ISRAEL-The Israeli Economy from the Foundation of the State through the 21st Century

By Sauer, Robert M. | The Middle East Journal, Winter 2012 | Go to article overview

ISRAEL-The Israeli Economy from the Foundation of the State through the 21st Century


Sauer, Robert M., The Middle East Journal


The Israeli Economy from the Foundation of the State through the 21st Century, by Paul Rivlin. Cambridge, UK and New York: Cambridge University Press, 2011. 308 pages. $31.99.

There are many good reasons to read Paul Rivlin's account of the recent history of the Israeli economy. However, there are also many reasons to be very careful in accepting all of the analyses as established facts. The first part of the book discusses the history of the Israeli economy in terms of its broad structure. The second part focuses on individual topics in Israeli political economy. The good and the bad in the book roughly follow this division into two parts.

In the first part of the book, Rivlin nicely summarizes how, between 1917 and 1948, the Jews planted the seeds of the pre-state economy under the shadow of British rule and conflict with the Arabs. The Jewish community combined a strong socialist identity with reliance on private capital for growth. The economy was dominated by agricultural collectives (Kibbutzim and Moshavim), an all-powerful federation of trade and labor unions (the Histadrut) whose headquarters in Tel Aviv was nicknamed the "Kremlin," and an overbearing central government which owned all of the land.

After the War of Independence in 1948, the Israeli economy continued to be controlled by the unions and the government. But the focus of the economy began to shift away from agriculture and towards basic industries such as textiles and clothing. Economic policy also changed focus, concentrating mostly on absorbing immigrants, encouraging investment by Jewish entrepreneurs from abroad, and protecting local industries (import substitution).

Despite several praiseworthy but fleeting attempts to liberalize the economy (especially in the late 1970s), protectionism, union domination, and massive expenditures by the central government (including necessarily high defense outlays) continued unabated. This inevitably led to an unsustainable public debt burden, monetization, and hyperinflation. By 1985, Israel had no choice but to introduce a radical and comprehensive stabilization program which shocked the economy onto a new trajectory. The need for more free trade and establishing a modern market economy finally began to be taken more seriously.

Since 1985, the struggle for economic freedom has made important but still limited inroads into the public consciousness. Israelis are just beginning to understand that enormous economic potential exists and that it is being stymied by anachronistic economic structures. …

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