn't come empty-handed. They brought their families and all their belongings and property to Israel. It is estimated that this part of the property is on par with Germany's reparations.
These two golden cards made Israel not short of money when it was first founded. The average annual GDP growth rate exceeded 10%, and some decent industries have also developed. For example, the textile industry has become its pillar industry and the second largest export industry.
Do you know what its largest export industry is? I tell you, it is a global leading industry developed by Israel over the years. I guess you wouldn't have guessed it in a hundred times. It is diamond polishing. Now, the three major diamond processing centers in the world are Belgium, India, and Israel. This is a little piece of trivia.
The Yom Kippur War and Economic Crisis
Just as everything was developing smoothly and Israel felt that it was about to emerge from the shadow of war, a blow came. In October 1973, another war broke out between Israel and Egypt, Syria, and the Arab countries behind them. This war can be said to be the most intense and largest-scale war ever fought between the two sides. It later evolved into a confrontation between the United States and the former Soviet Union. This was the Fourth Middle East War, known as the Yom Kippur War.
Why is this war important? Why am I taking it out to talk about it separately? It's not just because of its scale, but because of some of the effects it brought in its wake.
You think about all the Arab countries in the Middle East, all oil tycoons. They were very unhappy with the US's blatant support for Israel, so they led OPEC in imposing an oil embargo on Israel, the US, the UK, and Canada for a year. During this period, global oil prices soared three times, triggering the world's first oil crisis.
Then six years later, the Iranian Revolution triggered the second oil crisis, and the world fell into very serious inflation. The United States and the United Kingdom experienced their worst inflation in decades, reaching about 10%.
As for Israel, it lacked oil in the first place, and Arab countries imposed an oil embargo on it, so its inflationary pressure was even greater. Coupled with the fact that it spent so much money fighting wars, where did the money come from? It can only borrow and print money. So its inflation rate reached 450% in 1984. That is to say, prices would more than quadruple every year, which is similar to Venezuela now.
This hyperinflation is certainly a devastating blow to the economy. So the decade after the Yom Kippur War is also known as Israel's lost decade.
Smart friends may have noticed that it's only called the lost decade, not 20 or 30 years. Why? It means that after the 1980s, Israel was no longer lost, it stood up. This brings us to a key figure in Israel, Shimon Peres.
Shimon Peres and Economic Reforms
This man can be said to be a very legendary figure in Israeli politics. He may not be the most dazzling one, but he can be said to be one of the few who has done the most. He was born in 1923 and has been active in Israeli politics all his life, jumping back and forth in key positions such as Minister of Defense, Minister of Foreign Affairs, and Minister of Finance. He is more famous for his diplomatic skills, successfully persuading the United States and France to buy a large number of arms from him.
And it was during Israel's lost decade that he served as interim prime minister three times. Whenever there was something wrong, whenever someone was needed to hold the fort, Peres was called upon. You see, in 1984, inflation was already so high that if it wasn't dealt with, it might be heading straight for 1,000%. So Peres, as the firefighter captain, became the Prime Minister of Israel again.
After he came to power, he immediately implemented a series of very determined economic policies. Let's take a look.
First of all, he strictly controlled government spending and restricted government borrowing. Secondly, he made the Bank of Israel completely independent. Of course, the Bank of Israel existed before, but it had to listen to the government to some extent. After Peres's reform, the central bank became independent. You don't need to listen to the government, you only have one goal, which is to control inflation.
You see, these two things, limiting government spending and the central bank's complete independence, should be familiar to those who follow our channel. These are very smart and very effective ways to control inflation. But what makes Peres so great? What makes these things so difficult? It's difficult because someone has to dare to propose them and be able to implement them.
Let's just say that the government needs to drastically cut spending, right? Whose spending are you cutting? Whose spending are you cutting? That's why these two things, although definitely good for the Israeli economy, will face enormous pressure within the government in the short term. This is also why at this critical moment, we need an old hand like Peres to hold the fort.
Moreover, the old man was really ruthless and very decisive in his work. The government's spending cuts were directly halved, which resulted in Israel's government spending to GDP ratio being cut in half from 280% in three years after 1984. Government debt has also been on a downward trend since then.
