Jewish Studies Israeli Economy
by
Paul Rivlin
  • LAST REVIEWED: 18 August 2021
  • 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.

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    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.

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  • 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.

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    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?

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

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    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.

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

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    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.

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

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    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).

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

    DOI: 10.1017/CBO9780511921308Save Citation »Export Citation » Share Citation »

    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.

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

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

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

    DOI: 10.1515/9780691229706Save Citation »Export Citation » Share Citation »

    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.

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The Pre-state Period and the State of Israel

The State of Israel was created in 1948 by the Jewish community in Palestine. This community (known as the Yishuv in Hebrew) had high standards of living and education. The development of the Yishuv economy is analyzed in Metzer 1998, Metzer 2003, and Gross 1999, which examine the economies of the Jewish and Arab communities in the three decades of British rule between 1919 and 1948. Shafir 1989 critically examines the early period of the Yishuv, and Karlinsky 2005 examines the origins of the citrus industry, which, among other things, provided vitally needed exports. The significance of Israel’s educational levels, achieved in part by immigration mainly from Europe, is noted in Easterlin 1961.

  • Easterlin, Richard A. “Israel’s Development: Past Accomplishments and Future Problems.” Quarterly Journal of Economics 75.1 (1961): 63–86.

    DOI: 10.2307/1883204Save Citation »Export Citation » Share Citation »

    This is a succinct account of Israel’s economic achievements in its early years and its prospects as viewed in the early 1960s, including the significance of education.

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  • Gross, Nahum. Lo ‘al ha-ruaḥ levadah. Jerusalem: Magnes Press of Hebrew University, 1999.

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    Translated as: “Not by spirit alone.” This is a collection of papers on the economy of the Yishuv in the 1920s, the 1930s, and during World War II. It also examines economic policy in the early years of the state. In Hebrew.

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  • Karlinsky, Nahum. California Dreaming: Ideology, Society, and Technology in the Citrus Industry of Palestine, 1890–1939. SUNY Series in Israeli Studies. Albany: State University of New York Press, 2005.

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    This book shows how the California citrus industry served as the model for the private-sector citrus industry in the Yishuv.

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  • Metzer, Jacob. The Divided Economy of Mandatory Palestine. Cambridge Middle East Studies 11. Cambridge, UK: Cambridge University Press, 1998.

    DOI: 10.1017/CBO9780511583254Save Citation »Export Citation » Share Citation »

    This is a detailed study of the Jewish and Arab economies during the period of the British Mandate and includes reflections on the late-20th-century state of relations between Israel and the Palestinians.

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  • Metzer, Jacob. “Calcalat Aretz Yisrael be’tekufat Ha’Mandat:Al Hotpathut HaMechkar.”. In Economy and Society in Mandatory Palestine, Iyunim Bitkumat Israel. Edited by Avi Bareli and Nahum Karlinsky, 7–57. Sede Boqer, Israel: Ben-Gurion Research Center, 2003.

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    Translated as: “The economy of mandatory Palestine: Reviewing the development of research in the field.” This paper, in Hebrew, summarizes the development of the Jewish community during the Mandate period.

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  • Shafir, Gershon. Land, Labor, and the Origins of the Israeli-Palestinian Conflict, 1882–1914. Cambridge Middle East Library 20. Cambridge, UK: Cambridge University Press, 1989.

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    This volume examines the Second “Aliya,” the wave of East European agricultural workers that reached Palestine between 1904 and 1914 and was very influential in forming Israeli society.

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Economic Growth and Development

In addition to the books listed in General Overviews, a number of other works provide supplemental material and alternative views on how the economy has developed and on the policy choices made. A number of books use a Marxist approach to analyze economic developments in Israel. They show either how socialism was undermined and replaced by capitalism, without the public being offered a choice, or how Israeli socialism was so flawed that capitalism was its inevitable replacement. Ben-Porat 1993 concentrates on the role of labor, while Nitzan and Bichler 2002 and Filc and Ram 2004 include the role of the business sector and government. Shalev 1992 provides a review of the labor movement and its role in the economy. A wealth of information is available in the publications of the Bank of Israel, especially in its annual report (Bank of Israel 2021, cited under Data Sources), and in those of the Central Bureau of Statistics, in particular its statistical abstract (Central Bureau of Statistics 2021, cited under Data Sources). Klein 2005 provides a review of some of some of the main books on the Israeli economy.

  • Ben-Porat, Amir. The State and Capitalism in Israel. Contributions in Economics and Economic History 147. Westport, CT: Greenwood, 1993.

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    This is an account of the Histadrut, or General Federation of Labor, which played a central role in the economy of the Yishuv and in Israel.

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  • Filc, Dani, and Uri Ram, eds. Shilton Hahon: Hahevra Haisraelit be’edan haglobali. Jerusalem: Van Leer Institute, 2004.

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    Translated as: “The power of property: Israeli society in the global age.” The book, in Hebrew, analyzes the increase in power of the corporations against the background of weakening of labor unions and a shrinking public sector during the process of globalization. It also examines the policy that supports market principles while harming the welfare state. Socioeconomic changes are discussed in the context of relations between affiliation groups and identity groups.

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  • Klein, Michael W. “Studying Texts: A Gemara of the Israeli Economy.” Israel Economic Review 3.1 (2005): 121–147.

    DOI: 10.3386/w11352Save Citation »Export Citation » Share Citation »

    This paper reviews six books, published in English on the economy of Israel. Each book was written or edited by Israelis, and each is from a different decade. While each book examines the economy at a different stage of its development, there are five common themes: the relevant comparison group for considering the Israeli economy; the challenges of immigration, integration and inequality; the appropriate roles of the government and markets; the degree openness and dependence; and inflation, crisis, and stabilization.

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  • Nitzan, Jonathan, and Shimshon Bichler. The Global Political Economy of Israel. London and Sterling, VA: Pluto, 2002.

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    This is a comprehensive, Marxist critique of Israel’s political economy and its “war machine.”

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  • Shalev, Michael. Labour and the Political Economy in Israel. Library of Political Economy. Oxford and New York: Oxford University Press, 1992.

    DOI: 10.1093/acprof:oso/9780198285137.001.0001Save Citation »Export Citation » Share Citation »

    This book examines Israel’s central labor organization (the Histadrut) and the Israeli Labour Party, which dominated politics for more than four decades.

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Israel after the Great Recession

Although the Israeli economy did well in the recession of 2008–2009, by 2011 huge protests about the cost of living broke out. Israel’s financial strength is examined in Braude, et al. 2013. The contrast between a strong economy and a weak society is the central theme in Rivlin 2010, which is cited under General Overviews. Rosenhek and Shalev 2013 shows how the younger generation has been less well served by the liberalization of the economy than their parents, and how this led to the protests of 2011.

  • Braude, Jacob, Zvi Eckstein, Stanley Fischer, and Karnit Flug, eds. The Great Recession: Lessons for Central Bankers. Papers presented at an international conference held 31 March–1 April 2011 in Jerusalem. Cambridge, MA: MIT Press, 2013.

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    Braude and colleagues show that Israel benefited from economic growth, fiscal discipline, and a conservative and relatively highly regulated financial system. The nonbank credit market did, however, suffer weaknesses.

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  • Rosenhek, Zeev, and Michael Shalev. “The Political Economy of Israel’s ‘Social Justice’ Protests: A Class and Generational Analysis.” In Special Issue: Social Protest in the Social Sciences. Contemporary Social Science: Journal of the Academy of Social Sciences 9.1 (2013): 31–48.

    DOI: 10.1080/21582041.2013.851405Save Citation »Export Citation » Share Citation »

    The liberalization of Israel’s political economy, which contributed to a substantial rise in the living standards of the parental generation of the middle class and improved their life chances in the 1990s, is now impeding their children. Changes in home ownership, relative incomes, and the value of higher education and other assets that were previously the key to middle-class incomes and lifestyles are analyzed. The impact of neoliberal policies in the declining scope and generosity of the public sector’s role in employment and housing is documented.

