The Historama
Alex Ben-Arieh
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The Israeli Economy from 1967 - 2007
"From Blossoming Socialism to Successful Capitalism"
By Sever Plotzker, 'Economic' supplement for Independence Day, "Yediot Achronot" newspaper, 23 April 2007, p. 2-3
translated from Hebrew with comments and minor editing by

Photo: Amnon Dankner & David Tartakover, Where We Were and What we Did (Eifo Hayinu Ve Ma Asinu), p. 132
The apex of technology in Israel's motor industry:
Israeli-made "Susita", "Carmel" and "Sabra" cars of the 1960's.
Fifty years after Britain's Prime Minister Harold Macmillan commented that his countrymen "had never had it so good", and fourty years after Israel's defining moment, her influential victory in the 1967 Six Day War, when did we also have it so good?

Being in the opening rounds of an economic boon today, 1967 seems light years from us: were things any different then? Where were we better off economically then versus today?

Where we were and where we've come to - an inquiry

They lived well, the Israelis of the pre-Six Day War period.

Israel of 1965-7, after twenty years of phenomenal economic growth plus one year of recession, was a developed western economy, with a gross national product per capita of almost $8,500 (in today's U.S. Dollars), almost half of the American per capita GNP. This is an impressive achievement: the standard of living in Israel was then higher by far than that of most other countries, and higher than any measure of the standard of living of the nations of the Middle East and Eastern Europe - from where came millions of new immigrants to Israel in the 1950's and '60's.

In Tel Aviv was built the first skyscraper, the Shalom Tower; in Haifa there operated the first underground subway, the Carmelit. The tower and the subway signaled the first signs of future municipal transport development - above and below ground, like in the cities of America. In Jerusalem, the new Knesset [Israeli Parliament] building was inaugurated, in Eilat new hotels, in Ashdod new port docks. The national highway was completed, the pipe delivering clean water from the Kineret [Sea of Galilee] to the south - the second-largest national project after [the nuclear facility in] Dimona. Dimona of atomic power then was also Dimona of textile: before the Chinese took this over in the 1990's, Israel's governments declared the domestic textile and clothing industry as the engine of growth and source of employment for the masses in the 1960's.

Until the outbreak of the recession towards the end of 1965, all the Israelis worked: unemployment fell below 4% of the workforce. A rising insufficiency in working hands was felt, and the level of real wages rose without end.

The Israelis of 1967, writes Tom Segev in his book '1967', "Saw themselves as part of the western world and so built expectations of for the outlook of their lives and of the nation... they felt secure, believed that their livelihood was becoming better and so too would be the future of their children. In the middle of the 1960's it indeed appeared that Israel was leaping forward from feat to feat, in almost every field in the real of everyday life: in every city of the country there were movements of development and growth spurring greater hope and pride."

In Israel of before 40 years there were stable prices - inflation was single-digited, and a currency - the Lira - stable: three Lirot brought one Dollar. In the black market of Tel Aviv, in the alleys next to the Central Post Office, Dollars were sold for 3 Lirot and 30 Agorot. In the first years after the Six Day War, when tourists flooded the country, and the currency exchangers of East Jerusalem opened their shops without fear, the exchange rate of the black-market Dollar fell even below the office rate, and the Israelis celebrated.

The salaried Jewish Israeli brought home about 700 Lirot a month; a family vacation to Europe cost 1,100 Lirot. Cars were expensive, apartments were cheap: a reasonable apartment in a mass residential project [called "Shikunim"] in Bat Yam [sea-side city just south of Tel Aviv and Yaffo] cost around 15,000 Lirot - as did a Volkswagen car imported from Germany. Those who bought the car were mostly the recipients of war reparations. But the Israeli-assembled cars, the Japanese "Contessa", cost only 10,000 Lirot.

Photo: Dankner & Tartakover, p. 100
"Luxus" / "De-luxe"
Higher-end Israeli apartment of the 1950's-60's with interior design of the time (and standard tiled floors).

