Explaining Israel's Booming Economy

In the past year, Israel's economy has managed to defy both the global economic crisis and the worsening security situation, posting an annualized 4.4 percent growth in the last quarter of 2009. Yuval Steinitz, Israel's 51-year-old finance minister, a philosopher by profession and a close ally of Prime Minister Benjamin Netanyahu, claims much of the credit. Steinitz sat down recently with NEWSWEEK's Dan Ephron to explain his approach and the challenges Israel faces. Excerpts:

When the crisis hit, Israel did the opposite of the rest of the world. You raised taxes and didn't inject money into the system the way other countries did. What made you think that would work when your economy is similar to other developed countries?
Actually, our economy is quite different than most other countries in the West. We manufacture almost no consumer goods. In the U.S., if you lower taxes to encourage people to consume, they'll buy American cars, or at least Japanese cars produced in America. In our economy, if people use the money to buy a new car, it won't be an Israeli car. So if I encourage people to buy more, it doesn't help.

But I've read that the real reason Israel wasn't affected as badly is that Israeli institutions weren't invested in mortgage-backed securities.
This was an advantage but it wasn't enough. In the beginning of 2009, we were in a big crisis. Government revenues were going down, unemployment was climbing sharply, our exports were collapsing. We suffered different effects, mainly on our exports—but exports are about 50 percent of our economy. When our government was formed, right away we announced a two-year budget and a tax reduction in the long term [preceded by a tax hike]. And you see the recovery.

I've read also that the rich-poor gap is now bigger in Israel than anywhere else. How did that happen?
This is officially true, but there are different ways of calculating it. We calculate it quite differently. If you take not salaries but standard of living, if you take into account that all Israelis have health care, then it's slightly less. Still, it is serious and we want to reduce it further.

The U.S. peace envoy, George Mitchell, suggested recently that the U.S. could withhold loan guarantees in order to get concessions from Israel. I read your response in the Israeli press: you said Israel doesn't need U.S. loan guarantees. Is that true?
Look, I think Mitchell explained that he was misunderstood, that he didn't want to give any message of pressure or threats against Israel. I think it would be totally unjustified and unfair to pressure Israel.

More generally, when the U.S. wants Israel to act in a certain way, is it legitimate for it to say, "You're getting aid money, you're getting loan guarantees, this is going to be used as leverage"?
I think not, and I must say we don't see such an attitude.

Israel gets nearly $3 billion in U.S. aid every year, more than any other country. When the aid started 30 years ago, Israel's economy was much smaller, maybe a fifth of what it is today. Are we approaching a time when Israel will no longer need the money?
Unfortunately, this is still necessary. We are spending much more of our GDP on defense than any other country, more than double any other Western country. Now, the United States supports the defense of Western Europe with NATO [and that of] countries like Japan and South Korea. And if you count the expenditures, they're much higher than the aid to Israel. So it is justified.