The political economy of any country is an analysis that transcends the dry data and figures of a conventional economic survey. It includes the relationship between the economy and the society as two integral parts of the same picture. It is a far more judgemental way of looking at a country’s economy and it juxtaposes openly the social injustices against the economic achievements. This chapter, which is based on the work of local Israeli political economists, follows the development of the Israeli economy in such vein, and focuses on the realities of the present century.
The early years of statehood were a time of hard economic realities. Israelis of a certain age and leaning to the left, today look nostalgically at the period when they and their leaders were content with less, or at least this is how it seems from our vantage point. It was also a period when the state functioned as a welfare state, with strong trade unions and a nationalised economy.
In the 1950s and early 1960s Israel, in fact, enjoyed a booming economy. Germany provided Israel with generous compensation money that reached by 1964 around 850 million dollars. However, this period ended with a deep recession that set in during 1966. We now know in hindsight that Prime Minister Levi Eshkol’s government deliberately created an economic recession in 1966–1967, but hid that fact from the public so as not to lose its popularity among the voters. Eshkol adopted this strategy already in 1964, with the help of his Finance Minister, Pinchas Sapir. Politicians such as Eshkol and Sapir hoped to build the Israeli economy around expanded heavy industry but faced workers who had different ideas and preferred other ways of making a living. These other sectors at that time contributed very little to the Israeli economy. In 1964, Israel was thus a country relying too heavily on generous German reparations (that decreased significantly after 1964) and support from the US and the Jewish world. Eskhol and Sapir, with the help of the Director General of the Central Bank, The Bank of Israel, David Horowitz, artificially ‘slowed down’ the economy; hoping it would limit the choices of workers in the future.
In a speech to the Israeli Knesset, on February 14, 1966, Sapir, when presenting the annual state budget spelled out clearly what ‘slowing down’ meant: ‘We have 100,000 superfluous workers’. They were superfluous since their employment allegedly contributed nothing to the country’s output. The solution was unemployment and raising prices. By the time the recession ended, 108,000 people had lost their jobs – twelve percent of the labour force in a country whose population was then 2.6 million. The main sector hit was the construction industry that nearly went bankrupt (it fell by thirty percent), and it was followed by sharp rises in prices. These developments hit mainly the Mizrahi dominated development towns. It was also characterised by emigration out of the country and a decrease in Jewish immigration into the state.1
Every economic parameter described here changed dramatically for the better after, and because of, the 1967 war. Was this the reason Israel went to war? We can never fully answer these questions, but like many other historians I do suspect it played a role in the final decision to go to war.2
In the post 1967 era, an important watershed was the victory of the Likud in the national elections of May 1977. Until then, the Israeli economy was centralised with only a small private sector. Most of the industry, services and banking sectors were in governmental hands. Israeli economists call this ‘the period of the corporative economy’, which started in fact in the late 1960s and continued in various degrees until the early 1980s.3 It was characterised by a growing share of the workers in the national income in relation to the employers’ profits. This was mainly the achievement of the strong trade unions and the result of a series of successful industrial actions taken by the unions within the public sector.
The Likud transformed the economy, opened the closed financial and banking markets to competition and supply and demand forces and began privatising public sectors of the economy. Liberalisation included reducing the sales’, income and import taxes. It also led to the weakening of the trade unions, which were unable, unlike before, to defend the workers’ labour conditions. Thus, the disparity in salaries grew in the 1980s and as neo-liberalism set in as the main ideology inspiring policy makers in Israel, not only did the disparity grow, but also the employers’ profits at the expanse of the workers’ share in the national income.4
The consequences of this policy were quite disastrous. Israel suffered from hyperinflation between 1980 and 1985, before it underwent some reversals back to government regulations to stop the deterioration. There are two explanations economists in Israel give for this particular bad spell. Mainstream economists cast the blame on the surplus of demand and the shortage of raw material. More critical economists claim the militarisation of the economy and the accumulation of wealth in the hands of few financial giants, limited the investments in the public sphere and regulated the growth in the value of assets in the market. The new Likud government did not have the power in the face of these forces and allowed them to spiral the economy out of control. By militarisation they mean that much of the expenditure went to build a new, huge and modern army.5
As mentioned before, this economic calamity in the first half of the 1980s hit the stock exchange market. In 1983, the big banks in the state regulated jointly their joint under-valued stocks. This intervention in the stock exchange’s prices and values led to the financial destruction of individuals and companies, including the Kibbutzim movements, which were deeply invested in banks’ shares. Eventually the banks themselves collapsed and had to be saved by nationalisation.