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Data Sources

The Bank of Israel (Israel’s central bank) and the official Central Bureau of Statistics provide a wealth of current data and analysis on the economy. Their websites contain numerous reports in English and Hebrew that are widely used. Particularly recommended is Bank of Israel 2021 and the Central Bureau of Statistics 2021.

Globalization, Foreign Trade, and Payments

The foreign-trade sector has always been large, but its structure has changed over time. In the early years of the state, the import substitution (IS) meant that exports were not the object of policy. Despite IS, imports of goods and services were much larger than exports, and the current account deficit was large despite significant transfers from abroad. There were periodic crises in balance of payments that necessitated deflation and even recession, but Israel avoided developing a burdensome debt until the 1970s, although it experienced balance-of-payments problems and frequent devaluations, as analyzed in Michaely 1975 and Pomfret 1976. From 2003 onward, the current account of the balance of payments went into significant surplus and has remained so almost every year since then. As a result, the foreign debt has become negative: Israel has a surplus of foreign assets over liabilities. Trade liberalization developed with the signing of a free-trade agreement with the European Economic Community in the 1960s and another with the United States in 1975. In the early 1990s, Israel unilaterally reduced restrictions on so-called third countries with which it did not have trade agreements, and this encouraged imports from low-cost economies, including China (see Gabai and Rob 2002). Razin examines the impact of globalization on the Israel economy following the end of hyper-inflation in the mid-1980s.

  • Gabai, Yoram, and Rafael Rob. “The Import-Liberalization and Abolition of Devaluation Substitutes: Implications for the Israeli Economy.” In The Israeli Economy, 1985–1998: From Government Intervention to Market Economics. Edited by Avi Ben-Bassat, 281–308. Cambridge, MA: MIT Press, 2002.

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    This paper examines the trade liberalization of the late 1980s and early 1990s.

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  • Michaely, Michael. Foreign Trade Regimes and Economic Development: Israel. Special Conference Series on Foreign Trade Regimes and Economic Development 3. New York: Columbia University Press, 1975.

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    A detailed analysis of trade and exchange policies from the founding of the state to the early 1970s.

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  • Pomfret, Richard W. T. Trade Policies and Industrialization in a Small Country: The Case of Israel. Kieler Studien 141. Tubingen, Germany: J. C. B. Mohr P. Siebeck, 1976.

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    Pomfret’s book praises the economic policies of the 1950s and 1960s and considers them successful despite being unorthodox.

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  • Razin, Assaf. Israel and the World Economy. The Power of Globalization. Cambridge, MA: MIT Press, 2018.

    DOI: 10.7551/mitpress/9780262037341.001.0001Save Citation »Export Citation » Share Citation »

    Razin examines the impact of globalization on the Israeli economy. The mass immigration of Soviet Jews, the rise of the hi-tech sector, increased foreign investment, the resilience of the economy in the 2008 international financial crisis, and the brain drain are among the main topics.

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Economic Policy

Insofar as the government has dominated the economy for much of Israel’s history, an analysis of economic policy, policymaking, and even policymakers is a very fruitful way of understanding development. This section is divided into six subsections. The first deals with the History of Economic Policy, and it is followed by subsections on Fiscal Policy, Central Banking, Capital Markets, and Recent Policy Recommendations.

The History of Economic Policy

The early years were ones of state-led industrialization, examined in Levi-Faur 2001. Economic policy moved from state control to a more decentralized market-oriented system, but this change was not smooth or without controversy, as shown in Pack 1971, Lerner and Ben-Shahar 1975, and Zilberfarb 2005. Most of the economists favored faster change; non-economists were more critical (see Arnon 1985 and Aharoni 1991). Growth rates were much faster in the 1950s and 1960s, when the government intervened more than in the 1970s, 1980s, 1990s, and the first decade of the twenty-first century. Does this disprove conventional economics? Not necessarily; it does perhaps suggest that what was appropriate for the early period of development was not suitable later. It may also suggest that fast growth in the early period left a legacy of inefficiency that slowed growth in the later period. A more positive interpretation is that pragmatic governments knew how and when to change policy. Other economists have suggested that had Israel moved more quickly toward a free-market economy, the benefits would have come quicker; see Razin and Sadka 1993 and Plessner 1993. Three publications look at the interaction of politics and economic policy since the 1970s: Ben-Porath 1975, Ben-Porath and Bruno 1977, and Ben-Bassat and Dahan 2006, all of which are cited under Fiscal Policy. Levi-Faur 1998 compares Israel’s development experience with other fast-growing economies. Menahem and Zehavi 2016 examines policymaking in the government.

  • Aharoni, Yair. The Israeli Economy: Dreams and Realities. New York: Routledge, 1991.

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    The decline of socialism is the theme of this book, which takes a broad look at the development of the economy.

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  • Arnon, Jacob. Meshek beshhror. Tel Aviv: Kibbutz HaMeuchad, 1985.

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    Translated as: “Economy in a whirlwind.” A former head of the Ministry of Finance looks at the economy in crisis during the 1970s and early 1980s. In Hebrew.

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  • Lerner, Abba, and Haim Ben-Shahar. The Economics of Efficiency and Growth: Lessons from Israel and the West Bank. Cambridge, MA: Ballinger, 1975.

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    This book shows how Israel deviated from the path recommended by conventional economics. It includes one of the first analyses of Israel’s economic relations with the territories occupied in 1967.

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  • Levi-Faur, David. “The Developmental State: Israel, South Korea, and Taiwan Compared.” Studies in Comparative International Development 33.1 (1998): 65–93.

    DOI: 10.1007/BF02788195Save Citation »Export Citation » Share Citation »

    This article compares the transformation of the Israeli economy and society with that of two “East Asian Tigers.”

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  • Levi-Faur, David. Ha-Yad ha-lo ne‘elamah: Ha-poliṭiḳah shel ha-ti‘u's be-Yi'sra’el. Jerusalem: Yitzhak Ben Zvi Institute, 2001.

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    Translated as: “The hand that did not disappear: The politics of industrialization in Israel.” This book looks at the successes and failures of the industrialization program implemented in the early years of the state. In Hebrew.

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  • Menahem, Gila, and Amos Zehavi, eds. Policy Analysis in Israel. Bristol, UK: Policy Press, 2016.

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    This volume examines policymaking in central government, the legislature, the central bank, and local government. It also examines the role of the third sector.

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  • Pack, Howard. Structural Change and Economic Policy in Israel. New Haven, CT: Yale University Press, 1971.

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    An impartial examination of the economy in the 1950s and 1960s, focusing on the successes and failures of policies that were adopted.

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  • Plessner, Yakir. The Political Economy of Israel: From Ideology to Stagnation. SUNY Series in Israeli Studies. Albany: State University of New York Press, 1993.

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    A radical, pro–free market critique of the management of the economy by the labor movement.

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  • Razin, Assaf, and Efraim Sadka. The Economy of Modern Israel: Malaise and Promise. Chicago: University of Chicago Press, 1993.

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    An examination of what went wrong in Israel’s state-controlled economy and how it can be rectified.

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  • Zilberfarb, Ben-Zion. “From Socialism to Free Market—The Israeli Economy, 1948–2003.” Israel Affairs 11.1 (2005): 12–22.

    DOI: 10.1080/1353712042000324427Save Citation »Export Citation » Share Citation »

    This article provides a brief overview of Israel’s transformation from a socialist to a market-oriented economy.

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Fiscal Policy

Many changes have been made in fiscal policy, resulting in a reduction the role of the state. These are examined in Ben-Porath 1975 and Ben-Porath and Bruno 1977. The politics behind fiscal policy is analyzed in Ben-Bassat and Dahan 2006. Two papers—Trajtenberg 2020a and Trajtenberg 2020b deal with the need for tax reform and for fiscal policy as a whole.

  • Ben-Bassat, Avi, and Momi Dahan. Mazan hachot be’ta’alich ahtikzuv. Jerusalem: Israel Democracy Institute, 2006.