The Contessa competed against models of Israeli-made cars: the inexpensive "Susita" [the name is a play on the word "Sus" for horse, or horse-power - probably borrowed from the French-Citroen "Deux Chevaux"], the white-collar/army-used "Carmel", and the sporty "Sabra" [the name means "cactus flower" and is Israeli slang for a native-born Israeli] which was the splendor of local motor-engine technology. The public loved these inexpensive plastic cars, but the economists claimed forcefully that the Israeli car industry possessed no competitive advantages, that there was no marketing future and that it existed solely from the government subsidies which flowed into the pockets of the industrialists and hurt the consumers. Two ministers of finance, Levi Eshkol at first and then Pinchas Sapir afterwards, agreed with them; the Israeli car industry expired in a matter of years thereafter.

The first experimental television broadcasts began in 1966, and gathered the nation into the worldwide tribal campfire. In 1967 live broadcasts of the army parades were also broadcast, during which the Chief of Staff, Yitzhak Rabin, recounted to the Prime Minister [Levi] Eshkol on the inflow of the Egyptian Army into Sinai [i.e. in contravention to the UN cease fire agreement]. Thereupon began the period of waiting prior to the Six Day War.

The Hebrew University in Jerusalem was rated as one of the best in the world, and her school of economics was ranked the best from among those outside the United States. In an international study of mathematics aptitude, the students of Israel took first place.

All around, Israel was regarded as an industrialized country, although in international classifications she always appeared as "developing". There were many benefits in this as far as eligibility for foreign aid, although its extent was actually marginal: most of the Dollars which flowed into Israel in the 1960's came not from American Jews nor from American governments but rather from the exporters - the farmers, the diamond industry workers, the tourists and the Dead Sea industries. Also the Holocaust survivors: hundreds of millions of Deutsche Marks in war reparations (to individuals) and restitutions (to the State) from West Germany financed the economy's core, the import of "luxury" consumer goods and the large public investments in infrastructure. Some of the money was wasted on showcase programs and white elephants. The economic press attacked and the government replied in defense in a humbled voice of weakness.

[Looking a decade back, at the 1950's, Howard Sachar in his book "A History of Israel" (page 426) puts the issue of foreign currency sources in sharper light: during "Israel's first decade, only one-twelfth of the nation's foreign currency expenditures were paid through 'earned' income. The rest derived from American, German and other overseas sources. During the 1950's, world Jewry covered 59 percent of the balance-of-payments deficit, the United States government 12 percent, and West Germany 29 percent. Quite literally these funds sustained Israel's economy, gave the nation breathing room in the unprecidented task of tripling, feeding, housing, and employing its population and defending its borders."]

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They lived well in a State in which it was good to live, good for the wealthy but also good, relatively, for the poor. Israel of the 1960's was very much a country of equality, "among the most equalized in the world", writes Prof. Penny Ginor in the book "Social and Economic Parities in Israel". According to one international comparison, back then we were in first place in the western world in terms of economic equality, according to a different comparison, in fourth place after Sweden, Japan and England. Today, as is known, Israel closes the list of equalized countries at the tail's end. We fell from the heights of equality to the bottom.

Only about 8% of the citizens of Israel lived in those years under the poverty line. The low incidence of poverty placed Israel in line with countries with low poverty, like Britain, Sweden, Denmark, New Zealand as a member which didn't suffer - relatively - from the problem of relative poverty. The poor of Israel received a larger segment of the national product than the poor of other developing countries.

And today? About a quarter of the Israelis lived last year under the poverty line. This is the highest rate of poverty in the West. No other modern country or society has an incidence of poverty which approaches Israel's record levels. Within less than four decades we jumped from nearly last place to first place in the index of poverty.

Photo: Dankner & Tartakover, p. 202
Local industry:
Shemen company advertisement for shaving cream, 1950's-1960's.
Israel in the years before and after the Six Day War was also a model welfare state. The state and unionized institutions provided education, health, employment, nursing, and housing services of a good quality. The strength of the national workers union [the "Histadrut"] became prominent on the basis of two of her elements - as an association of professionals and as an economic titan.

Here is a partial list of the brands in which the Histradrut then ruled (though it's business arm "Meshek Ha'Ovdim" - The Workers' Economy): Bank Ha'Poalim and its related businesses, Solel Boneh [the construction firm] and its related businesses, Koor Industries and its related businesses, Tiyush, Shikun Ovdim, Ha'Sneh, Ha'Mashbir Ha'Mercazi Le'Tzarkan [Israel's premier department store chain], Co-op Supermarkets, Tnuva Milk Company, the Egged and Dan bus companies, the Clalit Health Service, Misha'an, the Kibbutz industries and regional factories. A quarter of all Israeli workers were employed directly by the Histadrut and by "Workers' Economy". At least two of every three salaried workers worked in 1966 in the Histadrut or in the government or in one of the hundreds of nationalized-government/Histadrut/Jewish-Agency affiliated companies (a condition which didn't change significantly until 1976). The scale of the financial program of the workers' company was more important than the scale of the government's civilian budget.

