I. Brief Economic History
The first survey of the Dead Sea in 1911, by the Russian Jewish engineer Moshe Novomeysky, led to the establishment of Palestine Potash Ltd. in 1930, later renamed the Dead Sea Works. In 1923, Pinhas Rutenberg was granted an exclusive concession for the production and distribution of electric power. He founded the Palestine Electric Company, later the Israel Electric Corporation. In 1937, there were 86 spinning and weaving factories in Israel, employing a workforce of 1,500. Capital and technical expertise were supplied by Jewish professionals from Europe. The Ata textile plant in Kiryat Ata, which went on to become an icon of the Israeli textile industry, was established in 1934.The industry underwent rapid development during World War II, when supplies from Europe were cut off while local manufacturers were commissioned for army needs. By 1943, the number of factories had grown to 250, with a workforce of 5,630, and output increased tenfold.
After statehood, Israel faced a deep economic crisis. As well as having to recover from the devastating effects of the 1948 Arab-Israeli War, it also had to absorb hundreds of thousands of Jewish refugees from the Europe and the Arab world. Israel was financially overwhelmed and faced a deep economic crisis, which led to a policy of austerity from 1949 to 1959. Unemployment was high, and foreign currency reserves were scarce. In 1952, Israel and West Germany signed an agreement stipulating that West Germany was to pay Israel for the persecution of Jews during the Holocaust, and compensate for Jewish property stolen by the Nazis. Over the next 14 years, West Germany paid Israel 3 billion marks. The reparations became a decisive part of Israel’s income, comprising as high as 87.5% of Israel’s income in 1956. In 1950, the Israeli government launched Israel Bonds for American and Canadian Jews to buy. In 1951, the final results of the bonds program exceeded $52 million.
Additionally, many American Jews made private donations to Israel, which in 1956 were thought to amount to $100 million a year. In 1957, bond sales amounted to 35% of Israel’s special development budget. Later in the century Israel became significantly reliant on economic aid from the United States, a country which also became Israel’s most important source of political support internationally. The proceeds from these sources was invested in industrial and agricultural development projects, which allowed Israel to become economically self-sufficient. Among the projects made possible by the aid was the Hadera power plant, the Dead Sea Works, the National Water Carrier, port development in Haifa, Ashdod, and Eilat, desalination plants, and national infrastructure projects. After statehood, priority was given to establishing industries in areas slated for development, among them Lachish, Ashkelon, the Negev andGalilee.
The expansion of Israel’s textile industry was a consequence of the development of cotton growing as a profitable agricultural branch. By the late 1960s, textiles were one of the largest industrial branches in Israel, second only to the foodstuff industry. Textiles constituted about 12% of industrial exports, becoming the second-largest export branch after polished diamonds. In the 1990s, cheap East Asian labor decreased the profitability of the sector. Much of the work was subcontracted to 400 Israeli Arab sewing shops. As these closed down, Israeli firms, among them Delta, Polgat, Argeman and Kitan, began doing their sewing work in Jordan and Egypt, usually under the QIZ arrangement. In the early 2000s, Israeli companies had 30 plants in Jordan. Israeli exports reached $370 million a year, supplying such retailers and designers as Marks & Spencer, The Gap, Victoria’s Secret, Wal-Mart, Sears, Ralph Lauren, Calvin Klein, and Donna Karan.
In its first two decades of existence, Israel’s strong commitment to development led to economic growth rates that exceeded 10% annually. Average living standards steadily rose, with the expenditure of an average wage-earner’s family rising in real terms by 97.% between 1950 and 1963. The years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled, inflation soared and government expenditures rose significantly. Also worthy of mention is the 1983 Bank stock crisis. By 1984, the economic situation became almost catastrophic with inflation reaching an annual rate close to 450% and projected to reach over 1000% by the end of the following year. However, the successful economic stabilization plan implemented in 1985 and the subsequent introduction of market-oriented structural reforms reinvigorated the economy and paved the way for its rapid growth in the 1990s and became a model for other countries facing similar economic crises.