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    Translated as: “The balance of forces in the budgetary process.” This publication, in Hebrew, looks at the politics of the budget from the late 20th century to the date of publication.

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  • Ben-Porath, Yoram. “The Years of Plenty and the Years of Famine—A Political Business Cycle?” Kyklos 28.2 (1975): 400–403.

    DOI: 10.1111/j.1467-6435.1975.tb01952.xSave Citation »Export Citation » Share Citation »

    This paper examines the role of electoral politics in the management of the economy.

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  • Ben-Porath, Yoram, and Michael Bruno. “The Political Economy of a Tax Reform: Israel 1975.” Journal of Public Economics 7.3 (1977): 285–307.

    DOI: 10.1016/0047-2727(77)90051-2Save Citation »Export Citation » Share Citation »

    This paper examines the role of politics in the development of a tax reform program in the 1970s.

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  • Trajtenberg, Manuel Popliker Itamar. “Al hamissim ve al hneflaot: lekrat reforma be marareket hamissim.” Haifa, Israel: Samuel Neaman Institute for National Policy Research, 2020a.

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    Translated as: “On miracles and wonders towards reform of the tax system.” This paper recommended a series of tax reforms that would increase revenues by the equivalent of 1.2 percent of GDP. In 2021 some of them were included in the state budget.

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  • Trajtenberg, Manuel Popliker Itamar. Lekrat mediniut meuzenet: achriut taksivit mul tzrichim hevrati’im. Haifa, Israel: Samuel Neaman Institute for National Policy Research, 2020b.

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    Translated as: “Towards a new fiscal policy for Israel: Balancing budgetary responsibility and societal needs.” This paper proposes a new fiscal policy, intended to balance between maintaining fiscal discipline and the needs of society in Israel. It proposes two targets, a debt-to-GDP target and a government expenditure-to-GDP target, that the government should set at the beginning of its term and then build annual budgets to ensure that they are achieved in time.

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Central Banking

The Bank of Israel was created in 1954, six years after the state was founded. Its development and increased independence vis-à-vis the government parallels and was a cause of the liberalization of the economy. The stabilization program of 1985 meant that it no longer was forced to accommodate fiscal policy, and it became the arbiter of interest rates and the exchange rate (see Barkai and Liviatan 2007). Conventional economists have seen this as the triumph of reason over chaos, while others see it as the triumph of market forces over social welfare. The development of an independent monetary policy is seen as part of a successful attempt to impose a neoliberal order on the economy. Globalization imposed new rules on economic management that strengthened the role of the Bank of Israel and reinforced it as the ultimate arbiter in a liberalized economic order. See Maman and Rosenhek 2011.

  • Barkai, Haim, and Nissan Liviatan, eds. The Bank of Israel. Vol. 1, A Monetary History. New York: Oxford University Press, 2007.

    DOI: 10.1093/acprof:oso/9780195300727.001.0001Save Citation »Export Citation » Share Citation »

    This volume has chapters on the foundation of the Bank of Israel and the development of monetary policy. It also analyzes the hyperinflation of the 1970s and 1980s and the emergence of an independent monetary policy after the economic stabilization program of 1985.

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  • Maman, Daniel, and Zeev Rosenhek. The Israeli Central Bank: Political Economy, Global Logics and Local Actors. Routledge Studies in Middle Eastern Economics. Abingdon, UK: Routledge, 2011.

    DOI: 10.4324/9780203830444Save Citation »Export Citation » Share Citation »

    This book examines the role of Israel’s central bank in the transformation of economic policy, putting special emphasis on the process of globalization and its effect in restricting the role of the state.

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Capital Markets

The transformation of the Israeli economy from a state-controlled to a much more liberalized one has been most noticeable in the capital markets. In the 1980s the government reduced its involvement because its deficit and financing needs declined. This is examined in chapters by Asher Blass and Oved Yosha (“Reform in the Israeli Financial System and the Flow of Funds of Publicly Traded Manufacturing Firms”) and by Avia Spivak (“Pension Fund Reform”) in Ben-Bassat 2002 (cited under General Overviews). Reforms of capital markets, designed to make them more competitive, have been implemented since 1985, and these are examined in Inter-ministerial Committee 2004. Legal aspects of financial reform are looked at in Sarnat 1992. Ben-Bassat 2020 reviews developments in the capital markets in the period to 2018.

Recent Policy Recommendations

In recent years a number a consensus has developed about some of the economic reforms that Israel needs. Two major ones are Bank of Israel 2019 and Brookings Institute 2020.

Economic Policymakers

This section includes two subsections. The first covers the writings of Policymakers, and the second deals with Early Economic Research and Policy Disputes.

Policymakers

A number of books by or about policymakers provide insight into economic policymaking at the highest levels of the civil service and the government itself. These works provide a broad overview of policymaking at different stages of Israel’s development. Books by former senior officials include Gabbay 2009, Fogel 2013, Klein 2009, and Kochav 2006, all of which are in Hebrew. Biographies of political leaders who played major roles in Israel’s economic development include Greenberg 2011 and Goldstein 2003, both in Hebrew. A former finance minister, Yitzhak Moda’i, has also written an account in Hebrew of his years in office (Moda’i 1988). The role of economic ideas is examined in Mandelkern and Shalev 2010. Ben-Bassat 2011 analyzes the relative influence of politicians, regulators, and interest groups in the reform process.

  • Ben-Bassat, Avi. “Conflicts, Interest Groups, and Politics in Structural Reforms.” Journal of Law and Economics 54.4 (2011): 937–952.

    DOI: 10.1086/658672Save Citation »Export Citation » Share Citation »

    Examines the relative power of politicians, regulators, and interest groups in the development of economic reforms.

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  • Fogel, Aharon. Hatnor vehachema. Jerusalem: Keter, 2013.

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    Translated as: “The oven and the butter.” This is an autobiographical work by a former head of the Ministry of Finance and its budget division in the 1980s and 1990s. He was one of those who played a major role in moving the economy from a socialist to a market orientation. In Hebrew.

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  • Gabbay, Yoram. Calcalat Politit: bein marit ayin calcalit ve metziout calcalit. Tel Aviv: Hakibbutz Hameuchad, 2009.

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    Translated as: “Political economy: The gap between perception and reality.” The author was responsible for a major part of the liberalization of Israel’s foreign-trade system in the 1990s. With the perspective of a former senior Ministry of Finance official, he takes a wide-ranging look at economic policymaking. In Hebrew.

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  • Goldstein, Yossi. Eshkol Biographia. Jerusalem: Keter, 2003.

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    Translated as: “Eshkol-Biography.” Biography of Levi Eshkol, who played a major role in the development of the economy before and after the creation of the state. He was minister of finance from 1952 to 1963 and prime minister from 1963 to 1969. In Hebrew.

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  • Greenberg, Yitzhak. Pinchas Sapir: Biographia calcalit politit. Tel Aviv: Resling, 2011.

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    Translated as: “Pinchas Sapir: An economic and political biography, 1949–1975.” Biography of the minister of industry and trade and minister of finance, who, more than any other, built the Israeli economy in the 1950s and 1960s. In Hebrew.

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  • Klein, David. Turning the Tide. Tel Aviv: Miskal-Yediot Ahronot, 2009.

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    A former governor of the Bank of Israel analyzes the successes and failures of monetary policy. In Hebrew.

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  • Kochav, David. Metziut ve mitusim be meshek ha Israeli ve haglobali mi nision ishi. Tel Aviv: Ministry of Defense, Israel, 2006.

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    Translated as: “Facts and fictions in the Israeli and global economies: A personal account.” Book by former senior economic official who served in the World Bank. In Hebrew.

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  • Mandelkern, Ronen, and Michael Shalev. “Power and the Ascendance of New Economic Policy Ideas: Lessons from the 1980s Crisis in Israel.” World Politics 62.3 (2010): 459–495.

    DOI: 10.1017/S0043887110000109Save Citation »Export Citation » Share Citation »

    Examines the role of new economic thinking following the stabilization of the economy in the 1980s.

