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Economy of Israel

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Sarona CBD, Tel Aviv, Israel
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The country's major economic sectors are technology, industrial manufacturing, and energy. Israel has signed free trade agreements with many world nations. In its early decades, the Israeli economy was largely state-controlled and shaped by social democratic ideas. In the 1970s and 1980s, the economy underwent a series of free-market reforms and was gradually liberalized. Israel has a close foreign trade relationship with the United States spanning both aid and bilateral investment.

History

The British Mandate for Palestine came into effect in 1920 aimed at restricting land purchases by Jewish immigrants. For this reason, the Jewish population was initially more urban and had a higher share in industrial occupations. This particular development resulted economically in one of the few growth miracles of the region whereby the structure of firms was determined mainly by private businessmen rather than by the government. The first survey of the Dead Sea in 1911, by the Russian Jewish businessman and engineer Moshe Novomeysky, led to the establishment of Palestine Potash Ltd. in 1930, later renamed the Dead Sea Works. In 1923, the businessman and hydraulic engineer Pinhas Rutenberg was granted an exclusive concession for the production and distribution of electric power. He founded the Palestine Electric Company, later the Israel Electric Corporation. Between 1920 and 1924, some of the country's largest factories were established, including the Shemen Oil Company, the Societe des Grand Moulins, the Palestine Silicate Company and the Palestine Salt Company.

In 1937, there were 86 spinning and weaving factories in the country, employing a workforce of 1,500. Capital and technical expertise were supplied by Jewish professionals from Europe. The Ata textile plant in Kiryat Ata, which went on to become an icon of the Israeli textile industry, was established in 1934. In 1939, the cornerstone was laid for one of the kibbutz industry's first factories: the Naaman brick factory, which supplied the growing need for construction materials.

The textile industry underwent rapid development during World War II, when supplies from Europe were cut off while local manufacturers were commissioned for army needs. By 1943, the number of factories had grown to 250, with a workforce of 5,630, and output increased tenfold.

From 1924, trade fairs were held in Tel Aviv. The Levant Fair was inaugurated in 1932.

After independence

After statehood, Israel faced a deep economic crisis. As well as having to recover from the devastating effects of the 1948 Arab–Israeli War, it also had to absorb hundreds of thousands of Jewish refugees from Europe and almost a million Mizrahi and other Jews from the Arab world. Israel was financially overwhelmed and faced a deep economic crisis, which led to a policy of austerity from 1949 to 1959. Unemployment was high, and foreign currency reserves were scarce.

In 1952, Israel and West Germany signed an agreement stipulating that West Germany was to pay Israel to compensate for Jewish property stolen by the Nazis, material claims during the Holocaust, and absorption of refugees as a result. Over the next 14 years, West Germany paid Israel 3 billion marks (around US$714 million according to 1953–1955 conversion rates or equivalent to approximately US$7 billion in modern currency). The reparations became a decisive part of Israel's income, comprising as high as 87.5% of Israel's income in 1956. Israel never had any formal diplomatic relations with East Germany. In 1950, the Israeli government launched Israel Bonds for American and Canadian Jews to buy. In 1951, the final results of the bonds program exceeded $52 million. Additionally, many American Jews made private donations to Israel, which in 1956 were thought to amount to $100 million a year. In 1957, bond sales amounted to 35% of Israel's special development budget. Israel later received increasing economic aid from the United States, a country that also became an important source of political support internationally.

Israel invested domestic tax dollars, Israel Bonds funds and foreign aid in industrial and agricultural development projects, and slowly became economically self-sufficient. Among the projects made possible by the aid was the Hadera power plant, the Dead Sea Works, the National Water Carrier, port development in Haifa, Ashdod, and Eilat, desalination plants, and national infrastructure projects.

After statehood, priority was given to establishing industries in areas slated for development, among them, Lachish, Ashkelon, the Negev and Galilee. The expansion of Israel's textile industry was a consequence of the development of cotton as a profitable agricultural crop. By the late 1960s, textiles were one of the largest industrial branches in Israel, second only to the foodstuff industry. Textiles constituted about 12% of industrial exports, becoming the second-largest export branch after polished diamonds. In the 1990s, East Asian manufacturers reduced retail prices by hiring less expensive laborers. The lower market prices decreased the profitability of the Israeli textile manufacturers. Much of the work was subcontracted to 400 Israeli Arab sewing shops. As these closed down, Israeli firms, among them Delta, Polgat, Argeman and Kitan, began doing their sewing in Jordan and Egypt, usually under the QIZ arrangement. In the early 2000s, Israeli companies had 30 plants in Jordan. Israeli exports reached $370 million a year, supplying such retailers and designers as Marks & Spencer, The Gap, Victoria's Secret, Walmart, Sears, Ralph Lauren, Calvin Klein, and Donna Karan.