Two developments have helped to transform Israel’s economy since the beginning of the 1990s. The first is waves of Jewish immigration, predominantly from the countries of the former USSR, that has brought over one million new citizens to Israel. These new immigrants, many of them highly educated, now constitute some 16% of Israel’s 7.5 million population. The second development benefiting the Israeli economy is the peace process begun at the Madrid conference of October 1991, which led to the signing of accords and later to a peace treaty between Israel and Jordan (1994). Despite the Second Intifada, which cost Israel billions of dollars in economic terms, Israel managed to open up new markets to Israeli exporters farther afield, such as in the rapidly growing countries of East Asia.
In the past few years there has been an unprecedented inflow of foreign investment in Israel, as companies that formerly shunned the Israeli market now see its potential contribution to their global strategies. In 2006, foreign investment in Israel totaled $13 billion, according to the Manufacturers Association of Israel.The Financial Times said that ‘bombs drop, yet Israel’s economy grows’. Moreover, while Israel’s total gross external debt is US$95 billion, or approximately 41.6% of GDP, since 2001 it has become a net lender nation in terms of net external debt (the total value of assets vs. liabilities in debt instruments owed abroad), which as of June 2012 stood at a significant surplus of US$60 billion.The country also maintains a current account surplus in an amount equivalent to about 3% of its gross domestic product in 2010.
The Israeli economy withstood the late-2000s recession, registering positive GDP growth in 2009 and ending the decade with an unemployment rate lower than that of many western countries.There are several reasons behind this economic resilience, for example, the fact, as stated above, that the country is a net lender rather than a borrower nation and the government and the Bank of Israel’s generally conservative macro-economic policies. Two policies in particular can be cited, one is the refusal of the government to succumb to pressure by the banks to appropriate large sums of public money to aid them early in the crisis, thus limiting their risky behavior. The second is the implementation of the recommendations of the Bach’ar commission in the early to mid-2000s which recommended decoupling the banks’ depository and investment banking activities, contrary to the then-opposite trend, particularly in the United States, of easing such restrictions which had the effect of encouraging more risk-taking in the financial systems of those countries.
II. Formula for economic success
WHAT ACCOUNTS FOR ISRAEL’S SUCCESS?
The success of Israel’s economic development despite its lack of security is attributable to four main factors:
Location of the Violence
Although Israel has been in a state of war (or cold peace) with surrounding Arab states for its entire existence, the violence associated with the Arab-Israeli conflict rarely penetrated Israel’s borders on a significant scale until the 1990s. Thus, economic development proceeded unscathed by the destruction of war. Terrorism, on the other hand, did reach Israeli targets inside the country and around the world since the pre-state era. But terrorism, as will be explained, does not threaten development in the same way that war does. In its first 40 years, Israel fought a war per decade with surrounding Arab countries. However, only on two occasions–in 1948 and 1973–did Arab armies launch full scale invasions of the Jewish state. Both times, Israel’s army repelled the offensives before they made serious inroads into Israeli territory, and managed to push the fighting into Arab land. Thus, the brunt of the attacks was absorbed by Israel’s military in terms of lost lives and damaged equipment. Spared the widespread destruction and occupation usually associated with war, Israel’s economic infrastructure was able to develop unharmed.
Its transportation and communications networks were undisturbed; its ports remained open; its factories and production facilities continued to produce, as did its farms; its offices and businesses operated regularly; and its laboratories and universities were able to thrive far from the war front. Of course, Israel’s workforce was affected by the wars as reserve soldiers were called into active duty, but not to the extent of crippling productivity. The suicide bombings of the past decade changed the equation by bringing the violence into the hearts of Israel’s major cities, into points of mass transit and commerce such as buses and shopping malls. Paradoxically, Israel saw enormous economic growth in the 1990s spurred by mass immigration and foreign investment. The key to understanding why the violence did not deter growth lies in the nature of terrorism and the fact that it aims at psychological rather than physical destruction. Terrorism does not stop industrial activity.
Terrorists targeted wedding halls and cafes, not the Tel Aviv Stock Exchange or high tech industrial parks. Israelis have continued to work and produce, even if they have stopped visiting crowded places. Similarly, while waves of terrorism have frightened away tourists, causing heavy losses to tourism-related sectors of Israel’s economy, they have not discouraged foreign investment mainly because “new economy” goods and services are often intangible and thus are not in danger of physical destruction.