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  • Moda’i, Yitzhak. Mechikat haefasim. Tel Aviv: Yediot Aharonot, 1988.

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    Translated as: “Eliminating the zeros.” A former finance minister’s account of the 1985 stabilization program. In Hebrew.

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Early Economic Research and Policy Disputes

In the early 1950s, economic policy became more market oriented, in part because of the influence of Don Patinkin and the economists whom he taught at the Hebrew University in Jerusalem (see Halevi 1969, Kleiman 1981, and Michaely 2007). They became the mainstream in Israeli economics, but not before a series of conflicts, both theoretical and organizational or political. A number of papers examine these disputes and are of importance in understanding the complex origins of current policies; see Krampf 2010 and Gross 2004. Schiffman, et al. 2017 looks at the role of foreign economic advisors in the period until the 1970s.

  • Gross, Nachum. Hamachleka le calcalah be universitat haivrit be yerushali’im be shnot hahamishim. Jerusalem: Maurice Falk Institute, 2004.

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    Translated as: “The Hebrew University economics department in the 1950s.” This paper, in Hebrew, examines the changes in the emphasis of economics teaching at the Hebrew University, as the old, institutional school gave way to the much more mathematical neoclassical school.

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  • Halevi, Nadav. “Economic Policy Discussion and Research in Israel.” In Supplement: Surveys of National Economic Policy Issues and Policy Research. American Economic Review 59.4 (1969): 74–118.

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    A detailed discussion of the issues that were researched in Israel in the 1950s and 1960s and the theoretical and institutional issues surrounding them.

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  • Kleiman, Ephraim. “Israel: Economists in a New State.” History of Political Economy 13.3 (1981): 548–579.

    DOI: 10.1215/00182702-13-3-548Save Citation »Export Citation » Share Citation »

    This paper analyzes the role of economists in the early years of the state.

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  • Krampf, Arie. “Economic Planning of the Free Market in Israel during the First Decade: The Influence of Don Patinkin on Israeli Policy Discourse.” Science in Context 23.4 (2010): 507–534.

    DOI: 10.1017/S0269889710000190Save Citation »Export Citation » Share Citation »

    Don Patinkin brought neoclassical economics to Israel. He founded the Maurice Falk Institute, which researched economic issues by using what were, in the early 1950s, new tools of analysis. He taught many of those who went on to serve in government and who became instrumental in the liberalization of the economy.

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  • Michaely, Michael. “Hahug Lecalcalah be universitat haivrit: yamei be’reshit ne zavit ishit.” Riv’on Le’Kalkala 54.3–4 (2007): 417–438.

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    Translated as: “The department of economics in the Hebrew University, early days—A personal perspective.” This is a study of the early years of the first university economics department in Israel, by one of its prominent graduates. In Hebrew.

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  • Schiffman, Daniel, Warren Young, and Yaron Zelekha. The Role of Economic Advisers in Israel’s Economic Policy: Crises, Reform and Stabilization. Cham, Switzerland: Springer, 2017.

    DOI: 10.1007/978-3-319-60682-8Save Citation »Export Citation » Share Citation »

    This book reviews the foreign economic advice given to the Israeli government mainly in the period up to the 1970s. It shows how limited the influence of such prominent economists as Kalecki, Mikesell, Lerner, Kahn, and Friedman was, but, in so doing, it reveals how and why the government acted.

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Geography and Environment

Israel is a small country with a population that is growing relatively rapidly for one with its level of economic development. The industrial geography of Israel and its development until the early 1990s is examined in Gradus, et al. 1993. This industrialization poses severe environmental challenges resulting in damage to air, water, and land. Ideology has played a major role in the location of economic activity, and this in itself has posed political and economic challenges. These and other issues are analyzed in Orenstein, et al. 2013. The labor movement that dominated the Yishuv and ruled in Israel until 1977 favored the development of the Galilee and the Negev, while the right-wing Likud, which has dominated Israeli politics since 1977, has invested heavily in Jewish settlements in the West Bank. During the early 1990s, the massive emigration mainly from the former Soviet Union was absorbed, with reliance on the market. Because they offered more employment for newcomers, the cities grew in size. This was in marked contrast to the immigration of the 1950s, when newcomers were directed to develop towns and rural communities in the periphery, where the government provided or encouraged the development of housing, social services, and employment. Alon 2016 analyzes the implications of fast population growth on the environment. Israel Academy of Sciences and Humanities Report on Sustainable Well-Being in Israel 2021, is an interdisciplinary study of issues related to well-being, including the environment.

  • Alon, Tal. The Land Is Full. New Haven, CT: Yale University Press, 2016.

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    Tal asserts that Israel is overpopulated and this poses a threat to its social stability and environment. He reviews the role of immigration, which is central in Zionist ideology; pro-natal policies; the problems of the Bedouin and Palestinian populations and those of the Ultra-Orthodox Jews. He also suggests how policies should be changed to tackle pollution, overcrowding, and the pressure on public services.

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  • Gradus, Yehuda, Eran Razin, and Shaul Krakover. The Industrial Geography of Israel. London and New York: Routledge, 1993.

    DOI: 10.4324/9780203328866Save Citation »Export Citation » Share Citation »

    This book looks at the ideological, political, and economic factors determining the location of industry until the early 1990s.

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  • Israel Academy of Sciences and Humanities. Doch ichut haim bat-kayma be Israel. Jerusalem. -Jerusalem: israel Academy of Sciences and Humanities.

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    Translated as: “Report on sustainable well-being in Israel 2021.” This is the first comprehensive report on well-being published in Israel. It includes analyses of the capital approach to sustainability, economic capital, natural capital and critical natural capital, human capital development, social capital for sustainable well-being, culture, and the future sustainability of well-being in Israeli society.

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  • Orenstein, Daniel E., Alon Tal, and Char Miller, eds. Between Ruin and Restoration: An Environmental History of Israel. History of the Urban Environment. Pittsburgh, PA: University of Pittsburgh Press, 2013.

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    This is a comprehensive analysis of environmental issues in their historical context.

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Inflation and Monetary Policy

The early development of monetary policy is examined in Krampf 2014 and Liviatan and Barkai 2007. Stabilizing the economy in 1985 and ending hyperinflation without a massive rise in unemployment was a major achievement, but it meant that structural change came slowly. This is examined in detail in Bruno 1993. Israel’s experiences are compared with those of other countries in Bruno and Piterman 1988. Leiderman 1993 and Barkai 1995 look at Israel’s experience with hyperinflation and stabilization.

  • Barkai, Haim. The Lessons of Israel’s Great Inflation. Westport, CT: Praeger, 1995.

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    This book explains how policies followed in the 1960s and 1970s led to the inflation crisis of the 1980s.

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  • Bruno, Michael. Crisis, Stabilization, and Economic Reform: Therapy by Consensus. Clarendon Lectures in Economics. New York: Oxford University Press, 1993.

    DOI: 10.1093/0198286635.001.0001Save Citation »Export Citation » Share Citation »

    A detailed examination of the politics and economics of the 1985 stabilization program is at the center of this book on the slaying of hyperinflation. This book is also important because Bruno was the academic who advised the government on the 1985 stabilization program and became a policymaker as governor of the Bank of Israel.

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  • Bruno, Michael, and Sylvia Piterman. “Israel’s Stabilization: A Two-Year Review.” In Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico. Edited by Michael Bruno, Guido Di Tella, Rudiger Dornbusch, and Stanley Fischer, 3–47. Papers presented at a conference titled “Inflation Stabilization,” held in June 1987 in Toledo, Spain. Cambridge, MA: MIT Press, 1988.

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    Bruno analyzes the development of hyperinflation in Israel and the politics and economics of the 1985 stabilization program. He also compares Israel’s experiences with those of other countries.

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  • Krampf, Arie. “Between Private Property Rights and National Preferences: The Bank of Israel’s Early Years.” Israel Affairs 20.1 (2014): 104–124.