In 1985, under the guidance of Shimon Peres, then the Prime Minister of a Unity government the economy was stabilised. Peres had enjoyed a cooperative general trade union (the Histadrut) that was willing to cut workers’ wages and also secured a very generous American aid package. The foreign currency and budgetary deficits were balanced and a new currency was introduced (1,000 old shekels to one new shekel – the NIS is still Israel’s currency today). Thus, under Peres’ leadership, by the end of the 1980s, Israel went from a period of rampant privatisation and hyperinflation to a more a balanced economy.
The First Intifada in the occupied territories, which erupted at the end of 1987, nearly caused a new recession and crisis but the arrival of the immigrants from the ex-Soviet bloc energised the economy and, together with tough policies against inflation, the economy was back on track. It was still one of the most capitalist-orientated economies in the world. In fact, the influx of immigrants helped to increase the GDP by about twenty percent. Because of this influx, the population of Israel grew in the 1990s from 4.6 million to 6 million (4.9 million Jews, 1.1 million Palestinian citizens of Israel and about three million Palestinians in the West Bank and the Gaza Strip).6
While the new immigrants were willing to work in areas shunned by most Israelis, and by that contributing to the economy, they pushed out, with the encouragement of the government, the Palestinian workers and employees in Israel (it affected mainly the Palestinian citizens of Israel, but it also hurt the Palestinian workers from the occupied territories who were allowed to enter and seek work in the Israeli labour market).
The ability of the government to deal successfully with large immigration and continue to steady the economy in the 1990s was helped by two factors. The first was the Oslo 1993 peace accord and in particular the bilateral peace agreement with Jordan in 1994, which opened new markets for Israel in the Arab world and probably, and more importantly, eased the all-Arab boycott – an old Arab League decision exerting pressure on countries around the globe not to trade with Israel, if they wished to trade with the Arab world. The second was the entry of international and multinational companies into business in Israel. From this moment onwards, the Bank of Israel, the central bank of the state, began to play an important role in the political economy of the state. It subscribed to a neo-liberal economic view of the world, an ideology that was fully endorsed by the very influential senior civil servants in the Treasury (more about them later on). Both groups, the state bankers and the management of the Treasury, navigated Israel into the 21st century as a neo-liberal economy.7
In the mid-1990s, Israel returned to a harsh version of capitalism. Essential services were privatised. For the first time in the state’s economic history previous state monopolies, such as the media and parts of the education system, were handed over to private ownership and interests. As in the mid-1980s, this proved to be one step too far and created another, temporary setback. The new crisis was a local version of the global high-tech crisis which undermined the Israeli economy further. Israel as a state does not enjoy a wealth of natural resources and imports many of its raw materials but had developed impressive high-tech, diamond and military industries. Hence, a global high-tech crisis will always have a huge impact on the Israeli economy. In the period I am covering here, the main manifestation of this crisis was the lay-off of a large number of high-tech employees in big companies and the disappearance of small companies which went bust. Israel was in danger of losing its image as the ‘start-up’ nation of the Middle East.
The captains of the Israeli economy did not lose hope and one way out of the new precarious situation was to try and reap further dividends from the peace process. The peace with Egypt was holding on, there was still optimism around the Oslo Accord that a solution to the Palestine question was around the corner and it was hoped that Israel was move into an economy of peace. In the second half of the 1990s, pundits noted that several recognised features of what political economists called ‘a permanent war economy’ were diminishing. These included the downsizing of huge military budgets, limiting further governmental intervention in the local market and an attempt to rely less on American financial aid.
There was also hope, nourished by economists in the Organisation for Economic Co-operation and Development (the OECD) world, that typical neo-liberal policies would enable economic growth despite the high-tech crisis. These policies are familiar to readers in the West: less interventionist policies by the government in the overall investments in the economy, cuts in direct taxes and of the social services budgets, selling the government’s assets and an intentional instigation of austerity in the public space, even to the point of declaring it an official policy.
To complement it all as a successful move towards the future what was missing was a peace settlement with the Palestinians, or at least substantial progress towards its implementation. However, this did not happen. On the contrary, the outbreak of the second uprising in the occupied territories (in October 2000), made things even worse. Israel entered the 21st century, facing a volatile situation in the occupied territories which caused a decline in tourism and in foreign investments and affected the economic activity. The inevitable recession, one of the worst in the state’s history, started in 2002.
