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June 20, 2008
Israel's many fiscal triumphs
Economic success is the result of a few pragmatic choices.
PAT JOHNSON
Israel has never been expert at overall economic planning, said a Tel Aviv University economist in Vancouver last week, but at key moments in its history, Israel has made the crucial, pragmatic choices that have turned a swath of resource-free desert into the region's economic powerhouse.
Paul Rivlin, an economist and senior research fellow at the Moshe Dayan Centre for Middle East and African Studies at Tel Aviv University, spoke June 11 at the Jewish Community of Greater Vancouver (JCCGV), in an event co-sponsored by the JCCGV and the Canada-Israel Committee, Pacific Region. The lecture was titled Israel's Economic Transformation.
Israel's economic success is due to a series of events and decisions built one upon the next, beginning in the Europe of the 1880s and continuing through the high-tech boom of the 1990s and beyond, said Rivlin.
In 1880s Europe, three concurrent developments had a major impact on Jewish life: the rise of nationalism, the evolution of political anti-Semitism and the development of socialism.
There was a mass movement of European émigrés at this time, a movement particularly marked among Jews, who suffered from discrimination and violence, in addition to the general economic conditions and hopes for improved potential that drove most migrants.
Picking up on the European concept of nationalism, continued Rivlin, a very small proportion of these émigrés chose the Zionist route for political and, to a lesser degree, religious motivations, even though this was a direct challenge to the ancient religious doctrine tying redemption of the land to the arrival of the Messiah.
Many European Jews, most notably Leon Trotsky, viewed political revolution and an overthrow of the established order as the best hope for a resolution to anti-Semitism, said Rivlin. In addition to notable Jewish activists in the communist movements of the early 20th century, Jews were also very prominent in the socialist movements that began in the last decades of the 19th century. In both these cases, Jews generally viewed political radicalism as a route out of the existing order, of which anti-Semitism was so fundamental a feature.
The agricultural socialism that emerged during and after the 1880s, became the prevailing ideology in the emerging Zionist movement, dominating the political and social structures of the pre-state yishuv and controlling politics in the nascent state for three decades – until 1977.
Before and after 1948, strong, centralized organization was necessary for the development of the infrastructure of the state and socialism provided a good template for this sort of concentrated organization, explained Rivlin.
In 1945, in the United Kingdom, the Labor party interrupted Winston Churchill's leadership, nationalizing key aspects of the British economy. The socialism of the budding state of Israel was already in full bloom when Clement Attlee became British prime minister and created the postwar consensus of economic interventionism and the welfare state that survived until the Thatcher era, Rivlin said, making the case that the creation of a socialist Israel was not viewed as a radical diversion, given international events at the time.
During the Depression, countries shut their economies to imports, in the hope that they could preserve domestic jobs. Developing countries were permitted to institute "infant industry protections," and Israel did so enthusiastically, said Rivlin, creating an economy with almost no external competition. This protected market was such that Israeli businesses could, until the 1960s, get away without marketing and branding techniques that were becoming standard across the developed world. For example, Rivlin said, it was not uncommon right into the 1980s to see Israeli products on the shelves ornamented in nothing more than a brown paper bag with a staple at the top.
"The producers didn't have to worry," he said. "There was no competition."
In 1952, Israel concluded a reparations agreement with Germany, a decision that was morally dubious but economically vital. "The Germans wanted to clean their name in some small way and Israel desperately needed money," he said.
The German funds saved the Israeli economy, Rivlin argued, giving Israel's government the funds and industrial equipment necessary for a rapid and effective growth from a largely agricultural economy into one that was diversified and highly developed.
Pinchas Sapir, a leading Labor politician, finance minister and legendary minister of trade and industry, recognized that, even with funds and technology, what Israel lacked was an entrepreneurial class. Sapir travelled the world, convincing investors and industrialists to invest in what Rivlin contended was then viewed as "a hole at the end of the world."
Sapir offered investors unprecedented considerations, promising no competition in particular sectors and local monopolies in exchange for investment, said Rivlin. The government of Israel, which owned most of the land, could also provide property for factories. The only thing Israel could not adequately provide was the one thing necessary to ensure a thriving economy: a market. Israel's population was very small and, by the mid-1960s, Sapir recognized that economic growth would require liberalized trade.
"The Zionist movement wanted to root [Jews] physically in the land of Israel," Rivlin said, a process that would completely alter the sociology of the Jews from European merchants and intermediaries to Levant farmers. But while agriculture for its own sake was the objective of Zionist chalutzim, pioneers, a strong staple agricultural base is a prime prerequisite to successful industrialization, said Rivlin. So, when Israel began a major process of industrialization in the 1960s, it already had the prerequisite of a strong agricultural base.
As industrial production and output soared, Israeli leaders emphasized full employment over exports. But, beginning in 1965, Israel began a series of trade agreements with the European economic community that would provide Israel with the export markets that would allow its domestic industry to explode. By the 1980s, Israel had inked a free trade deal with the United States. When, in the 1990s, it became clear that the trade agreements with Europe and America were providing Israeli consumers with access to Western markets but also expensive Western consumer goods, Israel overcame diplomatic obstacles, creating trade relations with low-cost import-producing countries like India, China, Japan and other Asian countries, giving Israeli consumers much more choice and affordability in consumer goods, particularly textiles and electronics.
When, after 1989, a million immigrants from the former Soviet Union arrived in Israel, they added to the demand for imports, increasing interest from other countries in investing in the growing Israeli market, continued Rivlin.
With the collapse of oil markets in the 1980s (they've since rebounded), Arab countries saw their economies falter, while Israel's economy, blessed with no oil and almost no natural resources of any kind, continued to flourish.
"Have we reached paradise?" Rivlin asked rhetorically. Well, no, he concluded.
Cheap imports knocked out of existence a bottom tier of Israeli industry, shrinking the job market and putting downward pressure on wages. But just as this reality was sinking in, Rivlin said, a counter force was emerging in Israel's high-tech sector. The high-tech boom of the 1990s was "beyond all belief," Rivlin said, shooting Israel to the third-largest country represented on NASDAQ, making technological exports 40-50 per cent of Israel's foreign income and spiking salaries in that sector to American levels. This, he noted, had the consequence of increasing economic inequality in Israel – typified by the small number of Israeli families who own a massively disproportionate segment of the economy.
The apparent ease with which Israel leapt into high-tech leadership is due to a confluence of excellent educational systems and the role of the military as a part of both economics and daily life, said Rivlin. Israel, unlike most countries, was putting computers in kindergarten classes two decades ago, he said, and the reality of Israel's small population – and the size of its enemies – meant that the army has always had to emphasize quality over quantity, a standard that was equally necessary to the economic success of the tiny country with a small population competing in a massive and globalizing economy.
Not only did Israel benefit from exporting technology, its domestic industry benefited from growing mechanization, in such areas as textiles, which were able to compete even with cheap Asian imports through increased capacity aided by technological advancements. And Rivlin cited another key aspect of Israeli economic success: no turnkey operations. Israel did not purchase foreign technology and bring in foreign workers to run it. Industries learned emerging technologies, then adapted and perfected them as necessary.
While Israel is not noted for excellence in overall planning, Rivlin said, there have been a few moments at critical junctures when its government made the right pragmatic decisions that set the economic engine of the country humming, from the development of an agricultural base to the evolution of a protected economy into an export-based powerhouse, from the injection of the morally contentious but economically necessary reparations money from Germany to the diversification of industry necessitated by the absence of natural resources.
"This kind of pragmatic foresight served the economy very well," he said.
Pat Johnson is, among other things, director of development and communications for Vancouver Hillel.
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