You see, we have looked at the economies of so many countries. Is it rare to find that after the 1990s, government spending is getting less and less, and less money is borrowed? The Bank of Israel also directly raised interest rates to 100% to combat inflation.
In addition to these two moves, Peres also persuaded the trade unions to carry out price controls and wage restrictions together. He also let the local currency depreciate to be more competitive in the market. After this set of combination punches, Israel's hyperinflation was brought down to less than 20% within two short years. It was a miracle, and it laid a very important foundation for the subsequent development of the Israeli economy.
Later, Peres also facilitated the Israel-Jordan peace treaty in 1993, as well as the historic Oslo Accords between Israel and Palestine. Although peace did not last long, his contribution to Israel was still enormous.
In 2007, Peres, 84, was elected the ninth president of Israel. Seven years later, he stepped down. The last of Israel's founding generation has only now ended his nearly seventy-year political career.
Let's get back to the Israeli economy in the 1980s. It had just curbed inflation, which was certainly remarkable, but stabilizing it didn't mean developing it. As we just saw in the curve, it's not just about central bank independence and government spending cuts.
Embracing Innovation
First of all, Israel was also doing what the world was basically doing in the 1980s, which was privatization and marketization, engaging in a market economy. Privatization will definitely release a lot of production capacity. This is very conventional. But this is not enough for Israel. If you just rely on free competition, you may not be able to compete with other countries. You still have to have your own characteristics, your own trump card.
So the path chosen by Israel is innovation. When you hear this, you might think, which country doesn't attach importance to innovation? Which company doesn't talk about its own innovation? This word has long been overused. I tell you, Israel's emphasis on innovation is, to put it mildly, really unusual.
Israel is known as the Silicon Valley of the Middle East. It has the highest number of startups per capita in the world. The amount of venture capital per capita is 28 times that of the United States. Its number of listed companies on Nasdaq is second only to the United States and China.
How did it do it? In fact, at the very beginning, the Israeli government had a very simple idea. I will encourage young people to start their own businesses, and I will give them money or interest-free loans. The Israeli government made such a big wave of investments in 1991. At first, it was vigorous and promising. But unexpectedly, within a few years, these startups all died out.
Later, the Israeli government asked around and finally realized that it was not enough to have initial funds, and that there needed to be rounds A, B, C, D, E, F, and G. The government couldn't just keep pouring money into it. It was also tight on its own. Besides, the government did not have the ability to screen out which ones were good and which ones were not. This was indeed too difficult for the government.
So later they figured out that I need to create a very good business environment, able to continuously screen and invest in these good startups, which requires driving the development of the entire investment industry.
You might need those excellent European and American companies in the international community to invest in us and drive us. Look how beautiful the idea is. You say attracting professional investors from overseas. Which country doesn't want to? But the question is, professional investors overseas are very demanding when it comes to returns. You think about Israel at that time, having just experienced hyperinflation and facing the risk of war everywhere. Moreover, at that time, there were a lot of investment opportunities internationally, like Mexico, Southeast Asia. So who would invest in Israel if they had nothing better to do?
To put it bluntly, you have to show enough sincerity to get these international investors to send their money. Therefore, after careful analysis, the Israeli government launched a project in 1993, which can be said to have changed its national destiny. It is called Yozma. The word means "initiative" in Hebrew.
The government has allocated $100 million in funding, of which $20 million will be invested directly in some high-tech enterprises. The remaining $80 million will be divided into 10 parts to establish 10 funds, each with an initial amount of $20 million. Here, the government's $8 million accounts for 40%, and the remaining 60% is foreign capital, which is $12 million.
In order to attract foreign investment, the government has really offered explosive preferential terms. As long as you participate in our Yozma project and make a profit, not only can you take away your 60% profit, you can also buy the government's 40% stake. I will only charge you a little interest. And if the investment loses money, the government can guarantee your principal.
For overseas investors, this is like pie in the sky. Why is the government willing to pay such a high price? It is certainly not for the returns on those investment projects, but more for attracting these high-quality overseas investments to drive the development of the country's investment and innovation industries.