However, as the readers may guess by now, these recessions in the economic history of Israel are short-lived. Either its own politicians, American money or the volatility of the region always provide a way out. This time too Israel proved to have a resilient economy and if ‘peace’ petered out as the engine that could propel the economy, the state adapted a softer version of a ‘war economy’ in its stead. We define it as softer as it kept the neo-liberal economy on track. What it meant in practice was that the state pushed once more for militarisation, due to the so-called ‘Israel’s war on terror’, which coincided with the ‘Western war on terror’ launched after 9/11 and hence, once again, arms sales soared and indeed high-tech was back on course as this ‘war’ required the cutting edge technology that this sector could produce. There was a growing need in the world, in particular in countries such as Iraq, Afghanistan, Pakistan and India for the high-tech’s inventive capacity to upgrade counter-insurgence and the war against guerrillas and imaginary or real individual terrorists (later on this knowledge was exported also to the Latin American regime to help fight opposition or crime and even to the American police force).8
At the beginning of this century, the Israeli economy was still based on governmental involvement and ownership in crucial industries and financial institutions, but as the century progressed we can note a growing tendency to privatise the governmental share of even the most essential services and public companies (even the checkpoints that are principal means for ruling the West Bank are sourced out and handed over to private security companies).
In the last two decades of the 20th century Israel turned into a developed economy. The great success was achieved through policies of social and economic injustice that left quite a few members of the society behind and unable to reap the fruits of the economic take-off. The success of a state is usually estimated according to its GDP; namely the value of all the commodities and services that particular economy has accumulated annually, divided by the number of population. So, we compare economies according to the GDP of one person within that economy. In 1980, the GDP in Israel was 5,612 dollars per person and in 1999, it rose to 16,531 dollars (the EU GDP in 1999 was 22,321 dollars per person).9
The extraction from the crises of the early 1990s and early years of this century is credited to Benjamin Netanyahu in his capacity as Finance Minister, who was appointed in 2003 (as part of Ariel Sharon’s government). His good connections, in those days, with the USA, enabled Israel to receive guarantees that gave the final push for a successful end to the temporary recession caused by the Second Intifada.
His main policy was to reduce dramatically the governmental involvement in the economy. He also initiated a very extreme version of an open market policy. As expected while the economy grew in certain macro parameters, such as GDP, reduction of unemployment and increase in stock exchange activity, it augmented the inequalities in the society. Under Netanyahu (who had even more power when elected several times as Prime Minister since 2009), Israel had, and still has today, the widest gaps between rich and poor in the OECD and it also heads the poverty indexes and has the lowest level of reported wellbeing and welfare of the OECD societies.10
This relative surge in economic activity and growth was halted once more when Israel was embroiled with yet another war in Lebanon in 2006. However, it seems that this was too short a setback to really warrant a deep analysis. Neither that war nor the never-ending embroilment in the military confrontation with the Hamas in Gaza seems to be potent enough to drag the Israeli economy into another recession.
That Israel had a stable economy was shown clearly in the way it sailed smoothly through the rough waters of the 2008 world financial crisis. All Israel needed to do to get out safely from the crisis was to lower the interest rate (and for instance did not have to channel more money and currency into its own economy as the USA and Britain had to do). In 2009, Israel was the only state with positive growth in the West. It was left with the problem of a strong local currency against foreign currencies, which caused the national bank every now and then to intervene and redress the balance for the sake of the exporters.
As noted several times in this chapter, Israeli economic success in this century comes at a price and without solving certain structural problems that are likely to affect it in years to come, this success may prove to be temporary. In macroeconomical terms, Israel did better than other economics at the end of the 20th and beginning of the 21st centuries, with its high-tech, military and stable banking system. The price was a struggling middle-class and impoverished communities, mainly the Palestinians in Israel and the ultra-Orthodox Jews. However, its moment of crisis, so far, arrived when the more affluent middle-class felt it could not cope anymore and in the second decade of this century cracks appeared in this picture of success. The middle-class felt it could hardly survive in this new environment and it all erupted in 2011 in a mass socio-economic protest movement, referred to by Israelis as Ha-Mehaha Hahevratit (the Social Protest).
One young woman, Daphne Leif, who could not find the means for paying the high rent as a tenant in Tel-Aviv, decided to erect a tent at the centre of the city and began with this a mass movement of protest across the whole country. The recruitment was done through the Facebook network and was inspired by the Arab Spring demonstrations in Cairo and Tunis. At its peak, the movement erected hundreds of tents at the centre of Tel-Aviv and in other parts of the country.
