An Israeli, the story goes, cables his friend, “start worrying, letter follows.” Indeed Israelis have a lot to worry about these days. But who would guess that among their worries would be the future of Israel’s miraculous success story — its high-tech industry.

It is a stupendous success. The number of Israeli high-tech companies on American stock exchanges is second only to America’s and Canada’s. Israel boasts almost as many start ups as Silicon Valley, about 2,500. Investment in Israeli venture capital ranks only behind that of California or New York among American states — quite a series of achievements for a country the size of greater Philadelphia that is constantly in war.

“Israel is blessed with a culture of innovation,” one of Israel’s high-tech pioneers, Yossie Hollander, who is the founder of New Dimension Software, which was sold to BMC Software, Inc. for $650 million. “It has a large educated workforce, a high volume of companies and physical concentration, all contributing to the same ‘cluster effect’ that you find in Silicon Valley.”

So why worry? Two recent conferences held by the Merage Foundation and the Ra’anana Conference for National High Tech Policy addressed the growing concern that Israel may be losing its competitive edge in a sector that represents 17% of its $140 billion GDP and close to 50% of its industrial exports.

The conferences bought together high-level international and Israeli participants from academia, industry, and government. They analyzed the twin dilemmas facing Israel: sustaining and growing its high technology sector and revamping the higher education system that underpins it.

An award winning international expert on Israeli high-tech, Susanna Khavul, who attended the conferences observed, “Israel is competing in the international bazaar for innovation where choice is increasing. Israel’s competitiveness depends on the ingenuity of its human capital. Israel must take an investing rather than a rationing approach to funding education, reduce bureaucratic controls, and introduce incentives and competition. Wiser investments in human capital today will keep the oil-wells of innovation pumping and continue to attract investors and customers in the future.” Mr. Hollander believes that the main problems facing the growth of Israeli high-tech are as follows: a decline in the number of engineers caused by declining educational standards, private sector financing limited to venture capital, regulations that need to be modernized to create additional financing options for those who don’t fit the venture capital model for bridge financing and for longer term investments. “A decrease in the country’s R&D,” he warns, “will have future deleterious effects.”

Inevitably perhaps in an economy that is still government dominated, both conferences focused on improving government “policies.” But high-tech thrived in Israel precisely because it was outside government control. Mostly financed by foreign investors, it exported its products and evolved an American inspired work culture — triggering productivity twice that of the productivity of the socialist inspired Israeli labor market.

Shlomo Kalish of Jerusalem Global Ventures says, “the phenomenal success of the Israeli startup industry followed the launching of its venture capital industry in the early 90’s. Earlier, funding of ideas and entrepreneurs depended on government bureaucrats. When venture capital developed, investments flowed to the most productive entrepreneurs with the highest world-wide per capita rate of innovation.”

Eventually growing government intervention and inordinately high taxation made the cost of doing business in Israel so high that even high-tech entrepreneurs were forced to look for government favors to stay competitive.

Israeli high-tech has much better chances of succeeding by preventing damage from government intervention than through better government “direction.” Costly government regulations and cost-inflating monopolistic practices — especially in financial markets should be removed. Government expenditures should be drastically cut to allow large cuts in taxes. Reforms must be pursued that will shift resources from Israel’s grossly inflated public sector to productive private investment.

Those who worry that high-tech will decline if government does not reduce its risks should realize that risk and its management are vital components of healthy growth. Risk-averse government bureaucrats generally increase risk by picking inefficient political favorites. Only competition promoting diffused private investment that entails accountability reduces risk. Competitive financial markets also provide small firms and startups better access to capital.

Generally, 60 years of large scale government “development efforts” only created massive bureaucracies that strangled private initiative and made Israel’s traditional industries non-competitive. Billions spent by governments on Negev and Galilee development retarded them rather than advanced them. Yet many Israeli policy makers, chiefly President Shimon Peres, keep insisting on government “direction” of high-tech. This despite the fact that no credible studies show that government ever played a consistent positive role in high-tech development.

The domination of Israel’s economy by government meant that despite an exceptional human capital and over $300 billion in aid, the Israeli economy cannot pay most of its workers more than $1,300 a month, and families are chronically in the red. It also made Israeli politics extremely fractious.

To help high-tech thrive, Israel must continue with radical reforms like the immensely successful financial market reforms that reduced costs and enhanced competitiveness and that were implemented by the former minister of finance, Benjamin Netanyahu. Markets can create prosperity in Israel, as they have done elsewhere, provided that the government will be cut from involvement in high-tech as well as elsewhere in the economy.

Mr. Doron is president of the Israel Center for Social and Economic Progress, an independent, pro-market think tank.