As the saying goes, "You can't catch a wolf without letting go of your child." Israel's sincere Yozma project has been a great success. Of course, there are some background and environmental factors at play here, and it certainly can't be entirely attributed to the government. We'll talk about this later. But what was the result? It was that Israel's entire entrepreneurial economy was quickly driven up.
Since then, the government has added second and third phases of investment. Among the 10 funds in Yozma Phase I, there are still 6 with annualized investment returns of more than 100%, doubling every year on average. You think about the news among overseas investors, the annualized return of 100% immediately attracted a large number of investors to flock to Israel. From 1992 to 2000, the number of VC funds in Israel increased from 20 to 513, and the number from banks increased from 1 to 28.
Now, Israel has more than 6,000 startups, basically all high-tech companies in a certain niche. After seeing the gears start to turn, the government, as promised, began to withdraw from 1998 and sell its stake.
At this point, some friends may wonder, you say that Israel is technologically advanced and has many startups, but why do I feel like I haven't heard of any Israeli technology giants? Let me give you a few examples.
A typical success story is the Israeli chip company Mellanox, which we talked about when we were talking about Nvidia. In 2020, it was acquired by Nvidia for $69 billion. In 2007, Mobileye, a technology company that makes self-driving cars, was acquired by Intel for a whopping $153 billion.
Most of them are toB technology companies, that is, dozens of people develop a very powerful technology, and then sell it to Microsoft, Google, for hundreds of millions or billions of dollars. This is also why we rarely hear about Israeli companies. Because those companies with great potential to become giants will soon be bought and owned by those giants close to the market.
In addition, Israel has such a good relationship with the United States that American giants love to buy Israeli technology companies. After all, Israel is relatively far from the market, so the cost of developing the C-end on its own is relatively high.
Investors in Israel are all professional investors. They will certainly not lose money, so it is more cost-effective to sell to large companies. For example, a few years ago, there was a very famous toC company in Israel called Waze, which made GPS. It was somewhat similar to software like Google Maps and AutoNavi. It was developing very rapidly at the time, but was later bought by Google for $13 billion. Both parties were very happy.
Of course, the reason why Israeli scientific research is so strong is that the government has indeed put in a lot of effort. The simplest, crudest, and most direct is that it is really willing to spend money. Look, this is the ratio of R&D investment to GDP in various countries.
South Korea ranks second with 5%, while Israel is 5.9%, not only ranking first, but also leaving South Korea far behind. Even in such a desert area with a severe shortage of water, its agriculture is doing very well. It has developed a very advanced irrigation technology. You all use sprinklers, and I will water them drop by drop, saving more water than you, and the crops will grow better.
Whether it is the Yozma project to drive the investment industry or the government's investment in scientific research, it actually only solves the problem of money. There is another key issue that we skipped just now. This is actually what I think is a more fundamental driving force behind Israel's economic development.
It is people. Jewish culture has some characteristics, such as attaching great importance to education and working hard. This is very similar to our East Asian culture. So education in Israel is also very developed, and there are many good universities. We will not elaborate on this here.
But it's not over yet. The key is that what is different from many East Asian cultures is that its culture also attaches great importance to doing business. It highly admires risk-taking. Jews have been a minority in most parts of the world for nearly two thousand years and have even been ostracized by society. So most of the time, they can only rely on themselves, doing business on their own and being very united. It is possible that only this part of the people can slowly survive.
Don't underestimate the power of this seemingly empty Jewish culture. For example, in many Chinese families, what they have been telling their children since childhood is that you have to study hard and find a stable job in the future. I don't expect you to be rich and honored. Or that you have to be the pillar of the country and serve the society and the motherland.
But if you live in a Jewish home, your mother might have been telling you since you were a child that when you grow up, you have to do business, you have to make a lot of money, you have to buy low and sell high, and don't work for others. And I used to have Jewish colleagues who said that's what his mother instilled in him from a young age.
You think, this kind of subtle influence from childhood actually has a great impact on a person. Then what will this lead to? It's that all talents, all elites, will put starting a business and doing business at the top of their list. Of course, this kind of profit-seeking attitude may indeed be disgusted by many people. But it is true that there are many successful people in the secular sense.
