Scopus 2018

The Future of the Israeli
Innovative Economy
by Eugene Kandel
succeed, their productivity level rises. They are very
supportive of each other, while at the same time
highly competitive. They do not expect favors from
the government.
The most important feature of the Innovative
Economy is that we fiercely compete for these
companies and people with the rest of the world.
Many foreign firms and governments are willing
and ready to pay significant amounts to attract
them. Even without this inducement, many Israeli
firms and their investors choose to move operations
overseas, so as to be closer to their key markets and
sources of financing. There is some understanding
of this in the government, so the Innovative
Economy is less regulated and less taxed, but even
this understanding is starting to lose its consensus
in politics. This economy used to grow very rapidly,
yet in the last couple of years — while financing is
still growing — its share of employment has started
to shrink.
The Main Economy (basically, everyone else) is
much more local, much less productive, and much
more risk averse. In many respects this economy
depends on the government to support it or bail
it out. Perhaps as a result it is excessively regulated,
unionized, and more heavily taxed. The feeling is that
The Innovative Sector is an engine that pulls
all the other cars in the economy. We, at the
National Economic Council, used this metaphor
to convince the Israeli government to adopt an
economic and social strategy, and established
dedicated processes and institutions to support
it, which we developed with several partners.
If I had to use the train metaphor today, I would
draw a picture of two separate trains, on separate
tracks, one much further ahead and moving much
faster than the other. They would symbolize two
different economies: the Innovative Economy and,
for the lack of a better term, the Main Economy.
Many years of studying and helping shape the
Israeli economy in various capacities has taught me
that it was a mistake to look at the Israeli economy
as a single unit. I believe that Israel, unlike other
countries, or perhaps somewhat ahead of them,
has become partitioned into two very different
economies that are practically disconnected from
each other.
Eugene Kandel is the Emil Speyer Professor of
The Innovative Economy employs almost nine
Economics and Finance at the Hebrew University. At percent of the workforce and produces close to 15
the University, he founded the Center for Financial percent of its GDP (both are much higher than in
Markets and Institutions and the MA program in Finance
any other country), while pushing the frontiers of
and Financial Economics. He is the CEO of Start-Up
technology worldwide. People running innovative
Nation Central and previously served as the Head of the
National Economic Council (NEC) and as the Economic companies and working in them think and operate
Advisor to the Prime Minister of Israel.
differently from the rest, and their firms are run,
structured, and financed very differently than
most firms in the Main Economy. They feel at
home anywhere in the world. They are happy to
take chances and welcome challenges. If they fail,
“If I had to use the train metaphor today, I would draw a picture of two separate trains, on separate tracks; one
38 they get up and start something new, and if they
much further ahead and moving much faster than the other.”
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