    DOI: 10.1080/13537121.2013.863083Save Citation »Export Citation » Share Citation »

    This article examines the early development of Israel’s central bank and its role in managing the economy.

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  • Leiderman, Leonardo. Inflation and Disinflation: The Israeli Experiment. Chicago: University of Chicago Press, 1993.

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    A conventional analysis of the causes of Israel’s hyperinflation, how it was overcome, and what lessons can be learned from the experience.

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  • Liviatan, Nissan, and Haim Barkai, eds. The Bank of Israel. Vol. 2, Selected Topics in Israel’s Monetary Policy. New York: Oxford University Press, 2007.

    DOI: 10.1093/acprof:oso/9780195300734.001.0001Save Citation »Export Citation » Share Citation »

    This book has chapters on the role of the Bank of Israel; monetary policy in the period following the stabilization program of 1985; and the liberalization of the foreign-exchange markets and the banking system.

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Israel and Its Neighbors

Israel has been at war since its creation, and so, in a negative sense, its relations with its neighbors have played an important role in economic development. Three subsections deal with aspects of this topic. The first is on Defense and Costs of Conflict, and the second is concerned with the Effects of Terrorism in the early twenty-first century. The third subsection looks at the Economics of Peace.

Defense and Costs of Conflict

Israel’s defense spending as a share of national income and the state budget is much higher than that of other developed countries. The army and defense industries have played a major role in the economy, and the effects of defense spending have been both positive and negative. In the 1970s, during and after the Yom Kippur War, it increased to levels that almost strangled the economy. Funds devoted to defense are at the expense of spending on education and health, but defense provides a service in ensuring the existence of the state, although some say that the need for the latter is overstated. Israel’s high technology has developed in part because of the defense effort and government policies to release technologies developed by the military for civilian use. Berglas 1983 is one of the first works on defense and the economy. Barkai 1986 looks at the costs of war, using methodologies that can be widely applied, and Lifshitz 2003 is a comprehensive guide to defense economics in Israel. Shiffer 2007 looks at the factors that determine the defense budget. Data on defense spending are published in Central Bureau of Statistics 2021. Ross, et al. 2015 examines the costs of the conflict between Israel and the Palestinians.

Effects of Terrorism

Israel has been subject to terrorist attacks since its founding. About one thousand Israelis were killed in the Second Intifada, or Palestinian Uprising, which began in 2000, and about 70 percent of them were civilians. In response, a number of researchers published analyses of the effects of terrorism on the economy. Eckstein and Tsiddon 2004 and Plessner and Ouziely 2009 analyze the effect of terror attacks on the economy. Miaari, et al. 2012 examines wider effects of conflict on the labor market.

  • Eckstein, Zvi, and Daniel Tsiddon. “Macroeconomic Consequences of Terror: Theory and the Case of Israel.” Journal of Monetary Economics 51.5 (2004): 971–1002.

    DOI: 10.1016/j.jmoneco.2004.05.001Save Citation »Export Citation » Share Citation »

    A theoretical analysis of the effects of terror, with application to the Israel case.

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  • Miaari, Sami, Asaf Zussman, and Noam Zussman. “Ethnic Conflict and Job Separations.” Journal of Population Economics 25.2 (2012): 419–437.

    DOI: 10.1007/s00148-011-0383-7Save Citation »Export Citation » Share Citation »

    This is a study of the effect of the Second Intifada and the demonstrations of Arab citizens of Israel on labor market outcomes of Arabs relative to those of Jewish Israelis. The analysis relies on a large, matched employer-employee data set, focusing on firms that in the pre-Intifada period hired both Arabs and Jews.

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  • Plessner, Yakir, and Sharon Ouziely. Hanezek hacalcali shel intifada al aksa 2000–2003. Working Paper 41. Jerusalem: Department of Agricultural Economics and Management, Hebrew University of Jerusalem, 2009.

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    “The Economic Cost of the Al-Aksa Intifada, 2000–2003.” A detailed, econometric study of the economic costs of the Second Intifada. In Hebrew.

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The Economics of Peace

Israel’s economic relations with its neighbors have been very limited because of the state of war or tension. The exception is the Palestinians, whose economy is dominated by Israel. A number of works have examined how economic relations between Israel and the rest of the Middle East, especially the Arab states, could develop. Interest has also grown in economic relations with the Palestinians, who are at the center of the conflict with Israel. The authors of Ben-Shahar, et al. 1989 were pioneers in examining the economic benefits of peace. Arnon and Bamya 2012 analyzes ways to strengthen the Middle East economy. Arnon, et al. 1997 examines the Palestinian economy and its intimate relations with Israel, while Awartani and Kleiman 1997 concentrates on the economic relations between the two sides.

Israeli Socialism, Its Decline, and Privatization

This section deals with the role of labor in Israel’s political economy. There are subsections on the Histadrut and the Decline of Israeli Socialism and on the Kibbutz. The final subsection examines Privatization, perhaps the most radical aspect of the reversal of socialism that Israel has experienced.

The Histadrut and the Decline of Israeli Socialism

Founded in the 1920s, the Histadrut, or General Federation of Labor, was both a labor union and an employer. It saw its role as developing a socialist society, and, for that reason, it provided protection for its members and tried to develop economic and social enterprises in the periphery of the country. As a result of internal failings, political changes, and public hostility, it lost its status and by the 1990s it had lost many of its assets. Zeira 2004 examines the changed role of the state in the economy. Kleiman 1998 investigates the economics and politics of these developments, and Kleiman 1987 and Cohen, et al. 2007 look at the decline of the labor unions and labor movement. Keren 1995 examines the triumph of technocrats in the stabilization program of 1985. Grinberg 1991 provides a comprehensive overview up to the beginning of the 1990s. Paz-Fuchs, et al. 2018 reviews privatization. Krampf 2018 examines the development of Israel’s political economy since the foundation of the state.

  • Cohen, Yinon, Yitchak Haberfeld, Tali Kristal, and Guy Mundlak. “The State of Organized Labor in Israel.” Journal of Labor Research 28.2 (2007): 255–273.

    DOI: 10.1007/BF03380045Save Citation »Export Citation » Share Citation »

    This paper chronicles the decline of collective bargaining and the role of the trade unions.

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  • Grinberg, Lev Luis. Split Corporatism in Israel. SUNY Series in Israeli Studies. Albany: State University of New York Press, 1991.

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    This book examines the Histadrut and shows how it shaped Israel’s political economy. Noting the contrast between private and public sectors, the book explains the organization’s history and structure as well as its relations with workers, employers, the Labor Party, and the government.

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  • Keren, Michael. Professionals against Populism: The Peres Government and Democracy. SUNY Series in Israeli Studies. Albany: State University of New York Press, 1995.

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    The then Labor Party leader and prime minister, Shimon Peres, introduced the 1985 economic stabilization program, which marked the beginning of a long process of liberalization. This book examines, among other things, the politics and economics surrounding that decision.

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  • Kleiman, Ephraim. “The Histadrut Economy of Israel: In Search of Criteria.” Jerusalem Quarterly 41 (1987): 77–94.

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    This paper examines changes in the role of the Histadrut as it moved from being an employer to become a pure labor union.

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  • Kleiman, Ephraim. “The Waning of Israeli Etatisme.” Israel Studies 2.2 (1998): 146–171.

    DOI: 10.2979/ISR.1997.2.2.146Save Citation »Export Citation » Share Citation »

    A useful review of the change in the role of the state in Israel’s economy.

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  • Krampf, Arie. The Israeli Path to Neoliberalism: The State, Continuity and Change. New York: Routledge, 2018.

    DOI: 10.4324/9781315193922Save Citation »Export Citation » Share Citation »

    Krampf asks how the transition to neoliberalism was coupled with the adoption of a hawkish and isolationist foreign policy. How did a state presumably founded on the basis of socialist ideas change within a few decades into a country characterized by very high levels of inequality? Israeli capitalism is the product of the encounter between imported Western institutional models and policy ideas and domestic economic, social, and security policy problems. This interaction gave rise to Israel’s combination of liberalization and nationalism.