The power of the Histadrut, against a backdrop of a weak private sector, worried even labor ministers, and they began to curtail her strides. [Levi] Eshkol, [Pinchas] Sapir, and Rabinovich (Minister of Finance from 1974-76) didn't want Israel's economy to be forcibly turned into an entity controlled by the apparachniks of the Histadrut. They saw in this scenario a great danger to the Zionist enterprise and an abominable lack of efficiency.

In the land of Israel, like elsewhere in the world, it turned out that it was not possible to run socialist enterprises for a long term in an economic environment of competitiveness. It further turned out that union bureaucracy was not immune to management mistakes and personal corruption.

Since then the workers' economy has vanished completely: its factories either dismantled, or went bankrupt, or were privatized; Tnuva is supposed to be sold this year to a private investment firm. The Histadrut (including cooperatives and Kibbutzim) now employs 1-2% of the Israeli workforce. The government's share of the production sector also shrank, from a quarter 40 years ago to tenth and less now.

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The intervention of a high rate of growth, together with low economic parities and an enormous and aggressive non-private sector, which characterized Israel at the outbreak of the Six Day War, earned worldwide amazement. Books were written about the economic miracle of the Jewish State, the diligence of her workers, the education of her children, the dedication of her leaders and the momentum of development in investment in the State.

The miracle was interrupted in 1966: the Israeli government decided in that year to spill cold water on the burning economy. Prime Minister Eshkol and the Minister of Finance, Sapir, feared "arrogant consumption" from a shortage of foreign currency, a deep government deficit, from inflation which reared its head, and from what was characterized as a "decline in work ethic". The initiated economic slowdown was immediately granted an original Hebrew name, "mitun" (recession). The recession indeed succeeded beyond the expected: 100,000 workers were laid-off from work within a year and a half, unemployment jumped from 3.5% to 11.5%, the economy stopped with the screeching of breaks and a sense of frustration and anger prevailed over the public.

A girl of 13 from Beit She'an, who was asked on a radio broadcast summing up 1966 if she was hungry and answered "yes", shook up the country and nearly toppled the Eshkol government. The ethnic tension returned to the headlines. The media painted a gloomy human landscape, despondent people. Israel almost stood on the edge of closure; that the last one to leave should not forget to turn off the lights, went a macabre joke. The number of emigrants, estimated the newspapers, was greater than the number of immigrants, and that the country was being emptied out of its inhabitants.

Most of these things simply weren't correct: the girl from Beit She'an wasn't suffering from hunger, the scale of emigration from Israel didn't expand, the public didn't lose its faith in the State - even though it expressed doubts about her leadership - and Zionism didn't reach its end. Israel on the eve of the Six Day War was a strong welfare state. But the recession achieved three significant results. One was economic: the balance of payments improved, inflation declined, and the government deficit narrowed to zero. A second result was political: since that recession, no government in Israel ever dared to openly declare its intention to increase unemployment. The third result was historical: the reports on the deep crisis in Israel, on the Israeli society being tempestuous and on the verge of disintegration, which lost its will to live, convinced the Arabs that Israel is not willing to go to war. The broadcasters of "Kol Ha'Raam" ("The Voice of Thunder" - Egypt's anti-Israeli Hebrew language program) from Cairo and the voice of Moscow Radio mostly ridiculed the "army of the unemployed of Moshe Dayan" [the Defense Minister].

Charting the course of Israel's economy, 1967 - 2007.

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The results of the Six Day War - the victories, the conquests, the international wonder, the patriotic awakening, the faith in our strength - extracted Israel in the blink of an eye from the economic and psychological recession. In regard to the conquered territories, the chosen path was the colonialist model: the importation of cheap Palestinian labor without local development [of the territories].