Almost half a million Israelis participated in several big demonstrations, quite unprecedented in the history of Israel. The government responded eventually with creating a committee that had suggestions for facilitating cheaper housing and improving other standard of living aspects: in particular the demonstrators were enraged by the fact that the locally produced food was cheaper abroad than in Israel itself and this is why the protest is also referred to as the ‘Cottage Protest’. Cottage is the trade name of a popular soft cheese produced locally and sold at a high, monopolised, price. The producers have reduced the price of the cheese since then, but this seemed to be the only tangible achievement of the protest movement. The Trajtenberg Committee, appointed by the government to respond to the protesters’ demands, made some significant recommendations for a change in the economy but most of them have not yet been implemented (Manuel Trajtenberg was the Chairman of the Higher Education Council’s Planning and Budget Committee).11
One new party, Yesh Atid (There is a Future), led by a former TV chat show presenter, Yair Lapid, benefitted most from the protest as it was committed, as a new party, to respond solely to the protesters’ demands. Lapid was successful enough to be invited after the national elections in 2013 to join Netanyahu’s third government as a Finance Minister, with little success. A year later, Netanyahu fired Lapid, as it was the case, as it often is in Israel, that this appointment was about power, not ideology. Lapid ignored his elections’ manifesto and focused on one particular issue that his core group of voters, liberal secular Jews, were interested in: abolishing the ultra-Orthodox Jews’ exemption from military service and encouraging their integration into the economy. The natural grown in the ultra-Orthodox community turned them into a young and significant part of the working force in Israel. For many of them work is not an option: they study in their Yeshiva and learning centres and women are not encouraged to work. However, in recent years, the trend has changed and Orthodox women go to the labour market in growing numbers as do the young men and very recently some of them even joined the universities. In any case, Lapid’s demands in this respect alienated the ultra-Orthodox parties on which Netanyahu relied for his 2013 government and simple parliamentary arithmetic led the Prime Minister to prefer his old ultra-Orthodox allies over his new secular political partners. Lapid was sent to the opposition benches in the Knesset.
The cause of the social protest was usurped from Lapid in 2014. Moshe Kahlon, a very successful minister in the 2013 Likud government, left his original party and established a new one, Kulanu (All together). He replaced Lapid as Finance Minister in the fourth Netanyahu government (elected in 2014) with a very attractive agenda that was meant to address the issues of housing, social welfare and other topics on the list of demands of the social protest movement. As this book is being written he still struggles to show that he is able to satisfy at least some of these demands. Readers will by now understand that Benjamin Netanyahu offers the portfolio of Finance Minister to anyone pretending to represent the social protest, knowing too well that to satisfy these demands there needs to be a fundamental and structural change in the local economy which can be unpopular and, electorally speaking, dangerous.
In hindsight, it seems that the protest was caused by a drastic increase in the cost of living that began in 2007, in particular in the housing market. The Israeli dream is to own a house, and house prices are constantly on the rise. Since 2007, house prices rose almost forty percent; more than the average growth in salaries.12
Housing is affected also by a growing involvement of speculates and real estate investors in the housing market, which means that construction is not always pushed forward in order to satisfy the high demand, especially among young people for their first home. In 2011, 138 average monthly salaries were needed to buy a flat (very high compared to the rest of the Western world, and we are talking about small flats in the case of Israel).13
Thus, to sum up, one can say that the 2011 social protest focused on standards of living among the Israeli middle-class, with particular focus on the issue of housing. Hence, the most vivid recollection from this demonstration were huge camps of tents all over Israel’s cities that were there until eventually the local authorities dismantled them. At first there was some political activity within the tents in an attempt to form a more cohesive social movement, but eventually it became a refuge for people without accommodation, before it disappeared (still today there is a small camp near one of Tel-Aviv’s railway stations). In the wake of the protest, in 2012, there were more violent and desperate smaller protests, ending in one case tragically when one of the protesters set fire to himself (he died later in the hospital).
However, this tragedy did not generate a significant change in the economic realities in Israel. The government found it difficult to respond favourably to the demands of the protests as they were asked to deal with endemic problems of the Israeli economy, something politicians rarely do. In the second part of this chapter, I will enumerate the most important of them.
There are several structural features of the Israeli economy that survived the years and are going to affect the economy in years to come. Here are the most important among them.
Since 2008, Israel has been credited as successful neo-liberal economy with a positive balance of payments and a strong currency. Despite its volatile security conditions, it is still an attractive site for foreign investments (although they have been on the decline in recent years). The price for this relative success are the incremental cuts every year since then in the public services in the areas of health, social welfare and education. As a result, and as noted above, Israel has the worst level of social and economic polarisation in the OECD.
This inequality was already transparent in the beginning of the century. Any analysis of the standard of living, the governmental allocations and the civil services’ infrastructure indicated that certain groups in the society would find it difficult to climb the socio-economic ladder. On the lowest rung stood the Jews who came from Ethiopia, Arab countries, Mizrahi Jews and the Palestinian citizens in Israel. The monthly income of these groups was half of that of the groups above them and this gap existed in the other parameters – of investment, labour market, prospects and employability.