In its first two decades of existence, Israel's strong commitment to development led to economic growth rates that exceeded 10% annually. Between 1950 and 1963, the expenditure among wage-earner's families rose 97% in real terms. Between 1955 and 1966, per capita consumption rose by 221%. In the 1970s, investment began to shift from agriculture and basic infrastructure to industry and defense programs. These latter investments would later become the foundation of Israel's technology sector. The years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled, inflation soared and government expenditures rose significantly, like much of the rest of the world. Also worthy of mention is the 1983 Bank stock crisis. By 1984, the economic situation became almost catastrophic with inflation reaching an annual rate close to 450% and projected to reach over 1000% by the end of the following year. However, the successful economic stabilization plan implemented in 1985 and the subsequent introduction of market-oriented structural reforms reinvigorated the economy and paved the way for its rapid growth in the 1990s and became a model for other countries facing similar economic crises.

Two developments have helped to transform Israel's economy since the beginning of the 1990s. The first is waves of Jewish immigration, predominantly from the countries of the former USSR, that has brought over one million new citizens to Israel. These new Soviet Jewish immigrants, many of them highly educated, had a wellspring of scientific and technical expertise, and helped develop Israel's burgeoning technology sector. They now constitute 15% of Israel's population. The second development benefiting the Israeli economy is the peace process that began at the Madrid conference of October 1991 and led to the signing of accords and later a peace treaty between Israel and Jordan (1994).

During the early 2000s, the Israeli economy slowed due to the global dot-com bubble which bankrupted many startups. The Second Intifada, which cost Israel billions of dollars in security costs, and a decline in investment and tourism, sent unemployment in Israel to the double digits; growth in one quarter of 2000 was 10%. In 2002, the Israeli economy declined about 4% in one quarter. Afterward, Israel managed to create a remarkable recovery by opening up new markets to Israeli exporters farther afield, such as in the rapidly growing countries of East Asia. This was possible thanks to a rebound in the Israeli tech sector, following recovery from the dotcom crash and a growing increase in demand for computer software as rates of global internet usage surged at this time. The explosion in demand for security and defense products following 9/11 also led to Israel selling more of its technologies abroad – a situation only made possible due to Israel's prior investments in the technology sector in an effort to curb high levels of domestic unemployment.

In the 2000s, there was an influx of foreign investment in Israel from companies that formerly shunned the Israeli market. In 2006, foreign investment in Israel was $13 billion, according to the Manufacturers Association of Israel. The Financial Times said that "bombs drop, yet Israel's economy grows". Moreover, while Israel's total gross external debt is US$95 billion, or approximately 41.6% of GDP, since 2001 it has become a net lender nation in terms of net external debt (the total value of assets vs. liabilities in debt instruments owed abroad), which as of June 2012 stood at a significant surplus of US$60 billion. The country also maintains a current account surplus in an amount equivalent to about 3% of its gross domestic product in 2010. In 2023, Israel's account surplus was 25.3 billion U.S. dollars.

The Israeli economy weathered and withstood the late-2000s recession, registering positive GDP growth in 2009 and ending the decade with an unemployment rate lower than that of many of its Western counterparts. There are several reasons behind this economic resilience: the country is a net lender rather than a borrower nation and the government and the Bank of Israel's generally conservative macro-economic policies. Two policies, in particular can be cited. First, the refusal of the government to succumb to pressure by the banks to appropriate large sums of public money to aid them early in the crisis, thus limiting their risky behavior. The second is the implementation of the recommendations of the Bach'ar commission in the early to mid-2000s which recommended decoupling the banks' depository- and Investment banking activities, contrary to the then-opposite trend, particularly in the United States, of easing such restrictions which had the effect of encouraging more risk-taking in the financial systems of those countries. American investors today make up the most significant portion of investors in Israel.

OECD membership

In May 2007, Israel was invited to open accession discussions with the OECD. In May 2010, the OECD voted unanimously to invite Israel to join, despite Palestinian objections. It became a full member on 7 September 2010. The OECD praised Israel's scientific and technological progress and described it as having "produced outstanding outcomes on a world scale."

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