In one year, 1968, the economy expanded by 12% and so too also in the following year, and also in the year after that. "Until when?" asked the Israelis. Until the next war, of course. "Over fifty years," wrote Prof. Yoram Ben-Porat in the prologue to the book 'The Israeli Economy - Growth Pangs', "the State of Israel was a economic miracle from the point of view of her rate of growth being among the highest in the world. However, from 1973 Israel is characterized by economic decline, a halt in growth, an acceleration in inflation and an increase in national debt".

The collapse of the "Solel Boneh" construction company: a metaphor for the crisis of 1983-84.
His views were written toward the end of the 1980's and reflected the pessimism of that time. The pessimism was justified: the "economic revolution" of the first Begin Government, which included the hasty abolition of supervision over foreign currency, a massive increase in government expenditures (in order to "improve the nation") and the complete loosening of the rein on monetary policy, brought about the heaviest disaster ever on the Israeli economy [in 1984]. Ten years went to waste in vain: the growth stopped, the deficit expanded, currency devaluation ran wild, foreign currency reserves were used up, financial institutions collapsed, the banking system broke down and inflation reached 400% a year. Those responsible for this terrible anarchy never stood before a governmental investigative committee, were not punished and came out safely even during the elections.

In 1985 the economy was saved from ruin thanks to a stabilization program brought about by a brave group of economists and statesmen: Michael Bruno, Emmanuel Sharon, Shimon Peres, and Yitzhak Moda'i. The downfall was repulsed and after a few years Israel returned to the course of growth (even though not as impressive as before), reforms, and to her struggle with the memories of inflation.

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The returns of Israel's economy over 40 years I'll allow myself to sum up in one sentence: from 1967 to 2007 Israel moved over, in a complicated political and social process punctuated and accompanied by crises and suffering, from a successful brand of socialism to a successful brand of capitalism - though less humane.

One way or another, prices were paid for failures, neglect, corruption and stupidity. Israel's population grew from 2.6 to 7.1 million, of whom 2 million are [Jewish] immigrants. The Israeli gross domestic product grew from 90 billion Shekels in 1967 (in terms of the currency's value today [about $21.4 billion in today's Dollars]) to 660 trillion Shekels this year [about $157 trillion Dollars], a compounded growth rate of 630%.

GDP per capita, a measurement of the degree of economic development, rose by 163% (2.4% per year on average), and for the first time last year crossed the level of $21,000.

In terms of purchasing power, we got very close to the levels of the wealthy west. The standard of living of the average Israeli leapt by 220% and is low today by only 20% from the standard of living in Britain; on the eve of the Six Day War we were far from the British standard of living by 40%. But the progress was zig-zagged and curvy; more than once was the economy on the very edge of a dangerous turn - the last time being in 2002.

In gradual progression, without distinction between ideological colors, successive governments carried out important structural reforms which sharpened competition in the market, dismantled monopolies and cartels, raised efficiency, and mostly improved the condition of the consumer. A lot of entrepreneurial energy burst forth in our country and a lot of profits were augured in the business sector and are now being passed along from the founding generation [of the entrepreneurial initiatives] to the generation of the sons and daughters. The economic parity between Israel and her Arab neighbors and between her and the Palestinians expanded by tens of times. But also the parities within Israel deepened; the polarity has increased, communities and whole social sectors have been left forgotten and left behind - low-wage workers, Arabs, the religious Jews, the elderly - and Israel has turned from a model society to a society of stocks and shares, with limited mutual liability.

In spite of four wars, seven years of hyper-inflation, two Palestinian intifada's, and a long sequence of fatal terrorist attacks, over the past 40 years Israel's exports grew by 1,900%. Israel has opened to globalization and integrated into it with amazing success; in the last decade foreigners invested close to $40 trillion in Israel. The technology and science industry, whose foundations were laid in the mid-1960's with the establishment of the first electronics and communications enterprises, has brought in since 1999 $100 trillion.

In the book "White Elephant" the economist Yitzhak Tischler delivered incontrovertible proof of Israel's economic backwardness: "a shirt costs in Israel three times more than in London". This was written in 1987; in 2007 a shirt in London costs three times more than in Israel. That's how we accomplished, 59 years after governmental independence and 40 years after security independence, also economic independence. From this perspective, the Zionist story is just beginning.

For more, related Israeli economic history (on construction and housing), click here.