The other threat to Israel

To the long list of Israel’s vulnerabilities, add the risk that the country won’t be able to attract as much foreign investment in coming years and that the most talented Israelis will leave the country.

A generation ago, Western companies looked at the rest of the Middle East as an oil play. Israel’s world-class education standards, its durable political institutions, its capable bureaucrats, and its strong rule of law earned the confidence of those looking to set up shop in other sectors.

Today, other countries in the region offer attractive opportunities for retail, tourism, health care, light-medium manufacture, and a host of other investments, and Israel’s small size and political isolation are becoming real weaknesses. Persian Gulf and other Middle Eastern governments are letting would-be investors know that companies with a large-scale presence in Israel aren’t going to fare as well inside their borders. Over time, this subtle (in some cases, not-so-subtle) pressure could have an impact.

Israel has outlasted many such threats in the past. The country’s comparative excellence in advanced technology — an area requiring limited long-term capital exposure and where the Israelis have little competition in the region — will offer lasting advantages. Second, Iran’s nuclear program provides a seriously destabilizing element to the politics of the region, but it doesn’t pose much direct threat to Israel’s economic development. Israel’s military capabilities, including its own nuclear weapons program, make direct conflict with Iran highly unlikely.

Other threats are more serious. One day soon, Hezbollah will have access to missiles with the range and accuracy to effectively target Tel Aviv from anywhere inside Lebanon. That will be a game-changer for Israel’s security, its economy, and its politics. More than half of Israel’s population and the heart of its economy are centered in and around Tel Aviv. As the city becomes more vulnerable to the threat of precision-guided missile attacks, those Israelis most directly involved in the country’s economic and financial life will be the most vulnerable to attack — and some may well leave the country.

Tel Aviv’s vulnerabilities to ballistic missile attack will strike at the heart of Israel’s technology and pharmaceutical industries. Consider the recent history of Armenia. Once the best educated of Soviet republics, a steadily deteriorating security environment, better opportunities elsewhere, and a strong Armenian diaspora presence in Russia, France, the United States and other countries made it easy and attractive for the best educated Armenians to leave. And leave they did — about a third of the population emigrated within 15 years of the Soviet collapse. The exodus hollowed Armenia out, and the country has yet to recover its economic dynamism. With an almost certain-to-deteriorate security environment, Israel’s greatest long-term risk may be a serious brain drain, just as its Arab neighbors are opening for business in so many non-energy-related sectors.

That’s a lot more dangerous for Israel’s future than a surprise attack from Tehran.

Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)