Thus, the macroeconomic political achievements are misleading. A very small class of Israelis enjoys a sharp rise in their standard of living, income, education and housing. Two thirds of Israeli employees’ salaries are below the average and two thirds of the youth are not eligible for matriculation (equivalent to A level or GSCE in the UK).
There have been other manifestations of this inequality throughout the years. In 1990, the upper decile of the population had nine times more in its share of the overall income than the lower decile and in 1999, it grew to twelve times more. This disparity was evident in every parameter and as the years go by the gap is constantly growing.14
There are some disparities that are prevalent all over the Western neo-liberal system, but seem to be more extreme in the local Israeli version. Such is the incomprehensible disparity between the salaries of senior management in the public and banking sectors and those of their employees. Already, in 1994, these salaries were thirty times more than the minimum wage and thirteen times more than the average salary. In 2000, it was forty times more and seventeen times more respectively. 15
The worst aspect of such polarisation is poverty. Since 2000 Israeli economists have argued about how to define poverty, or what they call ‘the famine line’ or ‘poverty line’. Annual reports in this century show a constant rise in the number of children who live below this imaginary line, namely in dire poverty. The situation of other members of the family in certain areas and groups is dismally the same. However one defines poverty, more and more people can hardly survive in the Jewish State. Most of them are children, Palestinian citizens and ultra-Orthodox Jews.
The inequalities have also geographical features. The periphery fails in producing university graduates or providing an adequate educational infrastructure. The periphery is still made of Mizrahi Jews, Ethiopian Jews and Palestinian citizens. The gap in the health services is also quite evident between periphery and centre.
There are two kinds of monopoly in Israel – one is exercised in the market and the other over the budget. The private sector is monopolised through few strong families, who have multi-layered companies that control most of the economic activity in the state. Holding companies (companies which do not have a real economic activity, but are running other real companies) and holding pyramids control the Israeli economy and usually they are owned by the same families. These pyramids allow them to control varied aspects of the economy such as the heavy and high-tech industries, insurance, media, investments, banking and construction and tourist companies.
The main drawback of this reality is that since many of these companies hold the pension funds and other investments of the public, any misjudgement they make can affect, and has affected, millions of people. Additionally, whenever these mega companies run into trouble the state rushes to cover their losses as their bankruptcy would be even worse for the public. In recent years, a few of these individuals were sent to jail for rigging the system too much; but they are still very powerful in the economy. When in 2014, Israel began to plan how best to exploit its newly discovered gas fields in the sea, these individuals were quick to take the lion’s share despite public outcry and the attempt by others to limit the damage. The failed coalition included politicians of the Labour party, notably the leader of the party, Shelly Yehmivotiz (whose reign was very short lived), some other members of the Knesset and some media personalities such as the socially conscious radio show host, Keren Neubach.
Another kind of monopoly is held by civil servants. The running of the Israeli economy is concentrated in the hands of one body, within the executive power: the Budget Wing of the Ministry of Finance. This body is the sole authority that determines the macroeconomic parameters in the Israeli economy. It also regulates to a certain extent the overall expenditure by the government. Each ministerial budget is fixed by this body and the Wing also influences budgetary decisions of other governmental bodies. Finally, it possesses a crucial monopoly over the information and intelligence needed for national fiscal and economic policies.
There are historical reasons for this state of affairs. Economic strategy in the first forty years of statehood was in the hands of the government. This included economic development, which became the principal executive tool in the hands of the state. This unit was also regulating and determining the huge amounts of money Israel received in foreign aid in those first forty years. The Treasury, or Ministry of Finance, was always held, at least earlier on, by very senior politicians, which increased the omnipotence of the Budget Wing over the society.
Powerful politicians at the head of the Treasury’s pyramid means that civil servants controlling the budget enjoy a direct line to the most senior politicians such as the Finance Minister and the Prime Minister. In this respect, the Treasury was not only an executor of a policy but also its conceiver and formulator. In the West, bodies like this recommend a policy or translate policies formulated higher above. In Israel, this is where policy is made in the economic sphere.
The Budget Wing also determines social policies. Critics of this body such as Adva, the socialist-orientated NGO on whose reports this summary is based, claim that the external image of this body as a professional and unbiased unit, absolves it from any public scrutiny either about its basic assumptions or general policies.16
Its activity attracted attention among social reform and justice movements in Israel when it became clear in this century that it is constantly cutting budgets for social services while decreasing taxes for companies. It is also showed great generosity towards the Jewish settlements in the occupied territories and a much less generous attitude towards the Palestinian citizens of Israel.
