In his most recent column, David Brooks describes the wealth generated by innovative clusters, citing Israel as a prime example. I strongly agree with him on the big picture:

All the countries in the region talk about encouraging innovation. Some oil-rich states spend billions trying to build science centers. But places like Silicon Valley and Tel Aviv are created by a confluence of cultural forces, not money. The surrounding nations do not have the tradition of free intellectual exchange and technical creativity.

But I also think it’s important to keep in mind that high-tech clusters are far less important than flexible labor markets and sustainable public spending. Relatively little technological innovation happens in Hong Kong, yet it offers an environment that encourages grassroots entrepreneurship. Business-model innovation, which can be considered a subset of technological innovation, is ultimately more important than gee-whiz widgets and gadgets.

In Start-Up Nation, which I recommend as highly entertaining as well as informative, Dan Senor and Saul Stringer celebrate how conscription, and in particular the rigorous process of recruiting bright students into elite military units, has helped foster an entrepreneurial culture. But the fact that Israel radically liberalized its economy over the past two decades strikes me as far more important than the success of ICQ. Brooks rightly emphasizes Israel’s sober macroeconomic policies:

The government did not have to bail out its banks or set off an explosion in short-term spending. Instead, it used the crisis to solidify the economy’s long-term future by investing in research and development and infrastructure, raising some consumption taxes, promising to cut other taxes in the medium to long term.

It is also true, as many on the Israeli left will remind you, that the embrace of neoliberalism has contributed to inequality, though we shouldn’t discount the absorption of immigrants from the former Soviet Union — the rough equivalent of German reunification in raw numbers — and the rising numbers of religiously observant Israelis who don’t participate in the mainstream labor market.