Top tech investor: ‘If Israel becomes less good to live in, people will leave’

Shlomo Dovrat warns weakness of state institutions and lack of sense of security threaten Israel’s tech standing in the global arena and its prospects for economic growth

Sharon Wrobel is a tech reporter for The Times of Israel.

Shlomo Dovrat speaks to Channel 12 news on February 24, 2023. (Screenshot: Channel 12)
Shlomo Dovrat speaks to Channel 12 news on February 24, 2023. (Screenshot: Channel 12)

Shlomo Dovrat, one of Israel’s top tech investors, warned that the ongoing war in Gaza has exposed deep weakness and lack of trust in state institutions, which is threatening the standing of the country’s main growth engine — the high-tech industry — and posing a risk for the prospect of a prosperous economy.

“Israel’s economy entered the crisis with extraordinary resilience, but the situation right now is fraught with significant risks and if we don’t come to our senses and act decisively and responsibly, there is a danger of a spiral effect and lost decade, similar to the aftermath of the Yom Kippur War,” said Dovrat, who is a co-founder and general partner at Viola, an Israeli investment group with over $5 billion in assets under management. “What the war revealed is a deep weakness in the functioning of state institutions, while we saw civil society rally and mobilize in an amazing way for the war effort.”

“The citizens’ trust in the country and its institutions. and a sense of security are two necessary conditions for a healthy economy and if we don’t succeed once the war ends to restore a sense of security and trust in the leadership, we will not have a growing economy,” he added.

Speaking on Wednesday at the annual conference of the Aaron Institute for Economic Policy at Reichman University, Dovrat cautioned that Israel is already facing a decline in global legitimacy at a time when risk appetite in the world is falling.

“The markets are telling us that we are not going in the right direction and don’t believe us that much, which has an impact on the appetite of investment entities to invest in Israel,” Dovrat noted. “The reality is that investors have become more selective and Israeli high-tech is completely dependent on international markets, which poses a threat.”

According to Dovrat, who is chairman of the Aharon Institute for Economic Policy, there are signs that investment in high-tech around the world is recovering, but Israel is not keeping apace, especially in the area of advancements and investments in artificial intelligence technologies.

Finance Ministry budget head Yogev Gradus speaks at a conference at the Aaron Institute for Economic Policy at Reichman University, July 10, 2024. (Courtesy)

“Israel’s high-tech industry has in recent years grown to be more than the economy’s catalyst, it is a platform, and our only form of being competitive in the long term,” Dovrat said. “If Israel becomes a less good place to live in, people will leave not because of ideology but because they have alternatives.”

“An Israeli entrepreneur who turns to Silicon Valley and receives a check from the Sequoia fund will have good reason to move, so we need to be competitive, we need to be a place where it is worthwhile to create startups,” he remarked.

The economy’s dependence on the high-tech sector has significantly grown in the past decades. The Israeli high-tech industry last year contributed 20% to local GDP, versus 6.2% in 1995, and made up 53% of total exports amounting to $73.5 billion, while generating tax revenues for the country.

Dovrat urged the government to take action to reduce the fiscal deficit to help restore investor confidence and support the economy.

“Fiscal responsibility is not a political issue, it is critical for the future of the Israeli economy,” said Dovrat. “Difficult decisions will need to be taken including raising taxes and implementing structural reforms that prioritize growth.”

Israel is in its 10th month of a war with Hamas, which began October 7 when thousands of terrorists streamed into Israel by land, sea and air, murdered some 1,200 people, mostly civilians, while taking hostages of all ages into Gaza.

Shira Greenberg, former Finance Ministry chief economist speaks at a conference of the Aaron Institute for Economic Policy at Reichman University, July 10, 2024. (Courtesy)

Finance Minister Bezalel Smotrich has been criticized in recent weeks for failing to offset extra war spending with wide-ranging cutbacks and other avenues of revenue, including higher taxes.

War costs have already driven up defense and civilian spending, leading to a fiscal shortfall of 7.6% of gross domestic product in June and breaching the deficit target ceiling of 6.6% that the government set for 2024.

2025 budget discussions postponed

Also speaking at the conference, Finance Ministry budget director Yogev Gradus attacked the government for delaying discussions on drafting the 2025 budget.

“It is not reasonable that we are already in July, and we are not deeply engaged in budget discussions. It can’t be done in a month or two,” he said.

Similarly former Finance Ministry chief economist Shira Greenberg expressed her dismay that in the current uncertain period budget discussions are being postponed. Earlier this week, the Bank of Israel said it expects that the government will need to make fiscal adjustments of at least NIS 30 billion ($8.2 billion) for the deficit in 2025 to shrink to about 4% of GDP.

Meanwhile, Israel’s right-wing coalition has left in place billions of shekels in discretionary funds made available to political allies under deals reached in coalition talks. Last week, the Knesset Finance Committee allocated hundreds of millions of shekels in “surplus” coalition funds to government ministries — including several ministries deemed superfluous by the Finance Ministry.

“How is it possible that coalition funds are distributed in places that do not support growth?” Greenberg asked. “There is no leadership that takes responsibility and comes up with the necessary solutions to lead us to a safe shore.”

“We need a government that will not exclude women, that will see the good of the whole public and not only the sectors that are its partners,” she urged.

Dovrat concluded with recommending that Israel needs a stabilization of the security situation, hold elections to choose a new government and restore the citizens’ faith in the country.

“But that is not enough. We need to build a strategic plan for the economy and for our society for the day after.”

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