For example, in 2014, the proportion of people earning more than $100,000 a year in the United States was 19%, while among Jews, the proportion of people earning more than $100,000 a year reached 44%, ranking first among all religious groups. This is still in the United States. Let's look at Israel. You think that the Jews can finally unite. Then their desire to make money and take risks, coupled with the government's boost, will lead a large number of social elites to embark on this path, and it will be unstoppable.
Moreover, this is not just about the existing talents in Israel, but Jews from all over the world will continue to return to this place. Israel's Law of Return states that Jews from all over the world have the unrestricted right to return to Israel and become Israeli citizens.
Speaking of this, there was another critical time, which was the collapse of the Soviet Union in the early 1990s. This led to the influx of about 1 million Jews into Israel, accounting for almost 20% of the population at that time.
And it's not over yet. Not only does Israel have a large number of new immigrants, but it is also particularly fertile. When I was shopping in the United States, I often saw a group of Jews, a father, a mother, and then a row of children, pushing a row of strollers. Then they all wore that little round hat called a kippah. I wondered at the time, you said what else to buy? What kind of shopping experience is there? This is purely just walking the baby.
And there's another example. When I first started working, there was a French Jew next to me. His family had a total of nine children, all raised by his mother. I was very shocked at the time, and then he told me that this is very normal among Jews. Of course, I would like to emphasize that this is an individual case, just that I was very shocked. Of course, it's not that every family has eight or nine children.
Looking at the data, Israel's fertility rate is 3.0, which means that each woman has an average of three children. This is far ahead of all OECD countries. In most developed countries, there are not many with more than two.
Look at this. This is the population structure of Israel. Look at this beautiful isosceles triangle, such a strong number of newborns.
The Challenges of Haredi Jews
Speaking of people, let's digress a little. The Jews in Israel are actually divided into different denominations, such as secular Jews, traditional Jews, and those ultra-Orthodox Jews. What they believe in is not exactly the same. Among them, the ultra-Orthodox Jews are also called Haredi. In terms of economics, they have also brought a lot of costs to Israel, and they may also be a hidden danger in the future.
This kind of Haredi, you can recognize them at a glance when you walk on the street. The men wear black clothes all year round, with a big black hat, a long black coat, black pants, and a white shirt. They mainly study the classic Jewish scriptures. In theory, men can be completely out of work.
So more than half of the Haredi in Israel are unemployed. It's really unbearable, so women go out to work and earn money, while men continue to study the scriptures. You can imagine that their economic situation must be very bad. More than half of them live below the poverty line.
And they also have reductions or even exemptions from military service because I have to study the scriptures. And the key is that the Haredi have a high status in the Jewish community from a religious point of view, so it is not easy for the government to manage. Economically, the government still has to allocate 3 to 4 billion US dollars in aid to them every year, specifically to fund their study of the scriptures.
And these Haredi people are particularly good at giving birth. We just said that Israel has a high fertility rate. The Haredi are the main force. Basically, they have five or more children in a family. So now the Haredi account for about 10% of Israel's population, and it is estimated that this figure could reach 25% in 50 years. Then there may be more people studying the scriptures in the future.
So you see, from an economic point of view alone, the Haredi do pose a huge burden on Israel. And there are often conflicts between them and the secular world, which is also a very thorny issue.
The Role of Military and US Aid
Let's go back and talk about a topic that cannot be avoided when it comes to Israel, which is its war and military, including US aid. This part is a bit sensitive, so let's just talk about it based on some objective data.
First of all, everyone must be curious about how much the Americans have actually helped Israel. We all know that Israel is one of the United States' closest allies. This is the military and economic aid the United States has given to Israel over the past 70 years.
You see, for example, in the 1970s and 1980s, when the war in the Middle East was at its worst and inflation was very high, the United States would give Israel more than $160 billion in military aid a year. And it's not just military aid. Because Israel's economy was not very good at that time, so from 1975, the United States also provided a lot of economic aid to Israel.
It was not until after 2000 that Israel felt that its economy was almost on its feet, and the United States only had military aid left, about 3 to 4 billion US dollars a year. So since World War II, all this aid adds up to more than $150 billion that the United States has provided to Israel.
