|Back to Publications|
THE ISRAELI ECONOMY: A RETROSPECTIVE VIEW
In many ways, Israel is no different from other small countries, attempting to define and maintain for themselves a place in a world increasingly becoming globally integrated. It is one of the few states founded by a migration of settlers, implanting new settlements and forging new institutions in virgin territories perceived to be uninhabited. In such new societies, the founders create a new social order, and do not have to take into account the traditions of an entrenched population.
To be sure, the land to which the pioneers came was not totally empty (nor were other new countries). However, they built new institutions, ignoring any indigenous social order, be it the 'old Yishuv' or the Arabs. The frontier experience, the ideological motivation, the creation from scratch of new institutions, the revolutionary nature of the society and the transplantation of ideas from homeland to the new environment are all common to all new societies: Australia, Canada, New Zealand, the Republic of South Africa, or the United States.
Israel is unique among new societies both by being developed on the basis of socialist principles and in being created by immigrants from Eastern Europe, not by settlers from Britain or Western Europe. Later, Israel was to be unique because of its move from a dominance of socialist thinking to a strategic alliance with the US. This shift was a result of a decline of the importance of ideology concomitant with an increase of Soviet antagonism toward Israel, but also a growing evidence that socialist orthodoxy did not work. Stalin's assassination of almost all Jewish writers in 1952, and the persecution of Jewish doctors in 1953, certainly did not make it easy even for the hardened ideologues to see the USSR as a friendly nation. Israel is also unique in the magnitude of the foreign unilateral transfers it was able to receive. The uncertainty regarding the continuation of these flows is a major factor in evaluating Israel's future political economic problems.
Israel can boast of some great achievements but also some equally large problems. It is also a country with a very dynamic, ever-changing texture. Understanding Israel is like trying to catch a moving target. Its institutions keep modifying their shape and the society undergoes metamorphoses. Modifications have been a result of the confrontation with reality, often a cruel reality. To understand Israel, it is important to analyze the political, economic and cultural continuities and discontinuities. To understand what has been endured and what has been revamped, one should look for the informal relationships, not the formal systems. Israel is a tiny country, and a very informal one. The crucial question to be confronted is not what were the formal changes, but how did the informal system work? In many cases, titles of individuals do not reveal their real importance. A title of Deputy Prime Minister may mean that its holder is an extremely important individual, or it may simply be an empty title. The President of Israel has only symbolic power.
Israel is an extremely complex society, full of contradictions, and including a wide variety of entities, associations and polities. The Israeli society is a diversified body, insurgent to paternalistic authority, and rebellious against government authority. It is full of tensions, oppositions and bitter well-intentioned controversies.
Getting a Perspective
The buds of Israel's political economy may be found in the period immediately after World War I. The few immigrants who came to Eretz Israel in the first Aliyah, or wave of immigration, did not have any central political institution. The World Zionist Organization started its 'Palestine office,' headed by Dr Arthur Ruppin, only in 1908. A Zionist leader, Menachem Ussishkin, convened an 'assembly of the Yishuv' in 1903, but the central political organization created there lasted only a year. The two main political bodies of the Jewish colonization movement in Eretz Israel - Ha'va'ad Ha'leumi (the National Council) and the Jerusalem Office of the World Zionist Organization (whose functions were transferred to the Jewish Agency in 1929) - were both created in the 1920s, under the British Mandate.
The Balfour Declaration served as a recognition of the international community in the legitimacy of the Zionist vision to resettle the land of their forefathers and as an opportunity to implement that vision. By 1948, when David Ben Gurion, an immigrant of the second Aliyah, read the declaration of independence, stirring every Jewish heart all over the world, two millennia of a Jewish stateless situation ended. In a period of a few decades, the dreamers saw at least one facet of their dream materialize. The revolutionaries became the rulers of a sovereign state.
Israel's economic problems cannot be discussed without taking into account the heavy burden of the defense toll on the economy. One result is the relatively large power of the Defense Ministry and its almost unlimited ability to get funds. The need for security was coupled with two other needs, dictated by the basic values of the state's leaders. The first was the burning belief, stemming from many generations of Jewish tradition, in the super importance of mutual aid and mutual responsibilities, and therefore in the necessity of immediate forging and implementing of social tools generally identified with a welfare state. The second stemmed from a utopian point of view of the Founding Fathers on the necessity of strict ideals of equality, socialism, and the superiority of the collective decision to what was perceived as a wild pursuit of affluence and private welfare.
The importance of mutual aid dictated a widely agreed increase in the level of economic intervention of the state and a rise in the size of the government budget. It also resulted in an inability of the economy to adjust to external shocks or to cope with the need to change the industrial structure even at a price of a temporary high unemployment. The second belief meant a general preference for societal requirements over those of the individual. Any theory based on Hedonism was perceived as improper for the special needs of the Israeli society and of building a Jewish Home Land.
The combination of these three factors with the gloomy reality of a less developed country, the general perception of inadequate sources of private capital and only a handful of private entrepreneurs all aided to reinforce the belief that the state alone could achieve security, social goals and accelerated economic growth. A widespread consensus that government should intervene, regulate and direct the economy developed. The very high degree of governmental intervention in Israel and its deep involvement in decisions almost to the level of an individual firm had deep ideological roots. It is a consequence of the way the political economy had been developed during the Yishuv period and reached its apex in the 1920s. It is strongly based on deep ideological beliefs coupled with pragmatic political power considerations. As we shall see, the political leaders did not rely on ideology alone.
