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Introduction to Israel's diversified economy

Question:

Discuss about the Development in Israel Country.

Israel is one of the country located in the Middle East on the southern shore of Mediterranean Sea with Red Sea in the north (Willner, 2015). The country features geographically diversified and distinct nature and characteristics within a small area of land. Israel technology and economical center is at Tel Aviv with Jerusalem being its largest city. In the year 1948, modern state of Israel came into existence post which the country has been developing rapidly. The country received mass immigration from neighboring nations leading to its population doubling. Economic situation in the country has also gained tremendous and rapid development with its 1960s GDP being US$ 1,366 to currently being at US$37,032 as per World Bank (Acs, 2007). Currently Israel ranks 35th as per its GDP with the country becoming an economic and technological powerhouse in the world. It is has been 5th in accordance to the Bloomberg Innovation Index, with over 160 Israeli businesses getting listed on NASDQ. Such enormous growth potential of the country is achieved from its economic policy setting that have transformed the nation over time. Israel has been in a state of war ever since its independence in May 1948 with six wars along with two intifadas that involves terrorism, economic boycott and intermittent diplomatic isolation (Anderson, 2007). Its war like conditions with neighboring states of Syria and Lebanon has disrupted peace in the country inspite of its several existing treaties. All trade opportunity on land has been disrupted in the country closing them also it is deprived from benefits of oil wealth in the Middle East but has to significantly bear instability in the region caused by arm race. In spite of the several challenges faced by the country, it has been able to extend a strong, modern and diversified economy with constant GDP growth, placing itself ahead of Spain, Greece, New Zealand and Portugal (Checherita-Westphal, 2012). It has been identified as one of the most emerging global markets by the Foreign Policy magazine’s Globalization Index. Israel has emerged to a Silicon Valley in the Middle East, second to California with concentration of large number of firms, attracting massive FDI and economic growth. It also ranks third in the world for number of University graduates per capita post United States and Netherlands, also with highest number of per capita scientists. Compared to other countries economic success post their independence post World War II, Israel leads on the top which is considered as remarkable by economists (Perez, 2013). The scope of this discussion analyses the economic policy and other factor changes which has led to growth and development of the nation.

Factors that facilitated development across Israel

Economic growths in Israel have defied various predictors of sustainable growth model for economic development especially from the premise that security is necessary for attaining such economic situation. Though security might not act as a determining condition but acts as a perquisite for economic growth, as revealed by historical data. Security threats can be classified as being internal to the country or external, as internal threats comprise of law and order issues, whereas external being threats from other nations (Ahal, 2009). Israel has been facing continued threat from internal as well as external situations, however they remained refrained from proper Israel unable to harm its physical infrastructure, thus not generating much impact on its economy. Non-economic forces propelled Jewish immigrants to the country, though it affected the country’s budget in a severe manner. These immigrants further added to the pool of skilled and knowledge capital providing a rich reservoir (Klein, 2008).  Further lack in military capability of resource poor Israel was instrumental in attracting large amounts of foreign capital that was primarily driven by political motives. Such transfers from Jews in Germany and economic aid from US led to economic development of the country. Lastly, Israel felt an urgent need for defense regulation that led to rise of military-industrial complex which added to economic growth with rise in export income and technological advancements. These are some of the primary factors identified that facilitated development across Israel leading to its unmatched economic growth (Papaioannou, 2008).        

 Israel had been in a system of turbulence and uncontrolled violence that cannot be associated with positive economic development. Investors make capital investments on basis of money, time, skills, energy taking substantial risks for deriving future pay-offs from such investments. In cases of uncertainty, investors will be deterred to make any sort of investment that they are most likely going to loss out in the future. In Israel it can be thus said that it lacked FDI due to its instability in the current government structure and due to its political violence. Its economy is continuously facing war threats and attacks that destroys the conventional belief of peaceful economic development (Dzisah, 2008). Though with creation of state of Israel halted small scale hostilities but there was growing security threats from external countries. Israel was also subject to Arab boycott, which further affected economy of Israel. Hence, Israel history of economic development can be marked and grouped in several eras.

