The Israeli Economy

A Story of Success and Costs

Joseph Zeira

• Publisher: Princeton University Press
• Year: 2021
• Print ISBN: 9780691229690, 9780691199450
• eBook ISBN: 9780691229706
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

An authoritative economic history of Israel from its founding to the present

In 1922, there were ninety thousand Jews in Palestine, a small country in a poor and volatile region. Today, Israel has a population of nine million and is one of the richest countries in the world. The Israeli Economy tells the story of this remarkable transformation, shedding critical new light on Israel's rapid economic growth.

Joseph Zeira takes readers from those early days to today, describing how Israel's economic development occurred amid intense fighting with the Palestinians and neighboring Arab countries. He reveals how the new state's astonishing growth continued into the early 1970s, and traces this growth to public investment in education and to large foreign transfers. Zeira analyzes the costs of the Arab-Israeli conflict, demonstrating how economic output could be vastly greater with a comprehensive peace. He discusses how Israel went through intensive neoliberal economic policies in recent decades, and shows how these policies not only failed to enhance economic performance, but led to significant social inequality.

Based on more than two decades of groundbreaking research, The Israeli Economy is an in-depth survey of a modern economy that has experienced rapid growth, wars, immigration waves, and other significant shocks. It thus offers important lessons for nations around the world.

1

Historical Background

This chapter describes the historical background to the economy of Israel. Clearly, this is not a full history of Israel, as it focuses only on the main historical processes that are crucial for understanding the Israeli economy. These processes are the Jewish-Zionist immigration to the country, the Israeli-Arab conflict, and nation building. These three processes intertwine strongly with one another. The Israeli-Arab conflict would not have erupted without the waves of Jewish immigration that posed a growing threat to the local Arab community. Similarly, the Jewish immigration was not an act of individuals, as most immigrations are. It was part of a political project, Zionism, whose goal was to renew Jewish nationalism in the country. This strongly linked the building of national institutions to Jewish immigration.

The history of Israel reflects a country that has changed dramatically over the years. In the nineteenth century, it was a collection of districts in the Ottoman Empire. During World War I, the British Army conquered it and the rest of the Middle East. Following their victory over the Ottomans, Britain and France divided the Middle East between them according to the Sykes-Picot Agreement.¹ Palestine became a British Mandate in 1922.² In 1947, the United Nations reached a resolution on the partition of Palestine into two states, one Jewish and one Arab.³ Following the rejection of the resolution by the Arab states and the Palestinians, a war broke out. In the middle of that war, on May 15, 1948, the British Mandate ended, and the State of Israel was established. After the 1949 Armistice Agreements between Israel and the Arab countries, which ended its War of Independence, the State of Israel controlled 78 percent of the territory of the country. This changed again in June 1967, when Israel occupied all of Western Palestine, the Golan Heights, and the Sinai Peninsula. Israel withdrew from Sinai in the Peace Agreement of 1979 with Egypt, but the remaining territories (the West Bank, the Gaza Strip, and the Golan Heights) are still under occupation, and their permanent status has yet to be determined.⁴

Jewish Immigration: Description

The main process behind the development of Israel has been the rapid growth of the Jewish population in the country since 1882 by means of immigration. Prior to that year, Jewish immigration was relatively small. In 1881, on the eve of the Zionist immigration, the Jewish population, called the “Old Yishuv,” numbered only 24,000.⁵ These Jews lived mainly in the four holy cities of Jerusalem, Hebron, Safed, and Tiberias, where Jewish communities had existed for hundreds of years. In the nineteenth century, Jews began to settle also in Jaffa, Akko, and Haifa.⁶ Many of them lived on religious donations, but some, mainly Sephardim, lived by engaging in retail, trade, and crafts. There were some early attempts at modernization in the Old Yishuv, in production, education, and even the foundation of an agricultural settlement (Petah Tikva, established in 1878). However, these attempts were minor and did not significantly change the Jewish community.⁷

Change began in 1882, after the pogroms in Russia in 1881, which were triggered by the murder of Tsar Alexander II. These pogroms, together with the dire economic conditions of Jewish life in Russia and Poland, led to a massive emigration from Eastern Europe. Most of the Jews went to the United States, numbering 3.7 million Jews between 1880 and 1929.⁸ Some emigrated to Europe, and only a handful of idealists went to Palestine. They belonged to a movement called Hovevei Zion (Lovers of Zion), and they formed the first wave of immigration. This movement soon became part of a wider national movement, Zionism, founded by Theodor Herzl in 1897. From then on, Jewish immigration to the country was the result not only of the terrible hardships of Jewish life in Eastern Europe but also of strong national aspirations, influenced by the general rise of national movements in Europe at the time and supported by the Zionist movement.⁹

Over the years, more waves of Jewish immigration to Palestine followed, becoming larger over time, and within a few decades, they changed the country beyond recognition demographically, geographically, politically, and economically.

Table 1.1 shows how the country’s demography changed dramatically over the years. While at the beginning of the period, in 1880, Jews constituted less than 5 percent of the population, in 1947, toward the end of the British Mandate, they were already close to a third of the population. This enabled them to declare independence and to win the war of 1947–1949.¹⁰ In the following three years, 1948–1950, the Jewish population doubled with the large immigration of the Holocaust survivors from Europe and entire Jewish communities from Syria, Yemen, and Iraq. At the same time, the Arab population declined drastically, both because Israel did not include the West Bank and Gaza, and because most Palestinians who had previously lived in the Israeli area became refugees.¹¹ After 1950, Jewish immigration to Israel continued, and the population grew quickly. From 1950 to 2018, total population grew 6.5-fold, and the Jewish population grew 5.5-fold.

Like all migrations, the Jewish immigration was driven by both push and pull forces. The push factors in the countries of origin were persecutions, wars, and economic hardship. The pull factors were religious; strong sentiments for the Jewish homeland; national aspirations; security; and more recently, Israel’s economic prosperity. The push forces explain why immigrations usually come in waves, when troubles hit countries of origin, and it was true for the Jewish immigration to Israel as well. This is important for the economic analysis in this book, because the variation in immigration over time helps us identify the economic effects of immigration. I next describe briefly the immigration waves since 1882.¹²

TABLE 1.1. Population in Palestine and in Israel, selected years, 1890–2018 (thousands at end of year)
Year		Population		Jews		Non-Jews		Comments
1880		549		24		525
1914		683		85		595
1922		768		84		683		First British census
1931		1,036		175		861
1939		1,505		449		1,056
1947		1,970		630		1,340
1948		1,015		759		156		Only in the State of Israel
1950		1,370		1,203		167
1960		2,150		1,911		239
1970		3,022		2,582		440		Arabs of East Jerusalem added in 1967
1980		3,922		3,283		639
1989		4,560		3,717		843		Eve of ex-Soviet Union immigration
2000		6,369		4,955		1,414		225 thous...

Table of contents

• Cover Page
• Series Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• Acknowledgments
• Map
• 1. Historical Background
• Part I. The Israeli Growth Miracle
• Part II. The Israeli-Arab Conflict
• Part III. Economic Lessons from a Turbulent History
• Part IV. Neoliberalism and Its Impacts
• Conclusion: Four Decisions, Two Dilemmas, and One Pandemic
• Appendixes
• References
• Index
• Series List