Moreover, when foreign investors have been fearful of traveling to Israel, Israelis have traveled to them–another indicator that new economy business can be conducted almost anywhere (i.e., there is no factory to inspect, construction to oversee, etc.) As a result, despite the terrorism, the risks associated with investment in the 1990s were fewer than in the previous 40 years. In sum, the violence of the Arab-Israeli conflict did not have much of a direct influence on the development of Israel’s economy. Israel’s physical infrastructure was largely insulated from the fighting, and its “intellectual” infrastructure has not provided a ready mark for attack.
One would expect that a country perpetually at war with its neighbors, with a compulsory military draft for men and women (and reserve duty thereafter), and under constant terrorist threat, would not attract large numbers of immigrants. Yet Jewish immigration to Israel has continued unabated since the yishuv era, peaking in the early state period and again after the fall of the Soviet Union. High rates of immigration led to expanded consumer demand and the growth of a domestic market; job creation and home construction; a larger workforce and increased productivity; and, with the arrival of highly educated immigrants, scientific progress and commercial innovation. The unstable security situation exerted little, if any, impact on immigration because most of the immigration was propelled by non-economic forces. (The 1990s immigration from the former Soviet Union is an exception, as will later be explained.)
Many Jews, especially in the early years of the state, immigrated to Israel because of religion and ideology. During the pre-state era, the idea of building a Jewish state in the biblical land of Israel was a practical and logical alternative to the antisemitism that many Russian and Eastern European Jews endured in their native countries. Similarly, after the decimation of European Jewry during the Holocaust, Israel served as a haven for many survivors and their families. For many religious Jews around the world, Israel held a strong pull as the realization of a promised return to the Jewish homeland. Such religious motivation has continued to bring Jews to Israel, particularly from Anglophone countries. After the state’s creation, Israel’s “pull” was complemented by a “push” from Arab and Muslim countries to expel their Jewish residents. The anti-Israel sentiment in Middle Eastern countries, especially those that had just fought against Israel’s independence, caused many Jews to fear for their safety. Many Jews fled countries such as Iraq, Yemen, and Iran in secret, leaving behind their homes and possessions.
Today, they (and their descendants) comprise roughly half of the country’s Jewish population. It is important to remember that successive Israeli governments have actively encouraged immigration as a means of strengthening the country against the vastly more numerous surrounding Arab population. (Officials have also made an ideological plea for an “ingathering of the exiles” to attract Jewish immigrants.) Even in 2002, the government of Prime Minister Ariel Sharon called for massive fund-raising to help Argentina’s approximately 250,000 Jews escape their country’s current political and economic turmoil, which has left them in a precarious position. The Jewish Agency, a governmental body with representatives around the world, vigorously recruits Jewish immigrants and helps settle them once they arrive in Israel.
The Agency played an important role in airlifting thousands of Yemenite Jews to Israel in the 1950s in “Operation Magic Carpet” and again in the 1984-85 “Operation Moses” which brought almost 17,000 Ethiopian Jews to Israel, and the 1990-1993 “Operation Solomon” during which 15,000 Ethiopian Jews were airlifted to Israel in one day. The Jewish Agency was also instrumental in engineering early Soviet immigration to Israel starting in the 1970s when it operated covertly in the USSR, which then did not allow Jews to emigrate. It maintained a prominent role throughout the 1990s, when more than one million Soviet immigrants arrived in Israel.
The Soviet immigration of the last decade stands out from previous waves both because of its sheer volume and because of its economic motivation. In fact, for many of the immigrants, Israel was a second-choice destination; the United States was the first. The political and economic disarray in the former Soviet republics, including Russia, drove the mass exodus of Soviet Jews who were undaunted by the prospect of military service in the face of the first Palestinian intifada, which began in December 1987, or the Iraqi Scuds that fell near Tel Aviv during the 1991 Persian Gulf War. These immigrants brought to Israel a tremendous reservoir of skill and education that helped fuel the high tech boom of the last decade.
