From Agriculture to High-Tech

The evolution of Israel's economy.

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As with many other aspects of modern Israel, understanding the history and roots of the Israeli economy requires a detour to ideas flourishing in the cradle of Zionism, central and eastern Europe in the late 19th century and the early years of the 20th century. There, budding Zionists planned for the economic future of a Jewish state. 

Disapproving the Status Quo

At the time, the economy of what was then called Palestine consisted nearly entirely of traditional Arab village farming alongside a tiny community of Jews who subsisted on charitable donations from abroad. This latter state of affairs was appalling to young European Jews joining the Zionist movement, many of whom were convinced that the status of Jews could improve only when they chose to undertake "honest labor," especially agricultural work.

The Zionist leadership also included individuals who, under the influence of socialist and communist ideas in vogue in eastern Europe at the time, rebelled against the stereotype of Jews as urban merchants. For them, industrial and agricultural laborers were "working class heroes," and they strove to create a new class of laboring Jews as part of the Zionist effort.

israel's economyThis background found expression in Zionist settlement activity in Israel in the early 1900s, which was characterized by an emphasis on establishing agricultural communities and on "communal equality"--the foundations of the famous kibbutz movement.

Beyond the ideology of "working the land" that underpinned this agricultural orientation was the belief that the nearly total lack of natural resources in the Land of Israel left few options in this regard. At the same time, the seeds were laid for the creation of a powerful labor-union umbrella organization that strove to represent all the workers at the national level, the Histadrut. The first leader of the Histadrut was none other than David Ben-Gurion, who would later found the state of Israel and steer it as its first prime minister--an indication of the centrality of socialist ideas within early Zionism.

The Fleeing Bourgeois

A new element was injected into the rapidly growing Jewish economy of pre-state Israel in the 1930s, when a wave of anti-Semitism in Europe caused large numbers of established bourgeois Jews from countries such as Poland and Germany to flee to the shores of Palestine. For the most part, these were well-educated urban dwellers who transferred with them the urban and industrial culture to which they were accustomed in Europe. In this period cities greatly expanded, light-industrial enterprises sprouted, and a stock-exchange was founded in Tel Aviv.

By the time the State of Israel was declared in 1948, these elements were interwoven into a mixed national economy. Government policy was firmly labor and socialist oriented. This resulted in the creation of a multitude of state-granted private-sector monopolies alongside state-owned companies under the direct control of government ministries. The national budget, which included a large defense-spending component, accounted for a significant proportion of GDP.

In addition to all this, the Histadrut labor union was a powerful economic player in its own right. Not only did it represent most of the workers in the country, thus wielding the threat of calling a crippling national strike at any time, it itself owned vast economic assets and major industrial concerns. Both the Histadrut and the government were controlled by the leading political party at the time, the Labor Party, a fact that often led to overly cosy relations.

At the same time, the private sector was not entirely shackled. Throughout the 1950s and much of the '60s the Israeli economy rapidly industrialized and boasted impressive annual growth figures. A balance of power emerged between the government, the Histadrut, and the industrial private sector. In practice, national economic policy was frequently determined in back-room summit negotiations involving representatives of each of these three major sectors.

The Impact of War

This statist state of affairs began to unravel in the 1970s. The world economic shocks of that decade were felt keenly in Israel, which was already reeling from the economic costs incurred in the 1973 Yom Kippur War. In the elections of 1977, the Labor party was knocked out of power for the first time in Israel's history and was replaced by the Likud party, which favored free-market policies. The Likud immediately implemented a series of economic liberalization laws, but the results were for the most part catastrophic.

The early 1980s were marked by hyper-inflation and economic malaise, which caused a retrenchment in liberalization policies; it appeared that overnight transformation from a statist economy to a free-market economy is not a simple step. The chaos came to end in 1985, when the government cobbled together an old-fashioned Histadrut-industrialists-government negotiating process that resulted in painful but necessary fiscal, budgetary, and wage austerity measures.

Nevertheless, liberalization proceeded, albeit at a slower pace. This coincided, in the late 1980s and early 1990s, with the underlying structural shift in the economy from agriculture and light industry to a knowledge-based economy, which placed Israel in an excellent position in the '90s for rapid economic growth following the signing of the Oslo peace accord, pushing its per-capita GDP to European levels.

The old verities of Labor Zionism were inverted: It was not the agricultural or manual Laborer who was the new hero of the economy, but rather young urban professionals and intellectuals. The Land of Israel, it turned out, had a natural resource that was worth more than all the others: the inquisitiveness and creativity of the residents of the land. The Histadrut Labor union, after years of mismanagement, was reduced to a shadow of its former self, and it failed to make inroads into the free-market leaning high-tech sector.

One thing, however, had remained the same: Immigrants bringing with them intellectual capital continued to improve the natural human resources. The olim (immigrants) from the former Soviet Union in the 1990s, who brought with them significant scientific and engineering talents, sparked new economic growth just as previous waves of immigrants had for a century. The expansion of high-technology industry was so prominent that Israel was called in some places "Silicon Wadi," a play on words incorporating the Arabic word for "valley."

The Recession

The economic boom-times came to an abrupt end in the year 2001. The collapse had two immediate causes: the NASDAQ crash in New York all but stopped the investment capital that had been flowing in to Israeli start-ups, and the new Palestinian Intifada frightened visitors away from the country. The recession lasted until the first half of 2003, when the global market began to recover. Israel experienced only a minor recession in 2008-2009 as a result of the global financial crisis, making it one of the most resilient economies in the world according to international ratings.

The future of Israel's economy will depend a lot on the state of the world economy as well as on the status of political relations between Israel and the Palestinians.

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Ziv Hellman is a Jerusalem-based writer and mathematician. A former editor at the Jerusalem Post, Ziv was a founding member of Peace Watch--the watchdog group reporting on the implementation of the Oslo Agreements. He also led the Israeli elections observer team evaluating the Palestinian Authority elections.