Of course, some say it's $200 billion. Anyway, Israel is definitely the country that has received the most US aid of all countries. So it's impossible to say that Israel's success is entirely on its own and not on the United States.
But it's not that Israel is fighting a war and the United States is paying for it. Israel itself has also spent a lot of money. You see, for example, in 2022, every country in the world spent about 2.3% of its GDP on the military. The United States definitely spends more, reaching 3.5%, which is 50% higher. Israel's figure is 4.5%. And you know what? In the 1970s, when the war in the Middle East was at its worst, how much could Israel spend? 30%. That is to say, 30% of a country's annual output was spent on war.
You say, what impact will this have on the economy? Then you can understand the inflation later. Then this money must have been printed and borrowed, right? Such a large war investment, coupled with US military aid, has indeed allowed Israel to reap some benefits in the military.
For example, its own weapons have gradually developed, and then it has become a business, and it has begun to sell weapons all over the world. Look at this, this is Israel's arms exports. In 2000, it was $2.5 billion. By 2020, it has risen to $8.3 billion. It has skyrocketed in the past two years. In 2022, it even reached $12.5 billion.
We will not elaborate on the specifics of Israel's military might. It is not my strength. But from a macroeconomic point of view, what is the advantage of having such a large arms industry? It's not because of its size. After all, exports of more than 10 billion only account for less than 10% of total exports.
The key is that the arms industry, the military industry, is a counter-cyclical industry. You think, generally speaking, the more turbulent the world is, the worse the economy will be. And if it's turbulent, Israel is probably not peaceful, and Israel's economy may be even worse. But at the same time, when there is turmoil, its arms industry may sell better.
So this kind of extremely strong counter-cyclical industry can help Israel hedge against economic fluctuations brought by its huge geopolitical risks. For example, in the past two years, the Russia-Ukraine War, the oil crisis, and the economic downturn, Israel's weapons have sold very well. Of course, if they fight a war themselves recently, that's another story.
In short, the military industry's help to Israel may not be as great as many people imagine, but it is indeed not small. And I tell you, the Israeli army happens to be a major pillar of its high-tech industry. This is about a very unique unit in its army called Unit 8200.
You know, the intelligence service is world-renowned in the Israeli military. And a very important branch of its intelligence service is Unit 8200. What the intelligence service does may be a bit like hackers. You have to collect a lot of intelligence in networks all over the world. But how they dig up intelligence is not what I want to talk about. The key thing I want to say is the people in it.
You think about intelligence work, which can be regarded as a country's top secret. During their service, the identities of these people are definitely highly confidential. The photos of them in the army have to be face-swapped. But you know what? The main personnel in this unit are basically young people between the ages of 18 and 21.
This unit is about the size of several thousand people. It's like everyone goes in and serves for a few years and then comes out. It's like a running banquet. So it slowly actually formed a very strict and very complete selection mechanism. Basically, it is to select the best group of people from among high school students across the country through annual or semi-annual tests. Of course, they have to be Jewish.
They even have a mechanism to lock in some particularly outstanding geniuses in advance, which is to find those potential 14- or 15-year-olds and give you three years of special training in programming or some basic hacking knowledge. You think, the elite Unit 8200 has tens of thousands of alumni.
These people's IQ goes without saying. The key is that they have also received militarized management training and have formed a very cohesive group. The status of this group of people in the technology circle is very high. And you think, they are only in their early twenties when they retire from the army, and they will become elites in various industries. A large part of them will start their own businesses.
So don't think they are small in number, but the companies they create are all very powerful technology companies. For example, the well-known Waze that was bought by Google, and another very famous website company called Wix, which is listed on Nasdaq. Its founder also came from Unit 8200.
In short, Unit 8200 is not just a simple intelligence department. It has also become a talent selection and training mechanism in Israel.
In fact, what we see in the news, including today's analysis of a lot of economic data, is who is fighting whom, who is allied with whom, and it feels like a military game. But when you look up the information, you can see a lot of live videos, interviews, and photos. You can really see their helplessness, helplessness, and even hatred in their words and eyes. It's really an indescribable sadness. You can understand that both sides are indeed feuding, but for more innocent civilians, I can only say that I hope peace will come soon.