Keeping Israel’s tech mojo alive: Innovation for sustainable development

Israel can successfully evolve from a start-up nation to a scale-up global leader through co-innovation partnerships with developing economies. It’s the only hope for keeping Israeli economic growth alive and bridging investment gaps as demographics and emerging markets drive economic growth for the rest of this century.

New partners in emerging and frontier markets seek to overcome scarcity in water, food, energy and health by emulating Israel’s technology path to development. Seventy years after the UN voted to recognize Israel’s right to exist, Israel is uniquely positioned to give back to the community of nations.

Israel’s recent commitments to build new bridges to developing economies (India and Africa, in particular), combat climate change and support the UN Sustainable Development Goals, along with Israel’s creative and pioneering spirit to hack global problems, can build a bridge for Israeli knowledge-based exports to developing markets.

Nearly every problem facing the world has been refracted in Israel in a concentrated and complex way: resource scarcity, ethnic conflict, immigration, fiscal constraints and security and environmental problems to name a few. But through its improbable and unlikely journey to developed-country status, Israel converted its litany of existential challenges into key drivers of economic growth.

Now, Israel’s development problems have gone global. Israel’s capacity to overcome scarcity through technological innovation is in high demand. Israel must partner with developing and transition economies in Africa, Asia and Latin America to find ways to use and adapt technologies that decouple growth from the use of increasingly scarce natural resources. Simply put, it must help save the planet.

Keeping Israel’s sustainable economic growth alive with new trading partners raises four questions:

1) How will we build bridges to inclusive global markets?

Developing economies represent the majority of global output ($54.37 trillion versus $44.14t. in developed markets in 2015). In 1990, developing economies comprised 24% of global GDP. Today, they are nearly 60%. This trend is accelerating. Growth rates for developing economies are tracking 5.2% higher compared to 2.2% in developed economies. The growth of a global middles class will be concentrated in Asia and Sub-Saharan Africa for the rest of this century. Israel’s future prosperity depends on serving these markets through trade, investment and the technical assistance to make global markets work.

The last structural change this profound occurred at the turn of the 20th century when the New World passed the Old World in output. Resulting inequality and protectionism destroyed trade and growth, and caused a retreat from global markets. We can’t afford a repeat of the catastrophic reverses and unequal gains in the 21st century.

2) Will we have a demographic dividend or bomb from changes in developing economies?

The “youth bulge,” the increasing share of the population in the 15-29 age group, runs 7% higher in developing economies than in developed economies. The ratio of nonworking-age (below 20 and above 65) to working-age population determines much about any economy. If there is sufficient job creation, there is a demographic dividend. If not, there’s trouble. As in Sub-Saharan Africa (where half of global population growth will occur until 2050) and Asia, investment flows for job creation and capital formation determine global outcomes.

3) How can we bridge investment gaps to meet sustainable development goals?

There’s currently an estimated $2.5t. investment gap globally to meet the UN’s sustainable development goals. The good news is that there is significant capital available in the world: $9.9t. in cash in global banks, $8t. in the bond market currently trapped in negative yields, and $5.2t. above regulatory minimums sitting in banks.

Israel has demonstrated competitive advantage in innovative technology for sustainable development goals: for example in agriculture, climate change, renewable energy, energy efficiency, health, and water – and the cybersecurity to insure the delivery of these critical goods and services. In addition, Israel’s savings rate and young age structure amplify the rate of growth in institutional investors and bank capital that can be “crowded in” to blended finance structures for development (including government and philanthropic investors at home and abroad). Technology mojo from Israel redesigned with these new co-innovation partners can leverage these investments for impact.

4) How will developed countries avoid being hit by slow growth and declining productivity?

The investment yields required to fund long-term liabilities in developed economies (pensions, insurance and health care) increasingly depend upon the increased productivity, job and firm performance in developing countries. Unfunded liabilities require institutional investors to look toward sustainable development investments that can deliver higher yield returns through well-structured, long-term investments that mitigate global risks from countries where demand is growing.

