Disadvantages Are the Source of Israel's Abundant Economic Strength

Perhaps the most important factor driving forward a country’s ability to create wealth is not its advantages, but its disadvantages. It’s not the cards you’re dealt, it’s how you play ‘em. Economic disadvantages can force a country to play its cards well.

The United States has enormous natural advantages, including the second-largest bounty of natural resources in the world. But it has become wealthy to some extent because of its disadvantages. To settle a large interior, Americans had to build the world’s most extensive railroad system, encourage labor mobility, and generally open their doors to immigrants. The challenges of raising capital to finance territorial development, in turn, helped spawn the world’s deepest and most sophisticated financial markets.

Canada’s economy has largely been fueled by a massive inventory of natural resources, including the third-largest proven petroleum reserves and one of the world’s largest supplies of timber. But two of Canada’s most important industries have grown in response to its greatest challenge. A large, cold country with a relatively small population, Canada has earned a place among the world’s leaders in transportation and telecommunications. Japan, burdened by a resistance to immigration, has compensated by developing production efficiencies that allow it to maximize the productivity of its workforce.

While a country’s apparent disadvantages often prod its people to develop leading-edge technologies or systems, its advantages may do little to foster prosperity, perhaps even hold it back. The country with the largest supply of natural resources by far, according to a study conducted by Investopedia, is Russia, home to huge deposits of oil, natural gas, coal, and timber. But despite $75 trillion in natural resources, Russia has only the 72nd highest GDP per capita. Its economy has been grappling with a severe recession for more than two years. Its natural resource wealth has made it heavily dependent on the ups and downs of global commodity prices. The country with the 10th-largest supply of natural resources is Venezuela, ravaged by goods shortages as well as tremendous political instability.

One of the best examples of a country that has managed to build wealth largely because of its disadvantages is Israel. Confronted by a war with five surrounding countries at its birth in 1948, Israel initially faced a deep economic crisis featuring high unemployment and low foreign currency reserves. But Israel managed to grow. It fostered a start-up culture characterized by its Silicon Wadi region (second only to Silicon Valley in its concentration of high-technology companies). It achieved membership in the OECD. It attained living standards comparable to European countries like France and Finland. It did this not despite its economic disadvantages, but because of them.

From its birth, of course, Israel has labored under the disadvantage of being surrounded by hostile neighbors. But that has forced it to develop strong trade ties outside the Middle East, which have insulated the national economy from negative regional spillover effects.

One of Israel’s biggest disadvantages has always been its small population, less than a million at the time of its founding. But rather than serve as a puny incubator, the country’s relatively small scale has forced Israeli entrepreneurs and business leaders to seek global markets and global product mandates, helping to spur creation of such products as the USB flash drive, Intel’s first PC CPU, and the laser keyboard.

Another challenge to contend with has been a 10-fold increase in population. This extraordinary level of immigration – characterized by large, sporadic inflows of people – has forced the small country to manage the economic burden of incorporating millions of immigrants, mostly while experiencing economic growing pains. But that disadvantage became an asset, allowing Israel to draw a diverse mix of skills from much of the world. During the 1990s, for example, roughly a million people from the former Soviet republics emigrated to Israel, an influx that could have been crushing to a country that size. Instead, it brought a fresh infusion of technologically-trained, entrepreneurially-inclined human capital.

Rather than a land of milk and honey, Israel faced the challenges of agricultural development in a country characterized by desert in the south and marshland in the north. But this forced it to develop leading-edge farming technologies, such as advances in the drip method of irrigation, which ensures a highly uniform distribution of water, maximizing efficient water use and recycling. The country’s harsh climate made that necessary, and necessity made it possible.

A hostile region, small domestic market, need to integrate large numbers of immigrants, and difficult terrain – all of these seem like economic liabilities. Unless you manage to turn them into assets. Of course, one should not paint too rosy a picture. Israel faces many challenges – economic, military, social and political – including low labor participation rates among its fastest-growing segments, ultra-orthodox Jews and Arab-Israelis.

Nonetheless, Israel has grown its economy by making the most of its disadvantages. As many countries have discovered, the question isn’t what potential weaknesses you may have. It is whether you are able to turn them into strengths.