The internal examination of how the economy is run emerged forcefully in the 1990s, during the time of the Oslo Accord, when it seemed for a while that issues of defence and security could rest and more focus could be directed to social and economic policies. This decade, as pointed out in the previous chapter, saw the emergence of the post-Zionist intellectual movement and allowed overall openness and willingness to examine the basic truisms underlying life in the Jewish State.
These critical Israeli academics claim that the Budget Wing is running the economy of the state instead of the elected politicians. This is not only a violation of the principles of democracy it also means that they have taken upon themselves a workload which is beyond their capacity.17
They were solely responsible for the crucial economic decisions in Israel in the 1980s. The officials in the Wing were obsessed with budget deficit that caused a recession in the Israeli economy. This Wing also took it upon itself to prepare the Israeli economy for the influx of more than one million immigrants from the former Soviet bloc in the 1990s, which in hindsight indicated that these experts failed to understand the longer term impacts such an immigration would have on the economy. As some Israeli scholars pointed out in the 1990s, these failures are the result of the fact that the Wing does not have any accountability to the society about it policies.18
An important feature of the political economy of Israel is the tendency for politicians to skip and subvert proper legislation in order to satisfy sectorial lobbies and interests. This method is called Hok Ha-Hesderim, the law of the ‘arrangements’. Shimon Peres initiated it for the first time in 1985 as Prime Minister to tackle the economic crisis then, and it remains intact until today. In essence, this law is a parliamentary procedure that allows members of the Knesset to pass budgetary laws without going through the regular parliamentary voting and vetting processes, where most of these laws would have no chance of passing. This procedure also allows members of the Knesset to annul laws that have already been adopted. The government is using this method in order to abolish laws that members of the Knesset with a more social conscience have passed (for instance for increasing the budgets for social services or the subsidies for the underprivileged sectors in the society).
Let us take the year 2002 as an example of how the ‘arrangement’ law works. The Treasury used this law in order to annul laws that increased the security of low income families as well as restrict the laws that upped the unemployment fees. In a similar way, the procedure was used to cut pensions that are given through the national security system. Finally, laws that were meant to ease life for those poorer families owning a cheap or low cost car were annulled through the procedure (this affected mainly single mothers). Other social welfare initiatives were axed such as those expanding public housing, senior citizens’ allowances, compensations for accidents at work, help with books for underprivileged pupils, free education for sick children, subsidies for widowed husbands, increase of subsidised medicines and more help for public defenders (pro bono) services.
The procedure also allowed members of the Knesset and ministers to circumvent possible external scrutiny and criticism of their strategic planning for the future. Thus, for instance, they could block and upset any urban and rural development or issue and initiate planning with no regard for potential ecological or environmental collateral damages. In normal procedures the public, as well as members of the Knesset, can oppose such governmental infrastructural expansions. However, in Israel there are ways of ignoring this mechanism of critique and revision.
The share of Israel’s population in the labour market is one of the lowest in the world’s emerging and developed economies as three important sectors do not take part in it (although this has slightly improved recently). In 2010, eighty percent of the women among the Palestinians of Israel, sixty-five percent of the males among the ultra-Orthodox Jews and almost half of people with disabilities were unemployed.19
These communities had something in common, in the past they relied on low-tech industry that could also be performed from home. The neo-liberal culture of Israel has destroyed the low-tech industry in the country and thus, for instance, the textile industry’s production lines, which were once an important part of this sector, have been moved abroad.
The exclusion from the labour market also created huge problems for these sections of the society – the worst of which was uncertainty about their future. At the beginning of the 21st century more than a million workers in a population of seven million, had no pensionary arrangement (or put differently, half of the working force in Israel had no such arrangement).
The burden of catering for these communities has shifted in recent years from the government to the municipalities. The reality there is quite tricky. Israel has the highest number of local heads of councils and mayors in jail at the time this book was completed. The neo-liberal policy in 2006 generated a huge crisis in the local municipalities and councils, as the government either interfered directly in running them or did not allow a due democratic process and appointed the council and its head itself.20 One hundred such municipalities were created. This was a severe violation of basic civil rights and worked against the employees as well as the citizens. In the case of the former, it allowed councils to withhold salaries and in the case of the latter, it ended up providing only minimal services to the community (as there was no fear of not being re-elected).
When we speak about a militarised society in the context of present-day Israel, there are two major aspects to consider. The first is the benefits Israel draws from being regularly involved in military actions in terms of its arms’ production and sales. In a way, in times of peace, there is a ‘danger’ that this important part of the Israeli GDP will decrease and potentially cause unemployment in the huge, indeed mammoth, Israeli military industrial complex, which includes among other things: the aircraft industry (Hatasiyah Havirit), the development of weapons (Rafael), space agency and the production of arms (Hatasiya Hazvait).