Like many emerging markets, Israel could not have achieved such a high rate of development without significant infusions of foreign capital. Private capital usually gravitates toward resource-rich, stable areas. Israel, of course, lacks both precious resources and stable borders. Yet it still managed to attract substantial foreign transfers, the main sources of which–donations from world Jewry and wealth transfers resulting from Jewish immigration, German reparations, and U.S. aid–were driven by political and ideological motives. The non-economic character of the transfers–the fact that the money came explicitly for development purposes, rather than for profit–afforded successive Israeli governments considerable leeway to direct development and subsidize a high standard of living. It was also essential given the high levels of government spending necessitated by Israel’s defense burden and immigrant absorption.
In fact, foreign aid to Israel on a per capita basis is the highest in the world. The security threat to Israel has actually resulted in higher levels of foreign transfers. For example, contributions from world Jewry to Israel have increased during wartime. More important is the U.S. military aid that Israel has received annually since the early 1970s. Most of the military aid, totaling almost $2 billion annually, consists of imports of U.S. military equipment–a condition stipulated by the American government. The aid helps relieve Israel’s heavy defense burden and provides Israel with the most advanced weaponry necessary to maintaining its qualitative edge in the region.
With the exception of the American military aid, the foreign “gift” transfers to Israel are slowly coming to occupy a less prominent position in the Israeli budget. German reparations to the state ended almost 40 years ago (though payments to individual survivors continue) and donations from Diaspora Jews are becoming less important relative to GDP. There has even been talk, most notably by former Prime Minister Benjamin Netanyahu, about ending the non-military component of the annual U.S. aid package, which amounts to about $1 billion a year.
The Military-Industrial Complex
The final factor accounting for Israel’s economic success despite its perilous security situation is the emergence of the country’s formidable and internationally competitive defense industry, which became a crucial engine for export-oriented growth. Created to supply the defense needs of constant warfare against Arab neighbors, Israel’s government-funded military-industrial complex eventually grew to become the fifth largest arms exporter in the world. By pursuing a goal of technological superiority in military equipment and strategy, the defense sector triggered a “spillover” effect that powered Israel’s commercial industries and the 1990s high tech boom. The local success and global expansion of Israel’s military industry following the 1967 War had a number of positive effects on Israel’s economy. Traditionally, military production has been the most modern sector of the economy, benefiting from massive R&D investment.
Indeed, during the 1980s, an estimated 65 percent of all government R&D expenditures were defense-related (compared to 13 percent in civilian sectors). The advanced technology developed in military research centers has been transferred to civilian sectors largely by former soldiers trained as army technicians, programmers, and engineers. The result has been industrial innovation and the creation of Israel’s high tech economy. Israel’s military production has also netted the country significant export income. Military exports grew in the 1970s parallel to Israel’s battlefield success and reputation. From 1973 to 1997, arms exports increased 25 times over from $40-70 million to $1.52 billion. By 1986, the New York Times reported that arms and security services accounted for more than 25 percent of Israel’s industrial exports. That number is still accurate today. Such high production has also ensured employment for many Israelis.
Today 20 percent of all industrial employment is military related. Finally, financing a large defense industry also allowed the government to direct development–and employment–to less developed parts of the country. Although Israeli military procurement has shifted in recent years to become more dependent on U.S.-made weapons, especially given the annual “strings-attached” U.S. military aid package of grants and loans to Israel, Israel’s defense industry remains strong. It became even stronger after September 11,2001, as global demand for Israeli security services rose. However, its influence on Israel’s economy is slowly declining as the private high tech sector, which produces dual use technologies and offers young scientists greater financial rewards, comes to dominate. Nonetheless, the military-industrial contribution to Israel’s economic growth cannot be emphasized enough.
PRESIDENTS WHO CONTRIBUTED TO THE ECONOMIC DEVELOPMENT OF ISRAEL
First President of the State of Israel 1949-1952
The first President of Israel, Professor Chaim Weizmann – scientist and statesman – was among the leaders who were instrumental in the establishment of the State of Israel. In April 1949 President Weizmann visited the United States. Met by crowds of record-breaking size, he mobilized an unprecedented $23 million in contributions for the State of Israel and for the fledgling scientific research facility which now bears his name – the Weizmann Institute of Science.