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  • Maron Asa, and Shalev Michael. Neoliberalism as a State Project: Changing the Political Economy of Israel. Oxford: Oxford University Press, 2017.

    DOI: 10.1093/oso/9780198793021.001.0001Save Citation »Export Citation » Share Citation »

    This book examines the way in which a neoliberal economy has been created and puts forward the thesis that the creation of a neoliberal political economy may have largely been a state project.

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  • Paz-Fuchs, Amir, Mandelkern Ronen, and Galnoor Izhak. The Privatization of Israel : The Withdrawal of State Responsibility. New York: Palgrave Macmillan, 2018.

    DOI: 10.1057/978-1-137-58261-4Save Citation »Export Citation » Share Citation »

    This book examines the way in which the state has withdrawn from key economic activities with negative consequences.

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  • Zeira, Yossi. Me’socialism le capitalism ? Meoravut hamemshalti be meshek ha isareli. Edited by Moshe Naor. Jerusalem: Magnes Press, 2004.

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    Translated as: “From socialism to capitalism? Government intervention in the Israeli economy.” This study, in Hebrew, emphasizes the role of the Israel-Palestinian conflict in maintaining strong government in Israel.

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The Kibbutz

The kibbutz, a voluntary collective settlement, is unique to Israel and played a major role in all aspects of life in the first thirty years of the state. Its success and subsequent partial demise parallel changes in Israeli society and its economy. Barkai 1987 examines the economics of the kibbutz, and Pavin 2006 provides basic data. Abramitzky 2018 updates and extends this analysis.

  • Abramitzky, Ran. The Mystery of the Kibbutz: Egalitarian Principles in a Capitalist World. Princeton, NJ: Princeton University Press, 2018.

    DOI: 10.2307/j.ctvc776j0Save Citation »Export Citation » Share Citation »

    This book shows how idealism and historical circumstances enabled the kibbutzim to create enclaves that overcame their economic contradictions for many years. Abramitzky combines economic analysis with the experiences of his family to tell the story.

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  • Barkai, Haim. Kibbutz Efficiency and the Incentive Conundrum. Research Paper 196. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1987.

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    This paper tackles the question of how people are motivated when they are not directly rewarded for their efforts.

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  • Pavin, Avraham. The Kibbutz Movement: Facts and Figures 2006. Ramat Ef’al, Israel: Yad Tabenkin—Research and Documentation Center of the Kibbutz Movement, 2006.

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    The state of the kibbutzim in 2006 is detailed in this work. It shows how far privatization has developed.

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Privatization

One of the most important trends in the Israeli economy since the 1980s has been the sale of Histadrut and government-owned companies to the private sector. Sometimes this has resulted in transferring monopolies. Little has been written about the process, partly because it has been carried out without public scrutiny and even without explicit criteria about the benefits that are supposed to be accrued. Korn 2002 puts privatization into its public policy context. Paz-Fuchs and Bensimhon-Peleg 2014 provides a survey of early-21st-century privatization activity. Levi-Faur, et al. 2013 examines the lack of a legal framework for privatization.

Minorities, Poverty, and Inequality

Israel has two large and very different minorities: the Arabs and the Ultra-Orthodox Jews. They both experience poverty on a large scale, and the reasons why they are poor are examined in three subsections: Religion and the Ultra-Orthodox, the Arab Minority, and Poverty and Inequality.

Religion and the Ultra-Orthodox

Religion plays an important role in the economy for several reasons. First, the government allocates funds for religious services and institutions. Second, many Ultra-Orthodox Jews have become reliant on the state for their income because they do not work. This causes losses to the economy and results in large spending by the government. The refusal by many Ultra-Orthodox to have their children study the secular syllabus means that they finish school without the skills needed to survive economically. As a result, they are condemned to poverty or reliance on the state. This issue has become so acute that it has become a theme in reports (Organisation for Economic Co-operation and Development 2009, International Monetary Fund 2012). Work has also been carried out within the framework of the theory of clubs in Berman and Klinov 1997 and Berman 2000 to explain why being a member of the Ultra-Orthodox community is attractive, given that it requires so many material sacrifices. Feldman, et al. 2014 provides statistical background.

  • Berman, Eli. “Sect, Subsidy, and Sacrifice: An Economist’s View of Ultra-Orthodox Jews.” Quarterly Journal of Economics 115.3 (2000): 905–953.

    DOI: 10.1162/003355300554944Save Citation »Export Citation » Share Citation »

    Many Israeli Ultra-Orthodox men study full-time in yeshiva until age forty. Why do fathers with families in poverty choose to study in religious seminaries rather than work? Draft deferments subsidize yeshiva attendance, but attendance typically continues long after exemption. A social-interaction approach explains these anomalies. Seminary attendance signals commitment to the community, which provides mutual insurance to members. Prohibitions strengthen communities by effectively taxing real wages, encouraging high fertility.

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  • Berman, Eli, and Ruth Klinov. Human Capital Investment and Nonparticipation: Evidence from a Sample with Infinite Horizons. Discussion Paper 97.5. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1997.

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    Between 1970 and 1993, labor force participation of prime-aged Israeli males fell from 94 percent to 86 percent. Expansion of military service was the main cause in the 1970s, but participation continued to fall in the 1980s despite the shrinking population share of the military. A unique Israeli feature was increased Ultra-Orthodox school attendance in the 1980s despite the low return to investment, especially when compared to the increasing returns to secular education and to labor market experience.

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  • Feldman, Mark, Matan Shmeltzer, Ruth Shayek, et al. Economic Characteristics of the Ultra-Orthodox Jewish Population in Israel, 1998–2010. Working Paper 84. Jerusalem: Central Bureau of Statistics, 2014.

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    This is an analysis of the size and growth of the Ultra-Orthodox population, through using different methodologies.

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  • International Monetary Fund. Israel: Selected Issues Paper. Washington, DC: International Monetary Fund, 2012.

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    This report includes a chapter on “Macro-social Challenges,” which analyzes low labor force participation by Ultra-Orthodox Jews and Arabs, and it looks at the consequences.

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  • Organisation for Economic Co-operation and Development. Economic Survey of Israel, 2009. Paris: Organisation for Economic Co-operation and Development, 2009.

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    The OECD makes a series of policy recommendations for the labor market and the education system that would reduce inequality and increase labor force participation.

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The Arab Minority

The Arab minority suffers from many disadvantages, the main one being discrimination, despite that it constituted 20 percent of the population when the state was created and now constitutes a similar proportion. The history and sociology are examined in Lewin-Epstein and Semyonov 1993. Much work has been done on discrimination and on how to improve the economic, social, and political position of this important group. The causes and implications are examined in Habib, et al. 2010, and statistical details are provided in Gharrah 2013. Asali 2006 and Haidar 2005 examine earnings differentials. Klinov and Oren-Yiftach 2005 looks at price differentials. Sadan 2006 examines the size of the Arab economy in Israel. Kasir and Eran 2020 suggests that series problems remain.

  • Asali, Muhammad. Why Do Arabs Earn Less Than Jews in Israel? Jerusalem: Maurice Falk Institute for Economic Research in Israel, 2006.

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    An economic analysis of dualistic labor markets that result in large earning differentials between Jews and Arabs.

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  • Gharrah, Ramsees. Sefer hahevra ha aravit be Israel: ochlusia, hevra ve calcala. Jerusalem: Van Leer Institute, 2013.

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    Translated as: “Arab society in Israel: Population, society, economy.” An important statistical resource on the Arab community, with numerous tables based on data from the official Central Bureau of Statistics. In Hebrew.

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  • Habib, Jack, Judith King, Assaf Ben Shoham, Abraham Wolde-Tsadick, and Karen Lasky. Labour Market and Socio-economic Outcomes of the Arab-Israeli Population. OECD Social, Employment, and Migration Working Papers 102. Paris: OECD Publishing, 2010.

    DOI: 10.1787/5kmjnrcfsskc-enSave Citation »Export Citation » Share Citation »

    This paper looks at the dualistic nature of labor markets and the socioeconomic basis for discrimination.