The government was also able to tap large sources of capital and therefore could decide on the allocation of that capital. If the government had been able to master political will and create the consensus required to avoid a mass protection of the domestic production, the collectivist type of decisions would not have necessarily caused severe misallocation of resources. The Israeli government, however, was very reluctant to open the economy to full-blown foreign competition.
Israel was able to achieve so many of its objectives simultaneously in part because it had at its disposal massive capital inflows that allowed a high rate of capital formation. The attempt to achieve simultaneously so many national objectives was also made possible by a willingness to sacrifice current consumption for later needs coupled with a high level of economic growth. Later, when growth stopped and private consumption continued to grow, the multiple goals were financed by a significant increase in both domestic and foreign debt. Total unilateral transfers increased dramatically in the 1970s and the 1980s, largely as a result of the jump in US aid. Yet the needs seem to have been insatiable. More importantly, Israelis shared a sense of common destiny, stemming from a long and tight struggle to survive and a strong feeling that there was no alternative. In the 1980s, this consensus was shattered, at least to some extent.
Several major problems have troubled the economy. First among these is the extreme dependence of the country on the continuation of a large inflow of capital to finance the very large import surplus. Almost since the first decade of Israel's existence, its economists have repeatedly warned that 'sometime in the next few years, the capital inflow will decrease substantially. 1 Economists were worried about the dislocations and the costs that would result from the necessary transformation of the economy to accommodate a lower level of capital inflows. Both because of luck and political astuteness, capital continued to flow, and the structural adjustments continue to be postponed. In 1952, Israel's net foreign debt was $375 million; in 1988, it was $18.6 billion. Between 1952 and 1964, the GNP tripled; and exports already covered about 50 per cent of imports. Between 1965 and 1972, GNP continued to grow by 8 to 15 per cent a year, except during the recession of 1966-7. From 1974 to 1990, growth has stopped and Israel's increased living standards have been paid for by a deterioration in the balance of payments, heightening the dependence on foreign sources of capital. One result was that foreign debt has reached record levels. Still, in the tables of world indicators, published by the World Bank, Israel's GNP per capita in 1986 ($6,210) ranked number 22 among the 117 countries listed in the World Development Report for 1988. It was surpassed by the rich oil countries, by 17 out of 19 'industrial market economies' (except Spain and Ireland) and by Singapore and Hong Kong.
Another major change in the 1970s was the first rejection of a sitting government in Israel's history. The election results of May 17, 1977, were the first setback for Labor since its victory against its major opponents in the Yishuv period and its ascendancy to the control of the Jewish National Institutions in 1931. This major upheaval, again, was interpreted in different ways by different sociologists and political scientists. Some stressed demographic trends relating to age and ethnicity that undermined Labor's base of traditional electoral support. Others saw the problem more in the public scandals that rocked the party and undermined public confidence.
In the 1988 elections, the ultra-Orthodox parties gained a bigger share of the votes, an outcome unpredicted by any of the experts that were carrying out public opinion polls. Anti-Zionist religious parties today hold the power to decide the form and structure of the Zionist state.
By 1970, Israel was no longer a closely knit society of idealists and revolutionaries, nor were most of its citizens dependent on the government so that it could make them docile and obedient. The revolutionaries became leaders or bureaucrats. Their solidarity was not always extended to include the new immigrants, who came from totally different ethnic origins, cultural molds, and traditions. Their previous emphasis on obligations sometimes turned into a stress on entitlements.
These changes are a few of many that show the basic continuous changes in a dynamic society such as Israel. Israel is a moving target, in which things are still shaping out. They took place amid a constant threat to the very existence of the State of Israel. The increasing sophistication of weapons systems made it more and more difficult to rely on soldiers 'on 11 months' leave.' The army has become increasingly more professionalized, with professional soldiers devoting decades of their lives to military service, and leaving the service with very little that would prepare them for non-military life. Equity problems of the sharing of reserve duty burden were becoming important issues.
Israel was created as a Jewish state, and most of its citizens want to see it as a Jewish state. Unless Israel finds a way to attract many more Jews to live within its borders, the question of the relations between Israel in its pre-1967 borders and the Palestinians of the area (that used to be called the West Bank) would become more than a question of military needs, secured borders or ideological attachment to the land of the forefathers. There will be a need to discuss how to maintain the Jewish majority without becoming a garrison state or an apartheid-like regime. Different possibilities may be examined, including exchange of populations. The relations with Jews in the Diaspora are also going through a major transformation.
These themes are largely interrelated. They are in turn related to the ability of Israel to survive and finance its swollen current account deficit. The solutions to all these problems will have to come from within the nation. These solutions cannot be based only on economic science. Based on economic considerations in their narrowest sense, Israel cannot survive, and most of the elite can become much richer by moving to other countries. The forefathers of Israel, who created the mythos of the pioneer, understood that point very well. In the much more heterogeneous society that is the Israel of today, it is crucial to be able to reach new consensus, in which economic efficiency considerations will be taken into account. Otherwise, Israeli firms could not compete in the global arena. Such a consensus does not necessarily mean that Israel must adopt a liberal type free enterprise economy. It must, however, change the mythos to allow the new entrepreneurs to become the heroes of the future. While it is almost natural to emphasize the problems and difficulties, it is important to do so with some perspective.