The transition from near-bankruptcy to one of the world’s brightest economies stemmed from a combination of political courage and Jewish heritage
It was probably the worst starting point in any economy’s history.
Vastly outnumbered and outgunned, Israel had to build an economy while spending fortunes on defense; lacking oil, gas, gold, iron, coal, timber, or water; and unable to sell its neighbors, because they boycotted it.
The Israeli economy also suffered from its political management. The public sector dominated the economy, tariffs made imports prohibitively expensive, private business was heavily taxed, and utilities were state-run, wasteful, and inefficient.
When this deformed economy was burdened by the costs of the 1973 and 1982 wars, the result was inflation that by 1985 reached 415%, while national debt soared to 270% of the national product.
Israel was pitied as an economic laggard, and its currency was ridiculed as paper money. Foreign currency reserves dwindled so fast that Israel was several months away from losing ability to buy abroad a single oil barrel.
A generation on, Israel’s economy is an international success story.
ISRAEL’S economic growth has been the fastest in the developed world this century.
Public debt, at 59% of the national product, is lower than its level in Germany, Britain, France and the US. Inflation and unemployment, 0.4% and 4% respectively, are among the world’s lowest; the shekel is stronger than the dollar, the euro and the pound; foreign-direct investments since 1995 averaged nearly $5 billion annually, and last year totaled $25 billion in the last quarter alone.
Per-capita product, at $37,900, has passed Italy’s and is expected to soon pass Britain, France and Japan. Exports, which last year crossed the $100 billion mark, while the country that in 1985 was on the brink of spending its last dollar now has a trade surplus.
What caused this spectacular transformation?
In the immediate sense, the cause was one brave political move. In a deeper sense, Israel’s economic success is a product of Jewish legacy.
The politicians acted in 1985. Let by Shimon Peres, the government executed a secretly planned package of drastic measures that added up to shock therapy.
The first was a 20% cut in defense spending, followed by sharp cuts in the rest of the budget. Then the government froze all public-sector hiring. Then it convinced the unions to agree to abandon agreements that indexed public-sector salaries to inflation.
Then the government abolished subsidies for food and public transport, and froze all retail prices. Then it slashed import duties and began cutting taxes. Then it had the Knesset make it illegal to print money as a way to cover deficits. Finally, it transferred responsibility for setting interest rates from the Treasury to the Bank of Israel, thus depoliticizing it.
Added up, this package reduced the amount of money in circulation, raised the amount of goods, and rationalized pricing. Consequently, interest rates soared, prices dropped, and inflation plunged.
The government later canceled a multi-billion-dollar project to build an Israeli fighter jet, thus firing some 2,000 engineers and technicians. Worse, the country’s biggest employer, the bankrupt, union-owned holding company Koor, fired 10,000 of its 32,000 workers, and then was sold to private investors.
People feared that the layoffs would spark a brain-drain and make the economy stagnate. Instead, the fired engineers started up their own companies, employing each other and also creating new jobs. Some of these firms began selling shares on Wall Street. Israelis discovered the thrill of private enterprise, and many became rich by inventing things like video pills, the disc-on-key, driving-assistance systems, firewall software, and medications for Parkinson’s and MS.
A dramatic transition from socialism to capitalism.
A second round of reforms came last decade, when Benjamin Netanyahu, as Ariel Sharon’s finance minister, cut taxes, slashed social spending, raised the retirement age, privatized the pension industry as well as oil refineries, banks, ports, the El Al airline, and almost anything else he could sell.
Israel thus completed a dramatic transition from socialism to capitalism.
The 1985 emergency plan became a textbook economic reform now studied in universities worldwide.
One uniquely Israeli factor in its success was the politicians’ ability to unite in the face of crisis, in a unity government where the prime minister was Labor’s Peres and the finance minister was Likud’s Yitzhak Modai, a wealthy cosmetics-factory owner.
This collaboration of political antagonists is what Greece didn’t manage to do in its recent crisis. It could happen because, unlike Greece, Israel had enemies ready to attack it. The politicians knew that if they didn’t jointly reinvent the economy – the country might not survive.
However, success also resulted from a national DNA forged by Jewish history’s travails.
GIVEN a chance to assume economic responsibility previously placed in the government’s hands, Israelis rose to the occasion. Had it not been for popular embrace of capitalistic opportunity, the public sector would never have shrunk from 70% to in the 1980s to hardly 40% today.
The same goes for the historic Jewish appreciation for merit, which the new economy prized.
Over the centuries, rich Jews married off their daughters not to the fellow rich man’s son, but to the humbly born genius from the local Talmudic academy. Money thus repeatedly married brains, and intellect was appreciated more than birthright, thus legitimizing and accelerating social mobility.
Similarly, the Jews’ legislation of compulsory education in the Roman era, centuries before any other civilization, encouraged a culture of curiosity and self-fulfillment which the new Zeitgeist celebrated.
Lastly, the Jews’ life for centuries in multiple countries as a minority forbidden to own and farm land turned many of them into entrepreneurs. That legacy traveled with the Jews as they returned to their land. It took several decades to be woken, but once it was, the Jews’ historic combination of enterprise, literacy, and global horizons proved more precious than the oil, gold, and water their land never had, and without which they built what is now one of the world’s most successful economies.