Israel's economic development journey and eras

Economy of Israel has been the topic of global discussion due to its technologically advanced global standards. It has attracted global attention ranking amongst top 20 nations in the world UN’s Human Development Index. It has been also successful in attaining highest development standards in Middle East, with high standards of living which can be held parallel to various European countries (Kirzner, 2009). Israel’s economy allows it to develop a sophisticated welfare state that has a powerful military system with technologically advanced nuclear weaponry. Its modern infrastructure includes industrial manufacturing, high-technology companies, diamond polishing and cutting companies and so on. Israel is however poor in its natural resources and is dependent on imports of several items including wheat, motor vehicles, petroleum, uncut diamonds and so on. Its high import of natural gases might be changed with recent exploration of natural gas in the country (Head, 2010). At present the GDP of the country is about $339.990 and growth rate is 3.8%. GDP per capita for the country is $39,125 and sector wise GDP is 2.3% agriculture, industry 31.7% and services 66%. The labour force is 3.595 million and its occupation. It has highest levels of Public Debt which accounts for 62.1% of GDP. Economic dynamism of Israel has attracted interest globally from various large investors in U.S. Israel economy has been across industries and investments. Israel has been facing various long-term challenges in its economic prosperity. In the short-term period there is inability to duplicate its success in field of telecommunications and technology but over a long-term period the country is unable to develop multinational corporations. There are also challenges from high dependency from Ultra-Orthodox Jews, who have low levels of official labour force participation (Putterman, 2010). Growing poverty amongst the sect of Jewish population has hurt the overall growth in the economy. Economic growth of the country is depicted by way of rankings and benefits that the country has gained post its independence. Israel’s trade and benefits have harnessed its development also governmental policy of the country has added to its robust growths. Israel’s government has been focused on developmental endeavors for creating an unique state that can render efficiency all over the world.      


First era of Israel economic development is referred to as the pre-state Yishuv. Roots of Israel’s economy can be found in pre-state Jewish settlement that was initiated in the 1880s, which was known to be Ottoman-controlled Palestine. Israel’s economic activities was led by socialist immigrants from Easter Europe as well as from Russia (Abu?Bader, 2008). They developed a number of agricultural settlements which had low access to water resources. Their focus on agriculture led to Israel developing of self-sufficient terms of agricultural technology. Later the Jewish population kept growing with Histadrut trade union functioning as a labor advocate leading to Israel’s futuristic developmental paths. Histadrut came to own several businesses and functioned as an integral state employment structure, especially aiding immigrants. Money from Histadrut was contributed to development of agricultural, manufacturing and construction related field, this furthered Israel’s economic model. Initial dependence of the Jewish immigrants based economy was on small manufacturing and agriculture, which started prospering in a relatively secure environment (Cukierman, 2008).     

Challenges faced by Israel's economy

Post-independence of the economy, the state was faced with high costs arising from mass immigrant absorption, building new institution and defense costs. The need for a government agency which could infuse public money into the economy for its development was envisioned. Since May 1948 Israel witnessed early immigration explosion posed a formidable  challenge. Immigrants numbers arose with at a rate of 22.7 percent on an annual basis. These immigrants were dependent on Israel for housing, education, language instruction, job training, and also for employment. Multiple immigrants were from North African countries and Middle Eastern with a large proportion of children. Such immigration powered Histadrut’s job-dispensing but led to labor shortages (Bolt, 2014). For the purpose of administering the then government’s social and Economic Growth economic programs, the country  still had to depend on outside funding in spite of its well-developed bureaucracy from the yishuv. In the 1950s and 1960s Israel attracted little foreign investment but saw high growth. The country lacking exploitable natural resources with only a small and fledgling domestic market, with a heavy handed government intervention its GDP arose to an astounding 30.1 percent in 1951.

Israel had to government-financed defense industry which is considered most significant change in its economy post 1967 War. The pre-state yishuv often wanted to purchase arms from abroad but it was forged, when in 1967 Israel’s military sector initiated production of communications equipment and light arms (Brender, 2008). It gained success in its production and thus started production of sophisticated weapons systems consisting of missiles, fighter jets and tanks starting to export them as well. Post war it accelerated its military needs led to formation of a local industry. Military production paced which was influenced by a War of Attrition with Egypt in 1960s and also to deal with cross-border terrorist attacks.

An important incident which was the French arms embargo leading to hostilities, led to restricting of Israel’s main supply of weapons from the U.S. refusal. This forced Israel into heavy debt for financing its

private consumption leading to inflation reaching double digits. Overhauling of Israeli currency help adopt to reforms for curing of public spending. The government in the country implemented economic programs for construction of insurance, construction, health services and business development that created economic boom but privatization overall weakened influence of Histadrut (Sadorsky, 2010).   

