The Israeli Economy

By Daniel Kabilyo

This is the story of the strongest and most stable economy in the Middle East. An economy that survives wars and economic earthquakes around the world. An economy that belongs to the OECD and until 72 years ago did not exist at all. The story of the Israeli economy.

The Stock Market Tel Aviv

The Israeli economy registered remarkable performance since the begging of the millennium. Starting on a low pace and enduring several pivotal periods, today the Israeli market, led by the high-tech sector, is in all accounts solid and demonstrating resilience in most of the important economic metrics. Having said that, it wasn’t always so and in order to maintain high growth in the near and distant future the Israeli policy makers will have to deal with several major obstacles.

The story of the Israeli economy can be walked through without the need to travel centuries back. The relatively new country (72 years as at 2020), though had many ups and downs, have succeeded in stabilizing its economy and now is an honorable competitor to the OECD members.

The story of the Israeli economy dates back to the period before the state was created, which is referred to as the former settlement in the British mandate (begging in 1920). During the period and until 1948, with the formal creation of the state of Israel, the local economic structure was created with some of the significant Israeli landmarks. Honorable mentions would count the creation of “Dead Sea Works” in 1930 which was given the license to extract salts and minerals from the Dead Sea, Israel Electric Corporation (IEC) in 1923, which, until this day, responsible for providing Israel with electricity and lastly “Ata textile” that essentially mirrors the changes that took place in Israeli society from the 1930s to the 1980s. This period is known as positive in the history of the Jewish economy in the land of Israel as it was boosted by WWII and the need for former settlement to be self-sufficient and even more, support the European Allies in the war with the formidable Axis. By the end of 1944, the industrial output increased significantly and in total, between 1922 and 1947, the domestic products grow about 13% on yearly average. The Jewish population in the land reached about 630,000 in those days and this figure is important as shall be later explained.

The war of independence that ended in 1949 in a glories victory brought upon the new country major challenges as the refugees from Europe, bruised and post traumatic, and later on the huge immigration from the Arab world, that left all their belongings behind, faced a high unemployment rate and depleting foreign currency reserve. A strict Austerity program was inaugurated and presented pervasive governmental interference that lasted until 1959. The program included allocation and distribution of resources under governmental oversight and fierce intervention in the foreign currency market. The program magnitude dwindled down as the first Prime Minister, David Ben-Gurion, signed a much needed agreement with Germany to compensate the Jewish state for the holocaust Jewish refugee’s confiscated property. Support from the United States and the issuance of Israeli bonds contributed as well. Thus, from 1950 to 1964 the economy improved and Israel experienced growth rates of above 10% a year on average.

On the down side, the economic growth in those days enveloped a disparity problem. The old settlement and the European immigrants where the primary Beneficiaries from the high growth whereas the Arab-Jews were slow to integrate and enjoy the positive sentiment. This disparity continued later on and was still an ‘under the surface’ many years later.

The second half of the 60s started with a recession that ended up after the great victory of the six days war. The positive sentiment after the remarkable victory along with another great influx of very skilled emigrates from the Soviet Union and other Western countries supported the growth. This positive economic period lasted until 1973 when Yum Kipur war broke. The decade after the war, as the Israeli sentiment, has been given the name “the lost decade” and with a good reason. It was characterized with sharp increase in inflation, non-market actual growth and high government expenditure. It continued to the 80s which started in a hyperinflation period which peaked at staggering 450% in 1984. The “Bank stock crisis” that broke in 1983 added fuel to the economic instability flames. To overcome the crises, the “1985 Israel Economic Stabilization Plan” was introduced and included dramatic measures including stopping the Central bank favored “go to” option of printing money. Other measures were a freeze in prices, wages and exchange rates and lastly significant cut in the state budget. The plan was considered success and in retrospect it had important impact – the modernization of the bank of Israel. The Bank that was considered up until this moment merely a tranche of the government, with no independent decision making, had cut the main artery with the government and the “printing money in request” has stopped.

The Kibbutzim, collective communities in Israel traditionally based on agriculture, played an important role in Israel's economy until the late 1970s.

Two major developments improved the Israeli economy in the 90s. The first would have been the continuance immigration of skilled Jews from former USSR, and their willingness to work in all positions offered, and the Oslo accord which lead later on to the peace process with Jordan. The 2000s started with a downturn due to the Dot-Com crises and the Second intifada. Taking the crises and the instability on the political side into account and despite of it, since the new millennium the economy grow 3.3% on averaged, higher than in many OECD countries.

In the past years the Israeli economy continued the positive trend in both macroeconomic and fiscal outcomes. Growth is strong and unemployment is low and falling. Low interest rates and prudent governmental and Monterey financial policy, which leads to improvement in the governmental debt in the past decade, contribute significantly. The strong and dynamic high-tech sector continues to lead the economy were the energy export from newly discovered gas fields will contribute in the not so distant future. The high tech sector in Israel is second in its size only to the US market and now days the amount of Israeli companies traded in the much distinguished NASDAQ stock exchange are the third after the US and China.

According to the OECD, Exports of goods by market and commodity are fairly diversified were the main export destinations are the United States (29%), Hong Kong (7%), UK (6%) and China (5%). The rest are mainly other EU and non EU OECD countries. In terms of commodity, pearls and stones leading the board and account for 26% of the Israeli exports, Medical Products account for 11%, Telecom 10% and electronic integrated products and Scientific instruments each account for 6%.

On the downside, Israel is facing some challenges in the future that the government will need to address. Susceptibility to political risk, although in recent years when a conflict broke it had no sever effect on the economy, is still looming in the horizon. Further, the Israel society is marked by lack of cohesion and significant disparities. Higher housing prices affect the middle class and young couples. On the infrastructure side, public transport deficiencies are detrimental to work life balance and effecting the country efficiency and productivity. Lastly, minorities in Israel have a negative effect on the economy as the Israeli – Arab, mainly women, and the ultra-orthodox Jews (Haredim) are absenting from the Job market.

Taking into consideration the relatively short existence of the country, the fact that the small country needed to grow overcoming many threats that escalated in many occasions to all out battles with its neighbors, that never resulted, even after undergoing a peace process, in real collaboration, although Israel has a long way to go, the main economic aspects signaling great present and bright future ahead.

Mr. Daniel Kabiljo (CPA) is an Israeli Accountant with special expertise
in the high-tech and energy sectors in Israel, US, Canada and the UK.