As we shall see, so far this ‘danger’ has not materialised. The arms trade is still a very important factor in the Israeli economy today. Israel is the fourth largest arms’ exporter in the world. The revenues from this industry are needed to cover the high military expenditures Israel has.21
This brings us to the second aspect of militarisation; the price the Israeli society as a whole pays for it. Whenever the military and security expenses are particularly high, as happened in the beginning of this century due to the outbreak of the Second Intifada, the Israeli Treasury reacts by cutting the budget of the social services even further in order to increase that of the Ministry of Defence.
However, the last few years proved that Israel has managed to maintain such a system without peace with the Palestinians. It is quite possible to say – without being conclusive as we are still in the phase whilst this book is being written – that quite a few neo-liberal economies maintain some sort of militarisation since 2001 due to the so called ‘war on terror’ and are ‘willing to the pay the price’ of cutting the national budgets elsewhere.
One could add to these twin principal aspects another one, quite often hidden from the research on the Israeli economy. The Israeli economy is wedded with the interests of the petrol and arms coalition, which directs American policy in the Middle East. This began to develop under the Reagan administration with the full blessing of the then Israeli Prime Minister, Menachem Begin. After the fall of the Shah in Iran, Israel’s arms’ industry, and in particular its distribution and sales sections, played a crucial role in ensuring the circulation of American weapons and arms’ deals. As the political economists Shimshon Bichler and Jonathan Nitzan correctly identify, this Israeli contribution is often absent from the analysis that tries to explain why Israel is the America’s blue-eyed boy in the region. The conventional explanations for this special relationship are summarised in a later chapter in this book. This important service Israel provided for the USA, under the Reagan administration, was rewarded by granting Israel a special status in the arms’ deals world. The rewards included immunity from any American pressure on Israel’s development of nuclear capacity and allowing Israel to tightly control the entrance of American goods to the Israeli market.22
So war economy was still possible during a time of peace. Moreover, the continued occupation of the West Bank and the siege on the Gaza Strip justified further militarisation of the economy. Towards the end of this chapter, I would like to look more closely at the impact of the occupation on the economy.
The mixed economic blessings of the continued occupation of the West Bank and the Gaza Strip began to unfold in this century. Until the end of the 20th century, the Palestinians in the occupied territories served as a cheap labour force in construction and unskilled work, robbed of the social securities provided to workers in Israel. From Israel’s point of view, before the two Palestinian uprisings in 1987 and 2000, the occupied territories were a goldmine of cheap labour and opportunities for export and dumping of Israeli commodities on the local population. After the first uprising, the territories became an economic liability. Under the Oslo Accord, Europe and the USA began to take upon themselves some of the heavy expenditures there (as did some rich Arab countries), but corruption on the one hand, and the Israeli policies that disabled turning this investment into a propeller of growth on the other, prevented the territories from taking off economically. Successive right-wing Israeli governments added to the economic cost of maintaining the occupation, by increasing the investments in the Jewish settlements in the occupied territories.
The economic situation of the Palestinians in the occupied territories was a mirror image of the economic value they had for Israel. Before the uprisings, the Palestinians at least could find employment in, and trade with, Israel. After the first uprising, Israel decided to replace them as a working force with cheap, underpaid guest workers from Thailand and Romania. This was a result of liberalisation of the market, employers looking for a cheaper workforce and ideology; an Israeli wish to enclave the Palestinians within the occupied territories.
However, even with the finance coming from outside, the occupation is a burden on the local economy. Israel tried to ease the burden by taxing the occupied people and relying on foreign aid, especially after the peace process began. Local Israeli industries continue to dump their products and gain from a ready-made market and, at times, a gateway to the Arab markets, which officially boycotted Israel.
Since the beginning of this century, Israel quite often found itself in a military operation, which is part of its policing of the occupation. This led to drastic cuts in social services and welfare budgets. Such cuts meant less money for education (which officially is still a free education, but parents are asked to pay more and more for the basic needs of their children within the system) and the hidden and informal privatisation of the health services. In recent years, new companies emerged that specialise in approaching the National Insurance for the insured rights in case of an accident or illness. They charge a hefty percentage for a service that should be easy and accessible to the citizens. In short, militarisation was one of the common justifications for transmitting the yoke of funding from the government to the public.
Sami Peretz until recently was the editor of the The Marker, the economic supplement of Haaretz. In June 2017, he summarised very well one of the major conundrums that both students of the topic and Israelis try to solve: is Israel an economic success story in the 21st century?23
He gives a complex answer, the gist of which is that in macroeconomic terms it is a success. Unemployment is low, the high-tech industry is on the rise, there has been a new discovery of rich gas fields, a very successful export industry and an excellent balance of foreign currency reserves in the central bank (Bank of Israel).