Israel experienced massive immigration from the former Soviet Union, who were dynamically “high tech” operating in favorable geopolitical climate provided by the Middle East peace process. Collapse of the Soviet Union rising political and economic turmoil forced almost 900,000 new immigrants to Israel

Israel's trade and benefits harnessed development


leading to its population of 4.56 million. Various progress in solving conflicts made it an attractive investment target. Israel’s sense of legitimacy emerging as an economic partner has led to its precarious position in the region which impacts FDI inflows from other countries. Israelis came together with representatives from other Arab governments creating a body for the Middle East-North Africa (MENA) economic summits increased creation of peace agreements in the region. Israel’s tourism sector received high levels of growth, due to its strong sector in the economy (Hoekman, 2008). Focus on tourism sector did not deter investment in regional water or transport development or in defense. But starting of Arab-Israeli conflict with starting of Palestinian suicide terrorism in Green Line though dampened but did not deter its economic development. Israel was deeply impacted economically by the influence of terrorism in 5 years which created huge burden. Though the economy started recovering since the 1990 yet many researchers attach Asian economic crisis or U.S. high tech bubble crisis with the fall out.      

Israel was thrown back in history with beginning of Palestinian terrorism attacks coupled with U.S. tech bubble burst and slowdown, it is assumed to the worst recession that the country has ever faced in its history. Economy of the country began contracting with prevailing dangerous security situation coupled with global economic crisis. The economy declined by one percent in 2002 also with contracting of its GDP by .06 percent in 2001.There was tremendous rise in unemployment which crossed 20 percent. Tourism that constitutes a major portion of the economy with cost of $1.7 billion fell to more than 50 percent in 2001 (Breznitz, 2007). Israel’s currency shekel feel in value against the dollar Defense expenditures leading to fall in government receipts. Industries those relied on Palestinian labor as construction and agriculture feel creating a negative impact on the economy. Many non-high tech industries were deeply affected by the violence creating impact on the hotel and hospitality sectors due to which the government announced an almost $100 million emergency loan forwarded to the hotel industry. Palestinian violence led to a cost of almost $200 million towards property damage, payments to victims and so on. Inspite of several challenges there has been tremendous amounts of violence with the Arab-Israeli conflict. Israel is experiencing war  with surrounding Arab states since a prolonged period of time which has caused several destruction in the country and to its economy. Terrorism has been threatening existence of tourism in Israel, which contributes to a significant amount in the country’s development. Terrorism has dampened growth and deterred economic development for quite some time now (Fagerberg, 2008). However, there are no governmental policy that can support and provide a stable economic environment that is conducive for growth. 

Pre-state Yishuv - roots of Israel's economy

Israel has been striving continuously for attaining competency with its skilled levels of immigrants. Primarily contributor to the immense development of Israel can be attributed to the entrepreneurship ambience in the country provided by the government. The government provides ample freedom and opportunities for business set up, further there are foreign funds inflow on which there is relatively less amounts of restrictions. Technologically skilled immigrants with jobs available, innovated and developed several companies in the country. These highly skilled employees not only developed companies but also set up technical institutes for training of more staffs and employees. More young and energetic people were trained in a technological field that led to development of the nation further. Training of more young and energetic people will create more companies and jobs for future. Israel’s economic development has been powered by its potential of human capital possessing immense skills that has capability to render various expertise and excellence similar to those compared to Silicon Valley. Technology export and catering to large number of domestic clientele has resulted in creation of opportunities within the country. Large number of immigrants brought with them potential opportunities of being consumers and further adding to the robust economic development and growth. Immigrants had connection with their counterparts in other countries which helped attract more amounts of funding from foreign sources. As more and more immigrants enter the country better will be its economic development. The government in the country exerts limited amount of restrictions on immigrants making it a more lucrative country to come in and settle. Jews and other community people who faces threats in their countries have been known to immigrate and settle in Israel since a long periods of time and the trends continues to set in.  