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  • Haidar, Aziz. Arab Society in Israel: Populations, Society, Economy. Jerusalem: Van Leer Institute, 2005.

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    This publication provides a comprehensive database on Israel’s Arab community.

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  • Kasir, Nitsa, and Yashiv Eran. The Economic Outcomes of an Ethnic Minority: The Role of Barriers. Discussion Paper Series. Bonn, Germany: IZA Institute of Economics, 2020.

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    This paper reviews data and presents a model of barriers to integration facing Arabs in Israel. The empirical analysis, based on a general equilibrium model of occupational choice with optimizing agents and barriers, suggests that there has been an increase in the barriers to the acquisition of human capital in highly skilled occupations, and, concurrently, a reduction in labor market barriers in all occupations.

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  • Klinov, Ruth, and Merav Oren-Yiftach. Do Arab and Jewish Markets within Israel Converge? A Case Study of Fruit and Vegetables. Discussion Paper A05. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 2005.

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    This paper shows that the prices of fruit and vegetables are often lower in the Arab sector than in the Jewish sector, and it looks at the causes.

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  • Levanon, Gad, and Yaron Raviv. “Decomposing Wage Gaps between Ethnic Groups: The Case of Israel.” Southern Economic Journal 73.4 (2007): 1066–1087.

    DOI: 10.1002/j.2325-8012.2007.tb00818.xSave Citation »Export Citation » Share Citation »

    This paper also looks at the differentials between Jewish and Arab earnings and the reasons for them.

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  • Lewin-Epstein, Noah. The Arab Economy in Israel: Growing Population-Jobs Mismatch. Discussion Paper 14–90. Tel Aviv: Pinchas Sapir Center for Development, Tel Aviv University, 1990.

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    One of the problems facing the Arabs in Israel is their location: many live far from the growth centers of the economy, and poor transport limits their participation still further.

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  • Lewin-Epstein, Noah, and Moshe Semyonov. The Arab Minority in Israel’s Economy: Patterns of Ethnic Inequality. Social Inequality. Boulder, CO: Westview, 1993.

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    A historical and sociological study of the Arab economy and the difficulties that it faces in Israel.

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  • Sadan, Ezra. The Share of the Arab Sector in the Economy. Lod, Israel: Abraham Fund Initiatives, 2006.

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    An examination of the macroeconomics of the Arab sector and its potential role in the economy.

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Poverty and Inequality

As Israel’s economy has strengthened, inequality and poverty have grown. This was partly due to internal factors, including the liberalization of the economy and the weaknesses of the education system, and it was reinforced by globalization that increased the rewards for certain types of human capital that are unevenly distributed. Ginor 1979 provides details of socioeconomic disparities and their causes in the early years of the state. Ben-David and Bleikh 2013 compares poverty trends in Israel with other Organisation for Economic Co-operation and Development (OECD) member states. Deutsch and Silber 2010 examines poverty and inequality in the period 1990–2006. Paltiel, et al. 2012 studies demographic trends and provides forecasts that are relevant for the study of poverty, and Flug and Kasir 2003 examines the relationship between employment and poverty. Kristal 2013 looks at some of the fundamental processes determining the distribution of income. OECD 2018 analyzes the extent of poverty and its relationship to education. International Monetary Fund 2018 and Erlander, et al. 2020 also examine the issues of poverty and inequality.

  • Ben-David, Dan, and Haim Bleikh. Poverty and Inequality over Time: In Israel and the OECD. Jerusalem: Taub Center for Social Policy, 2013.

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    This paper examines poverty and inequality in Israel and compares it with developments in the OECD.

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  • Deutsch, Joseph, and Jacques Silber. Ketzad ha tzimha ve a shinui be i-shivion mashpia al haani’im: Israel bein 1990 l 2006. Jerusalem: Van Leer Institute, 2010.

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    Translated as: “On the impact of growth and inequality change on the poor: The case of Israel between 1990 and 2006.” This is an examination of labor market trends and government policies and their effects on welfare and the distribution of income. In Hebrew.

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  • Erlander, Miri, Oren Karadi Lahav Heller, and Kliner (Kasir) Nitza. Ramat Hahaim, haoni ve hai-shivion be hachnasot 2018-2019 ve omdan 2020. Jerusalem: National Insurance Institute, 2020.

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    Translated as: “Living standards, poverty and income inequality, 2018–2019 and estimates for 2020.” This report provides estimates of the fall in living standards, the rise in poverty levels and inequality during 2020 as a result of COVID-19.

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  • Flug, Karnit, and Nitsa Kasir. “Poverty and Employment, and the Gulf between Them.” Israel Economic Review 1.1 (2003): 55–80.

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    This paper identifies nonemployment of the household head as one of the main factors affecting poverty. The existence of more than one wage earner is almost certain to guarantee remaining above the poverty line. Groups with a high poverty rate are characterized by an absence or shortage of wage earners.

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  • Ginor, Fanny. Socio-economic Disparities in Israel. New Brunswick, NJ: Transaction, 1979.

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    This book examines social and economic disparities in Israel from the early 1920s to the 1970s. Historical development is combined with an analysis of causes of economic inequality and poverty. Special attention is paid to the socioeconomic differences between and within the communities—the two main Jewish groups, European and Middle Eastern populations, and the Arab population.

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  • International Monetary Fund. Selected Issues: Israel. Washington, DC: International Monetary Fund, 2018.

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    The IMF makes policy recommendations designed to reduce poverty and inequality. It notes the gaps between women and men, Ultra-Orthodox Jews plus Arabs and the rest of the population.

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  • Kristal, Tali. “Slicing the Pie: State Policy, Class Organization, Class Integration, and Labor’s Share of Israeli National Income.” Social Problems 60.1 (2013): 100–127.

    DOI: 10.1525/sp.2013.60.1.100Save Citation »Export Citation » Share Citation »

    This is a new political-economy approach that stresses the importance of state policy, class organization, and organizational unity for determining how national income is distributed between workers and capitalists.

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  • Organisation for Economic Co-operation and Development. OECD Economic Surveys: Israel. Paris: Organisation for Economic Co-operation and Development, 2018.

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    This publication includes an analysis of the causes of poverty. It reviews the role of education and looks at the problems of the Ultra-Orthodox Jews and the Arab communities.

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  • Paltiel, Ari, Michell Spulker, Irene Kornilenko, and Martin Maldonado. Tachzit oclusia le Israel le tvach aroch 2009–2065. Jerusalem: Central Bureau of Statistics, 2012.

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    Translated as: “Fifty years population projections for Israel, 2009–2065.” This study shows how fast the population could grow into the mid-21st century, depending on various assumptions. The growth of the underprivileged Arab and Ultra-Orthodox Jewish sectors has caused alarm and calls for policy changes. Text in Hebrew.

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High Technology

Israel’s economy has been transformed by high technology, which now dominates manufacturing and services. It has its origins in the development of higher education before the state was created, in the army that needed and developed technology and skilled manpower, and in a number of very successful civilian technology promotion schemes. All this was in addition to the arrival of thousands of scientists, engineers, and technicians among the emigrants from the former Soviet Union who arrived in the 1990s. Senor and Singer 2009 provides an account of Israel’s high-technology development that places emphasis on the role of the military. Avnimelech and Teubal 2003, Peled 2001, and Rivlin 2015 show how civilian factors were also significant. Statistical analysis is provided in Feldman and Abouganem 2003 and Shmeltzer 2010. Rosenberg 2018 provides a comprehensive review of the development of the sector and its implications for the economy.

The Labor Market, Immigration, and Foreign Workers

This section is divided into three subsections. The first deals with the main issues in the Labor Market. The second examines Immigration and the third looks at the role of Foreign Workers, who have played a significant role in the early twenty-first century.

