File this one under the list of “infrequently-asked questions.” This is an issue I’ve discussed extensively over at TGGP’s blog. Basically, here is the puzzle: Jews are among the most wealthy groups in America, with a median income close to $100,000 a year.
Naively, you might expect Israel to be about as wealthy. Isreal is, after all, a country filled with Jews. Yet Israel is far poorer than a hypothetical “Jewish-America,” and is also poorer than America in general. Israel’s wealth is a little difficult to parcel out due to the presence of a large Arab minority. Yet even if you assign an income of non-Jews of 0, you arrive at an Israeli per capita GDP of $36,000. By comparison, both Ireland and America are in excess of $45,000 per capita. Corrections for Purchase Price Parity correct for some, but not all, of this difference.
This is part of a general phenomenon. As Tino has calculated, virtually all hyphenated-Americans do better in America than their home country.
With respect to European countries, this makes sense. As has been argued elsewhere, America/Europe income differences are due in no small part to different taxation policies. Lower marginal tax rates do have long-term effects on standards of living, even if they don’t “pay for themselves.”
Figuring out what’s going on in Israel is a bit trickier. This country looks more free-market than European standards. There are two crucial issues here:
1) Trade is very low. For its given level of wealth, Israel has a very small export sector. For instance, it has about an eighth as many exports as Belgium, a country with an economy less than twice as large. This should come as no surprise—the largest determinant of trade volume is geography, and Israel faces a far rougher neighborhood than Belgium. This forces Israel to produce more products domestically, rather than specialize.
2) Israel is a low trust society. I caught a lot of flack for this in the comments, but I stand by this statement. There is an enormous literature tracing the effects of trust and cooperation on firm size and GDP. In general, where social trust and cooperation is low — corruption is higher, and firms tend to be small-scale organizations built on kinship links. Managers must actively monitor their employees, rather than being able to scale up.
Somewhat surprisingly, Israel stands out as a country with high IQ but low levels of trust. Some 56% of Israelis report that you cannot trust others, which is a figure comparable to other low-trust societies like South Korea or Italy. Think of Israel as a Mezzogiorno with nuclear weapons.
One manifestation of this is that there are very few large Israeli firms. Teva, a generic drugs manufacturer, is a notable exception. By contrast, high-trust Switzerland is home to several national superstars like UBS, Novartis, TAG Hauser, etc. Israel’s economy is dominated by small-scale firms, many of which are founded by people who formed close bonds in the IDF. Even in America, there are host of large Jewish-founded firms, like Google.
Of course, a lack of large, productive multinationals may play a role in explaining Israel’s relatively poor economic performance. Firms with scale and branding are able to tap into the tail ends of a “smiley curve” economy by focusing on the value-added activities of branding, design, and distribution. Smaller firms operating in heavily competitive industries, by contrast, earn few economic rents.
It’s in this vein I want to revisit Helen Thomas’ comments that the Jews should return home. Set aside the Ashkenazi bias implicit in this question (where would Jews from or Iraq go?). A simple calculation would suggest that a mass relocation of Jews to other Western Democracies (particularly free market ones like America) would allow them to plug into a high-trust societies with more robust institutions.
More broadly, though we frequently assume that individuals are the same everywhere and growth should be possible for all — this just doesn’t look to be the case. The roots of post-Malthusian explosive growth are deeply rooted in a particular institutional form which was innovated in the Netherlands and exported to England in the Revolution of 1688. From there, it spread to a group of Anglophone settler nations and colonial dependencies like Singapore and Hong Kong (and by further American tutelage to countries like Taiwan, South Korea, and Japan). Alternative reforms were innovated in France after the French Revolution and spread by force throughout Europe.
We really have few examples of countries doing successfully economically without borrowing heavily from these models. For instance, Chile is the really successful part of South America, and they have also done the most to mirror First World institutions through the imposition of reforms led by the Chicago boys. China is a potential counter-example, yet the lesson here remains ambiguous as long as the country remains as poor as El Salvador. Again — look at the enormous success of Chinese transplants in more Anglo environments like Singapore, Taiwan, or Hong Kong. That is presumably indicative of Chinese potential GDP; and by that standard China is doing abysmally. Its institutions are to blame. (Interestingly, though China reports itself a high-trust society, it is also home to few large brands. Those that come to mind — like Huawei — are frequently state-supported. By contrast, poorer India already has several well-known brands like Tata, Infosys, Wipro, etc.)
There’s not a lot we can do to fix this. Moving the Jewish or Palestinian population out of Israel en mass isn’t a feasible option. Yet transforming these into high-trust societies overnight isn’t an option either. Paul Romer has advocated establishing charter cities around the world which would set up top-notch institutional enclaves in poor areas, yet he has found few backers.
This also has implications for America’s nation-building efforts. Nation-building succeeded in countries like Japan to the extent that parliamentary norms were successfully transplanted, while Japan was able to free-ride on the American military buildup. American demand for Japanese goods provided additional impetus for industrial growth. By contrast, interventions in Iraq, Afghanistan, and Pakistan have entrenched local interests by throwing in large amounts of aid. Exports of minerals and oil also generates a resource curse, making a transition into democratic, industrialized states even less likely.
I’m less certain about this issue than I have been in the past. I’m certainly open to other suggestions in the comments.