A bloody and costly war, the constant threat of terror attacks, a string of political scandals and a land almost devoid of natural resources. Only in Israel could this be the backdrop for the most impressive economic success story of the modern Middle East.

Despite the war with Lebanon, 2006 was a golden year for the economy of the region’s only liberal democracy. GDP grew by 5.1 per cent, competitiveness improved sharply and the stock market surged.

Israel came fifteenth in the World Economic Forum’s global competitive index, topping the list of Middle East states and up from 23rd place the previous year. Its nearest regional rival, the United Arab Emirates, came 32nd.

In recent years, this small state has turned itself into a “world technology powerhouse”, according to Augusto López Claros, the WEF’s chief economist. Much of the credit must go to Binyamin Netanyahu, who as Finance Minister in 2003 cut a deal with the Prime Minister, Ariel Sharon, that gave him free rein to push through market reforms. Mr Netanyahu sold off state assets, liberalised Israel’s monolithic banks and slashed its corporation taxes.

One firm in particular has become a symbol of Israel’s strength in research and development-heavy industry: Iscar, the world’s second-largest maker of cutting tools. Tool factories are expected to be dirty, but Iscar is different. All the floors are painted bright yellow, encouraging staff to keep them clean.

Not that there are many workers around. The company prides itself on its levels of automation, which enables the plant to be run at night by one person, at home, on their computer. Instead, around 10 per cent of the staff work on R&D.

The family-owned firm became world-famous overnight when the investing guru Warren Buffett bought 80 per cent of the business for $4 billion, in his largest overseas acquisition to date and one of the biggest foreign investment deals in the history of the Jewish state.

Cause, perhaps, for some long-overdue optimism in a troubled region.

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