Depending on how you look at it, Israel devotes up to a third of her resources to defending the country. In the past decade alone, Israel has fought an on-going was against internal Palestinian terror, fought a war in Lebanon, had to prepare for the Iranian threat, and more.

Contrast all that (+ the fall out from the Millenniumeconomic bubble  burst) with the fact that Israel’s economy has grown approx 5% pa on average since 2002. Staggering by most standards. As a mark of its success, in 2008, Israel was accepted into the OECD and the Financial Times upped its recognition of the Tel Aviv Stock Exchange.

Usually, peace leads to prosperity. An explanation for the dichotomy? In May 2007, CNBC  ran a series on the Israeli economy. A leader in formulating world economic opinion, the TV channel concluded that Israel has developed a strong model for economic growth, despite war rather than through peace.

How so? Well, some of Israel’s first high tech giants like Elbit were effectively spun out of the local defence establishment. Since then, if the current global industrial revolution is IT based, Israeli tech is a central part of that recent history. By way of proof, just look at the components in your mobile phone or the microchip enabling you to read this. All this coupled with massively improved fiscal and monetary policies from central government.

Israel’s economic joy of this decade has been led by technology transfer. It has been supported by arms sales (also tech based), real estate and the diamond industry. The inevitable consumer boom was the result of and not the trigger for the success.

So what is the effect on Israel’s economy of Palestinian and Hizbollah terror? I can identify 3 specific sectors.

1) SMEs – when people are called for reserve duty, it is the small enterprises which suffer the most. This was shown in stats after the 2006 Lebanese war, as individuals were called for 30+ days of service.

2) Certain regions of Israel suffer more from Palestinian terror. For example, in the south there is a refugee issue as one third of Sderot’spopulation have fled the constant shellings from Gaza. For example, despite the ceasefire, over 200 rockets and mortars have been launched since November 4th.

3) As resources are devoted to the defense sector, health, education and other social services are pushed way below recognised red lines. Only this week, yet another report was released showing how standards in maths and other subjects have dived again in high schools.

As a parallel, I leave my final word for the Palestinian economy: According to World Bank figures, it grew 5.5% annually from 1968 to 1999, just before  Chairman Arafat launched the second Intifada. In effect, once the Palestinians had been freed from Egyptian and Jordanian rule, Israeli support handed them one of the fastest growing economies internationally for over 2 decades. Today…..well, that’s for another posting.