Israel is currently performing poorly in developing economies and the risks to the Israeli economy are growing.

Two indicators of Israel’s poor performance in developing economies need to be reversed: 1) Israel’s exports per capita ranks 16th among 21 countries with similar economic characteristics, and 2) Israel ranks last among all 30 OECD countries in terms of assistance to least developed countries (.11% of GNI; the OECD target for overseas development assistance/GNI is 0.7% since 2005). Consider Israel’s growing risks: • 61% of all exports are targeted to aging, developed countries with rapidly declining global market shares of aggregate demand;

• Only 10 Israeli companies account for 47% of Israeli exports;

• Israeli technological solutions are largely under-represented in growth markets in Asia, Africa and Latin America;

• Of Israeli tech firms, only 7.5% in the agritech sector, 10% in the renewable energy sector and 13% in the water sector target developing economies;

• Israel’s long-term foreign trade insurance capacity (at 0.15% of GNI) is less than half of the global average (1.2%).

• Only 2.3% of Israel’s university students come from overseas (compared to 21% in the UK, 13% in France, and 12% in Germany) and too few are concentrated in financial, technology and international development programs targeted on skills transfer to professionally practice tools for development.

Israel needs a new Israeli development finance platform.

Currently, Israel’s exporters and tech companies miss out on development project opportunities because of unavailable or high costs of capital for project financing, excessive business concentration and a cumbersome bureaucracy. According to the Bank of Israel, Israel’s five largest industries are concentrated in non-tradeable (serving mostly the local market) goods and services sectors and are responsible for 81% of the country’s widening productivity gap. Israeli export financing is limited; and over 80% of all export activity is short-term, inflexible and concentrated in a few countries.

All the means and methods to leverage technology, innovation, investment and capacity building for sustainable development exist in Israel. Currently fragmented programs throughout all ministries (energy, environment, economy, foreign affairs, finance) can be concentrated into an integrated development finance and capacity building platform (modeling successful ones in Denmark, Holland, Germany, the US and the UK). Using Israeli ingenuity, the platform could integrate traditional tools such as emergency aid, export support, project finance, technology adaptation and impact investment to build a pipeline for sustainable development.

As a global laboratory, Israel is uniquely positioned to launch waves of tech solutions with new partners to strengthen their markets by combining innovative finance and technology for development. The development finance platform will be built upon three pillars:

1) Financial Capital:

The platform will leverage the strengths of the Israeli and international capital markets to provide financing for Israeli companies looking to export to developing markets; establish new facilities for project finance, trade finance, and insurance needed to build sustainable business relationships in these growing markets. Examples of innovative finance could include new instruments such as Diaspora bonds for green bonds to outcomes-based investments enabled by public-private partnerships and blended finance.

2) Human Capital:

The platform will train Israeli and international talented graduate students in financial innovation and development. Expand partnerships with developing countries by inviting students to train and build their skills in Israel with Israeli companies and researchers.

3) Project Development:

In partnership with Israeli businesses and innovators, and local markets, the platform will identify technological solutions and potential adaptations to fill the pipeline of development-focused projects.

Israel’s growth exemplifies how ingenuity overcomes adversity. For 70 years, necessity, deprivation and isolation pushed Israel to pioneer innovations and adapt technologies, processes and products. Israel is well positioned to transfer tech solutions to new start-up nations. Israel must waste no time in building the necessary development finance platform to bridge the Israeli economy to the developing markets.

The writer is senior director of the Jerusalem Institute’s Milken Innovation Center and Blum Lab for Developing Economies. He teaches at the Graduate School of Business Administration at the Hebrew University of Jerusalem. He’s led the team launching a Masters of Development Practice Program in conjunction with the university’s International School of the Faculty of Agriculture, Food and Environment opening October 2018.