The Labor Market

Labor has played a key political as well as economic role in Israel’s development. One of the most important developments since the 1970s, if not before, has been the decline in the labor movement. This was the result of developments within the economy and also partially due to the employment of large numbers of Palestinians from 1967 until the early 1990s, when they were largely replaced by workers from the Far East. Ben-Porath 1987 details developments in the public sector that dominated the economy, Ben-Porath and Gronau 1985 examines one aspect of the expansion of the labor force, while Klinov 1993 looks at a wider range of factors. Dahan 2002 looks at the rise in earning inequality in the 1980s and 1990s, something that has continued since then. Dahan 2013 shows that, among Jews, ethnic differences have played a smaller role in earning differentials.

  • Ben-Porath, Yoram. “Tasoka ve sachar be migzar ha tzibori be talich ha hatama, Israel 1973–1985.” Riv’on Le’Kalkala 37.131 (1987): 943–961.

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    Translated as: “Public sector employment and wages in the process of adjustment.” This article, in Hebrew, examines the development of wages and employment in the public sector during a period of transition.

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  • Ben-Porath, Yoram, and Reuben Gronau. “Jewish Mother Goes to Work: Trends in the Labor Force Participation of Women in Israel, 1955–1980.” In Special Issue: Trends in Women’s Work, Education, and Family Building. Journal of Labor Economics 3.1 (1985): S310–S327.

    DOI: 10.1086/298087Save Citation »Export Citation » Share Citation »

    This paper examines the sociology and economics of the rise in the female participation rate, which was one of the factors that transformed the Israeli economy.

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  • Dahan, Momi. “The Rise of Earnings Inequality.” In The Israeli Economy, 1985–1998: From Government Intervention to Market Economics. Edited by Avi Ben-Bassat, 485–517. Cambridge, MA: MIT Press, 2002.

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    This paper examines the increase in the inequality of earnings in the 1980s and 1990s.

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  • Dahan, Momi. Haim kor a chituch hizliach be sade has calcalu? Jerusalem: Israel Democracy Institute Jerusalem, 2013.

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    Translated as: “The Israeli economy: Has the melting pot succeeded?” This paper (in Hebrew) finds, for the first time, a narrowing of income gaps between households of two groups of origin (Europe/America versus Asia/Africa) since the 1990s. Paradoxically, it seems that the increase in earnings inequality (between people with higher education and people without higher education) is responsible for the economic upsurge of Israelis of Asian/African origin.

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  • Klinov, Ruth. Koach ha avoda be Israel 1948–1990. Discussion Paper 93.8. Jerusalem: Maurice Falk Institute for Economic Research in Israel, 1993.

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    Translated as: “The workforce in Israel: 1948–1990.” This paper, in Hebrew, provides an overview of developments in the labor market in the first forty years of the state.

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Immigration

Immigration is the sine qua non of Zionism, and as Halevi and Klinov-Malul 1968, Ben-Porath 1986, and Rivlin 2010 (all cited under General Overviews) show, it has been a major source of population and labor force growth. As a result of these supply factors and the fact that when combined with capital it has produced income and thus demand, immigration has played a major role in the economy. Goldner, et al. 2012 examines the absorption of immigrants in the 1990s, as does Gandal, et al. 2004, with particular reference to wages.

  • Gandal, Neil, Gordon H. Hanson, and Matthew J. Slaughter. “Technology, Trade, and Adjustment to Immigration in Israel.” European Economic Review 48.2 (2004): 403–428.

    DOI: 10.1016/S0014-2921(02)00265-9Save Citation »Export Citation » Share Citation »

    In the early 1990s, Israel experienced a surge of emigration from the former Soviet Union. These immigrants had relatively high education levels. There is little evidence that the immigration shock put downward pressure on Israeli wages. Two mechanisms through which Israel may have absorbed labor supply changes related to immigration were global changes in production technology and national changes in the mix of output.

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  • Goldner, Sarit Cohen, Zvi Eckstein, and Yoram Weiss. Immigration and Labor Market Mobility in Israel, 1990 to 2009. Cambridge, MA: MIT Press, 2012.

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    This paper measures the mobility of immigrants—mainly from the former USSR—as they were absorbed into the Israeli economy.

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Foreign Workers

From 1967 until the early 1990s, Israel imported Palestinian workers from the West Bank and Gaza to work on building sites and do other work that Israelis do not want to do. When this became impossible for security reasons, it partly replaced them with workers from eastern Europe and then increasingly from the Far East. Many African workers arrived illegally, and so Israel now has hundreds of thousands of legal and illegal foreign workers, very few of whom have permanent resident rights. Amir 2002 examines government policy toward foreign workers, and Drori 2009 provides a comprehensive overview of the subject.

  • Amir, Shmuel. “Overseas Foreign Workers in Israel: Policy Aims and Labor Market Outcomes.” International Migration Review 36.1 (2002): 41–57.

    DOI: 10.1111/j.1747-7379.2002.tb00070.xSave Citation »Export Citation » Share Citation »

    The Israeli government has, since 1996, been trying to reduce reliance on foreign workers but has failed. This paper examines why.

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  • Drori, Israel. Foreign Workers in Israel: Global Perspectives. SUNY Series in Israeli Studies. Albany: State University of New York Press, 2009.

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    This is the only book that comprehensively analyzes the import of foreign workers from Third World economies to Israel. It examines the effect of migrants on Israeli society, particularly the issue of national identity. This wave of Third World workers began as a political move to avoid the danger of hiring Palestinians to do work that Jewish Israelis would not do.

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The Shadow Economy

The shadow economy in Israel has been estimated at between 13 and 19 percent of GDP. OECD 2020 reviews the tax system and refers to the shadow economy. Shami 2021 provides a comprehensive review.

  • Organisation for Economic Co-operation and Development. OECD Economic Surveys: Israel. Paris: Organisation for Economic Co-operation and Development, 2020.

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    This study includes an analysis of the efficiency and equity of the tax system and refers to the scale of the hidden economy.

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  • Shami, Labib. The Non-observed Economy in Israel. Jerusalem: Taub Center for Social Policy Studies in Israel, 2021.

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    This analysis provides details of the hidden economy and compares Israel with other countries.

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COVID 19 and the Economy

COVID 19 has had major effects on the Israeli economy. These effects have been analyzed in Bank of Israel 2020, Organization for Economic Co-operation and Development 2021, Taub Center for Social Policy Studies in Israel 2020, and International Monetary Fund 2020.

  • Bank of Israel. Bank of Israel Annual Report. Jerusalem: Bank of Israel, 2020.

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    The report noted the decline in GDP in 2020 and the much sharper fall in employment. Exports helped to support the economy as did massive government funding of households and companies.

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  • International Monetary Fund. Israel: 2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Israel. Washington, DC: International Monetary Fund.

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    The pandemic has severely impacted Israel’s society and economy. While strong growth and large pre-crisis buffers meant Israel entered the crisis with relatively low vulnerabilities, real GDP still contracted during the first three quarters of 2020. The scale of COVID-19 spread required strict containment and mitigation measures, including three nationwide lockdowns. Nonetheless, the economic contraction was smaller than in other advanced economies, due, in part, to the resilience of the economy supported by its large high-tech sector.

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  • Organisation for Economic Co-operation and Development. OECD Economic Surveys: Israel 2020. Paris: Organisation for Economic Co-operation and Development, 2021.

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    The pandemic is threatening to reverse some of Israel’s recent economic achievements, raise poverty, and exacerbate wide productivity disparities between its vibrant high-tech sector and lagging sheltered sectors. Lockdown measures and high uncertainty led to a sharp contraction in output and reduced employment.

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  • Taub Center for Social Policy Studies in Israel. “The Impact of the Coronavirus on the Economy of Israel: An Overview.” In State of the Nation Report 2020. Jerusalem: Taub Center for Social Policy Studies in Israel, 2020.

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    The chapter in this report analyzes the effects of COVID-19 on the economy in 2020 and notes that other OECD countries have been affected to a greater extent than Israel. The rate of growth of Israel’s population of 1.9 percent annually is three or more times higher than the OECD average, therefore, in terms of GDP per capita, the effect of COVID-19 on Israel’s economy is much more significant.

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