Let's compare the dreams and the reality of Israel. The dreams were mainly the creation of a new Jew, the build-up of a new and egalitarian society, the molding of a new culture, and the creation of a new, but based on the old, comprehensive model of social, economic and political structure - Herzl named his utopian description, 'the old-new land' (Altneuland). For the socialist Zionist, the new society was to be imbued with the contemporary socialist ideologies, but permeated with the Jewish social traditions and the mystique of the Jewish people. The nonsocialist leaders and the socialist pioneers collaborated to create new institutions and build a new economy. They, in effect, constructed a homeland for the Jews. They also forged central political institutions that maintained a large degree of quasi-state power and authority.

These dreams were assumed to be achievable by the sheer will power of the pioneer. Economic laws, it was believed, could be ignored as irrelevant. Those pointing out economic constraints were never well received in the Yishuv society nor in the Israeli one. The pioneers aspired to liberate the Jew from the Diaspora mentality by insisting on physical labor. They also aspired to expand the capacity of the country to absorb more immigrants. They attempted to achieve this revolutionary transformation, not to follow laws of economic profitability. Shimshoni points out that Israeli leaders are skeptical of experts. 2 They would still remind anyone that when the Jezreel Valley was acquired in 1920, it was swampy and fallow. Foreign Zionists and experts opposed the deal based on what they felt was an objective cost-benefit analysis. Today, this valley is the heartland of Israel's flourishing agriculture.

The Zionist revolution that transformed persecuted Jews to proud farmers and soldiers in their own sovereign state started only a hundred years ago. To achieve its many dreams, it had to mystify the reality and to demand many sacrifices in the name of ideological beliefs. The core values were regarded as sacrosanct. The tiny community did not have enough of an economic base for the home market to develop its own industry and the new zealots refused to become simply a colonial minority living on the toil of the Arab worker.

As to reality, that depends on the period we are looking at and on the perspectives taken. Israel is a country characterized by sharp swings, abrupt changes and dynamic movement. Further, scientific research has begun to show some inconsistencies between official ideologically biased proclamations and reality, even during the Yishuv period. Thus, it was shown that the egalitarian ideal was not always a basis for actual pay, or that the pursuit of political power was a better explanatory variable than ideological announcements, or that Ben Gurion did not mold the army to be free of any political meddling.

In 1882, 20,000 Jews lived in Eretz Israel. In 1919, the Jewish population of Eretz Israel was 57,000. Between 1919 and 1932, the Jewish population grew by 8.0 per cent per annum. During the period 1932-1947, it increased by 8.4 per cent p.a. In the quarter century ending in 1948, the Jewish population in Eretz Israel grew eightfold. In 1948, when the state was proclaimed, there were 650,000 Jews in it; in 1988 - about 3.5 million. After 1948, the rate of immigration accelerated. By the end of 1951, the Jewish population had more than doubled again. The next doubling of Jewish population took two more decades, and since the 1970s the growth through immigration practically stopped, to be renewed in 1989.

Only 70 years ago, the area that is now Israel was a deserted land, neglected for generations and extremely poor. Its soil was largely washed to the sea, its forests were destroyed, and its rivers turned into marshes that had to be drained. The land did not have any electricity, road conditions were poor and small villages faced months of virtual isolation. In less than a lifetime, a group of dreamers worked diligently and hard to form a new nation, to restore a virtually dead language (one that was neglected and used only in prayers for more than two thousand years), to create some of the finest universities in the world, and to establish a network of political and economic institutions.

The country was certainly not one of milk and honey. However, it was turned from a weary and neglected place, infested by swamps and eroded by desert climate, to a mosaic of green and to a place where world records in milk production per cow or yields of several crops per dunam of land (and even more important-per cubic meter of water) were achieved by the obstinate devotion of many hard-working pioneers and by massive capital flows. Between 1922 and 1932, the gross national product (GNP) in the Jewish sector of Eretz Israel grew by 17.6 per cent p.a. (7.8 per cent p.a. per capita). Between 1932 and 1947 the growth was 11.2 per cent p.a. or 3.0 per cent p.a. per capita. The total stock of capital increased fifteen fold. 3

Moreover, in the first decade of Israel's existence GNP tripled; it doubled in the second decade. Finally, in terms of per capita product, the growth was 4.7 per cent annually in the British Mandate period, 5.2 per cent annual average from 1952 to 1972, and less than 1 per cent per annum since then. Thus, Israel enjoyed one of the highest rates of immigration and product growth in the world for about fifty years (from 1922, in the Yishuv period, to 1972). Since then, economic growth has come to a halt. Business firms have moved from stressing growth to emphasizing survival, from willingness to take business risks to hesitation, vacillation and irresoluteness.