Israel’s key capital has been always its heavy reliance on its immigrants and skill as well as knowledge transfers. Educated immigrants in the country have paced up its rate of scientific and other research development. Owing to conducive infrastructure that has prompted scientific and other innovative development, Israel has emerged to a leading country. Burden of terrorism has almost reduced earnings from tourism sector to a negligible amount. Workforce has developed over the years tremendously in the country owing to its increased productivity with commercialization on innovation. Large number of immigrants also provided the economy with a large consumer base in the domestic market alone. In recent times immigration has been propelled to an extent that is affected by means of noneconomic forces, through instable security situation. Immense economic motivation from Soviet Union immigration, has made Israel the second best destination post U.S. Foreign Transfers accounts for a large amount of Israel’s economic development as such robust rate of economic development. Without such foreign transfer including aids from U.S. such high levels of economic growths would not have been possible. Similar to other emerging markets, Israel’s strong reliance on foreign funds has largely been due to lack of precious resources and lack of stability in bordering areas. Governmental policy that attracted investment from abroad primarily attracted funds from Jewish immigrants. The government reliance on U.S. aid depicting its political and ideological reliance further helped manage more aids towards the country. Funds also came from German’s Jewish communities who felt more attached to the country emotionally. Such transfer led to profit–afforded successive Israeli governments for directing development and subsidizing standard of living. The economy of Israel thus, continues to grow with government’s policy allowing foreign funds in setting up businesses led to emergence of highly innovative tech companies. Democratic government with low levels of intervention in businesses and other related policies further helped in free flow of investments that is directed at developments. Indirect aids received further helped the economy in indirect infrastructure development of the country. Infrastructure development coupled with direct investment in companies allowed economic expansion of the country.   

Israel's government agency infusing public money into the economy

Conclusion 

Israel’s un-parallel success and economic growth are unique in nature to the Jewish history and Jewish state. Factors leading to success of Israel are multiple in nature, primarily being existence of Jewish Diaspora that lead to immigration along with economic with ideological support. The nation was created post Holocaust at onset of Cold War induced Germans, which led to combination of local ingenuity along with foreign funding enabled the country to developed at a fast pace. Apart from accepting ingenuity of people coupled with funding especially from US, there were other determinants of growths especially as Israel’s adoption of democratic form of government. Its government ensured responsible development, through at several instances it has been held responsible for its prevailing wars. Israel hence gained an advantage in international politics. Significant economic growth has been facilitated through measures of social capital and humans. Immigrants who came into Israel, brought in skills and education along with them which facilitated the nations development. These immigrants helped develop strong academic institutions for training of native Israelis in terms of latest technologies. Israelis shared a religious and national devotional ideology for creating a successful state. Such attitudes allowed Israelis to solves various challenges in a collective manner for building of a strong civic support towards economic development. Though Israel has achieved tremendous success it cannot be adopted as a developmental model in spite of its unique factors. However, in general terms Israel provides a learning that can go against any type of conventional expectations, as they have denoted economic growth even in absence of security.

References

Abu?Bader, S. &.?Q. (2008). Financial development and economic growth: empirical evidence from six MENA countries. Financial development and economic growth: empirical evidence from six MENA countries., 803-817.

Acs, Z. J. (2007). Entrepreneurship, economic growth and public policy. Small business economics, 109-122.

Ahal, S. N. (2009). U.S. Patent No. 7,627,612. Washington, DC: U.S. Patent and Trademark Office.

Anderson, S. (2007). The economics of dowry and brideprice. The Journal of Economic Perspectives, 151-174.

Bolt, J. &. (2014). The Maddison Project: collaborative research on historical national accounts. The Economic History Review, 627-651.

Brender, A. &. (2008). How do budget deficits and economic growth affect reelection prospects? Evidence from a large panel of countries. The American Economic Review, 2203-2220.

Breznitz, D. (2007). Industrial R&D as a national policy: Horizontal technology policies and industry-state co-evolution in the growth of the Israeli software industry. Research Policy, 1465-1482.

Checherita-Westphal, C. &. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 1392-1405.

Cukierman, A. (2008). Central bank independence and monetary policymaking institutions—Past, present and future. European Journal of Political Economy, 722-736.

Dzisah, J. &. (2008). Triple helix circulation: the heart of innovation and development. International Journal of Technology Management & Sustainable Development, 101-115.

Fagerberg, J. &. (2008). National innovation systems, capabilities and economic development. Research policy, 1417-1435.

Head, K. M. (2010). The erosion of colonial trade linkages after independence. Journal of international Economics, 1-14.

Hoekman, B. &. (2008). Services trade and growth.

Kirzner, I. M. (2009). The alert and creative entrepreneur: A clarification. Small Business Economics, 145-152.

Klein, M. W. (2008). Capital account liberalization, financial depth, and economic growth. Journal of international money and finance, 861-875.

Papaioannou, E. &. (2008). Economic and social factors driving the third wave of democratization. Journal of comparative Economics, 365-387.

Perez, N. (2013). The privatization of Jewishness in Israel (or, on economic post-Zionism). Israel Affairs, 273-289.

Putterman, L. &. (2010). Post-1500 population flows and the long-run determinants of economic growth and inequality. The Quarterly journal of economics, 1627-1682.

Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy policy, 2528-2535.

Willner, D. (2015). Nation-building and Community in Israel. Princeton University Press.

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