Second President of the State of Israel 1952-1963
Ben-Zvi took great interest in the various Jewish communities who came to Israel, and in the history of Jewish settlement in the Land of Israel. He focused on the traditions, rituals and religious art of Oriental Jewish communities – Yemenite, Persian, Kurdish, Bucharan and others. He himself wrote some twenty volumes on the history of Jewish communities as well as on the unbroken chain of Jewish settlement in the Land of Israel since the days of the Second Temple. His work laid the foundations for Yad Yitzhak Ben-Zvi, which is devoted to the study of Jewish communities as well as of the Land of Israel and Jerusalem.
However, Ben-Zvi’s devotion to the “Tribes of Israel,” as they were called at the time, was more than academic. A proponent of “diversity” decades before the word became popular, Ben-Zvi invited representatives of different Jewish ethnic communities and of minority communities to the President’s residence – a monthly event attended by 100-200 guests from all over the country. Each group related the history of its community, its customs, rituals and traditions, and displayed the items which evolved around these traditions.
Third President of the State of Israel 1963-1973
One of the projects he launched was the study group on Diaspora Jewry, established in conjunction with the Institute of Contemporary Jewry at the Hebrew University. He invited academics to participate in a monthly gathering dedicated to examining and discussing intellectual and abstract issues in Jewish life. This rather exclusive and highly-prestigious circle, which brought together Jerusalem’s intellectual elite with representatives from Diaspora communities, became an “institution” in itself. Each guest lecture was followed by a discussion, which was often summarized by Shazar himself and subsequently published. Shazar also strove to enhance the stature of the State of Israel by bringing distinguished writers and scientists to the country as his personal guests, in order to expose such public-opinion makers to Israel and turn them into ambassadors of good will for the new state. Among those who came, at Shazar’s invitation, was author Isaac Bashevis Singer.
Unlike many Zionist leaders, Shazar did not reject Yiddish culture or totally abandon his religious upbringing. At a time when many other Israeli leaders publicly expounded the hegemony of Hebrew culture as part of their rejection of Diaspora life, Shazar remained firmly rooted in the wellsprings of his early years, with an affinity for Hassidism and for East European Jewish culture as a whole. He established a synagogue at the President’s residence and reached out to Jewish communities in the Diaspora. Distinguished guests from abroad were always taken to Shazar’s Saturday morning Kiddush after synagogue services
Fourth President of the State of Israel 1973-1978
Katzir placed special emphasis on education and science as a fulcrum to economic prosperity. As a former chief scientist of the IDF (1966-68), Ephraim Katzir made numerous tours of army units and military research facilities, as well as of industrial complexes and educational facilities, including those in development towns. Using his personal standing and the prestige of his office, he galvanized academics to address the danger of assimilation in Diaspora communities by pressing for the establishment of departments of Jewish studies at colleges and universities abroad – deemed the “last chance” to expose Jewish youth in the Diaspora to their heritage and Jewish identity.
Fifth President of the State of Israel 1978-1983
During his Presidency, he strove to act as a bridge between Israel’s ethnic groups, religious and secular, Sephardim and Ashkenazim, left and right, Jews and Arabs. Striving to draw those on the periphery into the mainstream of Israeli life, he visited neglected settlements and disadvantaged urban neighborhoods, encouraging community self-confidence. Navon’s warmth and diplomacy and the prestige of his office did much to defuse a potentially explosive situation on the eve of the withdrawal from Sinai. He also opened the President’s residence to writers and performers from across the cultural spectrum.
Sixth President of the State of Israel 1983-1993
Over the next two decades, Chaim Herzog combined a business career with public service, first as managing director of an industrial development group, later as a senior partner in a Tel Aviv law firm. He was chief military commentator for Israel Radio during both the Six-Day War and the Yom Kippur War and became renowned for his balanced broadcasts which boosted the morale of the population. Herzog was called back to active duty after the 1967 Six-Day War, to serve as the first military governor of Judea, Samaria and East Jerusalem.
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