From Agriculture to High-Tech

The evolution of Israel's economy.

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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."

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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.