Long before there was a company called Enron which cooked the books and made a liability look like an asset, there was a country called Israel which cooked the books and made a Third World economy look like a First World economy. Enron is gone now but Israel is around and her economy is still talked about in glowing terms despite the fact that many people know Israel has no economy worth talking about.
Politicians lie about their economies, and the economists they hire go along with the charade. What makes it possible for these two to have a charade in the first place is that a nation’s economy is complex, and ordinary people do not ask to be told how it works but ask to be told they are doing well or will be doing well soon.
It will not be possible to give a complete picture of a nation’s economy in one article and I shall try to do it in several. For now I must explain why I call Israel’s economy a bikini economy and that’s what this discussion is about.
I began to follow the economy of Israel decades ago and right off the bat I realized that something wasn’t kosher in the way that they reported on it. I did not give it a name then but later on when the Brazilian bikini became the craze, I saw the similarities it had with the Israeli economy and called the latter the bikini economy.
What distinguishes the Brazilian bikini is that a minimum amount of material goes into making it yet it sells at an extremely high price. The reason the Brazilians give for the high price is that a great deal of art and much ingenuity go into the design of the thing. To understand how this resembles the Israeli economy, we need to acquire an overall view of a national economy’s architecture.
There are many economies in the World and they are all different from one another. Therefore nothing that is said about one can be regarded as ideal. Still, we must begin somewhere and so I regard as ideal an economy that has the following characteristics: It is made of one third industry and two thirds service. To be varied and balanced, the industrial part is made of six roughly equal sectors. They are agribusiness, leather & textile, chemicals, transport & machinery, construction & utilities, metal & mineral mining.
About half of what goes into these industrial sectors is manufacturing. For example, agribusiness is both agriculture and food processing. The food processing part is manufacturing but not the agricultural part. The same principle applies to the other five sectors, and this means that an ideal economy must in theory have a manufacturing base that makes up at least 15% of the Gross Domestic Product (GDP). Less than that and the economy must be viewed as a service economy.
The countries that have little or no natural resources depend on manufacturing more than others to export and earn the foreign currency they need to pay for the imported raw material. In countries like Singapore and Taiwan, for example, manufacturing makes up more than a quarter of the GDP.
You can have a country that is populated with first class bankers, lawyers, doctors, nurses, musicians, chefs, teachers, retailers and so on, all of whom belonging to the service part of the economy but if you don’t have the industrial base or the equivalent thereof in terms of foreign currency earner, your country will look like a Third World economy. This is because your ability to produce or to buy industrial products always determine the quality of your services.
What makes a First World economy and gives a high value to your services are the journeymen, technicians, engineers and scientists who design and produce the consumer goods that the public wants, and the machines that the service industries need. Without these people, a world class brain surgeon operating in an economy that is underdeveloped will not be paid more than say, a doctor in Sri Lanka if only because that economy cannot provide him with the modern equipment he needs or the foreign currency to buy the equipment from abroad.
Armed with this knowledge I looked at Israel’s economy which may be home to first class bankers, lawyers and violinists who emigrated to Israel from other countries, and I asked what about the industrial base? In the Nineteen Sixties and Seventies, they said that the backbone of Israel’s manufacturing was food processing.
I compiled what processed foods they produced in Israel and compared it to that of their neighbor, Egypt. I found that Israel’s production ranged between one part in fifteen to one part in twenty what the Egyptians were producing which meant that the contribution to Israel’s GDP in dollar terms should have been 5% to 6.5% what the Egyptians were showing. Instead, the Israelis had given a value to their manufacturing of processed foods equal to 80% that of Egypt. This was more than a twelve fold exaggeration.
I searched for a reason and found that the excuse they gave was that Israel processed kosher food which is something so unique, it has a value higher than anything else. Just like the Brazilian bikini, see. But wait a minute, the companies that produce the kosher foods in Israel are branch plants of those that produce the same products in New York. Yet the contribution of these to the American GDP is a fraction that of Israel. Oh yes, there is that too. Well, you may look at it the following way, producing kosher food in America is not like producing kosher food in Israel. Get it? Oh yes, I get it all right.
A few years later, as they could no longer expand the food processing sector in Israel, they showed the expansion to the GDP as coming from the textiles. Here they showed a contribution to the GDP in dollar terms that was higher than Egypt’s even though their actual production was one twentieth that of their neighbor. The excuse they gave this time was that Israel produced and exported not textiles but fashion. Get it, f-a-s-h-i-o-n. Oh Yeah! I get it.
So I looked for Israeli fashion in North America and found none. I turned to a friend who was traveling to Israel, asked him to buy me something fashionable and gave him enough money to pay for a suit. He came back with a T-shirt made of material that looked like a fishnet. The whole thing weighed maybe an ounce or two, probably less than a Brazilian bikini. I never wore the darn thing, and so much for Israeli fashion.
In the Nineteen Eighties, Israel had a construction boom financed by the Americans to move settlers into Gaza and the West bank of Palestine. For this they needed cement which is a component of the chemical sector. At the same time they expanded the pharmaceutical and petrochemical subsectors. The net result was that they climbed from one tenth to about one fifth the level of Egypt’s production in these subsectors. However, the Israelis showed a contribution to the GDP in dollar terms that ranged between twice and three times that of the Egyptians, a twelve to fifteen fold exaggeration.
I looked for the excuse they gave here and found that they were saying they produced surgical gloves with latex so thin, the value added to crude petroleum was 30 times the price of the raw material. Given that everywhere else in the World the added value never exceeds 8 times the price of the raw material, they were better in Israel than everywhere else in the World. So I looked for bikinis made with Israeli latex but found none. Not even in Brazil they wore such things.
And now they say they are into the high-tech business. So, what is it that they make? Well, they don’t make many high-tech finished products that you can buy and read: "made in Israel" written on them. Instead, they say they fabricate custom-made, semi-finished products that go into someone else’s finished product or they assemble them into military equipment made mostly from parts that the Americans give them for free. And here, you have nothing with which to compare the value added, so you accept the value they attach to their products which you never get to see anyway because they are hidden. See how smart they are!
Well, you get the idea, it is a bikini economy made for a doll and sold at the price of a wedding gown for a princess. But who is buying?