The reasons for the arrest in growth have been studied by many of Israel's leading economists. It has been proposed that the growth stopped because of the escalation of oil prices, the worsening terms of trade, the zooming defense burden and the slowing down of immigration. Another reason for the changing fortune of Israel may have been its inability to adjust the institutions and the political weal to allow a return to growth, led by exports. This type of a growth strategy must be carried out by firms able to compete successfully in the world market. In the domestic economy, the government can protect industries, allow monopolies or procure products at higher than world prices. For example in order to achieve regional distribution of industries, certain firms may be favored. In the world arena, however, firms must compete in a free market and achieve competitive advantages. Moreover, export success is a moving target: competitors may increase their productivity, enhance their technological capabilities, or develop new products, making competition fiercer. Israel does not have many natural resource endowments, but does enjoy the availability of a highly motivated and well-educated labor force. This human capital should enable the country to compete in high-technology markets.

In the relatively short period of its existence, Israel's history is marked by many more notable great achievements. First, the country was not only able to absorb into its ranks a large influx of immigrants from more than a hundred countries, but also to mold them into a multifaceted culture of one nation, and more or less integrate them into both the economic and the social fabric of the country. Second, Israel was able to survive despite continuous threats from her neighboring countries and from Arab terrorists of different kinds. It successfully built a massive, strong and efficient military force that protected it in several and very frequent wars. It also developed an impressive array of military and security-related manufacturing industries, producing among others tanks and armored vehicles, jet aircraft, RPVs (remotely controlled pilotless vehicles), missiles, sophisticated communications equipment and some of the best and most reliable small weapons produced in the world. Israel also developed a network of agricultural training centers, that transformed persons with no knowledge or tradition in farming to skilled workers achieving some of the world records in agricultural production. Until 1974, Israel was also able to expand income per capita at a rapid rate.

In addition to these achievements, Israel developed a fine and notable network of social services. A large-scale program of social legislation was set in motion in 1953, when the National Insurance Institute was created, and more social legislation was introduced in the beginning of the 1970s. This second round has come about largely because of effective political pressures of the Jews of Asian and African origins but also because of guilt feelings of the old timers.

One result has been the sharp decline in net taxation. While gross taxation increased, the transfer payments increased even faster. Gross taxation zoomed from 28 per cent of GNP in 1960-65 to about 50 per cent in the first half of the 1980s. Net taxation was 19 per cent of GNP in the 1960s and about the same ratio in the 1980s. Moreover, the activities of the National Insurance Institute mushroomed. The Institute levied high payroll taxes and increased the gap between the cost of labor to the employer and the net wages, but financed more social services and a free high school education.

Further, there is a very strong sensitivity to human problems of adjustment. More often than not, the government was unable to implement a policy designed for economic recovery for fear of its impact on human misery and therefore on the probability of emigration. The threat of emigration is a very powerful tool that does not let the government apply too strong an economic medicine.

Agricultural experimental stations, after many trials and errors, found the most suitable crops for the land. Manufacturers, faced with innumerable difficulties, erected and developed factories producing extremely sophisticated products invented in Israel and sold in dozens of foreign markets. To be sure, not all investments were very wise. In fact, there is ample evidence that much of the investment resources have been consistently misallocated. A whole generation of medical doctors with great zest and indefatigable energy eliminated the many diseases, mainly malaria, and made Israel a model of health services, of hospitals provisions and of medical research. The rate of infant mortality per 1,000 live births, still 54.3 in the mid-195Os, was reduced to 8.8 by the end of 1987. The country enjoys an incredible diversity of newspapers and periodicals, theaters and concerts. The independence of judges and democratic institutions are zealously guarded.

Some dreams were simply achieved. Zionists spent many nights arguing on the differences between a national home and a state. Since 1948, the Jewish state has been a fact. The sovereign rights of the state are fact, as are the rule of law and the democratic regime. Now that the existence of the State of Israel is taken for granted despite its neighbors' rejection of its very right to exist, Israelis are groping to define a place for themselves and a new vision for their nation. Most of them came (or were born) after the state was established; not as pioneers believing in an ideology. They have to find a way for a tiny nation to continue to survive without being an integrated part of a larger trade block. They have to create, design and structure a new set of institutions, commensurate with changing economic reality and shifting ideologies. They also look for the best ways to define the unique bonds that tie them together as a Jewish state and, based on these bonds, the relationships between them and the Jewish people living outside Israel.

Once their dreams became a reality, some dreamers found themselves without new dreams. It is not easy to define the role of a Zionist outside Israel. It is also not clear that such national institutions as Keren Kayemet should continue to exist. Other dreams are moving targets. The State of Israel is a creative entity, changing continuously. It is a dynamic entity that has taken many forms in the relatively short period of its independent existence. Before discussing the many changes in the reality of Israel, some continuities should be mentioned.

Part III