How to Revive Jerusalem, Israel's Poorest City

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JERUSALEM-How do you revive Jerusalem, the poorest city in Israel, overshadowed by religious tensions, throttled by traffic, and with a dwindling workforce?

Some mayors might be discouraged, but not Jerusalem Mayor Nir Barkat. In my meeting with him on Monday, he exuded confidence, with plans to revive the city through tourism and biotechnology.

Barkat, Jerusalem's mayor since 2008 after five years as opposition leader of the city council, came to politics through philanthropy, specifically an effort to revive Jerusalem's schools. He made his fortune as a high tech entrepreneur specializing in anti-virus software, and then as a venture capitalist. True to his roots, he is trying to run the city like a business, rather than through the usual political machinery.

Now, each section of the municipality has a budget, with targeted outcomes and goals, an approach that is normal for a business, but a novelty for Jerusalem. The numbers are almost in for 2011, and it looks like the budget will be about balanced for the fifth year in a row.

Israel's national unemployment rate was estimated to be 5.0% as of October 2011, but unemployment rates in Jerusalem have always been higher than the country as a whole. Young Israelis are increasingly leaving Jerusalem for jobs elsewhere. Barkat wants to turn this around.

In our conversation he used expressions such as "core competitive advantages" and "enabling industries to scale," meaning to expand easily. The mayor has sought the advice of Harvard Business School professor Michael Porter about ways to make Jerusalem more competitive, and he gave Porter a key to the city as an expression of his regard.

Porter, who leads Harvard's Institute for Strategy and Competitiveness, believes in clusters of innovation that create growth. These clusters are groups of specialized companies that can power a regional economy. Porter writes on his Web site that "Cluster development initiatives are an important new direction in economic policy, building on earlier efforts in macroeconomic stabilization, privatization, market opening, and reducing the costs of doing business."

Tourism, the mayor explained, is a natural cluster, because Jerusalem has benefited from 3,000 years of investment. Paris has 40 million visitors a year, and this year Jerusalem had 3.5 million.

Barkat aims to get this number up to 10 million, drawing on the potential international cadre of Christian, Jewish, and Muslim visitors who want to visit Jerusalem once in their lifetime. Expanding tourism to this level would create an estimated 140,000 more jobs for Jerusalem natives who might otherwise leave to work elsewhere.

To this end, Barkat is encouraging substantial investment in infrastructure, such as new hotels for visitors. A Waldorf Astoria is under construction. A municipal office provides one place for firms to get the multitude of needed permits, cutting down on red tape. Tax incentives are available for new hotels. Hotel occupancy went up 24 percent last year, and the mayor is aiming at a 15 percent increase annually.

As well as tourism, Jerusalem has a natural advantage as a biotechnology hub. Pharmaceutical companies such as Teva, Rafa Laboratories, and Omrix, and research institutions such as Hebrew University and Hadassah Hospital can offer another cluster of innovation.

To encourage more start-ups, Barkat wants the city to build more lab space. He wants to fund technology incubators to encourage scientists to start companies, with government grants for the first two years of operation.

Mrs. Chen Levin, manager of the biotech initiative, told me that much of the cost of these incentives comes from the national, rather than the municipal government. When I asked her whether the funds need to be paid back, she replied that they didn't need to be repaid, they were an "investment."

These investments are precious Israeli tax dollars that might offer a return, or might not.

The same view of government spending as investment without direct returns comes from the light rail program, which supposedly will bring some sanity to Jerusalem's clogged streets.

Traffic in Jerusalem often slows to a crawl. Eden, who works in an ice cream store in the Old City, and who prefers that his last name not be used, told me, "The buses are so slow. I can get off the bus at the bottom of Agrippa Street, do my shopping, and get back on the same bus at the top of the street."

When I suggested running bus lines through dedicated roadways, rather than installing trains, he told me, "We have to think about the future, rather than the present."

Few rail projects ever pay for themselves, but Barkat is hopeful that light rail will be different. Similarly, he wants to build a rail line from Jerusalem to Tel Aviv, to cut the travel time from one or two hours, depending on traffic, to 26 minutes.

Some of Jerusalem's economic problems need to be resolved at the national level. Take the perennial housing shortage, for instance. Much land is controlled by state institutions and unavailable for development, and so contractors cannot build the homes that people want to buy.

High food prices are the result of lack of competition at the wholesale and retail level, with a structure that needs to be radically changed.

Labor market rigidities prevent hiring. Once a worker has been on the job for longer than a year, his employer can only get rid of him with difficulty. Plus, high employment taxes going to government coffers add to wages paid to the employee. So employers play it safe and hire as few workers as possible.

Despite these problems, Mayor Barkat is trying to change Jerusalem. As 2012 begins, let's wish him success.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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