Israel's Doing as Well as Britain -- Until You Look Closely

TheMarker.com's Guy Rolnik takes a look at the export of whole firms, for example.
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Israel's

gross domestic product rose by an unprecedented 9.1% in the third quarter, in annualized terms. The headlines blared: "The market races on."

According to the

Central Bureau of Statistics

, the business product soared by 12.5% and the standard of living rose by 5.3%. The quantum leap in economy activity in the third quarter lifted GDP per capita to Britain's level of $18,600, compared with $17,200 in the third quarter of 1999.

The engine driving the rampant growth was the business sector. Its product rose, as said, by 12.5%, compared with 11% in the second quarter and 8.8% in the first quarter. The gain was fed by a gigantic 47.6% jump in exports of goods and services in the third quarter, and that, said the statistics bureau, resulted from the extraordinarily high export of start-ups.

That, dear reader, is yesterday's news.

First, take that odd figure quantifying the growth of exports of goods and services in the third quarter: 47.6%. Hang on a second -- almost 50%? Since when have Israel's exports of goods and services grown at that kind of pace? To the best of our recollection, never. What changed?

What changed was that

Lucent Technologies

(LU)

bought an Israeli start-up,

Chromatis Networks

, for $4.8 billion. That's what changed.

A moment of background. When a foreign corporation buys an Israeli start-up whose main asset is patents or knowhow, the Central Bureau of Statistics records the deal in the state's books as ¿export of software¿. Hence the acquisition of start-ups by foreign companies serves to drastically bloat export figures.

Meaning, when the government statistician writes that exports have ballooned because of the sale of start-ups, he doesn't mean that start-ups have increased their volume of exports, means the export of the whole enchilada, the entire company, has been exported, as its equity passes into the hands of an American corporation.

A question arises. Can the export of whole companies be regarded as the kind of export ¿goods and services¿ usually encompasses? The answer, of course, is yes. The figures for the last three years show that ¿export of companies¿ is one of Israel's main industries, not a one-time event, as we may have thought.

But one has to understand the downside too. It is a much more volatile and risky industry than ¿export of goods and services¿ because it depends on the mood of the financial markets.

The best example is, of course, Chromatis. When the deal was announced, its value in terms of Lucent stock stood at $4.8 billion. But the wind changed. Investors began to sour on communications in general and optics in particular. Lucent stock collapsed and the value of the Chromatis deal shrank to less than $2 billion.

How does the Central Bureau of Statistics record deals of this kind? Does it factor in the snags that may arise? Does it factor in that much of the proceeds will never make it to Israel?

The 47.6% leap in exports for the third quarter teaches us something we hadn't realized before: The

Tel Aviv Stock Exchange

isn't the only Israeli institution being shaken by the ears by

Nasdaq's

fall.

The industry of founding and ¿exporting¿ start-ups is still humming along. But because of the dour mood on the financial markets, the scope of deals is low. In other words, the third-quarter leap in Israel's exports of goods and services is unlikely to repeat itself in 2001.

The case of high-tech is emblematic of the rest of the marketplace, too. Yesterday's figures dished up by the Central Bureau of Statistics are no more descriptive of the true state of affairs in other sectors than they are of tech.

They describe exactly what the economy's status was before the

intifada

, the Palestinian uprising, resumed. Tomorrow's news is that tourism has collapsed and nobody can guess when it will recover.

Add Nasdaq's chilling effect on the export of start-ups and it becomes clear: the Central Bureau of Statistics' report on yesterday serves, at best, as a fond memory of the way we were, of how good things looked as we awaited the materialization of the

New Economy

in the

New Middle East

.