However, these macro achievements hide crucial negative aspects that in the future could have a devastating effect on the economy. Peretz calls it a dual economy. The darker side of this duality is a significant deterioration in the level of education in Israel, low workforce productivity, huge gaps in salaries, pension and occupational security between different sectors, low state investment in professional training relevant to the local labour market, high cost of living and red-tape bureaucracy that does not encourage investment.
Time will tell which forces will determine the economic future of Israel. As we began the chapter with political economy, let me finish by adding to Peretz’ analysis the political developments that could drag the economy into recession and crisis. These include the possibility of another Palestinian uprising, a war in the north with Hezbollah or the spill-over of the wars in the Arab world into Israel.
1 Arnon Lafrom, ‘The Last Person to Leave will Put out the Light’, Fifty Years to the 1966–1967 Recession, Documents released by the Israeli State Archive, see summary in Ofer Aderet, ‘How Levi Eshkol’s Government “Engineered” Israel’s 1966–1967’s Recession’, Haaretz, 16 February, 2016.
2 See Tom Segev, 1967, pp. 250–260 and see Yoav Peled, ‘Profits or Glory? The 28th Elul of Arik Sharon’, The New Left Review, Issue 29, September-October 2004, pp. 47–70.
3 Abraham Daniel, Labor Enterprises in Israel: The Institutional Economy, Volume 2, Jerusalem: Jerusalem Academic Press, 1976.
4 Tali Kristal, ‘The Political Economy of Israel and the Increase in the Income Inequality, 1970–2010’, Israeli Sociology, Volume 2, 2010, pp. 285–311 (Hebrew).
5 Yagil Levy, ‘From the Citizen’s Army to the Market Army: Israel as a Case Study’ in Stuart Cohen (ed.), Israel’s Armed Forces in Comparative Perspective, London and New York: Routledge. 2010, p. 169.
6 Israel’s Central Bureau of Statistics, see http://www.cbs.gov.il/statistical/population.htm.
7 Daniel Maman and Zeev Rosenhek, The Bank of Israel: Political Economy in the Neo-Liberal Age, Jerusalem: Van Leer, 2009 (Hebrew).
8 Neve Gordon ‘The Political Economy of Israel’s Homeland Security/Surveillance Industry’, New Transparency, Working Paper III, April 28, 2009, see: http://www.sscqueens.org/sites/default/files/The%20Political%20Economy%20of%20Israel%E2%80%99s%20Homeland%20Security.pdf
9 Shlomo Sivrski et al., The Israeli Budget for 2000: An Update, (information on equality and social justice in Israel), Tel Aviv: Adva Center, 2000, pp. 3–6 (Hebrew).
10 Ibid.
11 The Recommendations of the Trajtenberg Committee, Press Release, 27 December, 2011 (Hebrew).
12 According to the Israeli Statistical Bureau as reported in Yediot Aharonot, 6 October, 2013 (Hebrew).
13 According to Nimrod Bousso in The Marker (Haaretz’ economic supplement), 29 September, 2015 (Hebrew).
14 See ‘The Bureau of Statistics Report’ in Yediot Aharonot, 26 February, 2015 (Hebrew).
15 Shlomo Swirski and Etty Konor-Attias, The Social Reality in Israel, Tel-Aviv: Adva Center, 2000, pp. 2–5 (Hebrew).
16 Shlomo Swirski et al., ‘A View on the Budget Law and Arrangement Law for 2000’, Adva Centre, 11 November, 2002 (Hebrew).
17 Shlomo Swirski and Ami Frankel, ‘The Position of the Knesset in the process of Formulating the Budget and its Confirmation: A Critical Review and a Proposal for Reform’, Adva Centre, September 2000 (Hebrew).
18 Ibid.
19 Yousef Jabain, ‘Arab Employment in Israel’, The Israeli Institute for Democracy, 31 October, 2011 (Hebrew).
20 Momi Dahan and Avi Ben-Bassat, The Political Economy of the Local Councils, Tel-Aviv: The Democratic Library, 2009 (Hebrew).
21 See http://www.upi.com/News_Photos/Features/Worlds-Top-5-arms-exporters/fp/3105/?spt=su
22 Shimshon Bichler and Jonathan Nitzan, The Global Political Economy of Israel, London: Pluto, 2002.
23 Sami Peretz, ‘A Personal Column’, The Marker, Haaretz, 23 June, 2017, p. 10 (Hebrew).