The Story of Israel’s Economic Success


By Sarah L, Staff Writer

Although Israel is commonly called the “Start-up Nation,” it is only over the last 40 years that Israel has transitioned to the free-market economy responsible for this claim to fame.  The “all for one and one for all” mentality of socialism was arguably necessary to Israel’s early survival. However, the nation’s economic success is based not on socialism; rather, the transition to a capitalist economy when socialism was deemed obsolete allowed for the success of the hi-tech sector (among others!) for which it is now famous.*

The first Zionists were greatly influenced by the theories of Karl Marx. For them, the combination of socialist equality and Jewish autonomy – or Zionism – was the answer to the oppression and persecution which had so long plagued European Jewish communities.  The principles of socialism are central in Herzl’s writings. In The Jewish State, he wrote, “We will seek to bestow the moral salvation of work on men of every age and of every class; and thus our people will find their strength again…”

The emphasis on physical labor, characteristic of the Second Aliyah (1904-1914), was known as “avodah Ivrit,” or “Hebrew labor.”**  This ideology saw physical labor – specifically working the Land – as constituting both individual rebirth and a personal contribution to the rebirth of the Jewish state. “Avodah Ivrit” became one of the grounding principles of Labor Zionism, the movement that was to lead Israel during its first 30 years of statehood.

In 1922, Great Britain was given official Mandatory rule over Palestine by the newly established League of Nations. The League of Nations Mandate for Palestine, Article 4 says,

An appropriate Jewish agency shall be recognized as a public body for the purpose of advising and co-operating with the Administration of Palestine in such economic, social, and other matters as may affect the establishment of the Jewish National Home and the interests of the Jewish population in Palestine, and, subject always to the control of the Administration, to assist and take part in the development of the country.

Accordingly, the World Zionist Organization founded the Jewish Agency as the governing body for the Jewish community in Mandatory Palestine.

Most of Israel’s social, governmental, and economic infrastructure was built inside this framework of British supervision between 1918-1947. This includes the highly influential Histadrut, or General Workers’ Confederation, and the IDF’s precursor, the Haganah, as well as the Jewish Agency itself. Although the British Mandate is often vilified for turning a blind eye to Arab violence during the 1920s and 1930s, the boom of immigration and Jewish civil infrastructure during this period shows the essential nature of the Mandatory period for the development of the state of Israel.

When Israel declared its independence in May of 1948, the combined infrastructure of the British and the Yishuv (the Hebrew word used to describe the Jewish community in pre-State Israel) was passed on to the new government. Despite numerous hardships – including extreme rationing and absorbing high numbers of refugees – Israel was often called an “economic miracle,” due to the exponential growth of its GDP in the years following its birth.

However, by the late ‘60s, the idealistic nationalism which had fueled Israel’s rebirth was faltering. The same socialism which had forged the Israeli mentality and allowed for the survival of the Jewish State now caused a high cost of living, high taxes and a stagnating economy. The government played the main role in the economy, owning or directing much of Israel’s public sector and strictly regulating every area of life.  Many Israelis began to question the Labor Zionist mentality.

In 1973, after the Yom Kippur War, economic disillusionment set in for real throughout Israel, catapulting Menachem Begin to power in 1977. Begin had served for decades as the leader of Israel’s opposition in the Knesset (Israeli parliament) and his campaign platform was based largely on the promise of a free market. Unfortunately, his campaign promises were only realized nearly a decade later when Israel was on the brink of economic collapse.

Throughout the 70s and early 80s, risky and even illegal investment practices by some of Israel’s largest banks caused a major recession and spike to inflation. By 1984, inflation was at nearly 450% and projected to reach 1000% by 1985. Israel’s then-Prime Minister, Shimon Peres – spurred by American pressure – implemented an aggressive plan designed to cut inflation and bring the country out of its spiral. The plan included privatizing government assets and reducing federal spending. By 1987, inflation had dropped to 20%, setting the stage for the economic boom of the 1990s.

One instrumental feature of the reform was the dramatic lowering of restrictions on private investors, both domestic and foreign. This sudden shift created a vacuum that investors rushed to take advantage of. Money flooded the Israeli economy. Other catalysts for the boom were the international growth of the tech industry and the rush of highly educated immigrants from the countries of the former Soviet Union. By 2000, Israel had entered a new era.

Today, Israel is often called the “Start-up Nation,” and some have begun to refer to its hi-tech sector as “Silicon Wadi” a complementary play on California’s tech center, “Silicon Valley.” Ironically, the country that once insisted on doing its own farm work now largely relies on foreign workers – mainly from East Asia – for agricultural labor.

Although Israel was initially founded as a socialist country, its continuing success is largely based on the privatization of government assets and the opening of the economy.  The Labor mentality was necessary to the building of the state, but capitalism was necessary for it to flourish into the 21st century.

* All sources available upon request

** The combination of this ideology and a lack of financial resources gave birth to the first Jewish agricultural collective, or kibbutz, in 1910.

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One Comment on “The Story of Israel’s Economic Success”

  1. Funny that America started as a capitalist,God fearing nation and currently devolving into socialism. Whereas the Jewish state was founded and now exists as nearly polar opposites. The HOLY ONE’S perfect hand controls it all.

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