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Nasdaq's problems could not have come at a worse time for Israel and its high-tech makeover Add to ...

This time last year, 44-year-old Arnie Draiman had more work than he could handle. Draiman, a Jerusalem-based human resources consultant with a background in web design and technology, was one of thousands of skilled technicians riding a high-tech wave that has transformed the Israeli economy in recent years.

His company specialized in solutions for translating languages on web sites-a complex technical problem because languages such as Arabic and Hebrew read from right to left. But in December, Draiman was laid off, together with 35% of the staff. "Every other day I open the newspaper and read about another of our clients going out of business," he says.

I met Draiman at a high-tech conference at the Jerusalem Hilton, where industry high-fliers were rubbing shoulders-with rabbis. The conference was organized by Aish HaTorah, an internatonal group with a yeshiva (rabbinical seminary) in the Old City of Jerusalem. The yeshiva world is usually regarded as the last repository of ancient religious values, but even these bastions of conservatism are joining the high-tech revolution.

Ten years ago, the Israeli economy was an old-fashioned, unattractive prospect. Resources-starved Israel had little to offer world markets apart from Jaffa oranges and Gottex swimwear. But the 1990s changed all that. In the past decade, Israel has enjoyed an industrial makeover which has made her the darling of foreign investors. Triggered by the start of the Israeli-Palestinian peace process in 1993 and encouraged by government-sponsored incubators and venture funds, hundreds of startups have been established. Many of the workers were skilled Russian engineers who arrived during a mass wave of immigration in the early 1990s. The entrepreneurs were often graduates of Israel's tech-savvy army, who transformed their military know-how to civilian use.

Israel now boasts more than 100 companies quoted on Nasdaq-the largest number of any country outside North America-and the high-tech sector became the biggest single factor in the country's booming economy. Last year, Israel's GDP grew by 5.9%, more than a third of it fuelled by high tech. The rush to turn profits has made Israel-a tiny country with a population of only six million-probably the largest per-capita repository of foreign high-tech investment of any country in Europe or the Middle East.

One measure of Israel's new economic coming of age was 18-year-old Ehud Tannenbaum, otherwise known as "The Analyzer," a cyber-warrior who successfully penetrated the Pentagon's computer system from his bedroom. Teenage hackers like Tannenbaum, who now runs his own internet security consultancy, were drafted into the army and then into business. The result is an impressive roster of Israeli web security companies like Check Point Software Technologies, a world leader in firewall technology.

But the Nasdaq plunge that began last September has sent shock waves through the booming Silicon Wadi, where gleaming steel-and-glass headquarters for the likes of Motorola and Intel have replaced orange groves and hotels as the main contributors to Israel's balance of trade.

There were 600 new startups last year alone, each hoping either to float on Nasdaq or be purchased for hundreds of millions of dollars. Examples include Chromatis Networks, which makes optical networking equipment, and was acquired by Lucent Technologies for $4.5 billion (all currency in U.S. dollars).

This time last year, the path from seed funding to IPO was reckoned to be down to 12 months, but the fall of Nasdaq has strewn so much rubble across the route it has become almost impassable. Venture capital has not yet dried up. Sequoia Capital, a prominent Silicon Valley company, recently announced a new $150-million Israel-dedicated fund. And VCs still have $3 billion to spend from their record fundraising year in 2000. Still, IPOs have been postponed, depriving investors of returns and discouraging newcomers. Unviable companies are going out of business almost daily.

Koldoon, an Israeli corporation which runs a database of tech companies, reports that of 1,500 Israeli companies on its list, 256 have closed in the last year. The stock market crash could not have come at a worse time. The Palestinian uprising in the West Bank and Gaza has slashed the number of tourists by half and deprived Israel's construction industry of a cheap labour pool of 100,000 Palestinian workers.

By the end of December, 42,000 Israelis (most of them in the tourist trade) had become unemployed as a direct consequence of the uprising, which took unemployment figures to an all-time high of 205,000 people-just over 9%.

But it may not all be bad news. Israel has been suffering from a severe skills shortage for years. As laid-off workers gravitate towards established companies with more viable business plans, wages are expected to fall, re-establishing Israeli companies on a sounder footing that in the long run could benefit the economy-and Arnie Draiman.

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