FORTUNE: ISRAEL RISES -- Prosperity Without Peace

BarEl's Partner Yoav Etiel is quoted in this Fortune Article

Author: Nelson D. Schwartz - FORTUNE

FORTUNE - Features
By Nelson D. Schwartz

 First, Israel built a controversial wall to block suicide bombers. Now it's exporting high-tech security services to the world. The result: a booming economy.

With its hardwood floors, glass walls, and elegant French cuisine, ChloFelys restaurant in Tel Aviv would be right at home in Santa Monica or South Beach-as would the players who frequent its tables. In one corner sits the former head of Shin Bet, Israel's FBI; at another table a lawyer-the son-in-law of former Prime Minister Yitzhak Rabin-is wooing a client; and a bigtime venture capitalist named Yossi Vardi walks around as if he owns the place. Chloelys is buzzing, but dishes like seafood-stuffed zucchini flowers only partly explain why. After a three-year slump brought on by the intifada and compounded by the bursting of the global tech bubble, Israel's economy is growing again, and its success has implications for both the U.S. and the entire Middle East.

Owner Victor Gloger says half-jokingly that things started getting better at Chloelys only when Yasir Arafat died last fall. Actually Israel started recovering before that, aided by new demand for its high-tech exports and by a series of free-market moves initiated by Finance Minister Benjamin Netanyahu. The Bush administration's decision to topple Saddam Hussein as well as the cease-fire announced in February by Israeli Prime Minister Ariel Sharon and Arafat's successor, Mahmoud Abbas, have helped, too, allowing Israel to spend 10% less on defense, reducing its budget deficit, and ultimately boosting growth. Israel is, as ever, a tense place: These days Sharon's plan to uproot thousands of Israelis from their homes in Gaza in August has Jewish extremists vowing to respond with violence-including, it is feared, attacks against Sharon himself. But the country's newfound prosperity has given even some Palestinians cause for hope.

But geopolitics isn't what's driving Israel's new boom. Economic growth couldn't have returned if the government hadn't found a way to block the suicide bombers who carried out dozens of attacks in 2002 and 2003. Thanks mostly to the controversial security barrier now snaking its way through the West Bank-a forbidding amalgam of concrete, barbed wire and deep ditches that has been condemned by the World Court and the European Union-deaths from bombings dropped from 54 last year to just 11 so far in 2005. "We are one of the few countries dealing successfully with the threat of suicide bombers," says Shlomo Maital, a Canadian-born economist and professor at Israel's Technion Institute of Management. The barrier has enraged Palestinians trapped on the other side, while reinforcing the Jewish state's pariah status in much of the world. But the sense of security ordinary Israelis now feel has enabled normal life to resume and made both tourists and foreign investors willing to come here again. "People feel better psychologically," says Gloger. "After the bombings and the invasion of the West Bank in 2002, the place was nearly empty. But business is up 35% this year."

The skills gained through reestablishing Israel's security haven't just helped merchants at home. They've been a key factor in allowing Israeli companies-from software designers to fence builders-to sell their wares throughout a terror-torn world. And that, in turn, has enabled this resource-poor country of just under seven million to prosper in the global economy.

In 2004, Israel's GDP grew by 4.2%, double Europe's growth rate. This year it's expected to rise by 3.8%, and Israeli companies are flexing their muscles worldwide. An Israeli real estate firm recently snapped up New York's Plaza hotel for more than a half-billion dollars. And last year Israeli pharma giant Teva purchased U.S. generic drugmaker Sicor for $3.4 billion. Lehman Bros. investment banker Len Rosen advised Teva on that deal, and Rosen says Lehman is aiming to have nine investment bankers based in Israel by year-end, up from five in 2002. "Last year was our best ever," says Rosen, whose team helped raise $1.7 billion in the U.S. for Israeli companies in 2004. Israel already has more companies listed on Nasdaq than any other foreign country except Canada, including six that have debuted since the beginning of 2004. Real estate is also rebounding, helped by lower mortgage rates and an influx of French Jews worried by signs of increasing anti-Semitism at home. Broker Yoav Etiel returned to Israel after 17 years in the U.S., setting up a company that caters to foreigners in the seaside town of Zichron Yaacov. "About half my business comes from abroad," he says, adding that prices for the homes he's selling are up 20% in the past year.

Read the full article at: Fortune Magazine, June 13, 2005