RISHON LEZION, Israel — Goldman Sachs senior investment analyst Abby Joseph Cohen has some advice for the country:
“Israel should focus on the creation of an economy based on the quality of the products it manufactures and not on their low price,” said [Cohen] at the Israel President’s Conference hosted by President Shimon Peres today…
“Israel should base its economy in a way to preserve a stable and growing economy. The model of low pricing is not suitable for Israel. The economic model that suits Israel is a model that mainly produces high-quality products. Investors see Israel as a magnet for investment because of the success of its start-ups. Investment has quadrupled in recent years.”
The price that a business lists for a product or service is not only relevant towards revenue; it is also an integral part of marketing. If a product has an extremely low price, overall sales will increase, but people will perceive the quality of the product to be low. If a product has an extremely high price, sales will decrease, but people will believe the product to be superior. (If a person buys a $1,000 bottle of wine, he will believe that the wine is inherently better — even if he knows nothing about wine — than a $20 bottle.)
Israel faces an economic delimma: Should it follow the China and India’s lead by marketing itself as a country whose labor costs are low, or should it bill itself as a country that produces high-quality (though expensive) products, particularly in the high-tech industry?
Cohen is correct. Israel should choose the latter option. As Israel grows, its cost of labor will be unable to compete with other countries that are less developed. Wages and inflation are increasing in China and India, so global companies will likely outsource to other countries that are even less developed in the future. As the dollar continues to fall against the shekel, U.S. companies will earn less and less profit (in dollars) by outsourcing to Israel. (The only exception is in a niche market: I know several outsourcing companies here that employ native speakers of English — and pay them absurdly low wages — to work in sales and other areas for client businesses in the United States.)
The high-tech industry is Israel’s core competency and unique product quality – the country is on the same level as Silicon Valley and Bangalore, India. Israel needs to leverage this fact. If Israel produces high-quality goods at higher prices, then wages will increase here as a result. When wages increase, people will spend more money in Israel — and that will bolster the rest of the economy as a whole.
