Abstract
Generally, scholarships on Israel suffer from a preponderant focus on conflict, strategic concerns, and political contestation. Joseph Zeira’s The Israeli Economy: A Story of Success and Costs is a welcome departure and a valuable work on the less-discussed aspects of the economy of the Jewish state. Since its creation, Israel has witnessed extraordinary circumstances that included a hostile neighborhood, series of wars, and massive influx of immigrants, besides facing the obvious transformative challenges from a highly agrarian economy to a developed nation. As such, the book is about both “the Israeli economy and about the economic history of Israel” (p. xvii) since the early-1950s. In this volume, Zeira confronts prevailing questions and contradictions while narrating the “success story” of the Israeli economy.
For nearly 50 years (1922–1972), Israel registered a rapid economic growth despite an overwhelming rise in population on account of Aliya (Jewish immigration). The country’s per capita gross domestic product (GDP) also increased by 5% annually. Terming this as the “catching up” period, Zeira asks how Israel sustained such an incredible growth while absorbing waves of refugees (many of whom came penniless to the country). The book flags different factors to explain the Israeli economic wonder. Notably, by sustaining large trade deficits, Israel accumulated the capital necessary for growth through “large inflows of unilateral transfers” from abroad (p. 76). Principally, this included money that the early immigrants brought before the formation of Israel, reparations from West Germany since 1953, large-scale US aid (especially after 1970), and donations by the world Jewry.
In basic terms, the Israeli growth confirms the existing trends where the economic growth is “driven mainly by growth of total factor productivity” (p. 97). Productivity, in turn, was made possible by combining human capital and technical change. The former developed with the expansion of state-funded education, while the latter was made possible by the careful and systemic adoption of technologies. In other words, Israel ensured increased factor productivity by “expansion [of] education and adoption of new technologies” (p. 97). In addition, the high human capital of immigrants complemented the development of its nascent education sector while also enabling the rapid adoption of newer technologies. Moreover, under the Jewish Agency (and later under the Israeli government), the public sector contributed to the creation and sustenance of productivity by providing land, equipment, and needed capital. This allowed the large-scale development of housing projects, agricultural fields, irrigation, and electricity production plants.
Zeira also calls attention to certain contradictions linked with the Israeli economy. For instance, he explains how despite the technological success, its labor productivity has remained behind other developed countries. Further, he examines the impact that the growth in technology sector had on Israel’s overall growth. It is revealed that there is “no sign that Israel’s growth accelerated with the rise of this [high-tech] sector” (p. 94). Such observation may appear counterintuitive as technological growth has become synonymous with Israel. Zeira explains that during the period when growth in the high-tech sector took place, the industrial growth in Israel was witnessing a decline. Therefore, instead of creating additional economic growth, the high-tech sector merely “enabled Israel to find suitable employment for its growing educated labor force” (p. 119).
Perhaps the most critical theme that the book examines is the impact of conflicts on the Israeli economy. The author concludes that “despite the centrality of the conflict in Israel, its economic effects have received little attention so far” (p. 127). In this regard, the book contributes significantly as it empirically affirms that conflict had “significant effects” on the country’s economy, both directly and indirectly. For example, through economic modeling, the book reveals that Israel could have had a 26% higher output if it did not suffer from the high volumes of conflict. Such knowledge about the consequences of conflict helps comprehend periods of high inflation and economic recessions in Israel’s economic history. Essentially, the book communicates how successive Israeli governments have been vexed with balancing the defense budget with the country’s economic needs.
The author divides Israel’s conflicts into “narrow conflict” and “wider conflict.” The former refers to the period when Israel had no large-scale threats. This includes the War of Independence (in the late 1950s), where the conflict was limited to “light weapons and explosives” (p. 128). It also comprises the period after the First Intifada (1987–1993), following which the conflict may have been persistent yet not large-scale in scope. Zeira concludes that the economy incurred “low military costs” and “lower burden” during these periods of “narrow conflict.”
In contrast, the conflict with the Arab states required large-scale conventional armies to fight full-fledged wars. This period of conflict (1967–1980), referred to as the “wider conflict,” had massive consequences for the economy as Israel consistently had to sustain high military spending. This “wider conflict” period witnessed soaring defense spending, rising inflation, high taxation, onslaught of recession, and a “severe fiscal crisis” that could not be managed until 1985. It was not before Israel signed a disengagement agreement (with Egypt) and withdrew from Sinai that the Israeli military costs witnessed a slump. Zeira concludes that the peace with Egypt was critical in allowing Israel to reduce the costs imposed by the prolonged conflicts of the 1960s and the 1970s.
Another aspect efficaciously highlighted is the economic cost of conscription. Previously, conscription in Israel has been viewed and examined through strategic and political prisms. The book explores the economic dimension of conscription and emphasizes that the cost incurred due to conscription is an opportunity cost, which is quite challenging to measure and, therefore, it remains less talked about in public discourse. Zeira informs that conscription has inflicted a loss of human capital by shortening the period that an Israeli citizen stays in the labor market (compared to countries that do not have conscription). Through the economic model, Zeira suggests that the output loss due to conscription may exceed 5% of the country’s GDP.
In the latter half of the book, the author focuses on macro aspects. First, the book tests several existing economic models and theories against the Israeli economic experience. For example, the author tests the Keynesian theory against Israel’s business cycles, which confirms that business cycles are driven mainly by aggregate demand. A similar observation has been made about the inverse relationship between inflation and unemployment against the major macroeconomic concepts, including the Philip Curve. Later, the book examines the monetary policy and the changing role of the Central Bank of Israel. Initially, the Central Bank’s principal objective was to “support the urgent national goals” (p. 271), which continued during the conflict in the 1960s and the 1970s. However, in the 1980s, the Central Bank’s role witnessed a transformation as the country turned toward neoliberal policies of budget cuts and privatization. Like the central banks worldwide, the Central Bank of Israel assumed the role of the regulator. The book also explains the 1985 stabilization of the economy—a milestone in the country’s economic history that marked Israel’s adoption of neoliberal policies.
Ultimately, this essential contribution by notable macroeconomist Joseph Zeira disentangles numerous contradictions and questions about Israel by enabling an entirely different dimension to understand the country and its journey as a state. It explains the Israeli “growth miracle” that successfully absorbed millions of refugees while still being able to alleviate and sustain high living standards. It informs about the consequential choices that the State of Israel had to make during its conflicts and how it was able to address the “bread-vs-butter” dilemma.
The book is divided into four parts covering 13 chapters with a lucid introduction and conclusion. At times, the book turns technical for readers who are not well-versed in economics. However, the author has compensated for this by adding articulative explanations before and after each chapter and each segment that effectively keeps the readers on track. This way, the book has to offer something for everyone. In short, The Israeli Economy: A Story of Success and Costs is an empirically rich and intellectually stimulating contribution. It is an outstanding addition to the literature on the Israeli economy while simultaneously providing a window to the country’s political, social, and security choices. Therefore, the book is an essential read for policymakers, students, and researchers interested in understanding Israel.