Israeli Economy

Abstract

The achievements of the Israeli economy since 1948 have been immense. The population has grown from 750,000 at independence to 9.3 million at end 2020, while gross domestic product (GDP) rose from $6.5 billion to $407 billion in 2020 (in 2020 prices and exchange rates). As a result, GDP per capita increased almost eightfold from $4,500 to $49,000. The Israeli economy has several outstanding features. The first is financial strength, manifest in the balance of payments, the government budget, and the banking system, and it reflects the cautious way that the economy has been managed since 1985. Behind this financial strength was the rapid development of high-technology exports and associated foreign direct investment. Allocations for defense as a share of GDP have fallen since 1975 but remain very large in absolute terms and account for a much-larger share of GDP than in most countries. On the beneficial side, the military has trained thousands of young people in high technology and has stimulated production in that sector. Israel is plagued by poverty and inequality in the distribution of income both before and after taxes and transfers. In Israel the poor are officially defined, by using a relative poverty measure, as those having an income below 50 percent of the median income; the rate of poverty is one of the highest in Western countries. The strengthening of the economy while the society has become weaker is a reversal or perceived reversal: for many years, Israelis felt that their society was strong but their economy was weak. This seems paradoxical given that between 1948 and 2010 Israel attracted just over three million immigrants. In 1948, two-thirds of the population was born abroad, whereas in 2020, 16 percent of the population were immigrants. The effects of immigration are central in Israel’s economic history, and economic policy has been dominated by the search for capital that would permit the growth of employment and output, given the increase in the supply of labor. Israel has also experienced a profound change from a state-led economy to a much more liberalized and globalized one. It has developed a consumer society in which the satisfaction of individual wants rather than collective needs is paramount.