Israeli Economy

by

Paul Rivlin

• LAST REVIEWED: 29 November 2022
• LAST MODIFIED: 29 November 2022
• DOI: 10.1093/obo/9780199840731-0110

Introduction

The achievements of the Israeli economy since 1948 have been immense. The population has grown from 750,000 at independence to 9.3 million at end 2020, while gross domestic product (GDP) rose from $6.5 billion to $407 billion in 2020 (in 2020 prices and exchange rates). As a result, GDP per capita increased almost eightfold from $4,500 to $49,000. The Israeli economy has several outstanding features. The first is financial strength, manifest in the balance of payments, the government budget, and the banking system, and it reflects the cautious way that the economy has been managed since 1985. Behind this financial strength was the rapid development of high-technology exports and associated foreign direct investment. Allocations for defense as a share of GDP have fallen since 1975 but remain very large in absolute terms and account for a much-larger share of GDP than in most countries. On the beneficial side, the military has trained thousands of young people in high technology and has stimulated production in that sector. Israel is plagued by poverty and inequality in the distribution of income both before and after taxes and transfers. In Israel the poor are officially defined, by using a relative poverty measure, as those having an income below 50 percent of the median income; the rate of poverty is one of the highest in Western countries. The strengthening of the economy while the society has become weaker is a reversal or perceived reversal: for many years, Israelis felt that their society was strong but their economy was weak. This seems paradoxical given that between 1948 and 2010 Israel attracted just over three million immigrants. In 1948, two-thirds of the population was born abroad, whereas in 2020, 16 percent of the population were immigrants. The effects of immigration are central in Israel’s economic history, and economic policy has been dominated by the search for capital that would permit the growth of employment and output, given the increase in the supply of labor. Israel has also experienced a profound change from a state-led economy to a much more liberalized and globalized one. It has developed a consumer society in which the satisfaction of individual wants rather than collective needs is paramount.

General Overviews

The eight books listed in this section provide an overview of the economic development of Israel. The growth of the economy was made possible by increases in the labor force, aided by immigration, by the growth of the capital supply (much of which was imported), and by productivity improvements (see Szereszewski 1968 and Halevi and Klinov-Malul 1968). None of these factors were stable: there were periods of rapid labor force growth and others when it was slower. There were also periods when it was harder, or more expensive, to obtain capital, partly because of the condition of the economy and the policies that were followed. Controversies about productivity abound, but it has become clear with the development of the high-technology sector that elements of a dual economy exist: a sector with high productivity and others with much-lower levels. Ten main works examine the main patterns of development in the economy from the foundation of the state in 1948 until 2010. Each of them examines the economy at a different stage and looks at the challenges of immigration, integration, and inequality; the roles of the government and markets, openness and dependence, and inflation; crisis; and stabilization policies. They all accept the role of markets and advocate, with varying degrees of enthusiasm, the need or desire for free trade in goods and assets. Patinkin 1967 was a very influential book not only because of the analysis but also because the author was the founder of the modern school of economics at the Hebrew University. Ben-Porath 1986 provides an analysis of the growth process until the mid-1980s, and Ben-Bassat 2002 covers the period of crisis and reform in the 1970s and early 1980s. All these books recommend economic liberalization while noting problems of inequality associated with those policies. Rivlin 2010 includes a wider range of issues that affected the economy. Ben-Bassat, et al. 2021 comprehensively updates the analysis in the author’s 2002 book. Zeira 2021 includes a critique of economic policy and of Israel’s policies toward the Palestinians.

• Ben-Bassat, Avi, ed. The Israeli Economy, 1985–1998: From Government Intervention to Market Economics. Cambridge, MA: MIT Press, 2002.

  This work looks at the period after 1985, when the economy had been stabilized, hyperinflation was reduced, and the problem was how to ensure sustainable growth.

• Ben-Bassat, Avi, Gronau Reuben, and Zussman Asaf, eds. The Israeli Economy, 1995–2017: Light and Shadow in a Market Economy. Cambridge, UK: Cambridge University Press, 2021.

  During the period 1995–2017, inflation was vanquished, the deficit in the balance of payments turned into a surplus, the public debt to GDP ratio sharply decreased, and unemployment declined to an historical low. Despite these achievements, the economy suffered from very low productivity and rising inequality. Given these threats to future growth and social cohesiveness, the question arises: has the reliance on market forces been exaggerated, and has the government retreated from tasks that the private sector cannot or does not perform?

• Ben-Porath, Yoram, ed. The Israeli Economy: Maturing through Crises. Cambridge, MA: Harvard University Press, 1986.

  As well as including analysis of demographic trends and their economic impact, this book explores the problems faced in the 1970s and 1980s, when growth slowed and economic problems mounted.

• Halevi, Nadav, and Ruth Klinov-Malul. The Economic Development of Israel. New York: Praeger, 1968.

  This is the classic analysis of Israel’s first twenty years. It deals with growth, finance, and immigration and includes analysis of the pre-state period.

• Patinkin, Don. The Israeli Economy: The First Decade. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1967.

  Patinkin, who was one of the most influential economists in Israel, analyzes the successes and failures of economic policy in the state’s first decade. First published in 1959 (Jerusalem: Jerusalem Post Press).

• Rivlin, Paul. The Israeli Economy from the Foundation of the State through the 21st Century. Cambridge, UK: Cambridge University Press, 2010.

  DOI: 10.1017/CBO9780511921308

  This book looks at the development of the economy until 2010, with chapters on the Ultra-Orthodox, the Arab minority, and relations with the Palestinians. It also asks to what extent liberalization has been pursued at the expense of equity.

• Szereszewski, Robert. Essays on the Structure of the Jewish Economy in Palestine and Israel. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1968.

  This book analyzes the growth of the economy in the pre- and post-independence periods.

• Zeira, Joseph. The Israeli Economy: A Story of Success and Costs. Princeton, NJ: Princeton University Press, 2021.

  DOI: 10.1515/9780691229706

  This book analyses Israel’s growth experience and deals with the changing relations between the government and the private sector in an explicit way. It also examines the consequences of conflict with the Palestinians on the economy.